-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MBUp3FC/pVLujxtYOGQ4XByhCZGGWqXcRiezKAF58rxfGveVfaTz9G+jTM9WAoFM n9d3WGnpHRH+MjcxICumdw== 0000717829-96-000004.txt : 19960402 0000717829-96-000004.hdr.sgml : 19960402 ACCESSION NUMBER: 0000717829-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GIBSON GREETINGS INC CENTRAL INDEX KEY: 0000717829 STANDARD INDUSTRIAL CLASSIFICATION: GREETING CARDS [2771] IRS NUMBER: 521242761 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11902 FILM NUMBER: 96542061 BUSINESS ADDRESS: STREET 1: 2100 SECTION RD CITY: CINCINNATI STATE: OH ZIP: 45237 BUSINESS PHONE: 5138416600 10-K 1 FORM 10-K PAGE SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value; Preferred Stock Purchase Rights 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock, $.01 par value, of the registrant held by non-affiliates of the registrant as of March 15, 1996 was approximately $242,790,000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 16,090,529 shares of Common Stock, $.01 par value, at March 15, 1996. Documents incorporated by reference: Portions of Gibson Greetings, Inc.'s Proxy Statement for the 1996 Annual Meeting of Stockholders are incorporated by reference in Part II PAGE PART I Item 1. Business Gibson Greetings, Inc. and its wholly-owned and majority-owned subsidiaries (the "Company") operate in a single industry segment -- the design, manufacture and sale of everyday and seasonal greeting cards, paper partywares, gift wrap and accessories and related specialty products. In mid-November 1995, the Company sold Cleo, Inc. ("Cleo"), its wholly-owned gift wrap subsidiary, to CSS Industries, Inc. ("CSS"). In addition to gift wrap and related products, Cleo manufactured and sold boxed Christmas cards and Valentines. Net sales by Cleo (in thousands of dollars) included in the consolidated financial statements for each of the three years ended December 31, 1995 were $151,931, $189,292 and $197,765, respectively. In order to strengthen the Company's position in the rapidly-growing party area of the industry, the Company acquired The Paper Factory of Wisconsin, Inc. ("The Paper Factory") in 1993. The Paper Factory operates retail stores located primarily in manufacturers' outlet shopping centers. Since the date of acquisition, The Paper Factory has increased its number of stores from 104 to approximately 180. During 1992, the Company formed Gibson de Mexico, S.A. de C.V., a Mexican corporation, which purchased the net assets of a Mexican manufacturer and marketer of greeting cards, to market the Company's products primarily in Mexico. In view of the continuing poor economic conditions and devaluation of the peso in Mexico, the Company recorded a full reserve against this subsidiary during the fourth quarter of 1995. During 1991, the Company formed Gibson Greetings International Limited ("Gibson International"), a Delaware corporation. Gibson International markets the Company's products through both independent and large retail customers in the United Kingdom and other European countries. Products The Company's major products are extensive lines of greeting cards (both everyday and seasonal). Everyday cards are categorized as conventional greeting cards and alternative market cards. Seasonal cards are devoted to holiday seasons, which include, in declining order of net sales, Christmas, Valentine's Day, Mother's Day, Easter, Father's Day, Graduation and Thanksgiving. In 1995, approximately 62% of net sales of cards were derived from everyday cards and approximately 38% from seasonal cards. Cleo produced gift wrap and gift wrap accessories (including tissue and kraft paper, gift bags, tags, ribbons, bows and gift trims) predominately for the Christmas season. A line of gift wrap and related accessories continues to be produced by the Company. The Company's products also include paper partywares, candles, calendars, gift items and holiday decorations. The following table sets forth, in thousands of dollars for the years indicated, the Company's net sales attributable to each of the principal classes of the Company's products: PAGE Years Ended December 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- Greeting cards $246,895 $243,313 $268,952 Gift wrap 172,893 202,439 192,862 Other products 120,357 102,290 84,351 -------- -------- -------- Total net sales $540,145 $548,042 $546,165 ======== ======== ======== Many of the Company's products incorporate well-known proprietary characters. Net sales associated with licensed properties accounted for approximately 15% of overall 1995 net sales. Excluding Cleo, net sales associated with licensed properties accounted for approximately 15% of overall 1995 net sales. The Company believes it benefits from the publication of cartoon strips, television programming, advertising and other promotional activities by the creators of such licensed characters. The Company has also developed proprietary properties of its own. See "Trademarks, Copyrights and Licenses." Approximately 4% of the Company's revenues in 1995 were attributable to export sales and royalty income from foreign sources. Excluding Cleo, approximately 5% of the Company's revenues in 1995 were attributable to export sales and royalty income from foreign sources. Sales and Marketing The Company's products are sold in more than 25,000 retail outlets worldwide. Because of the value consumers place on convenience, the Company continues to concentrate its distribution through one-stop-shopping outlets. To market effectively through these outlets, the Company has developed specific product programs and new product lines and introduced new in-store displays. The Company's current products are primarily sold under the Gibson brand name and are primarily distributed to supermarkets, deep discounters, mass merchandisers, card and specialty shops and variety stores. During 1995, the Company's five largest customers accounted for approximately 24% of the Company's net sales and one customer, Wal-Mart Stores, Inc. accounted for more than 10% of the Company's net sales. Excluding Cleo, the Company's five largest customers accounted for approximately 32% of the Company's 1995 net sales and only one customer, Winn-Dixie Stores, accounted for more than 10% of the Company's net sales. The Company's products are usually stocked in a department where only these products are displayed. Product displays are expressly designed for the presentation of greeting cards, gift wrap, paper partywares, candles and other products. The Company also supplies corrugated displays for seasonal specialties. The Company's method of selling greeting cards requires frequent and attentive merchandising service and fast delivery of reorders. The Company employs a direct field sales force that regularly visits most of the Company's customers, supported by a larger, nationwide merchandising service force. PAGE In order to properly display and service these products, a sizable initial investment is made in store display fixtures, sometimes totaling 300 linear feet, and in the hiring and training of service associates. To minimize costs and disruption, in the short-term, caused by the loss of a customer, the Company has entered into longer term contracts with certain retailers, consistent with general industry practice. These contracts generally have terms ranging from three to six years, and sometimes specify a minimum sales volume commitment. Some of the advantages to the Company include: less disruption to its distribution channels; the ability to plan product offerings into the future; and establishment of a reliable service network to ensure the best product display and salability. In certain of these contracts, negotiated cash payments or credits constitute advance discounts against future sales. These payments are capitalized and amortized over the initial term of the contract. In the event of contract default by a retailer, such as bankruptcy or liquidation, a contract may be deemed impaired and unamortized amounts may be charged against operations immediately following the default. Use of these contracts has expanded in recent years within the industry and the Company currently has contracts with a number of customers including three of its top five customers. It is characteristic of the Company's business and of the industry that accounts receivable for seasonal merchandise are carried for relatively long periods, typically as long as six months. Consistent with general industry practice, the Company allows customers to return for credit certain seasonal greeting cards. Design and Production Most of the Company's products are designed, printed and finished at its Cincinnati, Ohio facility and then sent to its facilities in Berea or Covington, Kentucky for shipment directly to retail stores. The Company also purchases for resale certain finished and semi-finished products, such as gift items, from both domestic and foreign sources. The Company maintains a full-time staff of artists, writers, art directors and creative planners who design a majority of the Company's products. Design of everyday products begins approximately 12 months in advance of shipment. The Company's seasonal greeting cards and other items are designed and printed over longer periods than the everyday cards. Designing seasonal products begins approximately 18 months before the holiday date. Seasonal designs go into production about 12 months before the holiday date. Production of the Company's products increases throughout the year until late September. Because a substantial portion of the Company's shipments are typically concentrated in the latter half of the year, the Company normally is required to carry large inventories. The Company believes that adequate quantities of raw materials used in its business are and will continue to be available from many suppliers. Paper and other raw materials are the most significant component of the Company's product cost structure. PAGE Competition The greeting card industry is highly competitive. Based upon its general knowledge of the industry and the limited public information available about its competitors, the Company believes it is the third largest producer of greeting cards in the United States. The Company's principal competitors are Hallmark Cards, Inc. and American Greetings Corporation, which are predominant in the industry. Certain of the Company's competitors have greater financial and other resources than the Company. The Company believes that the principal areas of competition with respect to its products are quality, design, service to the retail outlet, price and terms, which may include payments and other concessions to retail customers under long-term agreements, and that it is competitive in all of these areas. See "Sales and Marketing." Trademarks, Copyrights and Licenses The Company currently has approximately 40 registrations of trademarks in the United States and an equal number in foreign countries. Although the Company does not generally register its creative artwork and editorial text with the U.S. Copyright Office, it does obtain certain copyright protection by printing notice of a claim of copyright on its products. The Company has rights under various license agreements to incorporate well-known proprietary characters into its products. These licenses, most of which are exclusive, are generally for terms of one to four years and are subject to certain renewal options. There can be no assurance that the Company will be able to renew license agreements as to any particular proprietary character. The Company believes that its business is not dependent upon any individual trademark, copyright or license. Employees As of December 31, 1995, the Company employed approximately 4,300 persons on a full-time basis. In addition, as of December 31, 1995, the Company employed approximately 5,300 persons on a part-time basis. Because of the seasonality of the Company's sales, the number of the Company's production and warehousing employees varies during the year, normally reaching a peak level in September. Approximately 200 hourly employees currently on the payroll at the Company's Berea, Kentucky facility are represented by a local union affiliated with the International Brotherhood of Firemen and Oilers Union. Unfair labor practice charges were filed against the Company as an outgrowth of a strike at the Berea facility in 1989. See "Legal Proceedings." PAGE Environmental Issues The Company, over the past decade, has taken a proactive approach to environmental concerns. In early 1990, the Gibson Card Division (the "Card Division") converted its card and related products production to water-based inks. Previously, the Card Division had its Cincinnati-produced waste solvents incinerated. All but one underground storage tank on Company owned and leased premises were removed in or before 1988. In 1990, the last underground storage tank, which had contained isopropyl alcohol, was also removed in accordance with governmental closure regulations. The Company's policy is to consult with professional firms for environmental audits before entering into potential long-term real estate transactions. Historically, expenditures associated with managing and limiting pollution or hazardous substances, as well as expenditures to remediate previously contaminated sites, have not been material to the Company's financial statements. The Company is aware of one contingent environmental liability as discussed below: Kirk Heathcott Site - Dyer County, Tennessee In December 1993, the Company was advised by the Tennessee Department of Environment and Conservation that Cleo had been identified by the State of Tennessee as a potentially liable party for reimbursement of Superfund expenditures made by the State for site identification, investigation, containment and clean-up, including monitoring and maintenance activities. The Company has ascertained that the State's claim is based on the alleged disposal of certain waste solvents by a third party at the site during the period 1972-1977. The State issued an Order to Cleo and three other parties dated February 6, 1996 requiring the respondents to investigate the extent of contamination and to remediate the property. The State has indicated that it may revise the Order to substitute the Company for Cleo. Such substitution will not affect the Company's exposure in this matter because Gibson agreed to indemnify Cleo against this liability under the terms of the agreement pursuant to which Cleo was sold to CSS. Based on an informal estimate provided by State authorities and on currently available information concerning the size and condition of the property, management does not believe that the outcome of this matter will result in a material adverse effect on the Company's total net worth, cash flows or operating results. The Company has identified two insurance companies that issued policies to a predecessor company during the applicable time period. These companies have been notified of the occurrence. The Company believes that this insurance may provide coverage for Cleo's potential liability at this site. The insurance companies have neither confirmed nor denied the coverage at this time. PAGE Item 2. Properties The following is a summary of the Company's principal manufacturing, distribution and administrative facilities: Approximate Floor Space Location Principal Use (Sq Ft) - -------------------- ------------------------------------- ----------- Cincinnati, Ohio Corporate headquarters, manufacturing and administration 593,700 Berea, Kentucky Manufacturing and distribution 597,100 Mexico City, Mexico Manufacturing and distribution 25,900 Telford, England Manufacturing, distribution and administration 58,800 Covington, Kentucky Manufacturing and distribution 293,000 Florence, Kentucky Manufacturing and distribution 110,700 Neenah, Wisconsin Distribution 50,000 --------- Total 1,729,200 ========= The first two facilities listed above are currently leased under an amended agreement for a term expiring in 2013. The Company has the right to renew the lease for one additional period of ten years. The Company also has an option to purchase these facilities in 2005 (and again in 2010) at the fair market value of the properties at the date of exercise. For accounting purposes, this lease has been treated as a capital lease. See Notes 6 and 11 of Notes to Consolidated Financial Statements set forth in Item 8 below. The Telford, England and Covington, Kentucky manufacturing and distribution facilities are owned by the Company. The Covington, Kentucky facility has been financed principally through tax-exempt debt and is pledged to secure the repayment of such debt. See Note 6 of Notes to Consolidated Financial Statements set forth in Item 8 below. The Florence, Kentucky facility, the Mexico City, Mexico facility and the distribution facility at Neenah, Wisconsin are leased. The Company also leases sales offices, other manufacturing, distribution and administrative facilities and, on a temporary basis, uses public warehouse space in various locations throughout the United States. The Paper Factory leases approximately 180 stores averaging approximately 3,000 to 4,000 square feet per store. Certain of these leases contain contingent payments based upon individual store sales. Leases for all such facilities expire at various dates through 2005. The Company believes that its facilities are adequate for its present needs and that its properties, including machinery and equipment, are generally in good condition, well maintained and suitable for their intended uses. PAGE Item 3. Legal Proceedings 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 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). In December 1994 the Court ruled that neither of the two named plaintiffs qualified as a class representative. Plaintiffs have filed an Amended Complaint naming a proposed substitute class representative, and a motion to certify a class, which the Company opposes, is pending. Like its predecessors in this litigation, the most recent complaint alleges violations of the federal securities laws and seeks unspecified damages for an asserted public disclosure of false information regarding the Company's earnings. The Company intends to defend the suit vigorously and has filed an Answer denying any wrongdoing and a Third Party Complaint against its former auditor for contribution against any judgment adverse to the Company. On April 10, 1995, two purported class action lawsuits were commenced against the Company, its then Chairman, President and Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Southern District of Ohio. The Complaints alleged violations of the federal securities law for an asserted failure to disclose allegedly material information regarding the Company's financial performance. On August 1, 1995, the two lawsuits were consolidated and captioned In Re Gibson Greetings Securities Litigation II. On August 9, 1995, the plaintiffs filed a Consolidated Amended Class Action Complaint which restated the basic claims which had been presented in the original complaints. The Court has denied, at this stage, the Company's motion to dismiss the Consolidated Amended Complaint and also has conditionally denied the plaintiffs' motion to certify a class for purposes of class action treatment of the litigation. The Court will reconsider the class action certification motion at the conclusion of discovery. The Company intends to defend the action vigorously. The litigation described in the two preceding paragraphs is in early stages of proceedings. Accordingly, the Company presently is unable to predict the effect of the ultimate resolutions of these matters upon the Company's results of operations and cash flows; as of this date, however, Management does not expect that such resolutions would result in a material adverse effect upon the Company's total net worth, although a substantially unfavorable outcome could be material to such net worth. PAGE On March 6, 1996, two purported class actions were filed against the Company's directors (as well as certain former directors) and the Company in the New Castle County, Delaware Court of Chancery (Crandon Capital Partners v. Cooney, et al. and Weiss v. Lindberg, et al.). The Complaints allege that the individual defendants breached their fiduciary duties to the plaintiffs by refusing to negotiate in response to an acquisition proposal for the Company by American Greetings Corporation. The Complaints seek to require the directors to do a number of things, including pursuing merger or acquisition discussions with American Greetings and others. The Complaints also seek unspecified damages against those directors. On March 20, 1996, a third action, Krim, et al. v. Pezzillo, et al., was filed in the same court. While it generally follows the allegations and demands of the other two Complaints, it specifically seeks injunctive relief against the exercise of the shareholder rights plan that has been a part of the Company's corporate governance for nearly ten years. While the Company is a named defendant in all three actions, none of the Complaints appears to seek any other specific relief against the Company. The defendants intend to defend the suits vigorously. In 1989, unfair labor practice charges were filed against the Company as an outgrowth of a strike at its Berea, Kentucky facility. Remedies sought included back pay from August 8, 1989 and reinstatement of employment for approximately 200 employees (In the Matter of Gibson Greetings, Inc. and International Brotherhood of Firemen and Oilers, AFL-CIO Cases 9-CA-26706, 27660, 26875). On May 19, 1995, a unanimous panel of the United States Court of Appeals for the District of Columbia Circuit found that the strike was not an unfair labor practice strike and that a significant number of strikers had been permanently replaced and thus were not entitled to reinstatement or back pay. The Court remanded the case to the National Labor Relations Board for a factual determination on the issue of permanency with respect to approximately 52 replacements hired after June 29, 1989. Management does not believe that the outcome of this matter will result in a material adverse effect on the Company's net worth, total cash flows or operating results. 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. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Executive Officers of the Registrant See Item 10. Directors and Executive Officers of the Registrant. PAGE PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The Company's debt agreements contain certain covenants including limitations on dividends based on a formula related to net income (loss), stock sales and certain restricted investments. At December 31, 1995, primarily as a result of the loss on the sale of Cleo (see Note 13 of Notes to Consolidated Financial Statements set forth in Item 8, below), there were no unrestricted retained earnings available for dividends. There were approximately 11,000 beneficial owners of the Company's common stock on February 29, 1996.
First Second Third Fourth Quarter Quarter Quarter Quarter Year -------- -------- -------- -------- -------- 1995 - ------------------- Dividends per share $ - $ - $ - $ - $ - Market price of common stock (1): Low 8 1/16 9 3/8 12 1/2 13 1/4 8 1/16 High 15 3/32 14 1/8 15 1/2 16 16 1994 - ------------------- Dividends per share Market price of $0.10 $0.10 $0.10 $0.10 $0.40 common stock (1): Low 20 7/8 15 5/8 13 3/8 12 3/4 12 3/4 High 23 5/8 21 5/8 17 16 1/8 23 5/8
[FN] (1) Per share prices are based on the closing price as quoted in the Nasdaq National Market. PAGE Item 6. Selected Financial Data The following summaries set forth selected financial data for the Company for each of the five years in the period ended December 31, 1995. Selected financial data should be read in conjunction with the Consolidated Financial Statements set forth in Item 8 below.
Statement of Operations Data (Dollars and shares in thousands except per share amounts) Years Ended December 31, -------------------------------------------------------- 1995 1994 1993(1) 1992 1991 -------- -------- -------- -------- -------- Revenues: Net sales $540,145 $548,042 $546,165 $484,118 $522,166 Royalty income 676 753 761 1,705 2,148 -------- -------- -------- -------- -------- Total revenues 540,821 548,795 546,926 485,823 524,314 -------- -------- -------- -------- -------- Cost of products sold 268,702 310,039 277,109 247,340 252,217 Selling, distribution and administrative expenses 239,922 276,147 227,863 218,642 194,872 Loss on sale of Cleo, Inc. 83,012 - - - - -------- -------- -------- -------- -------- Operating income (loss) (50,815) (37,391) 41,954 19,841 77,225 Interest expense 13,178 10,599 7,737 7,803 9,380 Interest income (915) (765) (949) (1,023) (342) (Gain) loss on derivative transactions/ settlement, net - (1,641) 5,689 - - -------- -------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of accounting changes (63,078) (45,584) 29,477 13,061 68,187 Income taxes (16,589) (16,981) 14,209 5,076 26,303 -------- -------- -------- -------- -------- Income (loss) before cumulative effect of accounting changes (46,489) (28,603) 15,268 7,985 41,884 Cumulative effect of accounting changes - - - (1,449) - -------- -------- -------- -------- -------- Net income (loss) $(46,489) $(28,603) $ 15,268 $ 6,536 $ 41,884 ======== ======== ======== ======== ======== Income (loss) per share before cumulative effect of accounting changes $ (2.86) $ (1.77) $ 0.95 $ 0.50 $ 2.61 ======== ======== ======== ======== ======== Net income (loss) per share $ (2.86) $ (1.77) $ 0.95 $ 0.41 $ 2.61 ======== ======== ======== ======== ======== Dividends per share $ - $ 0.40 $ 0.40 $ 0.39 $ 0.36 ======== ======== ======== ======== ======== Average common shares and equivalents 16,243 16,130 16,103 16,104 16,039 ======== ======== ======== ======== ========
Other Financial Data (Dollars in thousands except per share amounts) December 31, -------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Working capital $106,284 $151,128 $209,209 $224,261 $215,011 Plant and equipment, net 90,813 119,491 116,900 112,712 110,769 Total assets 425,827 612,195 572,459 501,104 544,261 Debt due within one year (2) 28,894 117,114 66,187 31,911 71,208 Long-term debt 46,533 63,233 74,365 70,175 71,079 Stockholders' equity 230,242 277,500 313,097 303,341 300,743 Book value per share 14.31 17.24 19.50 18.92 18.86 Capital expenditures 19,872 35,396 31,049 30,970 31,736
[FN] (1) The full year results for 1993 have been restated to correct the Cleo inventory overstatement and to record unrealized net losses on derivative transactions (Refer to Note 1 of Notes to Consolidated Financial Statements in Item 8 below). The Cleo inventory restatement reduced income before income taxes for 1993 by $8,806. The derivatives' net impact on income before income taxes was a reduction of $5,689 for 1993. The aggregate effect of these changes was to reduce net income by $10,584, and to reduce net income per share by $.66. (2) Includes the current portion of long-term debt which consisted of $9,894 in 1995, $11,164 in 1994, $3,917 in 1993, $1,811 in 1992, and $708 in 1991. PAGE Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations In mid-November 1995, the Company sold Cleo, its wholly-owned gift wrap subsidiary. In addition to gift wrap and related products, Cleo manufactured and sold Christmas cards and Valentines. Net sales by Cleo included in the consolidated financial statements for each of the three years ended December 31, 1995 were $151.9 million, $189.3 million and $197.8 million, respectively. The results of operations for 1995 included Cleo's results of operations through the date of sale and reflect the loss on the sale of Cleo of $54.5 million, net of tax benefit of $28.5 million. For comparative purposes, the discussion below presents results of operations for the year ended December 31, 1995 on a pro forma basis, excluding Cleo, as well as on an historical basis. See Note 14 of Notes to Consolidated Financial Statements set forth in Item 8, below, for certain comparative pro forma and historical data for 1995 and 1994. As announced on July 1, 1994, the Company determined that the inventory of Cleo had been overstated, resulting in an overstatement of the Company's previously reported 1993 consolidated net income. As a result of this overstatement, as well as the accrual of an unrealized market value net loss on certain derivative transactions which did not qualify as hedges, it was necessary for the Company to amend and restate its consolidated financial statements for the third quarter ended September 30, 1993, the fourth quarter ended December 31, 1993, the twelve months ended December 31, 1993 and for the first quarter ended March 31, 1994. The adjustments made are described in Note 1 of Notes to Consolidated Financial Statements set forth in Item 8, below, and should be reviewed in conjunction with the discussions of "Results of Operations" and "Liquidity and Capital Resources" presented below. Pro Forma Results of Operations - Year Ended December 31, 1995 Compared With Year Ended December 31, 1994 Pro forma revenues increased 8.2% to $388.9 million compared to pro forma revenues of $359.4 million in 1994. The increase in pro forma revenues was largely attributable to increased revenues at the Card Division, reflecting increased average prices partially offset by a modest decline in units sold. Additionally, revenues at The Paper Factory and Gibson International increased in 1995. Consistent with general industry practice, the Company allows customers to return for credit certain seasonal and everyday greeting cards. Also, consistent with general industry practice, and where deemed prudent to secure substantial long-term volume commitments, the Company enters into long-term sales contracts with certain retailers, some of which include advance payments. Pro forma returns and allowances were 18.2% in 1995 compared to 22.7% in 1994. The decrease in 1995 reflects a decrease in customer allowances, seasonal and everyday returns and long-term sales contract amortization. In 1994, $6.3 million of unamortized long-term sales contracts were charged to returns and allowances as a result of the bankruptcy of F&M Distributors ("F&M"). There were no similar charges incurred in 1995. Pro forma royalty income of $.7 million was comparable to 1994. PAGE Total pro forma operating expenses were $350.4 million or 90.1% of total pro forma revenues in 1995 compared to $371.2 or 103.3% in 1994. Pro forma cost of products sold was 38.2% of total pro forma revenues in 1995 compared to 41.6% in 1994. The decrease in 1995 compared to 1994 reflects lower average unit cost. Paper price increases have been offset to date by a combination of supply commitments, increased product selling prices and improved productivity. Pro forma selling, distribution and administrative expenses were 51.9% of total revenues in 1995 compared to 61.7% in 1994. The decrease in 1995 pro forma expenses, as a percentage of total pro forma revenues, reflected the positive results from the implementation of cost cutting measures and other initiatives at the end of 1994. Decreases are reflected in lower selling and marketing costs ($15.2 million), transportation costs ($1.7 million), and shipping costs ($.9 million) as well as a decrease in bad debts expense of $6.0 million. Additionally, the pro forma expenses in 1994 include the write-off of trade receivables and fixtures due to the F&M bankruptcy as well as workforce reduction costs at the Card Division totaling $11.6 million. There were no similar charges in 1995. In view of the continuing poor economic conditions and devaluation of the peso in Mexico, the Company recorded a full reserve against its Mexican subsidiary totaling $2.0 million during the fourth quarter of 1995. Pro forma financing and derivative transaction expenses were $8.6 million in 1995 compared to $4.8 million in 1994. Included in 1994 pro forma expenses was a derivative gain of $1.6 million. Pro forma income before income taxes was $29.9 million in 1995 compared to a pro forma loss of $16.6 million in 1994 while the pro forma effective income tax rate for 1995 was 45.5% compared to 41.7% in 1994. See Notes 1 and 7 of Notes to Consolidated Financial Statements set forth in Item 8, below. Pro forma net income was $16.3 million in 1995 compared to a pro forma net loss of $9.7 million in 1994. The Company attempts to minimize the impact of inflation by controlling its cost of raw materials, labor and other expenses, and pricing its products in light of general economic conditions. PAGE Results of Operations - Year Ended December 31, 1995 Compared With Year Ended December 31, 1994 Revenues decreased 1.5% to $540.8 million compared to $548.8 million in 1994. The decrease was principally attributable to Cleo's results of operations through November 14, 1995 partially offset by increases in revenues at the Card Division, The Paper Factory and Gibson International. Returns and allowances were 14.4% in 1995 compared to 17.3% in 1994. The decline reflects a decrease in customer allowances, seasonal and everyday returns and long-term sales contract amortization. In 1994 $6.3 million of unamortized long-term sales contracts were charged to returns and allowances as a result of the bankruptcy of F&M. There were no similar charges incurred in 1995. Total operating expenses were $591.6 million or 109.4% of total revenues in 1995 compared to $586.2 million or 106.8% in 1994. Total operating expenses for 1995 include the pretax loss on the sale of Cleo of $83.0 million ($54.5 million net of tax benefit). Cost of products sold was 49.7% of total revenues in 1995 compared to 56.5% in 1994. The decrease in 1995 compared to 1994 was primarily due to a one-time charge in 1994 of approximately $8.0 million as a result of extensive review of inventory at Cleo. Additionally, the decrease reflects lower average unit cost of product at the Card Division. Selling, distribution and administrative expenses were 44.4% of total revenues in 1995 compared to 50.3% in 1994. The decline in the 1995 expenses, as a percentage of total revenues, reflected the positive results from the implementation of cost cutting measures and other initiatives at the end of 1994. Decreases are reflected in lower selling and marketing costs ($19.6 million), transportation costs ($7.1 million), shipping costs ($5.9 million) and pension expense ($1.3 million). These were slightly offset by an increase in administrative expenses ($3.3 million). Bad debt expense in 1995 decreased $7.3 million. Bad debt expense in 1994 included a write-off of trade receivables of $7.3 million due to the F&M bankruptcy. Additionally, the write-off of fixtures of $2.6 million due to the F&M bankruptcy, and workforce reduction costs of $1.7 million at the Card Division are reflected as one-time charges in selling, distribution and administrative expenses in 1994. In view of the continuing poor economic conditions and devaluation of the peso in Mexico, the Company recorded a full reserve against its Mexican subsidiary totaling $2.0 million during the fourth quarter of 1995. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of " for the year ended December 31, 1995. The effect of the adoption of this standard on the consolidated financial statements was not material. Financing and derivative transaction expenses were $12.3 million in 1995 compared to $8.2 million in 1994. Included in 1994 expenses was a derivative gain of $1.6 million. Loss before income taxes was $63.1 million in 1995 compared to a loss of $45.6 million in 1994 while the effective income tax rate for 1995 was 26.3% compared to 37.2% in 1994. See Notes 1 and 7 of Notes to Consolidated Financial Statements set forth in Item 8, below. PAGE Net loss was $46.5 million in 1995 compared to a net loss of $28.6 million in 1994. The 1995 net loss includes an after-tax charge of $54.5 million related to the sale of Cleo. Results of Operations - Year Ended December 31, 1994 Compared With Year Ended December 31, 1993 The Company's 1994 results of operations were adversely affected by charges for inventory adjustments and sales returns and allowances, highly competitive pricing conditions and high product and distribution costs at Cleo combined with the bankruptcy filing of F&M, and competitive pricing pressures at the Card Division. Revenues increased 0.3% to $548.8 million compared to 1993. The slight increase in revenues was attributable to the Company's retail subsidiary, reflecting a full year of operations by The Paper Factory (acquired in June 1993). This revenue gain was substantially offset by declines in revenues at both the Card Division and Cleo. These declines resulted from increased competitive pressure as well as increased allowances related to current and prior year sales. Returns and allowances were 17.3% in 1994 compared to 13.3% in 1993. The increase in 1994 reflects a charge of $6.3 million of unamortized long-term sales contracts as a result of the F&M bankruptcy to returns and allowances. The 1994 increase also reflects a change in product mix between seasonal and everyday sales combined with increased customer allowances due to competitive pressure and costs associated with new customers. Royalty income of $.8 million was comparable to 1993. Total operating expenses were $586.2 million or 106.8% of total revenues in 1994 compared to 92.3% in 1993. Cost of products sold was 56.5% of total revenues in 1994 compared to 50.7% in 1993. The increase in 1994 compared to 1993 reflected continued pricing pressures and increased customer allowances, primarily at the Card Division and Cleo. In addition, the increase in 1994 over 1993 reflected a one-time charge of approximately $8.0 million as a result of extensive review of inventory at Cleo. Selling, distribution and administrative expenses were 50.3% of total revenues in 1994 compared to 41.7% in 1993. The increase in the 1994 expenses, as a percentage of total revenues, reflected the write-off of trade receivables and fixtures due to the F&M bankruptcy of $7.3 million and $2.6 million, respectively, and workforce reduction costs of $1.7 million at the Card Division. In addition, higher shipping costs ($6.9 million), other bad debt expenses ($3.2 million), the full year impact of The Paper Factory ($12.1 million), and increased selling and marketing costs, primarily associated with new customers ($10.9 million), contributed to this increase. Financing and derivative transaction expenses were $8.2 million in 1994 compared to $12.5 million in 1993. During 1994, the Company settled its lawsuit against Bankers Trust and recorded a gain for the year of $1.6 million representing the impact of settling the lawsuit net of previously recorded gains on these derivative transactions. Higher interest rates combined with higher average borrowings, largely resulting from the acquisition of The Paper Factory, as well as higher working capital levels, resulted in an increase in interest expense, net. PAGE Loss before income taxes was $45.6 million in 1994 compared to income of $29.4 million in 1993. The effective income tax rate for 1994 was 37.2% compared to 48.2% in 1993. See Notes 1 and 7 of Notes to Consolidated Financial Statements set forth in Item 8, below. During 1994, the Company adopted SFAS No. 112 - "Employers' Accounting for Postemployment Benefits" retroactive to January 1, 1994. The charges associated with the adoption were not material to the Company's consolidated results and have been included in the 1994 results. Net loss was $28.6 million in 1994 compared to net income of $15.3 million in 1993. Liquidity and Capital Resources Cash flows from operating activities for 1995 increased $51.6 million from 1994 to $45.2 million, compared to a decrease of $38.0 million in 1994 from 1993 and a decrease of $43.3 million in 1993 from 1992. The increase in 1995 was primarily the result of improved cash flow from on-going operations and a substantial reduction in trade receivables. These cash flow increases were partially offset by cash used in connection with a decrease in accruals for customer allowances and sales agreement payments due within one year and the increase in tax benefits associated with the loss on the sale of Cleo. The decrease in trade receivables from prior year reflects the disposition of Cleo. Cleo historically comprised the largest percentage of trade receivables at year end for the Company. The smaller increase in other assets reflects a lower increase in sales contracts in 1995 compared to 1994 while the decline in other current liabilities reflects payments to customers under contracts, principally negotiated in 1994 and 1995. Cash used in investing activities for plant and equipment purchases totaled $19.9 million in 1995 compared to $35.4 million and $31.0 million in 1994 and 1993, respectively. Plant and equipment purchases do not include assets acquired under capital lease obligations. During 1995, the Company renegotiated its long-term agreement for certain of its principal facilities resulting in the recording of a capital lease. See Note 11 of Notes to Consolidated Financial Statements set forth in Item 8, below. Cash used in financing activities in 1995 was $109.1 million compared to cash provided by financing activities of $34.1 million and $23.7 million in 1994 and 1993, respectively. The 1995 decrease in short-term borrowings resulted from the repayment of short-term debt with the proceeds from the sale of Cleo as well as improved cash flow from operations resulting in a decrease in the need for short-term financing. The 1994 increase in short-term borrowings reflected higher working capital requirements combined with payments under customer agreement contracts. Long-term debt decreased in 1995 primarily reflecting the partial redemption of senior notes with the proceeds from the sale of Cleo. Long-term debt decreased in 1994 reflecting current year debt payments and increased in 1993 due to the issuance of unsecured notes to the former shareholders of The Paper Factory, payable over four years. PAGE The Company is currently negotiating a new revolving credit facility to replace the existing facility due to expire in late April 1996. Management believes that it will be able to consummate this facility to provide funds for general corporate purposes. If consummated, the Company expects that the facility will have a duration of 364 days and will provide for borrowings in an amount adequate for the Company's needs over the term of the facility. The Company is required to maintain a specified level of consolidated net worth (as defined) pursuant to the terms of its revolving credit facility. As a result of the sale of Cleo, the Company was unable to maintain the specified level and therefore obtained an amendment to the revolving credit agreement which adjusted the required consolidated net worth. In addition, the Company sought and received waivers under the revolving credit agreement and its senior notes that permitted the Company to sell Cleo and to accept a short-term promissory note for a portion of the purchase price. The proceeds of the note were received on January 29, 1996. With the sale of Cleo, the Company anticipates significantly lower short-term borrowing requirements in 1996 compared with the Company's historical levels. Capital expenditures for 1996 are expected to be consistent with historical trends for the remaining operating units. The note receivable from CSS at December 31, 1995 was collected on January 29, 1996 and short-term debt at December 31, 1995 was repaid by mid January utilizing cash flow from operations and proceeds from the sale of Cleo. At February 29, 1996, the Company held short-term investments in excess of normal operating cash needs of approximately $45.3 million. 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, all of which total approximately $10.3 million to $32.5 million per year for the next five years, as well as for financing existing operations, currently projected capital expenditures, anticipated long-term sales agreements consistent with industry trends and other contingencies. The Company continues to face strong competitive pressures with regard to pricing and other terms of sales. During 1994, Wal-Mart Stores, Inc. (Wal-Mart) completed a review which recognized that the Company represented a small percentage of their store greeting card departments and began reducing the number of such departments carrying the Company's cards during 1995. Wal-Mart indicated that it intends to progressively phase out the remaining card departments represented by the Company beyond 1995. Approximately 60% of the Company's business with Wal-Mart had been through Cleo. In 1995 and 1994, Wal-Mart accounted for approximately 6% and 7%, respectively, of the Company's revenues, excluding Cleo. In 1996, revenues attributed to Wal-Mart are anticipated to be less than 2% of the Company's revenues. Management does not believe that there are any trends, events, commitments or uncertainties, except for previously disclosed items (see also Item 3. Legal Proceedings), 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. PAGE Except for the historical information contained herein, the matters discussed in this annual report are forward-looking statements which involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. For additional financial information see Consolidated Financial Statements and Notes to Consolidated Financial Statements set forth in Item 8, below. PAGE Item 8. Financial Statements and Supplementary Data
Gibson Greetings, Inc. Consolidated Statements of Operations Years Ended December 31, 1995, 1994 and 1993 (Dollars in thousands except per share amounts) Restated 1995 1994 1993 --------- --------- --------- Revenues: Net sales $ 540,145 $ 548,042 $ 546,165 Royalty income 676 753 761 --------- --------- --------- Total revenues 540,821 548,795 546,926 --------- --------- --------- Costs and expenses: Operating expenses: Cost of products sold 268,702 310,039 277,109 Selling, distribution and administrative expenses 239,922 276,147 227,863 Loss on sale of Cleo, Inc. 83,012 - - --------- --------- --------- Total operating expenses 591,636 586,186 504,972 --------- --------- --------- Operating income (loss) (50,815) (37,391) 41,954 --------- --------- --------- Financing and derivative transaction expenses: Interest expense 13,178 10,599 7,737 Interest income ( 915) (765) (949) (Gain) loss on derivative transactions/settlement, net - (1,641) 5,689 --------- --------- --------- Total financing and derivative transaction expenses, net 12,263 8,193 12,477 --------- --------- --------- Income (loss) before income taxes (63,078) (45,584) 29,477 Income taxes (16,589) (16,981) 14,209 --------- --------- --------- Net income (loss) $ (46,489) $ (28,603) $ 15,268 ========= ========= ========= Net income (loss) per share $ (2.86) $ (1.77) $ 0.95 ========= ========= =========
[FN] See accompanying notes to consolidated financial statements. PAGE
Gibson Greetings, Inc. Consolidated Balance Sheets December 31, 1995 and 1994 (Dollars in thousands except per share amounts) 1995 1994 --------- --------- Assets Current assets: Cash and equivalents $ 15,555 $ 2,000 Note receivable 24,574 - Trade receivables, net 46,620 197,799 Inventories 68,303 127,460 Income taxes receivable 10,698 - Prepaid expenses 4,054 5,719 Deferred income taxes 45,011 48,775 --------- --------- Total current assets 214,815 381,753 Plant and equipment, net 90,813 119,491 Deferred income taxes 14,745 8,080 Other assets, net 105,454 102,871 --------- --------- $ 425,827 $ 612,195 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Debt due within one year $ 28,894 $ 117,114 Accounts payable 7,995 21,779 Income taxes payable - 4,742 Other current liabilities 71,642 86,990 --------- --------- Total current liabilities 108,531 230,625 Long-term debt 46,533 63,233 Sales agreement payments due after one year 18,564 21,107 Other liabilities 21,957 19,730 --------- --------- Total liabilities 195,585 334,695 --------- --------- Stockholders' Equity: Preferred stock, par value $1.00; 5,000,000 shares authorized, none issued - - Preferred stock, Series A, par value $1.00; 300,000 shares authorized, none issued - - Common stock, par value $.01; 50,000,000 shares authorized, 16,585,130 and 16,579,530 shares issued, respectively 166 166 Paid-in capital 46,041 45,992 Retained earnings 191,793 238,282 Foreign currency adjustment (1,807) (1,000) --------- --------- 236,193 283,440 --------- --------- Less treasury stock, at cost, 494,601 and 483,701 shares, respectively 5,951 5,940 --------- --------- Total stockholders' equity 230,242 277,500 --------- --------- Commitments and contingencies (Notes 11 and 12) $ 425,827 $ 612,195 ========= =========
[FN] See accompanying notes to consolidated financial statements. PAGE
Gibson Greetings, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 1995, 1994 and 1993 (Dollars in thousands) Restated 1995 1994 1993 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ (46,489) $ (28,603) $ 15,268 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and write-down of display fixtures 26,896 26,150 22,688 Loss on disposal of plant and equipment 5,492 5,957 5,817 Loss on sale of Cleo, Inc. 83,012 - - (Gain) loss on derivative transactions, net - (1,641) 5,689 Deferred income taxes (2,901) (19,205) (8,909) Amortization of deferred costs and intangibles and write- down of deferred costs 23,590 31,155 19,547 Change in assets and liabilities: (Increase) decrease in trade receivables, net 17,820 (5,636) (22,529) (Increase) decrease in inventories 2,821 (2,322) 1,843 Increase in income taxes receivable (10,698) - - (Increase) decrease in prepaid expenses 221 (1,512) 286 Increase in other assets, net of amortization (27,260) (47,102) (25,999) Increase (decrease) in accounts payable (2,617) 2,944 2,579 Increase (decrease) in income taxes payable (4,742) (8,329) 3,014 Increase (decrease) in other current liabilities (19,267) 26,511 6,603 Increase (decrease ) in other liabilities (316) 16,053 5,696 All other, net (379) (850) (22) --------- --------- --------- Total adjustments 91,672 22,173 16,303 --------- --------- --------- Net cash provided by (used in) operating activities 45,183 (6,430) 31,571 --------- --------- --------- Cash flows from investing activities: Purchase of plant and equipment (19,872) (35,396) (31,049) Proceeds from sale of plant and equipment 926 289 550 Proceeds from sale of Cleo, Inc., net of escrow amount 96,437 - - Acquisition of The Paper Factory of Wisconsin, Inc., net of cash acquired - - (24,782) --------- --------- --------- Net cash provided by (used in) investing activities 77,491 (35,107) (55,281) --------- --------- --------- Cash flows from financing activities: Net increase (decrease) in short-term borrowings (86,950) 43,680 23,062 Issuance of long-term debt - - 8,075 Payments on long-term debt (22,207) (3,917) (1,811) Issuance of common stock 49 784 773 Acquisition of common stock for treasury (11) (52) - Dividends paid - (6,435) (6,417) --------- --------- --------- Net cash provided by (used in) financing activities (109,119) 34,060 23,682 --------- --------- --------- Net increase (decrease) in cash and equivalents 13,555 (7,477) (28) Cash and equivalents at beginning of year 2,000 9,477 9,505 --------- --------- --------- Cash and equivalents at end of year $ 15,555 $ 2,000 $ 9,477 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 10,489 $ 9,325 $ 7,544 Income taxes 1,751 10,240 20,243 Noncash investing and financing activities: Purchase of plant and equipment through capital lease obligation 19,160 - - Note received in connection with the sale of Cleo, Inc. 24,574 - -
[FN] See accompanying notes to consolidated financial statements. PAGE
Gibson Greetings, Inc. Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1995, 1994 and 1993 (Dollars in thousands except per share amounts) Restated 1995 1994 1993 --------- --------- --------- Common stock, par value $.01: Balance at beginning of year $ 166 $ 165 $ 165 Exercise of stock options - 1 - --------- --------- --------- 166 166 165 --------- --------- --------- Paid-in capital: Balance at beginning of year 45,992 45,209 44,436 Restricted stock 49 783 773 --------- --------- --------- 46,041 45,992 45,209 --------- --------- --------- Retained earnings: Balance at beginning of year 238,282 273,320 264,469 Net income (loss) (46,489) (28,603) 15,268 Cash dividends paid ($.40 and $.40 per share in 1994 and 1993, respectively) - (6,435) (6,417) --------- --------- --------- 191,793 238,282 273,320 --------- --------- --------- Foreign currency translation adjustment: Balance at beginning of year (1,000) 291 159 Aggregate adjustments resulting from translation of financial statements into U.S. dollars (807) (1,291) 132 --------- --------- --------- (1,807) (1,000) 291 --------- --------- --------- Less treasury stock, at cost: Balance at beginning of year 5,940 5,888 5,888 Common stock acquired 11 52 - --------- --------- --------- 5,951 5,940 5,888 --------- --------- --------- Total stockholders' equity $ 230,242 $ 277,500 $ 313,097 ========= ========= =========
PAGE Gibson Greetings, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share amounts) Note 1--Nature of Business and Statement of Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of Gibson Greetings, Inc. and its wholly-owned and majority-owned subsidiaries (the Company). All material intercompany transactions have been eliminated. Nature of business The Company operates in a single industry segment: the design, manufacture and sale of greeting cards, gift wrap and related products. The Company sells to customers in several channels of the retail trade principally located in the United States. The Company recognizes sales at the time of shipment from its facilities. Provisions for sales returns are recorded at the time of the sale, based upon current conditions and the Company's historic experience. To minimize disruptions, in the short-term, caused by the loss of a customer, the Company has entered into longer term contracts with certain retailers, consistent with general industry practice. These contracts generally have terms ranging from three to six years, and sometimes specify a minimum sales volume commitment. In certain of these contracts, negotiated cash payments or credits constitute advance discounts against future sales. These payments are capitalized and amortized over the initial term of the contract. In the event of contract default by a retailer, such as bankruptcy or liquidation, a contract may be deemed impaired and unamortized amounts may be charged against operations immediately following the default. The Company conducts business based upon periodic credit evaluations of its customers' financial condition and generally does not require collateral. The Company does not believe a concentration of business risk exists due to the diversity of channels of distribution and geographic location of its retail customers; however, the Company does believe it has certain risks related to up-front payments on long-term customer sales agreements. As further discussed in Note 13, the Company sold Cleo, Inc. (Cleo), its wholly-owned gift wrap subsidiary, to CSS Industries, Inc. in mid-November 1995. In addition to gift wrap and related products, Cleo manufactured and sold boxed Christmas cards and Valentines. Prior to the sale of Cleo, one customer in 1995 accounted for more than 10% of total revenues; however, on a pro forma basis, without Cleo, the Company's largest customer accounted for approximately 13% of total revenues. During each of the years ended December 31, 1994 and 1993, the Company's largest customer accounted for approximately 12% of total revenues. PAGE Retail Operations On June 1, 1993, the Company acquired The Paper Factory of Wisconsin, Inc. (The Paper Factory) for $25,100 in a business combination accounted for as a purchase. The Paper Factory operates retail stores located primarily in manufacturers' outlet shopping centers. The results of The Paper Factory are included in the consolidated financial statements since the date of acquisition. The total cost of the acquisition exceeded the fair value of the net assets of The Paper Factory by $26,200. In connection with the acquisition, the Company assumed liabilities of approximately $11,600. International Operations Gibson de Mexico, S.A. de C.V. (Gibson de Mexico) is primarily engaged in the manufacturing and marketing of greeting cards. Minority stockholders of Gibson de Mexico are principal officers of Gibson de Mexico. The total cost of the acquisition exceeded the fair value of the net assets by $583. In view of the continuing poor economic conditions and devaluation of the peso in Mexico, the Company fully reserved its investment in Gibson de Mexico totaling approximately $2,000 during the fourth quarter of 1995. Gibson Greetings International Limited (Gibson International) markets the Company's products primarily in the United Kingdom and other European countries. The minority stockholders of Gibson International are principal officers of Gibson International. The activities of these subsidiaries were not material to consolidated operations in 1995, 1994 and 1993. Cash and equivalents Cash and equivalents are stated at cost. Cash equivalents include time deposits, money market instruments and short-term debt obligations with original maturities of three months or less. The carrying amount approximates fair value because of the short maturity of these instruments. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Plant and equipment Plant and equipment are stated at cost. Plant and equipment, except for leasehold improvements, are depreciated over their related estimated useful lives, using the straight-line method. Generally, buildings are depreciated over 15 years; machinery and equipment are depreciated over 3 to 11 years; and display fixtures are depreciated over 5 years. Leasehold improvements are amortized over the terms of the respective leases (see Note 11), using the straight-line method. Expenditures for maintenance and repairs are charged to operations currently; renewals and betterments are capitalized. PAGE Other assets Other assets include deferred and prepaid costs, goodwill and other intangibles. Deferred and prepaid costs principally represent costs incurred relating to long-term customer sales agreements. Deferred and prepaid costs are amortized ratably over the terms of the agreements, generally three to six years. Goodwill and other intangibles are amortized over periods ranging from three to twenty years, using the straight-line method. Accumulated goodwill amortization at December 31, 1995 and 1994 were $4,367 and $3,926, respectively. The realizability of goodwill and other intangibles is evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. Accounting for Long-Lived Assets The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" for the year ended December 31, 1995. The statement requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The effect of the adoption of this standard on the consolidated financial statements was not material. Income taxes Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of currently enacted tax laws. Investment tax credits are amortized to income over the lives of the related assets. Interest rate swap agreements The difference between the amount of interest to be paid and the amount of interest to be received under interest rate swap agreements (used for hedging purposes) due to changing interest rates is charged or credited to interest expense over the life of the agreements. Interest rate swap and derivative transactions that did not qualify as hedges were recorded at their fair value. The fair value of interest rate swaps and derivative transactions is the estimated amount that the Company would receive or pay to terminate the swap agreements at the reporting date as determined by a financial institution's valuation model based on the projected value of the transactions at maturity. PAGE Postemployment Benefits Effective January 1, 1994, the Company adopted SFAS No. 112 - "Employers' Accounting for Postemployment Benefits." The statement requires accrual accounting for benefits provided to former or inactive employees after employment but before retirement. The Company previously accounted for a certain portion of these postemployment benefits on a pay-as-you-go-basis. Adoption of SFAS No. 112 did not have a material effect on the consolidated financial statements of the Company. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation" is effective for years beginning after December 15, 1995. This statement establishes financial accounting and disclosure standards for stock-based employee compensation plans. SFAS No. 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. The Company is evaluating whether it will change to the recognition provisions of SFAS No. 123; however, it has not yet fully determined the potential effect of the statement on the consolidated financial statements. Computation of net income (loss) per share The computation of net income (loss) per share is based upon the weighted average number of shares of common stock and equivalents outstanding during the year: 16,243,483 shares for 1995, 16,130,140 shares for 1994, and 16,102,709 shares for 1993. Restatements and Reclassifications On July 1, 1994, the Company announced that it had determined that the inventory of Cleo had been overstated at December 31, 1993, resulting in an overstatement of the Company's 1993 consolidated net income. The overstatement of inventory and income before income taxes was $8,806 and the effect on net income was $5,346 at December 31, 1993 and for the year then ended. The accompanying 1993 Consolidated Statement of Operations was amended and restated to reflect the correction of such overstatement. In addition, in an institution and settlement of administrative proceedings dated December 22, 1994 against Bankers Trust (the Bankers Trust Order), the Securities and Exchange Commission alleged that Bankers Trust misled the Company about the value of the Company's derivative positions. The Company has restated the accompanying 1993 year-end consolidated financial statements to reflect derivative values based on Bankers Trust's computer model as set forth in the Bankers Trust Order. Such restatement resulted in a $4,571 reduction in previously reported 1993 consolidated net income and a corresponding decrease in 1994 consolidated net loss. This restatement, coupled with the November 23, 1994 settlement between the Company and Bankers Trust, as discussed in Note 6, resulted in a net gain (loss) on derivative transactions and settlement in 1994 and 1993 of $1,641 and ($5,689), respectively, as shown in the accompanying consolidated statements of operations. PAGE Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the 1995 presentation. Note 2--Trade Receivables Trade receivables at December 31, 1995 and 1994, consist of the following:
1995 1994 --------- --------- Trade receivables $ 105,898 $ 265,194 Less reserve for returns, allowances, cash discounts and doubtful accounts 59,278 67,395 --------- --------- $ 46,620 $ 197,799 ========= =========
Note 3--Inventories Inventories at December 31, 1995 and 1994, consist of the following:
1995 1994 --------- --------- Finished goods $ 47,967 $ 73,881 Work-in-process 12,409 15,623 Raw materials and supplies 7,927 37,956 --------- --------- $ 68,303 $ 127,460 ========= =========
PAGE Note 4--Plant and Equipment Plant and equipment at December 31, 1995 and 1994, consist of the following:
1995 1994 --------- --------- Land and buildings $ 32,800 $ 36,126 Machinery and equipment 44,437 66,747 Display fixtures 83,784 90,493 Leasehold improvements 10,484 13,003 Construction in progress 1,598 3,578 --------- --------- 173,103 209,947 Less accumulated depreciation 82,290 90,456 --------- --------- $ 90,813 $ 119,491 ========= =========
At December 31, 1995, buildings included assets acquired under capital lease obligations of $19,135 with the accumulated depreciation on such assets of $132. Note 5--Other Assets Other assets at December 31, 1995 and 1994, consist of the following:
1995 1994 --------- --------- Deferred and prepaid costs $ 176,041 $ 148,150 Goodwill and other intangibles 27,148 30,042 --------- --------- 203,189 178,192 Less accumulated amortization 97,735 75,321 --------- --------- $ 105,454 $ 102,871 ========= =========
PAGE Note 6--Debt Debt at December 31, 1995 and 1994, consists of the following:
1995 1994 --------- --------- Debt due within one year: Loans payable to banks under a revolving credit agreement bearing interest at a weighted average rate of 6.57% and 6.88%, respectively $ 19,000 $ 50,000 Loans payable to banks under uncommitted borrowing facilities bearing interest at weighted average rates of 6.58% in 1994 - 55,950 --------- --------- 19,000 105,950 Current portion of long-term debt 9,894 11,164 --------- --------- $ 28,894 $ 117,114 ========= ========= Long-term debt: Senior notes bearing interest at 9.33%, with annual serial maturities from 1995 through 2000 $ 30,857 $ 50,000 Notes payable to former shareholders of The Paper Factory of Wisconsin, Inc. bearing interest at 5.01%, payable in annual installments of $2,019 4,037 6,056 Industrial revenue bonds bearing interest at 9.25%, payable in semi-annual installments of $300, secured by plant and equipment with a carrying value of $5,712 and $6,171 at December 31, 1995 and 1994, respectively 1,800 2,400 Economic development revenue and urban develpment action grant paid off or assumed by the purchaser in connection with the sale of Cleo - 15,243 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 573 698 --------- --------- 37,267 74,397 Capital lease obligations payable in monthly installments through 2013 (see Note 11) 19,160 - --------- --------- 56,427 74,397 Less portion due within one year 9,894 11,164 --------- --------- $ 46,533 $ 63,233 ========= =========
In 1993, the Company entered into a three-year revolving credit agreement, replacing a similar existing facility, which expires April 26, 1996. The remaining amount available under this agreement is $81,000. The Company is currently negotiating a new revolving credit facility to replace the existing facility. Management believes that it will be able to consummate this facility to provide funds for general corporate purposes. If consummated, the Company expects that the facility will have a duration of 364 days and will provide for borrowings in an amount adequate for the Company's needs over the term of the facility. The fair value of the Company's long-term debt (excluding capital lease obligations) is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair value of the Company's gross long-term debt at December 31, 1995 was $39,134. The annual principal payments due on long-term debt for each of the years in the five-year period ended December 31, 2000, are $9,894, $9,901, $7,890, $7,298 and $2,285, respectively. No interest was capitalized for the years ended December 31, 1995, 1994 and 1993. Certain of the Company's debt agreements contain covenants including limitations on dividends based on a formula related to net income (loss), stock sales and certain restricted investments. At December 31, 1995, there were no unrestricted retained earnings available for dividends. The Company also is required to maintain a specified level of consolidated net worth (as defined) pursuant to the terms of its revolving credit facility. As a result of the sale of Cleo, the Company was unable to maintain the specified level and therefore obtained an amendment to the revolving credit agreement which adjusted the required consolidated net worth. In addition, the Company sought and received waivers under the revolving credit facility and its senior notes that permitted the Company to sell Cleo and to accept a short-term promissory note for a portion of the purchase price. The proceeds of the note were received on January 29, 1996. PAGE The Company periodically has entered into interest rate swap or derivative transactions with the intent to manage the interest rate sensitivity of portions of its debt. On March 4, 1994, the Company felt compelled to enter into two interest rate derivative transactions to cap its exposure on two prior uncapped interest rate derivative transactions that had a negative market value in excess of $17,000. These two new transactions imposed caps on the Company's total exposure and replaced the previous uncapped positions that were entered into subsequent to December 31, 1993 in an attempt to limit the Company's exposure against rising short-term interest rates. In September 1994, the Company filed suit against Bankers Trust Company and its affiliate BT Securities (Bankers Trust) alleging that in connection with the sale of these and earlier derivatives to the Company, Bankers Trust had breached fiduciary duties, made fraudulent representations, and failed to make adequate disclosures, in violation of common law and statutory obligations to the Company. The suit was settled on November 23, 1994. The Company agreed to pay Bankers Trust $6,180 which included $3,344 of cash payments made to the Company which had been recorded as gains with respect to a number of earlier transactions. In return, the remaining transactions were terminated with no further liability to the Company. At December 31, 1995 and 1994, the Company had two outstanding interest rate swap positions with a total notional amount of $3,600. These two agreements, with terms similar to the related bonds, are constituted as hedges and effectively reduce the Company's interest on industrial revenue bonds from 9.25% to 6.67% through February 1998. The estimated fair value of these two agreements at December 31, 1995 was $64. PAGE Note 7--Income Taxes The provision for income taxes for the years ended December 31, 1995, 1994, and 1993 consists of the following:
1995 1994 1993 --------- --------- --------- Federal: Current $ (19,093) $ 1,574 $ 17,903 Deferred (2,252) (14,530) (8,450) Change in valuation allowance - (924) 1,600 Alternative minimum tax credit carryforward - (200) - Deferred investment tax credits, net (79) (100) (122) --------- --------- --------- (21,424) (14,180) 10,931 --------- --------- --------- State and local: Current 5,405 649 4,532 Deferred (570) (3,239) (1,708) Change in valuation allowance - (211) 365 --------- --------- --------- 4,835 (2,801) 3,189 --------- --------- --------- Foreign: Current - - - Deferred - - 89 --------- --------- --------- - - 89 --------- --------- --------- $ (16,589) $ (16,981) $ 14,209 ========= ========= =========
In 1993, tax laws raised the statutory tax rate for corporations from 34% to 35%. The adverse impact of this 1% increase in effective tax rates was partially offset by a favorable adjustment of $700 recorded in 1993 due to the revaluation of certain deferred tax assets. PAGE The effective income tax rate for the years ended December 31, 1995, 1994 and 1993, varied from the statutory federal income tax rate as follows:
1995 1994 1993 --------- --------- --------- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 3.2 4.0 7.0 Nondeductible losses (8.5) (2.6) 2.6 Other (3.4) 0.8 3.6 --------- --------- --------- 26.3% 37.2% 48.2% ========= ========= =========
The above schedule includes the effect of state and foreign net operating losses for which no benefits have been provided. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of currently enacted tax laws. The net deferred taxes are comprised of the following:
1995 1994 --------- --------- Current deferred taxes: Gross assets $ 45,275 $ 49,708 Alternative minimum tax carryforward 200 200 Gross liabilities (464) (1,133) --------- --------- 45,011 48,775 --------- --------- Noncurrent deferred taxes: Gross assets 21,573 19,338 Valuation allowance (830) (830) Gross liabilities (5,806) (10,126) Deferred investment tax credits (192) (302) --------- --------- 14,745 8,080 --------- --------- $ 59,756 $ 56,855 ========= =========
PAGE The Company has recorded a valuation allowance with respect to the deferred tax assets reflected in the table below as a result of recent capital losses and uncertainties with respect to the amount of taxable capital gain income which will be generated in future years. The tax balances of significant temporary differences representing deferred tax assets and liabilities for the years ended December 31, 1995 and 1994 were as follows:
1995 1994 --------- --------- Reserve for returns, allowances, cash discounts and doubtful accounts $ 25,390 $ 29,203 Reserve for inventories and related items 6,222 8,940 Postretirement benefits 2,251 1,991 Depreciation of plant and equipment (5,713) (9,999) Reserve for display fixtures 1,628 1,605 Accrued compensation and benefits 17,223 14,068 Sales agreement payments due 4,067 5,638 Other accruals and reserves, net 9,510 6,341 Alternative minimum tax carryforward 200 200 Deferred investment tax credits (192) (302) --------- --------- 60,586 57,685 Valuation allowance (830) (830) --------- --------- $ 59,756 $ 56,855 ========= =========
PAGE Note 8--Other Current Liabilities Other current liabilities at December 31, 1995 and 1994, consist of the following:
1995 1994 --------- --------- Compensation, payroll taxes and related withholdings $ 16,584 $ 13,842 Customer allowances 12,963 20,495 Accrued insurance 10,029 9,766 Sales agreement payments due within one year 7,628 17,048 Accrued interest 6,221 3,935 Property and other taxes 4,397 5,322 Other 13,820 16,582 --------- --------- $ 71,642 $ 86,990 ========= =========
Note 9--Employment and Postretirement Benefits The Company sponsors a defined benefit pension plan (the Retirement Plan) covering substantially all employees who meet certain eligibility requirements. Benefits are based upon years of service and average compensation levels. The Company's general funding policy is to contribute amounts deductible for federal income tax purposes. Contributions are intended to provide not only for benefits earned to date, but also for benefits expected to be earned in the future. PAGE The following table sets forth the Retirement Plan's funded status on the measurement dates, December 31, 1995 and 1994, and a reconciliation of the funded status to the amounts recognized in the Company's consolidated balance sheets at December 31, 1995 and 1994:
1995 1994 --------- --------- Actuarial present value of benefit obligations: Vested benefit obligation $ 61,449 $ 44,558 ========= ========= Accumulated benefit obligation $ 65,247 $ 48,221 ========= ========= Projected benefit obligation for services rendered to date $ 74,779 $ 60,354 Plan assets at fair market value 68,068 58,465 --------- --------- Plan assets less than projected benefit obligation 6,711 1,889 Unrecognized net asset at January 1, 1986, being recognized over 9.9 years - 413 Unrecognized prior service cost (1,174) (1,511) Unrecognized net gain resulting from experience different from assumed and effects of changes in assumptions 6,454 9,425 --------- --------- Accrued pension expense included in other liabilities $ 11,991 $ 10,216 ========= =========
The changes in asset values relative to the measurement dates are primarily due to fluctuations in the market value of the Retirement Plan's equity investments. In 1990, the Company established a nonqualified defined benefit plan for employees whose benefits under the Retirement Plan are limited by provisions of the Internal Revenue Code. Additionally in 1990, the Company established a nonqualified defined benefit plan to provide supplemental retirement benefits for selected executives in addition to benefits provided under other Company plans. A nonqualified plan was also established to provide retirement benefits for members of the Company's Board of Directors who are not covered under any of the Company's other plans. All plans established in 1990 were unfunded at December 31, 1995 and 1994, although assets for those plans are held in certain grantor tax trusts known as "Rabbi" trusts. These assets are subject to claims of the Company's creditors but otherwise must be used only for purposes of providing benefits under the plans. PAGE The following table sets forth the nonqualified defined benefit plans' benefit obligations on the measurement dates, December 31, 1995 and December 31, 1994, and a reconciliation of those obligations to the amounts recognized in the Company's consolidated balance sheets at December 31, 1995 and 1994:
1995 1994 --------- --------- Actuarial present value of benefit obligations: Vested benefit obligation $ 4,039 $ 2,829 ========= ========= Accumulated benefit obligation $ 4,763 $ 3,867 ========= ========= Projected benefit obligation for services rendered to date $ 5,452 $ 4,692 Plan assets at fair market value - - --------- --------- Unfunded projected benefit obligation 5,452 4,692 Unrecognized prior service cost (1,657) (1,899) Unrecognized net gain (loss) resulting from experience different from assumed and effects of changes in assumptions (306) 223 --------- --------- Accrued pension expense included in other liabilities $ 3,489 $ 3,016 ========= =========
The assumed weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation for the plans was 7.25% and 4.5% in 1995 and 8.5% and 5.0% in 1994, respectively. The assumed long-term rate of return on plan assets used for valuation purposes was 9.0% for 1995 and 1994. PAGE A summary of the components of net pension expense for all of the Company's defined benefit plans for the years ended December 31, 1995, 1994 and 1993, is as follows:
1995 1994 1993 --------- --------- --------- Service cost-benefits earned during the period $ 2,652 $ 3,285 $ 2,917 Interest cost on projected benefit obligation 5,833 5,339 5,092 Net amortization and deferral 7,409 (6,103) 128 Actual return on plan assets (13,178) 902 (4,941) Curtailments - 284 - --------- -------- --------- $ 2,716 $ 3,707 $ 3,196 ========= ======== =========
The Company has a defined contribution pension plan for employees who are members of a collective bargaining unit. Benefits under this plan are determined based upon years of service and an hourly contribution rate. Pension expense for this plan for the years ended December 31, 1995, 1994 and 1993, was $218, $409 and $451, respectively. During 1994, Cleo offered a voluntary early retirement program to eligible employees resulting in curtailments of certain employee benefit plans. Consequently, the Company recognized curtailment losses of $284 and $68 in a defined benefit plan and medical and life insurance plan, respectively, for the year ended December 31, 1994. The Company has two defined contribution plans pursuant to Section 401(k) of the Internal Revenue Code. The plans provide that employees meeting certain eligibility requirements may defer a portion of their salary subject to certain limitations. The Company pays certain administrative costs of the plans and contributes to the plans based upon a percentage of the employee's salary deferral and an annual additional contribution at the discretion of the Board of Directors. The total expense for these plans for the years ended December 31, 1995, 1994 and 1993, was $452, $550 and $501, respectively. In addition to providing pension benefits, the Company provides medical and life insurance benefits for certain eligible employees upon retirement from the Company. Substantially all employees may become eligible for such benefits upon retiring from active employment of the Company. Medical and life insurance benefits for employees and retirees are paid by a combination of company and employee or retiree contributions. Retiree insurance benefits are provided by insurance companies whose premiums are based on claims paid during the year. PAGE A reconciliation of the accumulated postretirement benefit obligation (APBO) measured as of December 31, 1995 and December 31, 1994 to the amounts recognized in the Company's consolidated balance sheets at December 31, 1995 and 1994 is as follows:
1995 1994 --------- --------- Retirees $ 1,475 $ 2,602 Fully eligible active employees 997 1,146 Other active employees 1,117 885 --------- --------- Accumulated benefit obligation 3,589 4,633 Unrecognized prior service cost 100 (713) Unrecognized net gain 1,475 1,114 --------- --------- Accrued APBO included in other liabilities $ 5,164 $ 5,034 ========= =========
The accumulated benefit obligation for 1995 and 1994 was determined using the following assumptions: 1995 1994 ------------------ ---------------- Discount rate 7.25% 8.5% Health care cost 9% for 1996 10% for 1995 trend rate graded down per graded down per year to 6% in the year to 6% in the year 2002, 5.5% year 2002, 5.5% thereafter thereafter Net periodic cost of these benefits for the years ended December 31, 1995, 1994 and 1993 is as follows:
1995 1994 1993 --------- --------- --------- Service cost-benefits earned during the period $ 161 $ 171 $ 148 Interest cost on accumulated benefits 349 363 470 Net amortization (70) 42 61 Curtailments - 68 - --------- --------- --------- $ 440 $ 644 $ 679 ========= ========= =========
PAGE The health care cost trend rate assumption does not have a significant effect on the amounts reported. For example, a 1% increase in the health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1995, and the net periodic cost for the year then ended, by approximately 4% each. Note 10--Stockholders' Equity Employee stock plans Under various stock option and incentive plans, the Company may grant incentive and nonqualified stock options to purchase its common stock. All incentive options are granted at the fair market value on the date of grant. Incentive stock options generally become exercisable one year after the date granted and expire ten years after the date granted, if not earlier expired due to termination of employment. Nonqualified stock options become exercisable according to a vesting schedule determined at the date granted and expire on the date set forth in the option agreement, if not earlier expired due to termination of employment. A summary of stock option activity during the years ended December 31, 1995, 1994 and 1993, is as follows:
1992 1994 1993 --------- ---------- --------- Number of options to purchase common stock: Outstanding at beginning of year 1,321,619 1,063,042 1,073,470 Granted 65,900 597,500 47,500 Exercised (5,600) (46,263) (26,348) Expired (348,753) (292,660) (31,580) --------- -------- --------- Outstanding at end of year 1,033,166 1,321,619 1,063,042 ========= ========= ========= Exercisable at end of year 388,999 641,408 666,594 ========= ========= =========
The exercise prices of options granted in 1995 ranged from $9.75 to $14.63. The exercise prices of options granted in 1994 ranged from $13.88 to $21.13 and the exercise price of options granted in 1993 ranged from $18.88 to $21.25. Options exercised were at prices of $11.38 to $20.25, in 1995, 1994 and 1993. During 1995, 476,600 options outstanding at the beginning of the year were repriced at $9.75. Options outstanding at December 31, 1995, are at prices ranging from $9.75 to $28.63. PAGE Under certain stock incentive plans, the Company may grant the right to purchase restricted shares of its common stock. Such shares are subject to restriction on transfer and to repurchase by the Company at the original purchase price. The purchase price of restricted shares is determined by the Company and may be nominal. No restricted shares were granted in 1995, 1994 or 1993. At December 31, 1995, 558,672 shares were available under the stock option and incentive plans, of which 484,272 shares could be issued as restricted shares. Stock rights On December 4, 1987, the Company's Board of Directors declared a dividend distribution of one right for each outstanding share of the Company's common stock to stockholders of record on December 21, 1987. Each right entitles the holder to purchase, for the exercise price of $40 per share, 1/100th of a share of Series A Preferred Stock. Until exercisable, the rights are attached to all shares of the Company's common stock outstanding. The rights are exercisable only in the event that a person or group of persons (i) acquires 20% or more of the Company's common stock and there is a public announcement to that effect, (ii) announces an intention to commence or commences a tender or exchange offer which would result in that person or group owning 30% or more of the Company's common stock, or (iii) beneficially owns a substantial amount (at least 15%) of the Company's common stock and is declared to be an Adverse Person (as defined in the Rights Agreement) by the Company's Board of Directors. Upon a merger or other business combination transaction, each right may entitle the holder to purchase common stock of the acquiring company worth two times the exercise price of the right. Under certain other circumstances (defined in the Rights Agreement) each right may entitle the holder (with certain exceptions) to purchase common stock, or in certain circumstances, cash, property or other securities of the Company, having a value worth two times the exercise price of the right. The rights are redeemable at one cent per right at anytime prior to 20 days after the public announcement that a person or group has acquired 20% of the Company's common stock. Unless exercised or redeemed earlier by the Company, the rights expire on December 28, 1997. PAGE Note 11--Commitments Lease commitments In connection with the sale of Cleo, the Company renegotiated its long-term 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. The Company also leases additional manufacturing, distribution and administrative facilities, sales offices and personal property under noncancelable operating leases which expire on various dates through 2005. Certain of these leases contain renewal and escalating rental payment provisions as well as contingent payments based upon individual store sales. Rental expense for the years ended December 31, 1995, 1994 and 1993, on all real and personal property, was $23,663, $24,493 and $20,297, respectively. Minimum rental commitments under noncancelable leases as of December 31, 1995 are as follows:
Capital Operating Year ending December 31: Lease Lease ------------------------------- --------- --------- 1996 $ 3,100 $ 11,870 1997 3,100 10,388 1998 3,100 5,848 1999 3,100 3,399 2000 3,152 1,890 Thereafter 56,680 1,019 --------- --------- Net minimum commitments 72,232 $ 34,414 ========= Less amount representing interest 53,072 --------- Present value of net minimum lease commitments $ 19,160 =========
PAGE Contract commitments The Company has several long-term customer sales agreements which require payments and credits for each of the years in the five-year period ended December 31, 2000, of $7,628, $5,950, $5,715, $3,913 and $2,986, respectively, and no payments and credits thereafter. These amounts are included as other current liabilities or other liabilities in the accompanying consolidated balance sheet as of December 31, 1995. Employment agreements The Company has employment agreements with certain executives which provide for, among other things, minimum annual salaries adjusted for cost-of-living changes, continued payment of salaries in certain circumstances and incentive bonuses. Certain agreements further provide for employment termination payments, including payments contingent upon any person becoming the beneficial owner of 50% or greater of the Company's outstanding stock. Note 12--Legal Proceedings 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 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). In December 1994 the Court ruled that neither of the two named plaintiffs qualified as a class representative. Plaintiffs have filed an Amended Complaint naming a proposed substitute class representative, and a motion to certify a class, which the Company opposes, is pending. Like its predecessors in this litigation, the most recent complaint alleges violations of the federal securities laws and seeks unspecified damages for an asserted public disclosure of false information regarding the Company's earnings. The Company intends to defend the suit vigorously and has filed an Answer denying any wrongdoing and a Third Party Complaint against its former auditor for contribution against any judgment adverse to the Company. On April 10, 1995, two purported class action lawsuits were commenced against the Company, its Chairman, President and Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Southern District of Ohio. The Complaints alleged violations of the federal securities law for an asserted failure to disclose allegedly material information regarding the Company's financial performance. On August 1, 1995, the two lawsuits were consolidated and captioned In Re Gibson Greetings Securities Litigation II. On August 9, 1995, the plaintiffs filed a Consolidated Amended Class Action Complaint which restated the basic claims which had been presented in the original complaints. The Court has denied, at this stage, the Company's motion to dismiss the Consolidated Amended Complaint and also has conditionally denied the plaintiffs' motion to certify a class for purposes of class action treatment of the litigation. The Court will reconsider the class action certification motion at the conclusion of discovery. The Company intends to defend the action vigorously. PAGE The litigation described in the two preceding paragraphs is in early stages of proceedings. Accordingly, the Company presently is unable to predict the effect of the ultimate resolutions of these matters upon the Company's results of operations and cash flows; as of this date, however, Management does not expect that such resolutions would result in a material adverse effect upon the Company's total net worth, although a substantially unfavorable outcome could be material to such net worth. On March 6, 1996, two purported class actions were filed against the Company's directors (as well as certain former directors) and the Company in the New Castle County, Delaware Court of Chancery (Crandon Capital Partners v. Cooney, et al. and Weiss v. Lindberg, et al.). The Complaints allege that the individual defendants breached their fiduciary duties to the plaintiffs by refusing to negotiate in response to an acquisition proposal for the Company by American Greetings Corporation. The Complaints seek to require the directors to do a number of things, including pursuing merger or acquisition discussions with American Greetings and others. The Complaints also seek unspecified damages against those directors. On March 20, 1996, a third action, Krim, et al. v. Pezzillo et al., was filed in the same court. While it generally follows the allegations and demands of the other two Complaints, it specifically seeks injunctive relief against the exercise of the shareholder rights plan that has been a part of the Company's corporate governance for nearly ten years. While the Company is a named defendant in all three actions, none of the Complaints appears to seek any other specific relief against the Company. The defendants intend to defend the suits vigorously. In 1989, unfair labor practice charges were filed against the Company as an outgrowth of a strike at its Berea, Kentucky facility. Remedies sought included back pay from August 8, 1989 and reinstatement of employment for approximately 200 employees (In the Matter of Gibson Greetings, Inc. and International Brotherhood of Firemen and Oilers, AFL-CIO Cases 9-CA-26706, 27660, 26875). On May 19, 1995, a unanimous panel of the United States Court of Appeals for the District of Columbia Circuit found that the strike was not an unfair labor practice strike and that a significant number of strikers had been permanently replaced and thus were not entitled to reinstatement or back pay. The Court remanded the case to the National Labor Relations Board for a factual determination on the issue of permanency with respect to approximately 52 replacements hired after June 29, 1989. Management does not believe that the outcome of this matter will result in a material adverse effect on the Company's net worth, total cash flows or operating results. 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. PAGE Note 13--Sale of Cleo, Inc. Effective November 15, 1995, the Company consummated its agreement to sell Cleo to CSS Industries, Inc. Total consideration to the Company amounted to approximately $133,074, consisting of $96,500 in cash, a note due and paid on January 29, 1996 for $24,574 and $12,000 which will be held in escrow for certain post-closing adjustments and indemnification obligations. In addition, the Company has been released from approximately $14,956 of third-party debt which will be retained by Cleo under its new owner. This transaction resulted in a loss of $54,471, net of taxes of $28,541, which has been included in operations for the year ended December 31, 1995. The following is a summary of Cleo's net assets as of November 14, 1995 and results of operations of Cleo for the period ended November 14, 1995 and for the year ended December 31, 1994:
As of November 14, 1995 ----------------- Current assets $ 191,203 Property and equipment, net 33,999 Other assets, net 1,087 --------- Total assets 226,289 Current liabilities 22,803 Long-term debt, including current portion 14,956 --------- Net assets $ 188,530 ========= Period Ended Year Ended November 14, 1995 December 31, 1994 ----------------- ----------------- Revenues $ 151,937 $ 189,387 ========= ========= Loss before income taxes $ (17,110) $ (36,922) ========= ========= Net loss $ (12,446) $ (22,646) ========= =========
PAGE Note 14--Quarterly Financial Data - Actual and Pro Forma (Unaudited)
(Dollars in thousands except First Second Third Fourth per share amounts) Quarter Quarter Quarter Quarter Year -------- -------- -------- -------- -------- 1995 (1) - ------------------- Net sales $100,164 $ 97,323 $144,121 $198,537 $540,145 Total revenues 100,287 97,470 144,323 198,741 540,821 Cost of products sold 39,168 37,520 82,520 109,494 268,702 Other operating expenses 56,774 55,264 140,437 70,459 322,934 Interest expense, net 3,045 2,873 3,254 3,091 12,263 Net income (loss) 271 641 (55,208) 7,807 (46,489) Net income (loss) per share 0.02 0.04 (3.41) 0.49 (2.86) 1994 (2) - ------------------- Net sales $ 93,187 $ 90,506 $152,881 $211,468 $548,042 Total revenues 93,429 90,648 153,026 211,692 548,795 Cost of products sold 36,028 43,538 86,480 143,993 310,039 Other operating expenses 66,826 67,787 64,422 75,471 274,506 Interest expense, net 1,653 1,867 2,514 3,800 9,834 Net income (loss) (10,843) (16,933) 359 (1,186) (28,603) Net income (loss) per share (0.67) (1.05) 0.02 (0.07) (1.77) 1995 Pro Forma (1) (3) - ------------------- Net sales $ 92,554 $ 87,369 $ 89,343 $118,947 $388,213 Total revenues 92,671 87,516 89,546 119,151 388,884 Cost of products sold 32,943 29,059 38,383 48,149 148,534 Other operating expenses 49,306 47,467 45,463 59,678 201,914 Interest expense, net 2,253 2,185 2,216 1,918 8,572 Net income 4,582 4,940 1,937 4,817 16,276 Net income per share 0.28 0.31 0.12 0.29 1.00 1994 Pro Forma (3) - ------------------- Net sales $ 86,167 $ 84,310 $ 94,733 $ 93,449 $358,659 Total revenues 86,405 84,452 94,878 93,673 359,408 Cost of products sold 31,621 28,815 41,900 47,283 149,619 Other operating expenses 49,827 53,154 53,375 65,250 221,606 Interest expense, net 10,237 8,024 (699) (12,762) 4,800 Net income (loss) (7,374) (6,308) 701 3,301 (9,680) Net income (loss) per share (0.46) (0.39) 0.05 0.20 (0.60)
(1) The 1995 fourth quarter included lower expenses resulting from an adjustment to customer returns and allowances increasing net income (loss) by $2,545 or $.16 per share and higher expenses attributed to the full reserve of the Company's investment in Gibson de Mexico decreasing net income (loss) by $1,157 or $.07 per share. (2) The first three quarters of 1994 have been restated for the effects of derivative transactions discussed in Note 12. The derivatives' impact on net income (loss) and net income (loss) per share for the first three quarters of 1994 was as follows: reduced net loss $7,477 or $.46 per share in the first quarter; increased net loss $3,255 or $.20 per share in the second quarter; no impact in the third quarter. (3) The unaudited Quarterly Financial Data - Pro Forma is based upon the Statements of Operations of the Company for each of the four quarters and year ended December 31, 1995 and 1994 and gives effect to the sale of Cleo as if it had occurred as of January 1, 1994 after giving effect to the pro forma adjustments. Pro forma adjustments represent management fee allocations including legal, tax and administrative expenses that are not expected to be eliminated, reduction in interest expense as a result of prepayment of short-term debt with sale proceeds and additional commitment fees on the unused portion of the revolving credit facility and an increase in income tax resulting from the income tax on reversal of loss on sale of Cleo net of pro forma expenses. Senior notes were assumed not to be prepaid. The pro forma quarterly financial data referred to above does not purport to represent what the Company's financial position or results of operations actually would have been if the Sale, in fact, occurred on the dates referred to above or to project the Company's results of operations for any period. This pro forma quarterly financial data should be read in conjunction with the consolidated financial statements and notes thereto. PAGE Independent Auditors' Report To the Board of Directors and Stockholders of Gibson Greetings, Inc. Cincinnati, Ohio We have audited the accompanying consolidated balance sheets of Gibson Greetings, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Companies at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Cincinnati, Ohio February 14, 1996 PAGE Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. PAGE PART III Except as set forth below, the information required by this Part is included in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's 1996 Annual Meeting of Stockholders, and is incorporated by reference herein. Item 10. Directors and Executive Officers of the Registrant The Executive Officers of the Company (at March 1, 1996) are as follows: Name Age Title ------------------- --- ---------------------------- Albert R. Pezzillo 67 Chairman of the Board, President and Chief Executive Officer William L. Flaherty 47 Vice President, Finance and Chief Financial Officer Stephen M. Sweeney 59 Vice President, Human Resources Gregory Ionna 44 Executive Vice President, Sales and Marketing - Gibson Card Division ALBERT R. PEZZILLO. Mr. Pezzillo has been Chairman of the Board and Chief Executive Officer of the Company since February 1996. He was a business consultant from 1990 until 1996 after his retirement in 1990 from his position as Senior Vice President of American Home Products Corporation, a manufacturer and marketer of ethical pharmaceuticals, medical supplies and hospital, consumer health care, food and household products. Prior to joining American Home Products in 1981, he held a variety of executive positions with Warner Lambert Company and Colgate Palmolive Company. Mr. Pezzillo became a director of the Company in April 1990. WILLIAM L. FLAHERTY. Mr. Flaherty has been Senior Vice President, Finance and Chief Financial Officer of the Company since November 1993. Prior to that time, he served as Vice President and Corporate Treasurer of FMR Corp., the parent company of Fidelity Investments Group, a mutual fund management and discount stock brokerage firm (1989 - 1992) and as Vice President and Treasurer of James River Corporation, an integrated manufacturer of pulp, paper and converted paper and plastic products (1987 - 1989). PAGE STEPHEN M. SWEENEY. Mr. Sweeney joined the Company as Vice President, Human Resources in 1987. He held similar positions with Coca Cola Enterprises, Inc. from 1985 until 1987, the Tribune Company from 1983 until 1985 and Contel, Inc. from 1976 to 1983. GREGORY IONNA. Mr. Ionna has been Executive Vice President, Sales and Marketing - Gibson Card Division since September 1993. Prior to that he served in various capacities within the Sales and Marketing functions of the Company . Officers serve with the approval of the Board of Directors. PAGE PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K a) The following documents are filed as part of this report: 1. Financial Statements: Page Herein Financial Statement ------ --------------------------------------------------------- 13 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 14 Consolidated Balance Sheets as of December 31, 1995 and 1994 15 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 16 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 17 Notes to Consolidated Financial Statements 32 Independent Auditors' Report 2. Financial Statement Schedules required to be filed by Item 8 of this Form 10-K: Schedules Filed: Page Herein Schedule ------ --------------------------------------------------------- 36 Valuation and Qualifying Accounts PAGE 3. Exhibits: See Index of Exhibits (page 37) for a listing of all exhibits filed with this annual report on Form 10-K b) Reports on Form 8-K: The Company filed the following reports on Form 8-K with the Securities and Exchange Commission during the quarter ended December 31, 1995: (i) Form 8-K filed October 6, 1995 (date of report: October 3, 1995) announcing a definitive agreement to sell Cleo, Inc. (Items 5 and 7) (ii) Form 8-K filed November 30, 1995 (date of report: November 15, 1995), and related Form 8-K/A (Amendment No. 1) filed December 4, 1995, in connection with the sale of Cleo, Inc. (Items 2 and 7); the following financial statements were filed with these reports: - Pro Forma Condensed Consolidated Financial Statements - Summary - Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1995 - Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 1995 - Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 1994 - Notes to Pro Forma Financial Information PAGE SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of the 28th day of March 1996. Gibson Greetings, Inc. By /s/ Albert R. Pezzillo ----------------------- Albert R. Pezzillo Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated as of the 28th day of March 1996. Signature Title ---------- ----- Chairman of the Board, /s/ Albert R. Pezzillo Chief Executive Officer ------------------------- Albert R. Pezzillo (principal executive officer) Senior Vice President, Finance /s/ William L. Flaherty Chief Financial Officer ------------------------- William L. Flaherty (principal financial and accounting officer) /s/ Charles D. Lindberg ------------------------- Charles D. Lindberg Director ------------------------- Benjamin J. Sottile Director /s/ Frank Stanton ------------------------- Frank Stanton Director /s/ Charlotte St. Martin ------------------------- Charlotte St. Martin Director /s/ C. Anthony Wainwright ------------------------- C. Anthony Wainwright Director PAGE
GIBSON GREETINGS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Thousands of dollars) Column A Column B Column C Column D Column E - -------------------- ---------- ------------------------- ---------- ---------- Additions ------------------------- Balance at Charged to Charged to Balance at Beginnng Costs and Other End of Description of Period Expenses Accounts Deductions Period - -------------------- ---------- ---------- ---------- ---------- ---------- Deducted from trade receivables Allowance for doubtful accounts: Twelve months ended 12/31/95 $ 12,653 $ 6,606 $ - $ 6,954 (A) $ 12,305 Twelve months ended 12/31/94 10,601 13,886 - 11,834 (A) 12,653 Twelve months ended 12/31/93 7,515 4,188 - 1,102 (A) 10,601 Allowance for sales returns, allowances and cash discounts: Twelve months ended 12/31/95 54,742 97,445 - 105,214 (B) 46,973 Twelve months ended 12/31/94 42,918 121,450 - 109,626 (B) 54,742 Twelve months ended 12/31/93 45,902 89,987 - 92,971 (B) 42,918
[FN] - -------------------- (A) Accounts judged to be uncollectible and charged to reserve, net of recoveries. (B) Includes actual cash discounts taken by customers and sales returns and allowances granted to customers, all of which were charged to the reserve. PAGE Index of Exhibits Exhibit Number Description ------- ----------------------------------------------------------------- 3(a) Restated Certificate of Incorporation as amended (*1) 3(b) Bylaws (*2) 4(a) Article 4.01 of Restated Certificate of Incorporation (included in Exhibit 3(a)) 4(b) Rights Agreement dated as of December 4, 1987, between Gibson Greetings, Inc. and The First National Bank of Boston, Rights Agent, including Certificate of Designation, Preferences and Rights of Series A Preferred Stock (*3) 10(a) Lease Agreement dated January 25, 1982 between Corporate Property Associates 2 and Corporate Property Associates 3 and Gibson Greeting Cards, Inc. (*4) 10(b) Amendment dated June 25, 1985, to Lease Agreement, dated January 25, 1982, by and between Corporate Property Associates 2 and Corporate Property Associates 3 and Gibson Greeting Cards, Inc. (*5) 10(c) Credit Agreement, dated as of April 26, 1993, by and among Gibson Greetings, Inc.; Bankers Trust Company; The Bank of New York; Mellon Bank, N.A.; The Fifth Third Bank; Harris Trust and Savings Bank; NBD Bank, N.A.; Royal Bank of Canada; The Sanwa Bank, Ltd.; Society National Bank; Union Bank of Switzerland; Wachovia Bank of Georgia, N.A.; and Bankers Trust Company, as agent (*6) 10(d) Form of Note Agreement between Gibson Greetings, Inc. and Connecticut Mutual Life, The Minnesota Mutual Life Insurance Company, The Reliable Life Insurance Company, Federated Life Insurance Company, The Variable Annuity Life Insurance Company and Nationwide Life Insurance Company, dated May 15, 1991 (*7) 10(e) Executive Compensation Plans and Arrangements (i) 1982 Stock Option Plan (*2) (ii) 1983 Stock Option Plan (*2) (iii) 1985 Stock Option Plan (*2) (iv) 1987 Stock Option Plan (*2) (v) 1989 Stock Option Plan (*2) (vi) 1989 Stock Option Plan for Nonemployee Directors (*2) (vii) 1991 Stock Option Plan (*2) (viii) Employment Agreement with Thomas M. Cooney (*8) PAGE (ix) Form of Second Amendment to Employment Agreement with Thomas M. Cooney (*1) (x) Employment Agreement between Gibson Greetings, Inc. and Benjamin J. Sottile, dated April 1, 1993 (*6) (xi) ERISA Makeup Plan (*9) (xii) Supplemental Executive Retirement Plan (*9) (xiii) Agreements dated January 2, 1991 and December 10, 1993 between Gibson Greetings, Inc. and Stephen M. Sweeney (*2) (xiv) Agreement dated November 18, 1993 between Gibson Greetings, Inc. and William L. Flaherty (*2) (xv) Agreement dated November 21, 1994 between Gibson Greetings, Inc. and Nelson J. Rohrbach (*10) (xvi) Agreement dated June 16, 1995 between Cleo, Inc. and Nelson J. Rohrbach (*11) (xvii) Agreement dated November 17, 1995 between Gibson Greetings, Inc. and Stephen M. Sweeney PAGE Exhibit Number Description ------- ----------------------------------------------------------------- (xviii) Agreement dated November 21, 1995 between Gibson Greetings, Inc. and William L. Flaherty (xix) Agreements dated January 2, 1991 and December 6, 1994 between Gibson Greetings, Inc. and Gregory Ionna 10(f) Stock Purchase Agreement (*12) 10(g) Amendment dated November 15, 1995, to Lease Agreement, dated January 25, 1982, by and between Corporate Property Associates 2 and Corporate Associates 3 and Gibson Greetings, Inc. 11 Computation of Income (Loss) per Share 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule (contained in EDGAR filing only) - ---------------------- * Filed as an Exhibit to the document indicated and incorporated herein by reference: (1) The Company's Report on Form 10-K for the year ended December 31, 1988. (2) The Company's Report on Form 10-K/A (Amendment No. 1) for the year ended December 31, 1993. (3) The Company's Report on Form 8-K dated December 28, 1987, filed January 4, 1988. (4) The Company's Registration Statement on Form S-1 (No. 2-82990). (5) The Company's Report on Form 10-K for the year ended December 31, 1985. (6) The Company's Report on Form 10-Q for the quarter ended June 30, 1993. (7) The Company's Report on Form 10-Q for the quarter ended June 30, 1991. (8) The Company's Report on Form 10-K for the year ended December 31, 1986. PAGE (9) The Company's Report on Form 10-K for the year ended December 31, 1992. (10) The Company's Report on Form 10-K/A (Amendment No.1) for the year ended December 31, 1994. (11) The Company's Report on Form 10-Q for the quarter ended June 30, 1995. (12) The Company's Report on Form 8-K dated November 15, 1995, filed November 30, 1995. - ---------------------- The Company will furnish to the Commission upon request its long-term debt instruments not listed above. PAGE EX-11 2 COMPUTATION OF INCOME PER SHARE EXHIBIT 11 Exhibit 11 GIBSON GREETINGS, INC. COMPUTATION OF INCOME (LOSS) PER SHARE (In thousands except per share amounts)
Twelve Months Ended December 31, ---------------------------------------- Restated 1995 1994 1993 ---------- ---------- ---------- Net income (loss) $ (46,489) $ (28,603) $ 15,268 ========== ========== ========== Weighted average number of shares of common stock and equivalents outstanding: Common stock 16,084 16,087 16,042 Options 159 43 61 ---------- ---------- ---------- 16,243 16,130 16,103 ========== ========== ========== Net income (loss) per share $ (2.86) $ (1.77) $ 0.95 ========== ========== ==========
PAGE EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Exhibit 21 GIBSON GREETINGS, INC. Subsidiaries of the Registrant As of December 31, 1995 NAME STATE OF INCORPORATION -------------------------------------- ---------------------- Gibson Greetings International Limited Delaware Gibson de Mexico S.A. de C.V. Mexico The Paper Factory of Wisconsin, Inc. Wisconsin PAGE EX-23 4 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT ----------------------------- We consent to the incorporation by reference in Registration Statements No. 2-88721, 33-2481, 33-18221, 33-32596, 33-32597, 33-44633, 33-67782 and 33-67784 of Gibson Greetings, Inc. on Form S-8 of our report dated February 14, 1996, appearing in this Annual Report on Form 10-K of Gibson Greetings, Inc. for the year ended December 31, 1995. DELOITTE & TOUCHE LLP Cincinnati, Ohio February 14, 1996 PAGE EX-10 5 EMPLOYMENT AGREEMENT - S.M.SWEENEY - EX 10(E)((XVII) EXHIBIT 10(e)(xvii) November 17, 1995 Mr. Stephen M. Sweeney Vice President - Human Resources Gibson Greetings, Inc. 2100 Section Road Cincinnati, OH 45237 Re: Employment Agreement Dear Steve: This will serve as an amendment to the Employment Agreement between the parties dated January 2, 1991 as amended December 10, 1993 ("Agreement") and shall become effective only upon the occurrence of a change in controlling ownership of the Company, or a sale of all or substantially all of the assets of the Company ("Qualifying Transaction"). Upon the closing date of any Qualifying Transaction occurring during the term of the Agreement, the Agreement shall be amended as follows: 1. Upon the occurrence of a Qualifying Transaction, the term of the Agreement is hereby extended for a period of two (2) years from the closing date of such Qualifying Transaction. Unless you receive at least six (6) months' prior written notice from the Company that the Agreement will terminate upon the expiration of said two (2) year period, the Agreement will automatically be extended and will continue in effect until terminated by the Company for any reason and at any time upon giving you six (6) months' written notice or by you upon thirty (30) days' written notice to the Company. This agreement shall remain at all times subject to earlier termination for cause. All other terms and conditions of the Agreement not amended hereby remain in full force and effect. Sincerely, GIBSON GREETINGS, INC. By: /s/ Albert R. Pezzillo ACCEPTED AND AGREED TO: /s/ Stephen M. Sweeney Stephen M. Sweeney Date: 11/28/95 PAGE EX-10 6 EMPLOYMENT AGREEMENT - W.L. FLAHERTY - EX 10(E)((XVIII) EXHIBIT 10(e)(xviii) November 21, 1995 Mr. William L. Flaherty Vice President, Finance and Chief Financial Officer Gibson Greetings, Inc. 2100 Section Road Cincinnati, OH 45237 Dear Bill: As we have discussed, Gibson Greetings, Inc. and you desire to amend your Employment Agreement dated November 18, 1993 ("Agreement"). This amendment is as follows: 1. Paragraph 10 of the Agreement is deleted. 2. New Paragraph 10 is hereby adopted to read as follows: In the event of: (a) voluntary termination of your employment by you no sooner than thirty (30) but not later than sixty (60) days after a Change in Control (as hereinafter defined); or (b) termination of your employment by the Company within one (1) year after a Change in Control (as hereinafter defined), but excepting termination by the Company pursuant to Paragraph 11 (illness, incapacity, or death) and termination by the Company for cause pursuant to Paragraph 12, then in the case of either (a) or (b) above, the Company shall pay to you the sum of three (3) times your annual base salary which at the time is in effect in lieu of all other severance, termination, and continuing pay benefits to which you would be entitled under the Agreement or otherwise (and including without limitation payments under Paragraphs 1 and 14). Payment will be made to you within three (3) business days following your termination. A Change in Control as used herein shall be deemed to have occurred if the conditions set forth in any one of the following subparagraphs shall have been satisfied: (i) any person is or becomes the Beneficial Owner, as defined in Rule 13(d)(3) of the Securities Exchange Act of 1934, as amended from time to time ("Beneficial Owner"), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 50% or more of the combined voting power of the Company's then outstanding securities; or PAGE (ii) if any action relating to termination is taken by the Company pursuant to the request or direction of any Person who by agreement, whether actual, implied, or otherwise will become a Beneficial Owner with ownership as described in (i) above, or pursuant to the request or direction of any Person who requests or directs such action as a condition to becoming a Beneficial Owner with ownership as described in (i) above, then a Change in Control shall be deemed to have occurred with respect to such action and to have preceded such action; or (iii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iv), or (v) of this definition) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two -thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iv) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (a) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (v) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. As used in this Paragraph, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Corporation or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation. 3. The last sentence of Paragraph 12 is amended to insert "10," between the word "Paragraphs" and the number "13." PAGE To indicate your acceptance of and willingness to be bound by this amendment to your Agreement, please sign and return one duplicate original of this letter. Sincerely, GIBSON GREETINGS, INC. By: /s/ Albert R. Pezzillo ACCEPTED AND AGREED TO: /s/ William L. Flaherty William L. Flaherty Date: November 30, 1995 PAGE EX-10 7 EMPLOYMENT AGREEMENTS - G. IONNA - EX 10(E)((XIX) EXHIBIT 10(e)(xix) January 2, 1991 Mr. Gregory Ionna Vice President - Marketing Gibson Division Gibson Greetings, Inc. 2100 Section Road Cincinnati, Ohio 45237 Re: Employment Agreement Dear Greg: In accordance with our prior discussions, it is my pleasure to confirm to you the following terms and conditions under which you have agreed to continue serving as Vice President - Marketing of the Gibson Division of Gibson Greetings, Inc. ("Company"). 1. 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 three years commencing December 1, 1990 and ending on November 30, 1993. Your annual salary, effective December 1, 1990, shall be $90,000 which amount may be increased from time to time by the Company throughout the term of the Agreement in accordance with the Company's salary administration program. In addition, you will qualify for the Key Executives' Bonus Program. 2. In addition to the above salary and bonus, you will also be included in Gibson's Supplemental Executive Retirement Plan and in Gibson's other programs for executives which include: executive physical examinations, supplemental life insurance, and tax preparation and estate planning assistance. 3. In the event you are unable to perform your duties hereunder due to illness or other incapacity, which incapacity continues for more than six consecutive or nonconsecutive months in any twelve month period, the Company shall have the right, on not less than 30 days written notice to you, to terminate this Agreement. In the event of your death during your employment hereunder, your salary shall cease as of the last day of the sixth full calendar month following the month in which your death occurs. Except for such salary continuation rights, this Agreement shall terminate as of the date of death. PAGE 4. In the event any person becomes the beneficial owner of fifty percent (50%) or more of the Company's securities, and you are not retained by that person in substantially the same capacity and salary as contemplated herein for at least six (6) months from the date of said change in beneficial ownership, then upon your termination hereunder, you will be paid one year's salary reduced by 1/12 for each full month of employment completed after said change in beneficial ownership. Any amount to be paid hereunder would be further reduced by the value of any severance package received by you from the new ownership in connection with your termination. 5. In the event you voluntarily terminate your employment during the term of this Agreement, or if your employment is terminated for cause, your right to all compensation hereunder shall cease as of the date of termination. "Cause" shall mean dishonesty, insubordination, gross negligence or willful misconduct in the performance of your duties, failure to perform duties in a diligent and competent manner, or any willful or material breach of this Agreement. Termination of employment under this Paragraph shall terminate this Agreement with the exception of the provisions of Paragraphs 6, 7, and 9. 6. Also in the event you voluntarily terminate your employment hereunder, or in the event the Company terminates this Agreement and your employment for cause, you agree that for a period of two years 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 by any division, subsidiary or affiliate of Gibson Greetings, Inc., without the Company's prior consent. If this Agreement is not earlier terminated as provided in this Paragraph, your said obligation not to compete shall continue in effect for a period of one year following the expiration of this Agreement or of any renewal or extension hereof. 7. In connection with this Agreement, you agree to continue to receive confidential information of the Company in confidence, and not to disclose to others, assist others in the application of, or use for your own gain, such information, or any part thereof, unless and until it has become public knowledge or has come into the possession of others by legal and equitable means. You further agree that, upon termination of employment with the Company, all documents, records, notebooks, and similar writings, including copies thereof, then in your possession, whether prepared by you or by others, will be left with the Company. For purposes of this Paragraph, "confidential information" means information concerning Company's finances, plans, sales, products, processes and services, or those of Company's subsidiaries, divisions or affiliates, which is disclosed to you or known by you as a consequence of or through your employment with the Company, and which is not generally known in the industry in which the Company or its subsidiaries, divisions or affiliates are or may become engaged. 8. Nothing herein is intended to be granted to you in lieu of any rights or privileges to which you may be entitled as an executive employee of the Company under any retirement, insurance, hospitalization, or other plan which may now or hereafter be in effect. PAGE 9. This Agreement shall inure to the benefit of and be binding upon you and your legal representatives as well as the Company, its successors and assigns including, without limitation, any person, partnership, corporation or other entity which may acquire all, or substantially all, of the Company's assets and business. To indicate your acceptance of and willingness to be bound by this Agreement, please sign and return one duplicate original of this letter. Sincerely, GIBSON GREETINGS, INC. /s/Benjamin J. Sottile Benjamin J. Sottile President and C.E.O. BJS/HLC/ss:=14 ACCEPTED AND AGREED TO: /s/ Gregory Ionna Gregory Ionna Date: PAGE December 6, 1994 Mr. Gregory Ionna Executive Vice President - Sales and Marketing Gibson Card Division Gibson Greetings, Inc. 2100 Section Road Cincinnati, OH 45237 Dear Greg: As you are aware, the original term of your employment agreement with Gibson Greetings, Inc. expired on November 30, 1993. We believe that you, as a highly valued member of the Company, have earned and continue to deserve the career and financial security afforded by an employment agreement. Therefore, we are hereby offering to extend your January 2, 1991 agreement indefinitely until it is terminated by the Company upon one (1) year's advance written notice to you. The agreement shall remain subject to earlier termination for cause. In addition, as requested by you, the two-year non-compete provision set forth in Paragraph 6 of the agreement shall be changed to one year. All other terms and conditions of the agreement shall remain the same. Please be aware that, even if the Company decides to terminate your employment agreement, that would not necessarily be a termination of your employment relationship with the Company. To indicate your acceptance of this amendment, please sign where indicated below and, as promptly as possible, return the executed original in the enclosed self-addressed envelope. Please be sure to retain an executed copy for your records. Sincerely, GIBSON GREETINGS, INC. /s/Stephen M. Sweeney Stephen M. Sweeney Vice President, Human Resources SMS/dk ACCEPTED AND AGREED TO: /s/ Gregory Ionna Gregory Ionna Date:12/14/94 PAGE EX-10 8 LEASE AMENDMENT AGREEMENT - EX 10(G) EXHIBIT 10(g) LEASE AMENDMENT AGREEMENT ------------------------- THIS LEASE AMENDMENT AGREEMENT (this "Agreement") is made this 15th day of November 1995 by and among CORPORATE PROPERTY ASSOCIATES 2 AND CORPORATE PROPERTY ASSOCIATES 3 (collectively "Landlord"), both California limited partnerships with an address c/o W.P.Carey & Co., Inc., 50 Rockefeller Plaza, New York, New York 10020 and GIBSON GREETINGS, INC., formerly known as Gibson Greeting Cards, Inc. ("Gibson"), a Delaware corporation, with an address at 2100 Section Road, Cincinnati, Ohio 45237. W I T N E S S E T H - - - - - - - - - - WHEREAS, Landlord and Gibson entered into a Lease Agreement dated January 25, 1982, as amended by Amendment dated June 25, 1985 and as further amended by an undated Letter Agreement executed by Landlord and Gibson on or about April 25, 1986 (collectively, as so amended, the "Lease"). Pursuant to the Lease, Landlord is currently leasing to Gibson three parcels of Land, together with the Improvements and Equipment erected thereon and pertaining thereto (individually, the "Ohio Premises", the "Tennessee Premises" and the "Kentucky Premises" and collectively, the "Leased Premises"). The Leased Premises are more particularly described in the Lease. WHEREAS, by Sublease of Tennessee Premises dated as of the first day of January, 1989, Gibson subleased to CLEO, Inc., a Tennessee corporation, a subsidiary of Gibson, ("CLEO") the Tennessee Premises (the "Sublease"). Landlord consented to the Sublease by letter to Gibson dated December 30, 1988. WHEREAS, a Memorandum of Lease was filed in Hamilton County, Ohio as to the Ohio Premises, Madison County, Kentucky, as to the Kentucky Premises, and Shelby County, Tennessee as to the Tennessee Premises, with respect to the Lease. WHEREAS, Gibson, with the consent of Landlord, is, contemporaneously with the execution of this Agreement, selling all of the stock of CLEO to CSS Industries, Inc., a Delaware corporation ("CSS") and terminating the Sublease. WHEREAS, CLEO and Landlord, contemporaneously with the execution of this Agreement, will execute a separate Lease Agreement with respect to the Tennessee Premises. WHEREAS, Landlord and Gibson wish to clarify their mutual rights, duties and obligations under the Lease and make various amendments to the Lease all as more particularly set forth herein. PAGE NOW, THEREFORE, the parties hereto in consideration of the mutual promises contained herein and intending to be legally bound hereby, covenant and agree as follows: 1. The recitals set forth above, all exhibits attached hereto, if any, and the Lease referred to therein, are incorporated herein by reference and all definitions and document identifications, shall, except as expressly provided to the contrary herein, have the same meanings in this Agreement as are respectively ascribed to them in the Lease as if set forth in full in the body of this Agreement. 2. The Lease is hereby terminated with respect to the Tennessee Premises only. Accordingly, all references in the Lease to the Tennessee Premises are hereby deleted and the term "Leased Premises" shall hereafter mean collectively only the Ohio Premises and the Kentucky Premises. 3. From and after the date hereof Gibson shall be obligated to perform all of the terms, covenants and conditions and shall hold all of the rights, duties, obligations and benefits of the tenant under the Lease (including, without limitation, liability for any Environmental Violation) as the same applies to the Ohio Premises and the Kentucky Premises only, as the same may be amended by this Agreement. 4. Gibson shall remain liable to Landlord for the performance of all of tenant's liabilities, duties, obligations, covenants and agreements under the Lease (including, without limitation, liability for any Environmental Violation) as they pertain to the Tennessee Premises (a) which arose on or prior to the date hereof or (b) which arise on or after the date hereof due to acts or omissions of Gibson and/or conditions existing at the Tennessee Premises prior to the date hereof. The foregoing agreement shall remain in full force and effect in favor of Landlord, notwithstanding any agreement between Gibson and CLEO and/or CSS with respect to assumption of liabilities under the Lease. 5. Landlord hereby agrees to enter into a direct Lease Agreement with CLEO contemporaneously with the execution of this Agreement. Landlord hereby acknowledges that (a) Basic Rent under the Lease has been paid through October 31, 1995; (b) to the knowledge of Landlord without independent investigation, no Event of Default exists under the Lease with respect to the Tennessee Premises; and (c) to the knowledge of Landlord without independent investigation, no condition exists which with the giving of notice or the passage of time or both would constitute an Event of Default under the Lease with respect to the Tennessee Premises except that the roof is in disrepair and needs to be repaired or replaced; provided, however, that Landlord shall take no action against Gibson with reference to the condition of the roof until after May 15, 1996. 6. (a) Gibson shall pay to Landlord, within two (2) business days following the execution and delivery of this Agreement, the sum of Twelve Million Two Hundred Thousand Dollars ($12,200,000) (the "Consideration"). The Consideration is a one-time lump sum payment as consideration for Landlord terminating the Lease as to the Tennessee Premises. Such payment shall not reduce or be credited toward the Basic Rent, Additional Rent or any other amount owed to Landlord by Gibson under the Lease or otherwise. PAGE (b) As directed by Landlord, Gibson shall wire the Consideration directly to Principal Mutual Life Insurance Company ("Lender") to be applied toward the payoff of the loan secured by a mortgage encumbering the Leased Premises (the "Loan"). Landlord covenants that Landlord will initiate a wire for the balance of funds necessary to fully pay off the Loan, including any prepayment penalty, contemporaneously with confirmation of receipt of the wire of the Consideration from Gibson to Lender. 7. Paragraph 5(a) of the Lease shall be amended to extend the Term of the Lease through November 30, 2013. The options to extend the Lease granted to Gibson in Paragraph 5(b) of the Lease are hereby terminated. Paragraph 5(b) of the Lease is deleted in its entirety and replaced by the following: "(b) Landlord hereby grants to Tenant the right at Tenant's option to extend the Term of this Lease for one additional period of ten (10) years after the expiration of the initial Term hereof (the "Renewal Term"). The Renewal Term shall be subject to all of the terms and conditions of this Lease as if the Term originally included such Renewal Term and upon the exercise of such option, the Term shall include such Renewal Term therein. Tenant may exercise its option to extend the Term only by giving written notice of such extension to Landlord no later than twelve (12) months, and no earlier than 18 months, prior to the expiration of the initial Term." All other provisions of Paragraph 5 of the Lease remain unchanged and in full force and effect. 8. In consideration of the extension of the Term of the Lease as provided in Paragraph 7 above, Exhibit F of the Lease is deleted in its entirety and Paragraph 6 of the Lease is amended to change Basic Rent as follows: Beginning November 15, 1995, the Basic Rent shall be Three Million One Hundred Thousand ($3,100,000) Dollars per annum, payable monthly, in arrears, as more particularly set forth in Paragraph 6 of the Lease. Every five (5) years, annual Basic Rent shall increase twenty percent (20%) over the then current Basic Rent as follows: For the period December, 2000 through November, 2005, inclusive, Basic Rent shall be Three Million Seven Hundred Twenty Thousand ($3,720,000) Dollars per annum; for the period December, 2005 through November, 2010, inclusive, Basic Rent shall be Four Million Four Hundred Sixty-Four Thousand ($4,464,000) Dollars per annum; for the period December, 2010 through November, 2013, inclusive, Basic Rent shall be Five Million Three Hundred Fifty-Six Thousand Eight Hundred ($5,356,800) Dollars per annum. Basic Rent for the Ohio Premises, the Kentucky Premises and the Tennessee Premises for the fourteen (14) days from November 1 through November 14, 1995, computed using the annual Basic Rent under the Lease in effect just prior to this Agreement, shall be paid by Gibson on December 1, 1995. Basic Rent, computed using the annual Basic Rent set forth above in this Paragraph 8, for the Ohio Premises and the Kentucky Premises for the sixteen (16) days from November 15 through November 30, 1995 shall be paid by Gibson on December 1, 1995. PAGE If Gibson exercises its option to extend the Lease pursuant to Paragraph 5(b) of the Lease as amended herein, the annual Basic Rent for the Renewal Term shall be the lower of: (a) Six Million Four Hundred Twenty Eight Thousand One Hundred Sixty ($6,428,160) Dollars; and (b) the fair market rental value of the Leased Premises. The fair market rental value of the Leased Premises shall be determined as follows: Landlord and Tenant shall endeavor to agree on fair market rental value at least nine (9) months prior to the expiration of the then current lease Term. If Landlord and Tenant are unable to reach agreement on the fair market rental value of the Leased Premises within said time period, the procedure set forth in Paragraph 27 of the Lease for determining the fair market value of the Leased Premises shall be followed except that the appraisers shall be instructed to determine fair market rental value, and not fair market value. In determining fair market rental value, the appraisers shall determine the amount that a willing tenant would pay, and a willing landlord of a comparable property located in a radius of 10 miles of the Leased Premises would accept, at arm's length, to rent a property of comparable size and quality as the Leased Premises taking into account: (a) the age, quality, and condition of the Improvements; (b) that the Leased Premises will be leased as a whole or substantially as a whole to a single user; (c) a lease term of ten (10) years; (d) an absolute triple net lease; and (e) such other items that professional real estate appraisers customarily consider. The fair market rental value shall be determined separately for each property comprising the Leased Premises. If, by virtue of any delay, fair market rental value is not determined by the expiration or termination of the then current Term, then until fair market rental value is determined, Tenant shall continue to pay Basic Rent during the Renewal Term in the same amount which it was obligated under this Lease to pay prior to the commencement of the Renewal Term. When fair market rental value is determined, the appropriate Basic Rent shall be calculated retroactive to the commencement of the Renewal Term and Tenant shall either receive a refund from Landlord (in the case of an overpayment) or shall pay any deficiency to Landlord (in the case of an underpayment). All other provisions of Paragraph 6 remain unchanged and in full force and effect. 9. In consideration of the extension of the Term of the Lease as provided in Paragraph 7 above, Paragraph 27 of the Lease shall be amended as follows: The options to purchase the Leased Premises granted to Gibson on the last day of the tenth (10th) year of the Term and on the last day of the twentieth (20th) year of the Term are hereby terminated. PAGE Landlord hereby grants Gibson the option to purchase the Ohio Premises, the Kentucky Premises or both on the last day of November, 2005 and, if Gibson does not exercise this option, Landlord hereby grants Gibson a second option to purchase the Ohio Premises, the Kentucky Premises or both on the last day of November, 2010, and if Gibson does not exercise this option and has extended the Lease pursuant to Paragraph 5(b) as amended herein, Landlord grants Gibson a third option to purchase the Ohio Premises, the Kentucky Premises or both on the last day of November, 2023. Accordingly, all references in Paragraph 27 of the Lease to "the last day of the tenth (10th) year of the Term" shall be deleted and replaced by "the last day of November, 2005," all references in Paragraph 27 of the Lease to "the last day of the twentieth (20th) year of the Term" shall be deleted and replaced by "the last day of November, 2010" and a reference to the third option granted herein on the last day of November, 2023 shall be added. The options to purchase granted to Gibson hereunder may only be exercised if no Event of Default has occurred which has not been cured both at the time of the exercise of the option and at the time of title closing on such purchase. If Tenant exercises its option to purchase the Ohio Premises, the Kentucky Premises or both, the purchase price shall be the fair market value of such premises at the time of the exercise of the option determined in accordance with the provisions of Paragraph 27 of the Lease (the fair market value of both premises comprising the Leased Premises shall be determined, even if Tenant desires to buy only one such premises, if on the purchase date the Basic Rent will not be determined by reference to the fair market rental value of the Leased Premises). If Gibson exercises its option to purchase either the Ohio Premises or the Kentucky Premises but not both, the Lease will continue with respect to the premises not being purchased, if the Term of the Lease has not terminated by the date of title closing on the purchase, and the Basic Rent for such remaining premises shall be either (a) the fair market rental value of such remaining premises, if Basic Rent is then being determined by reference to the fair market rental value of each premises comprising the Leased Premises determined in accordance with the provisions of Paragraph 6 of the Lease as amended in Paragraph 8 hereof, or (b) if the Basic Rent is not then being determined by reference to fair market rental value, the new Basic Rent shall be the product obtained by multiplying Basic Rent then in effect by a fraction, the numerator of which is the fair market value of the premises not being purchased and the denominator of which is the fair market value of both properties comprising the Leased Premises. All other provisions of Paragraph 27 remain unchanged and in full force and effect. 10. The following definitions shall be added to Paragraph 2 of the Lease: PAGE (a) "Environmental Law" shall mean whenever enacted or promulgated any applicable federal, state, foreign and local law, statute, ordinance, rule, regulation, or code relating to pollution or protection of the environment or to health and safety, including, without limitation, laws relating to (i) emissions, discharge, releases or threatened releases of Hazardous Substances into the environment (including ambient air, surface water, groundwater, or land) and (ii) the processing, use, generation, treatment, storage, disposal, recycling, or remediation of Hazardous Substances or Hazardous Conditions. (b) "Environmental Violation" shall mean (a) any direct or indirect discharge, disposal, spillage, emission, escape, pumping, pouring, injection, leaching, release, seepage, filtration or transporting of any Hazardous Substance at, upon, under, onto or within the Leased Premises, or from the Leased Premises to the environment, in violation of any Environmental Law or in excess of any reportable quantity established under any Environmental Law or which could result in any liability to Landlord, Tenant or First Lender, any Federal, state or local government or any other Person for the costs of any removal or remedial action or natural resources damage or for bodily injury or property damage, (b) any deposit, storage, dumping, placement or use of any Hazardous Substance at, upon, under or within the Leased Premises or which extends to any Adjoining Property in violation of any Environmental Law or in excess of any reportable quantity established under any Environmental Law or which could result in any liability to any Federal, state or local government or to any other Person for the costs of any removal or remedial action or natural resources damage or for bodily injury or property damage, (c) the abandonment or discarding of any barrels, containers or other receptacles containing any Hazardous Substances in violation of any Environmental Laws, (d) any Hazardous Condition which results in any liability, cost or expense to Landlord or First Lender or any other owner or occupier of the Leased Premises, or which could result in a creation of a lien on the Leased Premises under any Environmental Law, or (e) any material violation of or noncompliance with any Environmental Law; provided, however, Environmental Violation shall not include any matter described in the foregoing clauses (a) through (e) of this definition that (i) arises out of or relates to a condition existing at the Leased Premises on the date of this Lease, (ii) arises or results from the migration of any Hazardous Substance onto the Leased Premises from any other property, or (iii) arises or accrues due to acts or omissions occurring prior to the date of this Lease. (c) "Hazardous Conditions" shall mean conditions of the environment, including soil, surface water, groundwater, subsurface strata or the ambient air, relating to or arising out of the use, handling, storage, treatment, recycling, generation, release, disposal, or threatened release of Hazardous Substances. (d) "Hazardous Substances" shall mean any pollutant, contaminant, hazardous or toxic substance, hazardous waste, or other chemicals, substances or materials subject to regulation under any Environmental Law. PAGE (e) "Renewal Term" shall have the meaning set forth in Paragraph 5(b) of the Lease as amended in Paragraph 7 of this Agreement. 11. The effectiveness of this Agreement, the Lease Agreement with CLEO and the transactions contemplated by those documents is specifically conditioned and contingent upon: (a) Landlord and CLEO entering into a Lease Agreement for the Tennessee Premises in form and substance acceptable to Landlord; (b) CSS executing a Guaranty and Suretyship Agreement in favor of Landlord, guarantying CLEO's obligations under the lease with Landlord, in form and substance acceptable to Landlord; and (c) receipt of the Consideration by Lender within two (2) business days of the execution of this Agreement. 12. Except as expressly amended hereby, the Lease remains in full force and effect in accordance with its terms. PAGE IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the date first above written. Signed and acknowledged CORPORATE PROPERTY ASSOCIATES 2 in the presence of: By: W.P. Carey & Co., Inc., General Partner /s/ Samantha Garbus By:/s/ John J. Park - ------------------------- -------------------------- Name: Title: Senior VP /s/ Stacey Edelson - ------------------------- Name: CORPORATE PROPERTY ASSOCIATES 3 By: W.P. Carey & Co., Inc., General Partner /s/ Samantha Garbus By:/s/ John J. Park - ------------------------- -------------------------- Name: Title: Senior VP /s/ Stacey Edelson - ------------------------- Name: GIBSON GREETINGS, INC. By: W.P. Carey & Co., Inc., General Partner /s/ Dan Fausz By:/s/ William L. Flaherty - ------------------------- -------------------------- Name: Dan Fausz William L. Flaherty Vice President and /s/ Gerald S. Greeenberg Chief Financial Officer - ------------------------- Name: Gerald S. Greenberg PAGE State of New York : : ss. COUNTY OF New York : On this, the 15th day of November, 1995, before me, a notary public, the undersigned officer, personally appeared John J. Park, who acknowledged himself to be the Senior VP of W.P. Carey & Co., Inc., a New York corporation, and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal the day and year aforesaid. /s/ Samantha Garbus ------------------------ Notary Public My Commission Expires: SAMANTHA GARBUS Notary Public, State of New York No. 31-4995627 Qualified in New York County Commission Expires April 27, 1996 PAGE COMMONWEALTH OF PENNSYLVANIA : : ss. COUNTY OF Philadelphia : On this, the 15th day of November, 1995, before me, a notary public, the undersigned officer, personally appeared William L. Flaherty, who acknowledged himself to be the Vice President and Chief Financial Officer of Gibson Greetings Inc., a Delaware corporation, and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal the day and year aforesaid. /s/ Hollie R. Gibboney ------------------------ Notary Public My Commission Expires: NOTARIAL SEAL HOLLIE R. GIBBONEY, Notary Public City of Philadelpia, Phila. County My Commission Expires April 6, 1998 PAGE EX-27 9 FINANCIAL DATA SCHEDULE - EX 27
5 1000 12-MOS DEC-31-1995 DEC-31-1995 15555 0 130472 59278 68303 214815 173103 82290 425827 108531 46533 0 0 166 230076 425827 540145 540821 268702 508624 83012 0 13178 (63078) (16589) (46489) 0 0 0 (46489) (2.86) (2.86)
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