-----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, EYncTFGby1QTY6UCcbbhxU9nbzisxJrsnspjOitEWLney4QYJg0/+HDy5TcTzQ6d 7E+AIZu8IkCni13KshsImg== 0000717829-97-000005.txt : 19970328 0000717829-97-000005.hdr.sgml : 19970328 ACCESSION NUMBER: 0000717829-97-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GIBSON GREETINGS INC CENTRAL INDEX KEY: 0000717829 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 521242761 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-11902 FILM NUMBER: 97565208 BUSINESS ADDRESS: STREET 1: 2100 SECTION RD CITY: CINCINNATI STATE: OH ZIP: 45237 BUSINESS PHONE: 5138416600 10-K405 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, 1996 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 21, 1997 was approximately $341,048,000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 16,260,506 shares of Common Stock, $.01 par value, at March 21, 1997. Documents incorporated by reference: Portions of Gibson Greetings, Inc.'s Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated by reference in Part III -1- PAGE GIBSON GREETINGS, INC. 1996 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I PAGE ---- Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters 11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 53 PART III Item 10. Directors and Executive Officers of the Registrant 54 Item 11. Executive Compensation 54 Item 12. Security Ownership of Certain Beneficial Owners and Management 54 Item 13. Certain Relationships and Related Transactions 54 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 55 -2- 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. During 1991, the Company formed Gibson Greeting 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. In 1993, 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"). The Paper Factory operates retail stores under the names of The Paper Factory, Greetings N' More and Great Party located primarily in manufacturers' outlet shopping centers. 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 included in the consolidated financial statements for each of the two years ended December 31, 1995 were $151.9 million and $189.3 million, respectively. In view of the poor economic conditions and devaluation of the peso in Mexico, the Company liquidated its investment in Gibson de Mexico S.A. de C.V. ("Gibson de Mexico"), a majority-owned subsidiary, during 1996 resulting in a loss on liquidation of $2.1 million and an income tax benefit of $3.7 million for a net increase in net income of $1.6million or $.10 per share. 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 1996, approximately 68% of net sales of cards were derived from everyday cards and approximately 32% from seasonal cards. The Company's products also include paper partywares, gift wrap, 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(certain prior year amounts have been reclassified to conform to the 1996 presentation): -3- PAGE
Years Ended December 31, --------------------------------------------- Pro Forma --------- 1996 1995 1995* 1994* -------- -------- -------- -------- Greeting cards $227,512 $237,160 $255,192 $250,891 Partywares 48,386 40,891 40,939 34,282 Gift wrap 42,812 45,194 172,893 202,439 Other products 70,711 64,968 71,121 60,430 -------- -------- -------- -------- Total net sales $389,421 $388,213 $540,145 $548,042 ======== ======== ======== ========
[FN] * Includes Cleo, Inc. which was sold effective November 15, 1995. Many of the Company's products incorporate well-known proprietary characters. Net sales associated with licensed properties accounted for approximately 13% of overall 1996 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 also has developed proprietary properties of its own. See "Trademarks, Copyrights and Licenses." Approximately 6% of the Company's revenues in 1996 were attributable to sales and royalty income from foreign sources. Sales and Marketing The Company's products are sold in more than 25,000 retail outlets worldwide. The Company's current products are sold primarily under the Gibson brand name and are primarily distributed to supermarkets, deep discounters, mass merchandisers, card and specialty shops and variety stores. To market effectively through these outlets, the Company has developed specific product programs and new product lines and introduced new in-store displays. During 1996, the Company's five largest customers accounted for approximately 32% of the Company's net sales and 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 product 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. 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. -4- PAGE Consistent with general industry practice, the Company has entered into long-term sales agreements with certain retailers. These sales agreements typically have terms ranging from three to five years, and generally specify a minimum sales volume commitment. In certain of these sales agreements, negotiated cash payments or credits constitute advance discounts against future sales. These payments are capitalized and amortized over the initial term of the sales agreement. The Company currently has sales agreements with a number of customers including four 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, in some cases 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 The Company maintains an extensive world-wide free-lance pool and a full-time staff of artists, writers, art directors and creative planners at the Company's headquarters who design the majority of the Company's products. Design of everyday products begins approximately 9 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 14 months before the holiday date and seasonal designs go into production about 8 months before the holiday date. Most of the Company's products are 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 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. 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. 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 sales agreements, and that it is competitive in all of these areas. See "Sales and Marketing." -5- PAGE Trademarks, Copyrights and Licenses The Company currently has approximately 40 registrations of trademarks in the United States and approximately 70 registrations of trademarks 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 also 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, 1996 and 1995, the Company employed approximately 2,300 and 2,500 persons on a full-time basis, respectively. In addition, as of December 31, 1996 and 1995, the Company employed approximately 7,400 and 7,100 persons on a part-time basis, respectively. -6- 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 a third party's alleged disposal at the site, during the period 1972-1977, of waste allegedly generated at Cleo facilities. 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 issued a similar Order to the Company on May 1, 1996. The May 1, 1996 order 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 the potential liability of Cleo and/or the Company at this site. The insurance companies have neither confirmed nor denied the coverage at this time. -7- 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 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 Ranch Cucamonga, California Distribution 40,200 --------- Total 1,743,500 =========
The first two facilities listed above are currently leased 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 these dates. 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 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, and the facilities at Neenah, Wisconsin and Rancho Cucamonga, California are leased. The Company also leases sales offices, other manufacturing, distribution and administrative facilities and, on a temporary basis, uses warehouse space in various locations throughout the United States. The Paper Factory leases approximately 190 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 2006. See Note 11 of Notes to Consolidated Financial Statements set forth in Item 8 below. -8- PAGE 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. 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 then Chief Financial Officer and the former President and Chief Executive Officer of Cleo was filed in October 1994 in the United States District Court for the Southern District of Ohio (In Re Gibson Securities Litigation). In August 1996 the Court reconsidered its prior rulings and certified the case as a class action. The latest 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 a motion to dismiss the latest complaint and a Third Party Complaint against its former auditor for contribution against any judgment adverse to the Company. The case currently is scheduled to be tried in June 1997. The Company presently is unable to predict the effect of the ultimate resolution of the matter described above upon the Company's results of operations and cash flows; as of this date, however, Management does not expect that such resolution would result in a material adverse effect upon the Company's total net worth, although a substantially unfavorable outcome could be material to such net worth. On April 10, 1995, two purported class action lawsuits were commenced against the Company, its then Chairman, President and Chief Executive Officer and its then 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. The two lawsuits were consolidated and captioned In Re Gibson Greetings Securities Litigation II. This litigation has been concluded through the creation of a $1.6 million settlement fund, most of which is covered by insurance. -9- 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 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. -10- 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, 1996, the amount of unrestricted retained earnings available for dividends was $16.0 million, which includes a waiver in effect until June 1, 1997 on $7.0 million. 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. No dividends were declared in or paid in either 1996 or 1995. There were approximately 7,800 beneficial owners of the Company's common stock on March 7, 1997. The following table presents certain quarterly market price information for the years ended December 31, 1996 and 1995:
First Second Third Fourth Quarter Quarter Quarter Quarter Year -------- -------- -------- -------- -------- 1996 - ------------------- Market price of common stock (1): Low $13 3/8 $13 1/8 $11 3/4 $14 $11 3/4 High 16 7/8 14 3/4 14 3/4 20 1/4 20 1/4 1995 - ------------------- 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
[FN] (1) Per share prices are based on the closing price as quoted in the Nasdaq National Market. -11- 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, 1996. 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, ---------------------------------------------------------- 1996 1995 1994 1993(1) 1992 -------- -------- -------- -------- -------- Revenues: Net sales $389,421 $540,145 $548,042 $546,165 $484,118 Royalty income 825 676 753 761 1,705 -------- -------- -------- -------- -------- Total revenues 390,246 540,821 548,795 546,926 485,823 -------- -------- -------- -------- -------- Cost of products sold 152,229 268,702 310,039 277,109 247,340 Selling, distribution and administrative expenses 199,490 239,922 276,147 227,863 218,642 Loss on sale of Cleo, Inc. - 83,012 - - - -------- -------- -------- -------- -------- Operating income (loss) 38,527 (50,815) (37,391) 41,954 19,841 Interest expense 8,822 13,178 10,599 7,737 7,803 Interest income (3,364) (915) (765) (949) (1,023) (Gain) loss on derivative transactions/ settlement, net - - (1,641) 5,689 - -------- -------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of accounting changes 33,069 (63,078) (45,584) 29,477 13,061 Income taxes 11,107 (16,589) (16,981) 14,209 5,076 -------- -------- -------- -------- -------- Income (loss) before cumulative effect of accounting changes 21,962 (46,489) (28,603) 15,268 7,985 -12- PAGE Cumulative effect of accounting changes - - - - (1,449) -------- -------- -------- -------- -------- Net income (loss) $ 21,962 $(46,489) $(28,603) $ 15,268 $ 6,536 ======== ======== ======== ======== ======== Income (loss) per share before cumulative effect of accounting changes $ 1.34 $ (2.86) $ (1.77) $ 0.95 $ 0.50 -------- -------- -------- -------- -------- Net income (loss) per share $ 1.34 $ (2.86) $ (1.77) $ 0.95 $ 0.41 ======== ======== ======== ======== ======== Dividends per share $ - $ - $ 0.40 $ 0.40 $ 0.39 ======== ======== ======== ======== ======== Average common shares and equivalents 16,448 16,243 16,130 16,103 16,104 ======== ======== ======== ======== ========
-13- PAGE
Other Financial Data (Dollars in thousands except per share amounts) December 31, ---------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Working capital $134,628 $106,284 $151,128 $209,209 $224,261 Plant and equipment, net 92,649 90,813 119,491 116,900 112,712 Total assets 451,559 425,827 612,195 572,459 501,104 Debt due within one year (2) 7,901 28,894 117,114 66,187 31,911 Long-term debt 40,898 46,533 63,233 74,365 70,175 Stockholders' equity 256,316 230,242 277,500 313,097 303,341 Equity per share 15.81 14.31 17.24 19.50 18.92 Capital expenditures 26,507 19,872 35,396 31,049 30,970
[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. 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 $7,901 in 1996, $9,894 in 1995, $11,164 in 1994, $3,917 in 1993, and $1,811 in 1992. -14- PAGE Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Effective August 31, 1996, the Company liquidated its Mexican subsidiary resulting in a one-time charge of $2.1 million and related income tax benefit of $3.7 million. The net effect of the liquidation of Gibson de Mexico increased net income by $1.6 million or $.10 per share. 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 revenues by Cleo included in the consolidated financial statements for each of the two years ended December 31, 1995 were $151.9 million and $189.4 million, respectively. The results of operations for 1995 include 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. Results of Operations - Year Ended December 31, 1996 Compared With Pro Forma Year Ended December 31, 1995 Revenues in 1996 increased .4% to $390.2 million compared to pro forma revenues of $388.9 million in 1995. The increase was largely attributable to continued sales growth at The Paper Factory, reflecting increased retail locations, and Gibson International. This increase was partially offset by a decline in the Card Division's greeting card sales reflecting a volume decrease due in part to the loss of certain customers combined with higher returns and allowances, partially offset by new rooftops and increased selling prices. 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, the Company enters into long-term sales agreements with certain retailers, some of which include advance payments. Returns and allowances were 19.8% in 1996 compared to pro forma returns and allowances of 18.2% in 1995. The increase in 1996 reflects an increase in everyday returns and customer allowances slightly offset by a decrease in seasonal returns. -15- PAGE Total operating expenses were $351.7 million or 90.1% of total revenues in 1996 compared to pro forma operating expenses of $350.4 million or 90.1% in 1995. Cost of products sold was 39.0% of total revenues in 1996 compared to pro forma cost of products sold of 38.2% in 1995. The increase was primarily due to a change in product mix and higher returns and allowances, partially offset by an increase in selling prices. Selling, distribution and administrative expenses were 51.1% of total revenues in 1996 compared to pro forma selling, distribution and administrative expenses of 51.9% in 1995. The decrease in 1996 expenses, as a percentage of total revenues, reflected a decline in selling and marketing expenses and reduced bad debt expense at the Card Division, and a foreign exchange gain at Gibson International, partially offset by increased expenses in connection with various legal and employment matters, increased expenses at The Paper Factory to support increased retail locations and a loss on the liquidation of Gibson de Mexico. Excluding the charge for Gibson de Mexico, selling, distribution and administrative expenses as a percent of revenues would have been 50.6%. Income before income taxes, including the loss on the liquidation of Gibson de Mexico, was $33.1 million in 1996 compared to pro forma income before income taxes of $29.9 million in 1995. The effective income tax rate for 1996, excluding the pretax charge of $2.1 million and related income tax benefit of $3.7 million on the liquidation of Gibson de Mexico, was 42.0% compared to the pro forma effective income tax rate of 45.5% in 1995. See Notes 1 and 7 of Notes to Consolidated Financial Statements set forth in Item 8 below. Net income was $22.0 million in 1996 compared to pro forma net income of $16.3 million in 1995. The net effect of the liquidation of Gibson de Mexico increased net income $1.6 million or $.10 per share. Results of Operations - Year Ended December 31, 1996 Compared With Year Ended December 31, 1995 Revenues in 1996 decreased 27.8% to $390.2 million from revenues of $540.8 million in 1995 reflecting the reduction of revenue as a result of the sale of Cleo and a decline in the Card Division's greeting card sales reflecting a volume decrease due in part to the loss of certain customers combined with higher returns and allowances. This decline was partially offset by new rooftops, increased selling prices, sales growth at The Paper Factory reflecting increased retail locations and increased international greeting card sales. Returns and allowances were 19.8% in 1996 compared to 14.4% in 1995. The increase in 1996 reflects an increase in everyday returns and customer allowances, and the reduction in revenue as a result of the sale of Cleo slightly offset by a decrease in seasonal returns. Total operating expenses were $351.7 million or 90.1% of total revenues in 1996 compared to operating expenses of $591.6 million or 109.4% of total revenues in 1995. Cost of products sold was 39.0% of total revenues in 1996 compared to cost of products sold of 49.7% in 1995. The decrease was primarily due to the sale of Cleo which resulted in a change in the Company's product mix which is now composed of higher margin products. Selling, distribution and administrative expenses were 51.1% of total revenues in 1996 compared to 44.4% in 1995. The increase was due to the reduction of revenues as a result of the sale of Cleo, increased expenses in connection with various legal and employment matters, and increased expenses at The Paper Factory to support increased retail locations. -16- PAGE Income before income taxes, including the liquidation of Gibson de Mexico, was $33.1 million in 1996 compared to a loss before income taxes of $63.1 million in 1995. The effective income tax rate for 1996, excluding the pretax charge of $2.1 million and related income tax benefit of $3.7 million on the liquidation of Gibson de Mexico, was 42.0% compared to the effective income tax rate of 26.3% in 1995. See Notes 1 and 7 of Notes to Consolidated Financial Statements set forth in Item 8 below. Net income was $22.0 million in 1996 compared to a net loss of $46.5 million in 1995. The net effect of the liquidation of Gibson de Mexico increased net income $1.6 million or $.10 per share. 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 selling prices partially offset by a modest decline in units sold. Additionally, revenues at The Paper Factory and Gibson International increased in 1995. Pro forma returns and allowances were 18.2% in 1995 compared to 22.7% in 1994. The decrease in 1995 reflected a decrease in customer allowances, seasonal and everyday returns and long-term sales agreement amortization. In 1994, $6.3 million of unamortized long-term sales agreements 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. Total pro forma operating expenses were $350.4 million or 90.1% of total pro forma revenues in 1995 compared to $371.2 million 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 reflected lower average unit cost. Paper price increases were offset 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 were 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 ($6.0 million). Additionally, the pro forma expenses in 1994 included 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 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. -17- PAGE 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. 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 1995. 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 agreement amortization. In 1994, $6.3 million of unamortized long-term sales agreements 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 reflected 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 were reflected as one-time charges in selling, distribution and administrative expenses in 1994. In view of the 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. -18- PAGE 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. 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. Liquidity and Capital Resources Cash flows from operating activities for 1996 increased $62.1 million from 1995 to $107.2 million, compared to an increase of $51.6 million in 1995 from 1994 and a decrease of $38.0 million in 1994 from 1993. The increase in 1996 was primarily the result of improved cash flow from on-going operations, tax benefits associated with the loss on the sale of Cleo and lower cash requirements for sales agreement payments. The reduction in the use of cash for other assets reflects a decrease in the number of new sales agreements while the reduction in the use of cash for other liabilities reflects fewer payments to customers under sales agreements. Cash used in investing activities for plant and equipment purchases totaled $26.5 million in 1996 compared to $19.9 million and $35.4 million in 1995 and 1994, respectively. Reduced levels of spending in 1996 and 1995 for plant and equipment purchases are the result of the decision to delay the purchase of certain machinery for manufacturing as well as the delay of certain other capital projects at the Card Division. Plant and equipment purchases do not include assets acquired under capital lease obligations. During 1995, the Company renegotiated its long-term lease 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 provided by investing activities in 1996 included the collection of the note receivable of $24.6 million for the sale of Cleo. Cash used in financing activities in 1996 was $25.2 million compared to cash used in financing activities of $109.1 million in 1995 and cash provided by financing activities of $34.1 million in 1994. The 1996 decrease in short-term borrowings resulted from the collection of the note receivable from the sale of Cleo and from improved cash flow from operations eliminating the need for short-term financing. 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 sales agreements. Long-term debt decreased in 1996 reflecting current year debt payments. Long-term debt payments increased in 1995 primarily reflecting the partial redemption of senior notes with the proceeds from the sale of Cleo. The decrease in 1994 reflected current year debt payments. -19- PAGE Management will seek to extend the existing revolving credit facility due to expire in late April 1997. Management believes that it will be able to extend this facility. When consummated, Management 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. Capital expenditures for 1997 are expected to be comparable to 1996 levels. At February 28, 1997, the Company held short-term investments in excess of normal operating cash needs of approximately $111.0 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 sales agreements, all of which total approximately $11.1 million to $33.6 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 practices and other contingencies. Management does not believe that there are any trends, events, commitments or uncertainties, except for previously disclosed items (see Note 12 of Notes to Consolidated Financial Statements set forth in Item 8 below), 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. 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. -20- PAGE Item 8. Financial Statements and Supplementary Data
Gibson Greetings, Inc. Consolidated Statements of Operations Years Ended December 31, 1996, 1995 and 1994 (Dollars in thousands except per share amounts) 1996 1995 1994 --------- --------- --------- Revenues: Net sales $ 389,421 $ 540,145 $ 548,042 Royalty income 825 676 753 --------- --------- --------- Total revenues 390,246 540,821 548,795 --------- --------- --------- Costs and expenses: Operating expenses: Cost of products sold 152,229 268,702 310,039 Selling, distribution and administrative expenses 199,490 239,922 276,147 Loss on sale of Cleo, Inc. - 83,012 - --------- --------- --------- Total operating expenses 351,719 591,636 586,186 --------- --------- --------- Operating income (loss) 38,527 (50,815) (37,391) --------- --------- --------- Financing expenses, net: Interest expense 8,822 13,178 10,599 Interest income (3,364) (915) (765) Gain on derivative transactions/settlement, net - - (1,641) --------- --------- --------- Total financing expenses, net 5,458 12,263 8,193 --------- --------- --------- Income (loss) before income taxes 33,069 (63,078) (45,584) Income tax provision (benefit) 11,107 (16,589) (16,981) --------- --------- --------- Net income (loss) $ 21,962 $ (46,489) $(28,603) ========= ========= ========= Net income (loss) per share $ 1.34 $ (2.86) $ (1.77) ========= ========= =========
[FN] See accompanying notes to consolidated financial statements. -21- PAGE
Gibson Greetings, Inc. Consolidated Balance Sheets December 31, 1996 and 1995 (Dollars in thousands except per share amounts) 1996 1995 --------- --------- Assets Current assets: Cash and equivalents $ 98,155 $ 15,555 Note receivable - 24,574 Trade receivables, net 42,423 46,620 Inventories 65,069 68,303 Income taxes receivable - 10,698 Prepaid expenses 2,958 4,054 Deferred income taxes 44,598 45,011 --------- --------- Total current assets 253,203 214,815 Plant and equipment, net 92,649 90,813 Deferred income taxes 16,592 14,745 Other assets, net 89,115 105,454 --------- --------- $ 451,559 $ 425,827 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Debt due within one year $ 7,901 $ 28,894 Accounts payable 13,420 7,995 Income taxes payable 15,816 - Other current liabilities 81,438 71,642 --------- --------- Total current liabilities 118,575 108,531 Long-term debt 40,898 46,533 Sales agreement payments due after one year 14,274 18,564 Other liabilities 21,496 21,957 --------- --------- Total liabilities 195,243 195,585 --------- --------- -22- PAGE Commitments and contingencies (Notes 11 and 12) 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, 16,708,059 and 16,585,130 shares issued, respectively 167 166 Paid-in capital 47,474 46,041 Retained earnings 213,755 191,793 Foreign currency translation adjustment 871 (1,807) --------- --------- 262,267 236,193 --------- --------- Less treasury stock, at cost, 494,601 shares 5,951 5,951 --------- --------- Total stockholders' equity 256,316 230,242 --------- --------- $ 451,559 $ 425,827 ========= =========
[FN] See accompanying notes to consolidated financial statements. -23- PAGE
Gibson Greetings, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995 and 1994 (Dollars in thousands) 1996 1995 1994 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ 21,962 $ (46,489) $ (28,603) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation including write-down of display fixtures 22,774 26,896 26,150 (Gain) loss on disposal of plant and equipment (123) 5,492 5,957 Loss on sale of Cleo, Inc. - 83,012 - Gain on derivative transactions/ settlement, net - - (1,641) Deferred income taxes (1,434) (2,901) (19,205) Amortization of deferred costs and intangibles and write- down of deferred costs 24,121 23,590 31,155 Change in assets and liabilities: (Increase) decrease in trade receivables, net 4,197 17,820 (5,636) (Increase) decrease in inventories 3,234 2,821 (2,322) (Increase) decrease in income taxes receivable 10,698 (10,698) - (Increase) decrease in prepaid expenses 1,096 221 (1,512) Increase in other assets, net of amortization (7,782) (27,260) (47,102) Increase (decrease) in accounts payable 5,425 (2,617) 2,944 Increase (decrease) in income taxes payable 15,816 (4,742) (8,329) Increase (decrease) in other current liabilities 9,796 (19,267) 26,511 Increase (decrease) in other liabilities (4,751) (316) 16,053 All other, net 2,218 (379) (850) --------- --------- --------- Total adjustments 85,285 91,672 22,173 --------- --------- --------- Net cash provided by (used in) operating activities 107,247 45,183 (6,430) --------- --------- --------- -24- PAGE Cash flows from investing activities: Purchase of plant and equipment (26,507) (19,872) (35,396) Proceeds from sale of plant and equipment 2,480 926 289 Proceeds from sale of Cleo, Inc. net of escrow amount - 96,437 - Collection of note receivable from sale of Cleo, Inc. 24,574 - - --------- --------- --------- Net cash provided by (used in) investing activities 547 77,491 (35,107) --------- --------- --------- Cash flows from financing activities: Net increase (decrease) in short-term borrowings (19,000) (86,950) 43,680 Payments on long-term debt (7,628) (22,207) (3,917) Issuance of common stock 1,434 49 784 Acquisition of common stock for treasury - (11) (52) Dividends paid - - (6,435) --------- --------- --------- Net cash provided by (used in) financing activities (25,194) (109,119) 34,060 --------- --------- --------- Net increase (decrease) in cash and equivalents 82,600 13,555 (7,477) Cash and equivalents at beginning of year 15,555 2,000 9,477 --------- --------- --------- Cash and equivalents at end of year $ 98,155 $ 15,555 $ 2,000 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 3,455 $ 10,489 $ 9,325 Income taxes (13,973) 1,751 10,240 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. -25- PAGE
Gibson Greetings, Inc. Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1996, 1995 and 1994 (Dollars in thousands except per share amounts) 1996 1995 1994 --------- --------- --------- Common stock, par value $.01: Balance at beginning of year $ 166 $ 166 $ 165 Exercise of stock options 1 - 1 --------- --------- --------- 167 166 166 --------- --------- --------- Paid-in capital: Balance at beginning of year 46,041 45,992 45,209 Exercise of stock options 1,433 49 783 --------- --------- --------- 47,474 46,041 45,992 --------- --------- --------- Retained earnings: Balance at beginning of year 191,793 238,282 273,320 Net income (loss) 21,962 (46,489) (28,603) Cash dividends paid ($.40 per share in 1994) - - (6,435) --------- --------- --------- 213,755 191,793 238,282 --------- --------- --------- Foreign currency translation adjustment: Balance at beginning of year (1,807) (1,000) 291 Aggregate adjustments resulting from: Translation of financial statements into U.S. dollars 513 (807) (1,291) Liquidation of Gibson de Mexico S.A. de C.V. 2,165 - - --------- --------- --------- 871 (1,807) (1,000) --------- --------- --------- Less treasury stock, at cost: Balance at beginning of year 5,951 5,940 5,888 Common stock acquired - 11 52 --------- --------- --------- 5,951 5,951 5,940 --------- --------- --------- Total stockholders' equity $ 256,316 $ 230,242 $ 277,500 ========= ========= =========
[FN] See accompanying notes to consolidated financial statements. -26- PAGE Gibson Greetings, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 1996, 1995, and 1994 (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. Consistent with general industry practice, the Company has entered into long-term sales agreements with certain retailers. These sales agreements typically have terms ranging from 3 to 5 years, and generally specify a minimum sales volume commitment. In certain of these sales agreements, negotiated cash payments or credits constitute advance discounts against future sales. These payments are capitalized and amortized over the initial term of the sales agreement. In the event of default by a retailer, such as bankruptcy or liquidation, a sales agreement 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. In view of the poor economic conditions and devaluation of the peso in Mexico, the Company liquidated its investment in Gibson de Mexico S.A. de C.V. (Gibson de Mexico), a majority-owned subsidiary, during 1996 resulting in a loss on liquidation of $2,107 and an income tax benefit of $3,673 for a net increase in net income of $1,566 or $.10 per share. One customer in 1996 accounted for approximately 16% of net sales. Prior to the sale of Cleo, one customer in 1995 accounted for approximately 12% of net sales; however, on a pro forma basis, without Cleo, the Company's largest customer accounted for approximately 13% of net sales. During 1994, the Company's largest customer accounted for approximately 12% of net sales. -27- PAGE Retail operations The Paper Factory of Wisconsin, Inc. (The Paper Factory) operates retail stores located primarily in manufacturers' outlet shopping centers. The Paper Factory offers broad product assortments of nationally recognized brand gift wrap, greeting cards, paper decorations, wedding supplies and other paper products. International operations 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 this subsidiary were not material to consolidated operations in 1996, 1995 and 1994. 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 40 years; machinery and equipment are depreciated over 3 to 11 years; and display fixtures are depreciated over 3 to 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. 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 3 to 5 years. -28- PAGE Goodwill, principally from the acquisition of The Paper Factory in 1993, represents the excess of cost over fair value of net assets acquired. Goodwill and other intangibles are amortized over periods ranging from 3 to 20 years, using the straight-line method. Accumulated goodwill amortization at December 31, 1996 and 1995 was $4,687 and $4,367, 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 Impairment losses are 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. During 1996, the carrying value of certain long-term sales agreements and related display fixtures exceeded the fair value of the assets based on current and estimated future cash flows. The effect on the 1996 results 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. 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: 16,447,993 shares for 1996, 16,243,483 shares for 1995, and 16,130,140 shares for 1994. -29- PAGE Restatements and reclassifications 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. During 1995, the Company restated the accompanying 1994 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 1994 consolidated net loss or $.28 per share. 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 on derivative transactions and settlement in 1994 of $1,641 or $.06 per share as shown in the accompanying consolidated statements of operations. Use of estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. Note 2--Trade Receivables Trade receivables at December 31, 1996 and 1995, consist of the following:
1996 1995 --------- --------- Trade receivables $ 101,712 $ 105,898 Less reserve for returns, allowances, cash discounts and doubtful accounts 59,289 59,278 --------- --------- $ 42,423 $ 46,620 ========= =========
-30- PAGE Note 3--Inventories Inventories at December 31, 1996 and 1995, consist of the following:
1996 1995 --------- --------- Finished goods $ 47,666 $ 47,967 Work-in-process 11,710 12,409 Raw materials and supplies 5,693 7,927 --------- --------- $ 65,069 $ 68,303 ========= =========
Note 4--Plant and Equipment Plant and equipment at December 31, 1996 and 1995, consist of the following:
1996 1995 --------- --------- Land and buildings $ 32,155 $ 32,800 Machinery and equipment 52,948 44,437 Display fixtures 81,480 83,784 Leasehold improvements 11,700 10,484 Construction in progress 3,257 1,598 --------- --------- 181,540 173,103 Less accumulated depreciation 88,891 82,290 --------- --------- $ 92,649 $ 90,813 ========= =========
At December 31, 1996 and 1995, buildings included assets acquired under capital lease obligations of $19,135. Accumulated depreciation on such assets totaled $1,190 and $132 at December 31, 1996 and 1995, respectively. -31- PAGE Note 5--Other Assets Other assets at December 31, 1996 and 1995, consist of the following:
1996 1995 --------- --------- Deferred and prepaid costs $ 131,656 $ 138,114 Goodwill and other intangibles 26,160 27,148 --------- --------- 157,816 165,262 Less accumulated amortization 68,701 59,808 --------- --------- $ 89,115 $ 105,454 ========= =========
-32- PAGE Note 6--Debt Debt at December 31, 1996 and 1995, consists of the following:
1996 1995 --------- --------- Debt due within one year: Current portion of long-term debt $ 7,901 $ 9,894 Loans payable to banks under a revolving credit agreement bearing interest at a weighted average rate of 6.57% in 1995 $ - $ 19,000 --------- --------- $ 7,901 $ 28,894 ========= ========= Long-term debt: Senior notes bearing interest at 9.33%, with annual serial maturities through 2001 $ 25,714 $ 30,857 Notes payable to former shareholders of The Paper Factory bearing interest at 5.01%, payable in annual installments of $2,019 2,019 4,037 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 $8,664 and $5,712 at December 31, 1996 and 1995, respectively 1,200 1,800 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 441 573 --------- --------- 29,374 37,267 Capital lease obligations payable in monthly installments through 2013 (see Note 11) 19,425 19,160 --------- --------- 48,799 56,427 Less portion due within one year 7,901 9,894 --------- --------- $ 40,898 $ 46,533 ========= =========
-33- PAGE The Company has a 364-day revolving credit agreement providing $40,000 for general corporate purposes which expires in late April 1997. No borrowings were outstanding under the agreement at December 31, 1996. Management believes that it will be able to extend this facility. When consummated, Management 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, 1996 was $30,145. The annual principal payments due on long-term debt for each of the years in the five-year period ended December 31, 2001, are $7,901, $5,890, $5,299, $5,142 and $5,142, respectively. No interest was capitalized for the years ended December 31, 1996, 1995 and 1994. 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, 1996 the amount of unrestricted retained earnings available for dividends was $16,007, which includes a waiver in effect until June 1, 1997 on $7,000. At December 31, 1995, there were no unrestricted retained earnings available for dividends. 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, 1996 and 1995, the Company had two outstanding interest rate swap positions with a total notional amount of $2,400. These two agreements, with terms similar to the related industrial revenue bonds, are constituted as hedges and effectively reduce the Company's interest on the bonds from 9.25% to 6.67% through February 1998. The estimated fair value of these two agreements at December 31, 1995 was $28. -34- PAGE Note 7--Income Taxes The income tax provision (benefit) for the years ended December 31, 1996, 1995, and 1994 consists of the following:
1996 1995 1994 --------- --------- --------- Federal: Current $ 10,216 $ (19,093) $ 1,574 Deferred (1,251) (2,252) (14,530) Change in valuation allowance - - (924) Alternative minimum tax credit carryforward 200 - (200) Deferred investment tax credits, net (64) (79) (100) --------- --------- --------- 9,101 (21,424) (14,180) --------- --------- --------- State and local: Current 2,325 5,405 649 Deferred (319) (570) (3,239) Change in valuation allowance - - (211) --------- --------- --------- 2,006 4,835 (2,801) --------- --------- --------- $ 11,107 $ (16,589) $ (16,981) ========= ========= =========
The effective income tax rate for the years ended December 31, 1996, 1995 and 1994, varied from the statutory federal income tax rate as follows:
1996 1995 1994 --------- --------- --------- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 3.9 3.2 4.0 Liquidity of subsidiary (7.4) - - Nondeductible losses 0.3 (8.5) (2.6) Other 1.8 (3.4) 0.8 --------- --------- --------- 33.6% 26.3% 37.2% ========= ========= =========
-35- PAGE 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 for the years ended December 31, 1996 and 1995 consist of the following:
1996 1995 --------- --------- Current deferred taxes: Gross assets $ 44,852 $ 45,275 Alternative minimum tax carryforward - 200 Gross liabilities (254) (464) --------- --------- 44,598 45,011 --------- --------- Noncurrent deferred taxes: Gross assets 23,854 21,573 Valuation allowance (830) (830) Gross liabilities (6,304) (5,806) Deferred investment tax credits (128) (192) --------- --------- 16,592 14,745 --------- --------- $ 61,190 $ 59,756 ========= =========
The Company has recorded a valuation allowance with respect to the deferred tax assets reflected in the following table 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. -36- PAGE The tax balances of significant temporary differences representing deferred tax assets and liabilities for the years ended December 31, 1996 and 1995, consist of the following:
1996 1995 --------- --------- Reserve for returns, allowances, cash discounts and doubtful accounts $ 24,911 $ 25,390 Reserve for inventories and related items 6,103 6,222 Postretirement benefits 2,238 2,251 Depreciation of plant and equipment (6,188) (5,713) Reserve for display fixtures 1,006 1,628 Accrued compensation and benefits 17,802 17,223 Sales agreement payments due 7,697 4,067 Other accruals and reserves, net 8,579 9,510 Alternative minimum tax carryforward - 200 Deferred investment tax credits (128) (192) --------- --------- 62,020 60,586 Valuation allowance (830) (830) --------- --------- $ 61,190 $ 59,756 ========= =========
Note 8--Other Current Liabilities Other current liabilities at December 31, 1996 and 1995, consist of the following:
1996 1995 --------- --------- Compensation, payroll taxes and related withholdings $ 18,074 $ 16,584 Customer allowances 14,525 12,963 Accrued insurance 10,810 10,029 Sales agreement payments due within one year 8,592 7,628 Accrued interest 8,189 6,221 Property and other taxes 4,259 4,397 Other 16,989 13,820 --------- --------- $ 81,438 $ 71,642 ========= =========
-37- PAGE Note 9--Employee and Retirement Benefit Plans 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. The following table sets forth the Retirement Plan's funded status on the measurement dates, December 31, 1996 and 1995, and a reconciliation of the funded status to the amounts recognized in the Company's consolidated balance sheets at December 31, 1996 and 1995:
1996 1995 --------- --------- Actuarial present value of benefit obligations: Vested benefit obligation $ 60,741 $ 61,449 ========= ========= Accumulated benefit obligation $ 64,152 $ 65,247 ========= ========= Projected benefit obligation for services rendered to date $ 71,117 $ 74,779 Plan assets at fair market value 78,656 68,068 --------- --------- Projected benefit obligation greater than (less than) plan assets (7,539) 6,711 Unrecognized prior service cost (837) (1,174) Unrecognized net gain resulting from experience different from assumed and effects of changes in assumptions 19,858 6,454 --------- --------- Accrued pension expense included in other liabilities $ 11,482 $ 11,991 ========= =========
The market value of the Retirement Plan assets exceeded assumed market value by $5,946. 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. -38- PAGE In addition to the Retirement Plan, the Company has established the following plans: a nonqualified defined benefit plan for employees whose benefits under the Retirement Plan are limited by provisions of the Internal Revenue Code; a nonqualified defined benefit plan to provide supplemental retirement benefits for selected executives in addition to benefits provided under other Company plans; and a nonqualified plan 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. These plans were unfunded at December 31, 1996 and 1995, although assets for these 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. The following table sets forth the nonqualified defined benefit plans' benefit obligations on the measurement dates, December 31, 1996 and December 31, 1995, and a reconciliation of those obligations to the amounts recognized in the Company's consolidated balance sheets at December 31, 1996 and 1995:
1996 1995 --------- --------- Actuarial present value of benefit obligations: Vested benefit obligation $ 4,263 $ 4,039 ========= ========= Accumulated benefit obligation $ 4,840 $ 4,763 ========= ========= Projected benefit obligation for services rendered to date $ 5,081 $ 5,452 Unrecognized prior service cost (1,414) (1,657) Unrecognized net gain (loss) resulting from experience different from assumed and effects of changes in assumptions 248 (306) --------- --------- Accrued pension expense included in other liabilities $ 3,915 $ 3,489 ========= =========
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 7.75% and 4.50% in 1996 and 7.25% and 4.50% in 1995, respectively. The change in the discount rate from 7.25% to 7.75% reduced the Retirement Plan's projected benefit obligation by $4,564. The assumed long-term rate of return on plan assets used for valuation purposes was 9.0% for 1996 and 1995. -39- 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, 1996, 1995 and 1994, is as follows:
1996 1995 1994 --------- --------- --------- Service cost-benefits earned during the period $ 2,158 $ 2,652 $ 3,285 Interest cost on projected benefit obligation 5,635 5,833 5,339 Net amortization and deferral 6,494 7,409 (6,103) Actual return on plan assets (11,744) (13,178) 902 Other - - 284 --------- -------- --------- $ 2,543 $ 2,716 $ 3,707 ========= ======== =========
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. Eligible employees of Cleo participated in one of these defined contribution plans through the date of the sale of Cleo on November 14, 1995. The total expense for these plans for the years ended December 31, 1996, 1995 and 1994, was $752, $452 and $550, respectively. The Company had a defined contribution plan for Cleo employees who were members of a collective bargaining unit. Benefits under this plan were determined based upon years of service and an hourly contribution rate. Pension expense for this plan for the years ended December 31, 1995 and 1994, was $218 and $409, respectively. As a result of the sale of Cleo, the Company has no further obligations to the plan. 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. -40- PAGE A reconciliation of the accumulated postretirement benefit obligation (APBO) measured as of December 31, 1996 and 1995 to the amounts recognized in the Company's consolidated balance sheets at December 31, 1996 and 1995, is as follows:
1996 1995 --------- --------- Retirees $ 930 $ 1,475 Fully eligible active employees 1,030 997 Other active employees 1,020 1,117 --------- --------- Accumulated benefit obligation (unfunded) 2,980 3,589 Unrecognized prior service cost 89 100 Unrecognized net gain 2,042 1,475 --------- --------- Accrued APBO included in other liabilities $ 5,111 $ 5,164 ========= =========
The accumulated benefit obligation for 1996 and 1995 was determined using the following assumptions: 1995 1995 ------------------ ---------------- Discount rate 7.75% 7.25% Health care cost 8.5% for 1997 9% for 1996 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, 1996, 1995 and 1994 is as follows:
1996 1995 1994 --------- --------- --------- Service cost-benefits earned during the period $ 152 $ 161 $ 171 Interest cost on accumulated benefits 219 349 363 Net amortization (142) (70) 42 Other - - 68 --------- --------- --------- $ 229 $ 440 $ 644 ========= ========= =========
-41- 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, 1996, 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 up to 3,342,500 shares of common stock. All incentive options were 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. Certain nonqualified stock options were granted at exercise prices in excess of the fair market value on the date of grant. 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 1996, 1995 or 1994. -42- PAGE A summary of stock option activity during the years ended December 31, 1996, 1995 and 1994, is as follows:
1996 1995 1994 ------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- -------- Outstanding beginning of year 1,033,166 $ 14.58 1,321,619 $ 18.79 1,063,042 $ 19.75 Granted - exercise price on date of grant: Equal to market price of stock 445,750 12.57 65,900 10.99 597,500 17.24 Greater than market price of stock 350,000 14.64 - - - - Effect of cancelled and reissued stock options - - - (8.43) - - Exercised (119,077) 10.16 (5,600) 13.16 (46,263) 17.70 Forfeited (285,566) 19.81 (340,503) 18.04 (291,140) 19.43 Expired - - (8,250) 20.00 (1,520) 16.42 --------- -------- --------- -------- --------- -------- Outstanding end of year 1,424,273 $ 13.29 1,033,166 $ 14.58 1,321,619 $ 18.79 ========= ======== ========= ======== ========= ======== Exercisable end of year 694,694 $ 14.07 388,999 $ 20.47 641,408 $ 20.00 ========= ======== ========= ======== ========= ========
-43- PAGE The range of exercise prices on shares outstanding as of December 31, 1996 is as follows:
Weighted Weighted Average Weighted Range of Average Remaining Average Exercise Shares Exercise Contractual Shares Exercise Prices Outstanding Price Life Exercisable Price - ------------- ----------- -------- ----------- ----------- -------- $ 9.75-14.50 1,162,273 $ 12.07 6.82 514,994 $ 12.07 14.63-18.38 162,800 16.76 5.38 85,500 17.53 19.63-28.00 99,200 21.84 4.42 94,200 21.88
For the years ended 1996, 1995 and 1994, compensation expense recognized under stock-based employee compensation was not material. During 1995, 476,600 options outstanding at the beginning of the year were canceled and reissued at $9.75. At December 31, 1996, 73,238 shares were available under the stock option and incentive plans, of which 32,838 shares could be issued as restricted shares. Of the total shares available, 29,000 shares were reserved for issuance pursuant to the Company's Stock Option Plan for Non-Employee Directors. During 1996, the Company granted options for 300,000 shares of common stock in excess of those available under its existing stock option plans, including options for 250,000 shares to the Company's Chief Executive Officer. Stockholder approval of these options will be requested at the 1997 Annual Meeting. Options for 150,000 shares have an exercise price of $15.50 per share, options for 100,000 shares have an exercise price of $16.50 per share and options for 50,000 shares have an exercise price of $19.00 per share. At the time of approval, the amount by which the market value of the Company's common stock exceeds the exercise price of these options will be recognized as compensation expense and amortized over the vesting period of these options. In the event stockholder approval is not received, the Company's Chief Executive Officer has the right to terminate his employment contract during the following 60-day period. Effective January 1, 1996, the Company adopted SFAS No. 123 - "Accounting for Stock-Based Compensation." This statement encourages, but does not require, adoption of a fair-value-based accounting method for employee stock-based compensation arrangements. As permitted by the statement, the Company elected to only disclose pro forma net income and net income per share as if the fair-value-based method had been applied in measuring compensation costs. -44- PAGE Pro forma information for the years ended December 31, 1996 and 1995, is as follows:
1996 1995 --------- --------- Pro forma net income (loss) $ 20,264 $ (46,748) ========= ========= Pro forma net income (loss) per share $ 1.23 $ (2.88) ========= =========
Compensation expense reflected in the pro forma disclosures is not indicative of future amounts when the SFAS No. 123 prescribed method will apply to all outstanding nonvested awards. The weighted average fair value of options granted was $2,689 in 1996 and $1,952 in 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1996 and 1995: expected dividend yield of .94% to 2.02%; expected option lives of five years; expected volatility of .2840 to .3962; and risk-free interest rates of 6.25% to 7.50%, for both years. 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. -45- 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 2006. 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, 1996, 1995 and 1994, on all real and personal property, was $15,292, $23,663 and $24,493, respectively. Minimum rental commitments under noncancelable leases as of December 31, 1996 are as follows:
Capital Operating Year ending December 31: Lease Lease ------------------------------- --------- --------- 1997 $ 3,100 $ 13,976 1998 3,100 12,408 1999 3,100 6,347 2000 3,152 4,280 2001 3,720 2,215 Thereafter 52,960 1,771 --------- --------- Net minimum commitments 69,132 $ 40,997 ========= Less amount representing interest 49,707 --------- Present value of net minimum lease commitments $ 19,425 =========
-46- PAGE Contract commitments The Company has several long-term customer sales agreements which require payments and credits for each of the years in the four-year period ended December 31, 2000, of $8,592, $6,269, $4,466, and $3,539, 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, 1996. 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 then Chief Financial Officer and the former President and Chief Executive Officer of Cleo was filed in October 1994 in the United States District Court for the Southern District of Ohio (In Re Gibson Securities Litigation). In August 1996, the Court reconsidered its prior rulings and certified the case as a class action. The latest 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 a motion to dismiss the latest complaint and a Third Party Complaint against its former auditor for contribution against any judgment adverse to the Company. The case currently is scheduled to be tried in June 1997. The Company presently is unable to predict the effect of the ultimate resolutions of the matter described above upon the Company's results of operations and cash flows; as of this date, however, Management does not expect that such resolution would result in a material adverse effect upon the Company's total net worth, although a substantially unfavorable outcome could be material to such net worth. On April 10, 1995, two purported class action lawsuits were commenced against the Company, its then Chairman, President and Chief Executive Officer and its then 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. The two lawsuits were consolidated and captioned In Re Gibson Greetings Securities Litigation II. This litigation has been concluded through the creation of a $1,600 settlement fund, most of which is covered by insurance. -47- 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 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. -48- 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 is held in escrow for certain post-closing adjustments and indemnification obligations. In addition, the Company was released from approximately $14,956 of third-party debt which was 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) ========= =========
-49- 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 -------- -------- -------- -------- -------- 1996 Actual - ------------------- Net sales $ 97,572 $ 88,397 $ 92,369 $111,083 $389,421 Total revenues 97,779 88,585 92,551 111,331 390,246 Cost of products sold 39,338 31,106 38,721 48,064 152,229 Other operating expenses 52,207 46,082 50,710 50,491 199,490 Interest expense, net 1,489 1,090 902 1,977 5,458 Net income 5,596 5,869 4,054 6,443 21,962 Net income per share 0.34 0.36 0.25 0.39 1.34 1995 Actual (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) 1995 Pro Forma (1)(2) - ------------------- 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
(1) The 1995 fourth quarter included a reduction in expenses resulting from an adjustment to customer returns and allowances increasing net income (loss) by $2,545 or $.16 per share and an increase in 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. -50- PAGE (2) 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 gives effect to the sale of Cleo as if it had occurred as of January 1, 1995 after giving effect to the pro forma adjustments. Pro forma adjustments represent management fee allocations including legal, tax and administrative expenses that were 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. -51- 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, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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 /s/ Deloitte & Touche LLP - -------------------------- Cincinnati, Ohio February 12, 1997 -52- PAGE Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. -53- 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 1997 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, 1997) are as follows: Name Age Title ------------------- --- ---------------------------- Frank J. O'Connell 53 President and Chief Executive Officer Paul W. Farley 52 Assistant Treasurer and Principal Accounting Officer Gregory Ionna 45 Executive Vice President - Gibson Card Division FRANK J. O'CONNELL. Mr. O'Connell has been the Company's Chief Executive Officer and President since August 1996. He was a business consultant from May 1995 to August 1996. He served as the President and Chief Executive Officer of Skybox International, Inc. (Skybox), a trading card manufacturer, from July 1991 to May 1995. Prior to joining Skybox, he was a venture capital consultant from February 1990 to July 1991 and served as President of Reebok Brands, North America from February 1989 to February 1990. He became a director of the Company in August 1996. PAUL W. FARLEY. Mr. Farley has served as the Principal Accounting Officer since September 1996. In 1992, he became Vice President, Finance of the Gibson Card Division. Previously, he served as Corporate Controller from 1986 to 1992. He was appointed Assistant Treasurer in 1981. GREGORY IONNA. Mr. Ionna has been Executive Vice President - 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. -54- 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 ------ -------------------------------------------------------------- 21 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 22 Consolidated Balance Sheets as of December 31, 1996 and 1995 24 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 26 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 27 Notes to Consolidated Financial Statements 52 Independent Auditors' Report 2. Financial Statement Schedules required to be filed by Item 8 of this Form 10-K: Page Herein Schedule ------ -------------------------------------------------------------- 57 Valuation and Qualifying Accounts 3. Exhibits: See Index of Exhibits (page 36) for a listing of all exhibits filed with this annual report on Form 10-K b) Reports on Form 8-K: The Company filed no reports on Form 8-K with the Securities and Exchange Commission during the quarter ended December 31, 1996. -55- 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 27th day of March 1997. Gibson Greetings, Inc. By /s/ Frank J. O'Connell ----------------------- Frank J. O'Connell President and 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 27th day of March 1997. Signature Title ---------- ----- /s/ Albert R. Pezzillo ------------------------- Albert R. Pezzillo Chairman of the Board /s/ Frank J. O'Connell President and ------------------------- Chief Executive Officer Frank J. O'Connell (principal executive officer) /s/ Paul W. Farley ------------------------- Assistant Treasurer Paul W. Farley (principal accounting officer) /s/ George M. Gibson ------------------------- George M. Gibson Director /s/ Charles D. Lindberg ------------------------- Charles D. Lindberg Director /s/ Frank Stanton ------------------------- Frank Stanton Director /s/ Charlotte St. Martin ------------------------- Charlotte St. Martin Director /s/ C. Anthony Wainwright ------------------------- C. Anthony Wainwright Director -56- 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 Balance Beginning Costs and to Other at End of Description of Period Expenses Accounts Deductions Period - ------------------- ---------- ---------- --------- ---------- --------- Deducted from trade receivables Allowance for doubtful accounts: Twelve months ended 12/31/96 $ 12,305 $ 2,086 $ - $ 737(A) $ 13,654 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 Allowance for sales returns, allowances and cash discounts: Twelve months ended 12/31/96 46,973 101,815 - 103,153(B) 45,635 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
[FN] - -------------------- (A) Accounts judged to be uncollectible and charged to reserve, net of recoveries (including Cleo through November 14, 1995) which were charged to the reserve, and the reduction in the allowance as a result of the sale of Cleo effective November 15, 1995 of $1,917. (B) Includes actual cash discounts taken by customers and sales returns and allowances granted to customers (including Cleo through November 14, 1995) all of which were charged to the reserve, and the reduction in the allowance as a result of the sale of Cleo effective November 15, 1995 of $5,495. -57- 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, 1996, by and among Gibson Greetings, Inc.; The Bank of New York; The Fifth Third Bank; Harris Trust and Savings Bank; NBD Bank, N.A.; The Sanwa Bank, Ltd.; The Sumitomo Bank, Ltd.; and The Bank of New York, 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) 1983 Stock Option Plan (*2) (ii) 1985 Stock Option Plan (*2) (iii) 1987 Stock Option Plan (*2) (iv) 1989 Stock Option Plan (*2) (v) 1989 Stock Option Plan for Nonemployee Directors (*2) (vi) 1996 Nonemployee Director Stock Plan (*8) (vii) 1991 Stock Option Plan (*9) -58- PAGE Exhibit Number Description ------- ----------------------------------------------------------------- (viii) Employment Agreement between Gibson Greetings, Inc. and Benjamin J. Sottile, dated April 1, 1993 (*10) (ix) ERISA Makeup Plan (*11) (x) Supplemental Executive Retirement Plan (*11) (xi) Agreements dated January 2, 1991 and December 10, 1993 between Gibson Greetings, Inc. and Stephen M. Sweeney (*2) (xii) Agreement dated November 17, 1995 between Gibson Greetings, Inc. and Stephen M. Sweeney (*12) (xiii) Agreement dated August 25, 1996 between Gibson Greetings, Inc. and Frank J. O'Connell (*13) (xiv) Agreement dated December 28, 1996 between Gibson Greetings, Inc. and Gregory Ionna (xv) Agreements dated January 24, 1991 and December 10, 1993 between Gibson Greetings, Inc. and Paul W. Farley (xvi) Agreement dated September 3, 1996 between Gibson Greetings, Inc. and William L. Flaherty (xvii) Settlement Agreement dated February 18,1997 between Gibson Greetings, Inc. and Benjamin J. Sottile 10(f) Stock Purchase Agreement (*14) 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. (*12) 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) -59- PAGE - ---------------------- * 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, 1996. (7) The Company's Report on Form 10-Q for the quarter ended June 30, 1991. (8) The Company's definitive Proxy Statement dated April 24, 1996. (9) The Company's definitive Proxy Statement dated March 17, 1997. (10) The Company's Report on Form 10-Q for the quarter ended June 30, 1993. (11) The Company's Report on Form 10-K for the year ended December 31, 1992. (12) The Company's Report on Form 10-K for the year ended December 31, 1995. (13) The Company's Report on Form 10-Q for the quarter ended September 30, 1996. (14) 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. -60- PAGE EX-10 2 EMPLOYMENT AGREEMENT - G.IONNA - EX 10(E)(XIV) Exhibit 10(e)(xiv) _____________________ Mr. Gregory Ionna Executive Vice President Gibson Division Gibson Greetings, Inc. 2100 Section Road Cincinnati, OH 45237 Re: Employment Agreement Dear Greg: In accordance with our discussions, this letter serves as a contract confirming your employment as Executive Vice President of the Card Division of Gibson Greetings, Inc. This agreement supersedes and terminates that Employment Agreement entered into on January 2, 1991 and amended and extended by agreement of December 6, 1994. The terms of this new Agreement are as follows: 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 as of April 1, 1996 and ending on March 31, 1999. Your employment and this Agreement may be extended thereafter on an indefinite basis by mutual agreement of the parties. In the event that either you or the Company elect not to extend your employment on an indefinite basis after March 31, 1999, then you shall be treated as having been terminated without Cause and you shall be entitled to those termination benefits set forth in Paragraph 5. 2.Your annual salary, effective as of April 1, 1996, shall be $210,000 and effective as of the date of the signing of this Agreement shall be $230,000 and which amount may be increased from time to time by the Company in accordance with the Company's salary administration program. In addition, you will qualify for participation in the Incentive Bonus Program. 3.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, tax preparation, and estate planning assistance. Further, you will continue to receive all other fringe benefits as are generally available to Company executives as such benefit plans may exist from time to time. -61- PAGE Mr. Gregory Ionna _________________ Page Two 4.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 12 month period, the Company shall have the right, on not less than 30 days written notice to you, to terminate this Agreement; your employment and your salary and rights to participate in the Incentive Bonus Plan and benefits described in Paragraph 3 shall cease on the effective date of your termination. 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 and your rights to participate in the Incentive Bonus Plan and benefits described in Paragraph 3 shall terminate as of the date of death. Provided, however, that in the event of your death during your employment hereunder health insurance coverage shall be extended to your wife and dependent children at the Company's expense for at least six months. 5.The Company reserves the right to terminate your employment at any time during the term or extended term of this Agreement. Except where termination is pursuant to Paragraph 4, or is for Cause as defined in Paragraph 6, the Company will pay to you immediately upon such termination, two times your yearly salary at the salary level in effect on the date of termination, plus any unpaid bonus under the Incentive Bonus Program with respect to a completed calendar year of employment. In addition, you will continue to be covered at the Company's cost under the Company's medical benefits plan until you commence new employment or until two years from the date of termination, whichever first occurs. In the event any person, corporation, partnership or joint venture becomes the beneficial owner of fifty percent (50%) or more of the voting securities of the Company then the provisions of this Paragraph for two times salary and bonus shall be automatically revised to 2.9 times such salary plus any unpaid bonus but subject to the provisions of the attached Exhibit A. Further, upon the consummation of such a change of ownership you may, within 30 days, elect to terminate your employment and if you make such an election the Company shall, upon such termination immediately pay to you 2.9 times your yearly salary plus any unpaid bonus. -62- PAGE Mr. Gregory Ionna _________________ Page Three 6.In the event you voluntarily terminate your employment during the term or extended term of this Agreement, other than 1) on March 31, 1999 as provided in Paragraph 1, above, or 2) within 30 days of a change of ownership as provided in Paragraph 5, above, or if your employment is terminated by the Company for Cause, your right to salary and rights to participate in the Incentive Bonus Plan and benefits described in Paragraph 3 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 - provided, however, that in instances of alleged insubordination, gross negligence, failure to perform duties in a diligent and competent manner, or any willful or material breach of this Agreement you shall be promptly given notice and shall have 90 days in which to correct or cure any alleged deficiency. 7.Termination of employment under Paragraph 4, 5, or 6 shall terminate this Agreement with the exception of the provisions of Paragraphs 8, 9, and 11 and any other provisions of this Agreement which by their terms survive termination of employment. 8.In the event of termination of your employment for whatever reason, you agree that for a period of one year after such termination you will not compete, directly or indirectly, with the Company or with any division, subsidiary or affiliate of Gibson Greetings, Inc. or participate as a director, officer, employee, consultant, advisor, partner or joint venturer in any business engaged in the manufacture or sale of greeting cards, gift wrap or other products produced by the Company, or by any division, subsidiary or affiliate of Gibson Greetings, Inc., without the Company's prior consent. 9.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. -63- PAGE Mr. Gregory Ionna _________________ Page Four 10.Nothing herein is intended to be granted to you to the exclusion of any other 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. 11.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. By /s/ Frank O'Connell -------------------- AGREED: /s/ Gregory Ionna - ------------------- Gregory Ionna December 28, 1996 - -------------------- Date -64- PAGE EXHIBIT A Anything in this Agreement to the contrary notwithstanding, in the event that the Corporation's auditors (the "Auditors") determine that any payment or distribution by the Corporation to or for the benefit of Executive, whether paid or payable (distributed or distributable) pursuant to this Agreement or otherwise (a "Payment"), would be nondeductible by the Corporation for federal income tax purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the aggregate present value of the amounts payable or distributable to or for the benefit of Executive pursuant to this Agreement or any other agreement between Executive and Corporation (the "Agreement Payments") shall be reduced (but not below zero) to the "Reduced Amount." For purposes of this Agreement, the "Reduced Amount" shall be an amount expressed in present value terms which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Corporation because of Section 280G of the Code. As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Auditors, it is possible that Agreement Payments will have been made by the Corporation which should not have been made (an "Overpayment") or that additional Agreement Payments which will not have been made by the Corporation could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based on the assertion of a deficiency by the Internal Revenue Service against the Corporation or Executive which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to Executive which he shall repay to the Corporation, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by Executive to the Corporation if and to the extent that such payment would not reduce the amount which is subject to taxation under Section 4999 of the Code. In the event that the Auditors, based on controlling precedent, determine that an Underpayment has occurred, such Underpayment shall promptly be paid by the Corporation to or for the benefit of Executive, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. -65- PAGE EX-10 3 EMPLOYMENT AGREEMENT - P.W.FARLEY EX 10(E)(XV) Exhibit 10(e)(xv) December 10, 1993 Mr. Paul W. Farley Vice President - Finance Gibson Card Division Gibson Greetings, Inc. 2100 Section Road Cincinnati, OH 45237 Dear Paul: As you are probably aware, your employment agreement with Gibson Greetings, Inc. is set to expire on January 31, 1994. Upon that expiration, you would become an at-will employee of the Company. However, we believe that you, as a 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 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. 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 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/HLC/dk ACCEPTED AND AGREED TO: /s/ Paul W. Farley -------------------- Date: 1/28/94 -------------- -66- PAGE January 24, 1991 Mr. Paul W. Farley Controller Gibson Greetings, Inc. 2100 Section Road Cincinnati, Ohio 45237 Re: Employment Agreement Dear Paul: It is my pleasure to confirm to you the following terms and conditions under which you have agreed to serve as Controller 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 February 1,1991 and ending on January 31, 1994. Your annual salary, effective February 1, 1991, shall be $85,000 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. Cont'd...... -67- PAGE Mr. Paul W. Farley January 24, 1991 Page Two 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 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 Cont'd...... -68- PAGE Paul W. Farley January 24, 1991 Page Three 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. 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:=24 ACCEPTED AND AGREED TO: /s/ Paul W. Farley - ------------------- Paul W. Farley Date: 2/13/91 ------------ -69- PAGE EX-10 4 AGREEMENT - W.L.FLAHERTY EX 10(E)(XVI) Exhibit 10(e)(xvi) September 3, 1996 Mr. William L. Flaherty Gibson Greetings, Inc. 2100 Section Road Cincinnati, OH 45237 Dear Bill: You have notified us that you will be voluntarily terminating your employment effective as of September 15, 1996. Pursuant to your Employment Agreement, your right to all compensation ceases as of the date of termination and your Employment Agreement terminates with the exception of the provisions of paragraph 13 (noncompete), paragraph 14 (which is not applicable), paragraph 15 (confidentiality), and paragraph 16 (rights and provisions under certain benefit plans) and which remain in effect as provided therein. In addition to these provisions, you agree to advise, cooperate and consult with the Company during the next six months with respect to its ongoing business matters and during the pendency of litigation with respect to the defense and prosecution of all litigation involving the Company which (a) is presently outstanding or (b) may be brought in the future and involves matters arising during the course of your employment with Gibson. You also agree to be available at reasonable times in Cincinnati for such advice and consultation with normal Gibson reimbursement for travel expenses. In certain litigation matters you also are a named defendant and the defense that the Company has furnished you through the law firm of Taft, Stettinius & Hollister will be continued. You have rendered significant service to the Company, and in recognition of that service and the fact that there will be additional time commitments on your part as provided herein, Gibson agrees (a) at the time of payment of Gibson employee incentive bonuses in the Spring of 1997 to pay to you the sum of $100,000.00 and (b) forthwith to sell to you for $1.00 the automobile currently furnished to you by the Company. In the interest of confidentiality, any statements relating to matters covered by this Agreement will be subject to prior approval by the Company. If the foregoing is satisfactory to you, please execute both copies of this letter agreement and return one of them to the undersigned. Yours truly, GIBSON GREETINGS, INC. By: /s/ Frank O'Connell --------------------- AGREED: /s/ William L. Flaherty ------------------------ -70- PAGE EX-10 5 SETTLEMENT AGREEMENT - B.J.SOTTILE EX 10(E)(XVII) Exhibit 10(e)(xvii) SETTLEMENT AGREEMENT This Settlement Agreement is made and entered as of the 18th day of February, 1997 by and between Gibson Greetings, Inc. ("Corporation") and Benjamin J. Sottile ("Executive"). WHEREAS, Corporation and Executive entered into an Employment Agreement dated April 1, 1993, and WHEREAS, Executive's employment terminated on June 15, 1996, pursuant to the provisions of Paragraph 6(d) of said Employment Agreement, and WHEREAS, the parties desire to settle all claims relating to Executive's termination and the Employment Agreement, NOW, THEREFORE, the parties agree as follows: 1.The Corporation shall continue Executive's base salary through March 31, 1998 at the rate of $38,333.34 per month subject to customary withholdings. In the event of Executive's death prior to March 31, 1998, payment of said base salary shall be continued for six full calendar months after death through March, 1998, whichever occurs first; payments in the case of Executive's death shall be made to Executive's widow or if deceased to Executive's estate. 2.The Corporation forthwith shall pay to Executive the sum of $200,000.00 plus the sum of $34,045.00 for a total of $234,045.00 and both of which are subject to customary withholdings. In partial consideration for this payment, the Executive's participation in all benefit and payment plans of the Corporation, except to the extent specified in Paragraphs 4, 5, 6, and 8 and including, without limitation, incentive compensation, vacation, social club memberships, Pritikin, reimbursement for reasonable business expenses, automobile (except as provided in Paragraph 3), estate planning and financial planning, outplacement services, and any and all other benefits available for management level employees is terminated forthwith with no further payments or reimbursements of any sort to be paid to Executive. 3.The Executive, within 30 days from the date hereof, shall be entitled to purchase the automobile currently provided to him by the Corporation for the sum of $1.00. 4.The Corporation shall continue through March 31, 1998 Executive's coverage under medical and health benefit plans of the Corporation (as in effect from time to time for management employees) plus the special supplementary plan currently in effect for Executive. In the event of Executive's death prior to March 31, 1998, coverage under this Paragraph 4 shall be continued for Executive's widow through said March 31, 1998. -71- PAGE 5.The Corporation shall pay the $42,000 premium due in 1997 on Executive's $1,000,000 life insurance policy and shall pay $10,500 of the payment due on said life insurance policy in 1998 provided this obligation shall cease in the event of Executive's death. 6.The Corporation's contributions to the Corporation's Retirement Income Plan, Makeup Plan, 401(k) match amount, and S.E.R.P. Plan for and on behalf of Executive or substitute arrangements previously discussed with Executive shall be continued through March 31, 1998 or until Executive's death, whichever first occurs. Executive, at his cost, may continue to participate until March 31, 1998 in the Corporation's Voluntary Accidental Insurance Plan. 7.The Executive by this Agreement hereby resigns, effective immediately, as a member of the Board of Directors of Gibson Greetings, Inc. 8.The Executive hereby waives and releases the Corporation from any and all claims, demands and causes of action which Executive has or may have against the Corporation and including, without limitation, claims, demands and causes of action arising out of his employment by the Corporation or out of the Employment Agreement set forth above (specifically including as example claims to options and "golden parachute" rights) and also including, but not limited to, any and all actions for breach of contract, express or implied, wrongful termination in violation of public policy, and all other claims for wrongful termination and constructive discharge, and all other tort claims including, but not limited to, intentional or negligent infliction of emotional distress, negligence, negligent investigation, negligent hiring or retention, defamation, intentional or negligent misrepresentation, fraud, and any and all claims arising under any statute, including but not limited to, the Ohio Fair Employment Practice Act, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the Fair Labor Standards Act, Employee Retirement and Income Security Act, Americans with Disabilities Act, 42 USC Section 1981, Family and Medical Leave Act, U.S. and Ohio Constitutions, and any and all other laws and regulations relating to employment termination, employment discrimination or other retaliation, wages, hours, benefits, stock options, compensation, and any and all claims for attorneys' fees and costs, but excepting from this release any and all rights to reimbursement and indemnification to which Executive may be entitled as an officer or director of the Corporation and which are uniformly applicable to officers and/or directors. Executive shall reasonably cooperate with Corporation in connection with any and all legal matters in which the Corporation is involved or in which the Executive is involved as a result of his service as an officer or director. Corporation acknowledges that such reimbursement rights include legal fee payments and reasonable expenses in conjunction with shareholder litigation currently pending in the Federal District Court for the Southern District of Ohio, or in connection with any other litigation falling within the reimbursement indemnification rights set forth above. -72- PAGE 9.The Employment Agreement dated April 1, 1993 be and it hereby is terminated effectively immediately without further liability of either party thereunder with the exception that Paragraph 8, Noncompetition, shall remain in full force and effect to June 15, 1998 provided such Paragraph 8 shall not be applicable to Executive's employment by a non-greeting card company. 10.This Agreement contains the entire agreement of the parties with respect to Executive's employment by the Corporation and supersedes any prior or simultaneous agreements between them, whether oral or written. 11.This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Ohio. 12.This Agreement shall be binding upon and inure to the benefit of and shall be enforceable by and against the Corporation, its successors and assigns, and against the Executive, his heirs, beneficiaries, and legal representatives. 13.Executive acknowledges that he has had the opportunity to consult with an attorney prior to signing this Agreement, and that he has been advised and understands that he has twenty-one (21) days in which to consider whether he should sign this Agreement, and he further understands that he has seven (7) days following the date upon which he signs this Agreement to revoke it and that this Agreement will not become effective until after the seven-day period has elapsed. IN WITNESS WHEREOF the parties have executed this Agreement as of the date first above written. GIBSON GREETINGS, INC. ("Corporation") BY:/s/ Frank O'Connell -------------------- Date of Execution: 2/18/97 --------- /s/ Benjamin J. Sottile ------------------------ Benjamin J. Sottile ("Executive") Date of Execution: February 18, 1997 -73- PAGE EX-11 6 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, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Net income (loss) $ 21,962 $ (46,489) $ (28,603) ========== ========== ========== Weighted average number of shares of common stock and equivalents outstanding: Common stock 16,094 16,084 16,087 Options 354 159 43 ---------- ---------- ---------- 16,448 16,243 16,130 ========== ========== ========== Net income (loss) per share $ 1.34 $ (2.86) $ (1.77) ========== ========== ==========
-74- PAGE EX-21 7 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 The Paper Factory of Wisconsin, Inc. Wisconsin -75- PAGE EX-23 8 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 12, 1997, appearing in this Annual Report on Form 10-K of Gibson Greetings, Inc. for the year ended December 31, 1996. DELOITTE & TOUCHE LLP /s/ Deloitte & Touche LLP - -------------------------- Cincinnati, Ohio March 27, 1997 -76- PAGE EX-27 9 FINANCIAL DATA SCHEDULE - EX 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GIBSON GREETINGS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-MOS DEC-31-1996 DEC-31-1996 98155 0 101712 59289 65069 253203 181540 88891 451559 118575 40898 0 0 167 256149 451559 389421 390246 152229 351719 0 0 8822 33069 11107 21962 0 0 0 21962 1.34 1.34 PAGE
-----END PRIVACY-ENHANCED MESSAGE-----