-----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, FgixkvubuhtgRMGsEj62gUQy7DYE4N1LLstqOlMihBWQvRS2WRVqA1gUt1KLrPDU vX6vABxaxOAXQTtmdmYwqg== 0000950152-98-002882.txt : 19980401 0000950152-98-002882.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950152-98-002882 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE 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-K SEC ACT: SEC FILE NUMBER: 000-11902 FILM NUMBER: 98583954 BUSINESS ADDRESS: STREET 1: 2100 SECTION RD CITY: CINCINNATI STATE: OH ZIP: 45237 BUSINESS PHONE: 5138416600 10-K 1 GIBSON GREETINGS, INC. ANNUAL REPORT/FORM 10-K 1 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, 1997 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 ------------------ 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. [ ] The aggregate market value of the Common Stock, $.01 par value, of the registrant held by non-affiliates of the registrant as of March 20, 1998 was approximately $437,438,000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 16,366,738 shares of Common Stock, $.01 par value, at March 20, 1998. Documents incorporated by reference: Portions of Gibson Greetings, Inc.'s Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated by reference in Part III 2 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 greeting cards, paper partywares, gift wrap and other related specialty products. During 1991, the Company formed Gibson Greetings International Limited (Gibson International), a Delaware corporation. Gibson International markets the Company's products through both independent and large retail customers in the United Kingdom and other European countries. 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, which are located primarily in manufacturers' outlet shopping centers. In December 1997, the Company signed a letter of intent to sell The Paper Factory to The Paper Warehouse, Inc. (The Paper Warehouse). The proposed sale was subject to the satisfaction of certain customary closing conditions, including a due diligence review and execution of a definitive purchase agreement. The Company and The Paper Warehouse were unable to reach an agreement on the adjusted purchase price for The Paper Factory in accordance with the terms of the letter of intent. Negotiations were terminated in January 1998. Management continues to explore a number of opportunities to maximize the value of The Paper Factory for the Company's stockholders. 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 the year ended December 31, 1995 totaled $151.9 million. 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 pretax loss on liquidation of $2.1 million and an income tax benefit of $3.7 million for a net increase in net income of $1.6 million or $.10 per share on a diluted basis. In late 1997, the Company made a $4.1 million investment in The Virtual Mall, Inc., a company which provides digital greetings through the Internet under the name of Greet Street. In conjunction with the investment, the Company entered into an agreement whereby the Company's Card Division will be a major provider of content to Greet Street. See Management's Discussion and Analysis and Note 15 of Notes to Consolidated Financial Statements set forth in Items 7 and 8 below, respectively. On March 31, 1998, the Company announced a restructuring plan (the Plan) to outsource its principal manufacturing operations currently performed at its Cincinnati, Ohio headquarters facility. Implementation of the Plan will begin in the second quarter of 1998 and is expected to be substantially complete by the end of the fourth quarter of 1998. In addition, the Company will upgrade or replace its existing business information systems over the next 30 months. See Management's Discussion and Analysis and Note 15 of Notes to Consolidated Financial Statements set forth in Items 7 and 8 below, respectively. 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 1997, approximately 69% of net sales of cards were derived from everyday cards and approximately 31% from seasonal cards. The Company's products also include paper partywares, gift wrap, candles, calendars, beanbag toys, gift and plush 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:
Years Ended December 31, -------------------------------------------------------------------------- Pro Forma ------------ 1997 1996 1995* 1995** ------------ ------------ ------------ ------------ Greeting cards $ 233,321 $ 227,512 $ 237,160 $ 255,192 Partywares 54,778 48,386 40,891 40,939 Gift wrap 44,199 42,812 45,194 172,893 Other products 64,817 70,711 64,968 71,121 ----------- ----------- ----------- ------------ Total net sales $ 397,115 $ 389,421 $ 388,213 $ 540,145 =========== =========== =========== ============
* Excludes Cleo, Inc. which was sold effective November 15, 1995. ** Includes Cleo, Inc. 2 3 Many of the Company's products incorporate well-known proprietary characters. Net sales associated with licensed properties accounted for approximately 13% of overall 1997 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 7% of the Company's revenues in 1997 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 1997, the Company's five largest customers accounted for approximately 32% of the Company's net sales and one customer, Winn-Dixie Stores, Inc., accounted for approximately 15% 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, paper partywares, gift wrap, candles, and other products. The Company also supplies corrugated displays for certain seasonal products and other products such as beanbag toys. 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. 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 everyday and seasonal greeting cards. DESIGN AND PRODUCTION The Company maintains an extensive worldwide freelance pool and a full-time staff of artists, writers, art directors and creative planners who design the majority of the Company's products. Design of everyday products begins approximately eight months in advance of shipment. The Company's seasonal greeting cards and other items are designed and produced 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 eight 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, Kentucky or Covington, Kentucky for shipment directly to retail stores. See Management's Discussion and Analysis and Note 15 of Notes to Consolidated Financial Statements set forth in Items 7 and 8 below, respectively. The Company also purchases for resale certain finished and semi-finished products, such as beanbag toys and gift and plush 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 principal 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." 3 4 TRADEMARKS, COPYRIGHTS AND LICENSES The Company currently has approximately 35 registrations of trademarks in the United States and approximately 90 registrations of trademarks in foreign countries. Although the Company does not register all of its creative artwork and editorial text with the U.S. Copyright office, it does register selected works and obtains 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, 1997, the Company employed approximately 2,100 persons on a full-time basis. See Management's Discussion and Analysis and Note 15 of Notes to Consolidated Financial Statements set forth in Items 7 and 8 below, respectively. In addition, as of December 31, 1997, the Company employed approximately 7,200 persons on a part-time basis. ENVIRONMENTAL ISSUES The Company, over the past decade, has taken a proactive approach to environmental concerns. In early 1990, the Company's 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 two contingent environmental liabilities as discussed below: Old William Heathcott Site - Dyer County, Tennessee In December 1993, the Company, through its subsidiary Cleo, was advised by the Tennessee Department of Environment and Conservation (TDEC) that Cleo had been identified by the State as a potentially responsible party (PRP) liable for reimbursement of Superfund expenditures made by the State of Tennessee for site identification, investigation, containment and cleanup, including monitoring and maintenance activities at the Old William Heathcott Site, Dyer County, Tennessee (the Site). The Company subsequently sold Cleo in late 1995. Pursuant to the sale agreement, the Company agreed to indemnify the buyer and Cleo against various liabilities, including liability for the Heathcott landfill, subject to an aggregate cap of $12 million. On February 6, 1996, the State ordered Cleo to investigate and clean up the Site. CSS, Cleo's new owner, appealed the order. The State issued an order to the Company on May 1, 1996 identifying the Company as a PRP and demanding that the Company investigate and clean up the Site. At least three other PRPs also received such orders, including the current owner of the Site and the previous Site operator. The Company timely appealed the order, but the State has not set the appeal for hearing. The State has copied the Company on a memorandum that reports that the State spent about $75,000 to remove drums from the Site. It is not possible to predict whether the State will pursue the Company further or, if it does, what proportion of costs the State might seek to recover. Based upon information available to date, including an informal estimate previously provided by State authorities, 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 insurance companies have been notified of the occurrence by the Company and/or Cleo. One carrier has denied coverage on various grounds, including the pollution exclusion. To the Company's knowledge, the other carrier has not made a final determination. Carl Wright Site - Dyer County, Tennessee A disposal company known as Carl Wright Septic Service is alleged to have disposed of waste materials at a 33 acre Tennessee State Superfund Site known as the Carl Wright Site. The Company has received correspondence dated October 13, 1997, from counsel for Cleo and CSS indicating that TDEC personnel believe Cleo is a PRP for costs incurred by the State of Tennessee in remediating the Carl Wright Site. As in the Old William Heathcott Site proceedings, Cleo has taken the position that the Company is responsible for any liability at the Carl Wright Site. Cleo has reserved its rights under the indemnity set forth in the sale agreement, as described above in connection with the Old William Heathcott Site. The Company has not received any correspondence, requests or orders from the State in connection with the Carl Wright Site. As of this time, the Company has no information concerning the amount the State or Cleo may ultimately seek to recover in connection with the Carl Wright Site. 4 5 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 Covington, Kentucky Manufacturing and distribution 293,000 Telford, England Manufacturing, distribution and administration 58,800 Florence, Kentucky Manufacturing and distribution 110,700 Neenah, Wisconsin Distribution 50,000 Rancho 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 10 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, 11 and 15 of Notes to Consolidated Financial Statements set forth in Item 8 below. The Covington, Kentucky and Telford, England 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. 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. See Management's Discussion and Analysis and Note 15 of Notes to Consolidated Financial Statements set forth in Items 7 and 8 below, respectively. 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 certified the case as a class action. The Court subsequently concluded that the certified class representative could represent only those class members who purchased Gibson stock after April 19, 1994 and before July 1, 1994. Class members purchasing Gibson stock from November 3, 1993 to April 19, 1994 were given until January 29, 1998 to move for class certification. No such motion was filed. 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 is defending the suit vigorously and has filed motions to dismiss and for summary judgment on the latest Complaint. It has also filed a Third Party Complaint against its former auditor for contribution against any judgment adverse to the Company. Discovery has closed; however, no trial date has been set. The Company presently is unable to predict the effect of the ultimate resolution of the matter described above upon the Company's results of operations and cash flows. As of this date, however, management does not expect that such resolution would result in a material adverse effect upon the Company's total net worth. In addition, the Company is a defendant in certain other routine litigation which is not expected to result in a material adverse effect on the Company's net worth, total cash flows or operating results. 5 6 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. 6 7 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, 1997, the amount of unrestricted retained earnings available for dividends was $22.6 million. No dividends were declared or paid in either 1997 or 1996. There were approximately 5,700 beneficial owners of the Company's common stock on March 6, 1998. The following table presents certain quarterly market price information as quoted in the Nasdaq National Market for the years ended December 31, 1997 and 1996:
1997 1996 -------------------------------------------------- ----------------------------------------------- High Low Close High Low Close --------------- -------------- -------------- -------------- -------------- ------------ First Quarter $ 21 5/8 $ 18 $ 20 3/4 $ 17 $ 13 1/8 $ 13 1/2 Second Quarter 23 1/4 19 22 1/2 14 7/8 13 13 3/4 Third Quarter 26 3/4 18 1/2 25 7/8 15 11 1/2 14 1/2 Fourth Quarter 26 1/4 20 1/2 21 7/8 20 3/4 13 7/8 19 5/8
7 8 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, 1997. Selected financial data should be read in conjunction with the Consolidated Financial Statements set forth in Item 8 below. During the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 128 "Earnings Per Share." All previously reported net income (loss) per share amounts have been restated to conform to the new presentation under SFAS No. 128. STATEMENTS OF OPERATIONS DATA (Dollars and shares in thousands except per share amounts)
Years Ended December 31, -------------------------------------------------------------------------- Unaudited Pro Forma 1997 1996 1995(1) 1995 1994 1993(2) ---------- ----------- ---------- ---------- ---------- ---------- Revenues: Net sales $ 397,115 $ 389,421 $ 388,213 $ 540,145 $ 548,042 $ 546,165 Royalty income 602 825 671 676 753 761 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues 397,717 390,246 388,884 540,821 548,795 546,926 ---------- ---------- ---------- ---------- ---------- ---------- Cost of products sold 159,648 152,229 148,534 268,702 310,039 277,109 Selling, distribution and administrative 202,109 199,490 201,914 239,922 276,147 227,863 expenses Loss on sale of Cleo, Inc. - - - 83,012 - - Interest expense 5,432 8,822 9,487 13,178 10,599 7,737 Interest income (5,776) (3,364) (915) (915) (765) (949) (Gain) loss on derivative transactions / settlement, net - - - - (1,641) 5,689 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes 36,304 33,069 29,864 (63,078) (45,584) 29,477 Income taxes 14,706 11,107 13,588 (16,589) (16,981) 14,209 ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 21,598 $ 21,962 $ 16,276 $ (46,489) $ (28,603) $ 15,268 ========== ========== ========== ========== ========== ========== Net income (loss) per share: Basic $ 1.32 $ 1.36 $ 1.01 $ (2.89) $ (1.78) $ 0.95 ========== ========== ========== ========== ========== ========== Diluted $ 1.27 $ 1.34 $ 1.00 $ (2.89) $ (1.78) $ 0.95 ========== ========== ========== ========== ========== ========== Dividends per share $ - $ - $ - $ - $ 0.40 $ 0.40 ========== ========== ========== ========== ========== ========== Average common shares 16,379 16,094 16,085 16,085 16,087 16,042 ========== ========== ========== ========== ========== ========== Average common shares and equivalents 16,940 16,329 16,227 16,085 16,087 16,102 ========== ========== ========== ========== ========== ========== OTHER FINANCIAL DATA (Dollars in thousands except per share amounts) December 31, -------------------------------------------------------------------------- 1997 1996 1995 1994 1993(2) ---------- ---------- ---------- ---------- ---------- Working capital $ 147,205 $ 134,628 $ 106,284 $ 151,128 $ 209,209 Plant and equipment, net 85,376 92,649 90,813 119,491 116,900 Total assets 443,322 451,559 425,827 612,195 572,459 Debt due within one year (3) 7,890 7,901 28,894 117,114 66,187 Long-term debt 24,158 40,898 46,533 63,233 74,365 Stockholders' equity 281,744 256,316 230,242 277,500 313,097 Equity per share 17.11 15.81 14.31 17.24 19.50 Capital expenditures 17,677 26,507 19,872 35,396 31,049
------------- (1) Gives effect of the sale of Cleo as if it had occurred as of January 1, 1995 after giving effect to certain pro forma adjustments. (2) The full year results for 1993 have been restated to correct an inventory overstatement at Cleo 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 on a diluted basis. (3) Includes the current portion of long-term debt at December 31, which consisted of $7,890 in 1997, $7,901 in 1996, $9,894 in 1995, $11,164 in 1994, and $3,917 in 1993. 8 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Effective September 1, 1996, the Company placed its Mexican subsidiary, Gibson de Mexico, into liquidation. As a result, the Company recorded during the third quarter of 1996 a pretax loss on this liquidation of $2.1 million and an income tax benefit of $3.7 million for a net increase in net income of $1.6 million or $.10 per share on a diluted basis. The consolidated results of operations for 1996 include Gibson de Mexico's financial results through August 31, 1996. Gibson de Mexico`s financial results were not material to the consolidated results of operations. In mid-November 1995, the Company sold Cleo, its wholly-owned gift wrap subsidiary. In addition to gift wrap and related products, Cleo manufactured and sold Christmas cards and Valentines. The consolidated results of operations for 1995 include Cleo's financial results through the date of sale and reflect the loss on the sale of Cleo of $54.5 million, net of an income tax benefit of $28.5 million (see Note 13 of Notes to Consolidated Financial Statements set forth in Item 8 below). 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 a historic basis. RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 Revenues increased 1.9% to $397.7 million compared to $390.2 million in 1996. The increase was attributable to increased revenues at The Paper Factory and Gibson International. Domestic greeting card shipments at the Company's Card Division were down for 1997 reflecting a volume decline due to the loss of certain customers partially offset by lower returns and allowances. Returns and allowances were 18.3% in 1997 compared to 19.8% in 1996. The decline reflected decreases in everyday and seasonal returns, and in customer allowances. Consistent with general industry practice, the Company allows customers to return for credit certain everyday and seasonal 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. The Company continues to face strong competitive pressures with regard to both price and terms of sale. Total operating expenses were $361.8 million or 91.0% of total revenues in 1997 compared to $351.7 million or 90.1% in 1996. Cost of products sold was 40.2% of total revenues in 1997 compared to 39.0% in 1996. The increase was primarily due to a higher product obsolescence provision, a change in product mix and the sales mix between operating units. Selling, distribution and administrative expenses were 50.8% of total revenues in 1997 compared to 51.1% in 1996. The decline in 1997, as a percentage of total revenues, reflected lower distribution costs, administrative expenses and bad debt expense, offset by increased selling and marketing expenses. In addition, 1996 included a $2.1 million pretax loss for the liquidation of Gibson de Mexico, partially offset by a foreign exchange gain at Gibson International. In 1997, the Company recorded net interest income of $.3 million compared to net interest expense of $5.5 million in 1996. The change was due to an increase in interest income from higher invested cash balances and a decrease in interest expense due to lower interest-bearing obligations. Income before income taxes was $36.3 million in 1997 compared to $33.1 million in 1996. The effective income tax rate for 1997 was 40.5% compared to 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, of 42.0%. Net income was $21.6 million in 1997 compared to $22.0 million in 1996. The net effect of the liquidation of Gibson de Mexico was to increase net income in 1996 by $1.6 million or $.10 per share on a diluted basis. RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996 COMPARED WITH PRO FORMA YEAR ENDED DECEMBER 31, 1995 Revenues in 1996 increased 0.4% 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. 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. 9 10 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 was to increase net income in 1996 by $1.6 million or $.10 per share on a diluted basis. 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. 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 was to increase net income in 1996 by $1.6 million or $.10 per share on a diluted basis. 10 11 LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities decreased $57.0 million in 1997 from 1996 to $50.2 million compared to an increase of $62.1 million in 1996 from 1995 and an increase of $51.6 million in 1995 from 1994. The decrease in 1997 was primarily the result of an increase in the use of cash for other assets including customer sales agreements, the reduction of other current liabilities and the payment of income taxes as opposed to the receipt of income tax refunds in 1996. Cash used in investing activities for plant and equipment purchases totaled $17.7 million in 1997 compared to $26.5 million and $19.9 million in 1996 and 1995, respectively. Reduced levels of spending in 1997 compared to 1996 resulted from lower expenditures for manufacturing and distribution equipment at the Company's Card Division, and a lower level of new store openings and store remodelings at The Paper Factory. 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 used in investing activities in 1997 also included the investment of $4.1 million in The Virtual Mall, Inc., a company providing digital greetings through the Internet doing business as Greet Street. Cash provided by investing activities in 1996 included the collection of the note receivable of $24.6 million for the sale of Cleo, while cash provided by investing activities in 1995 included the proceeds received from the sale of Cleo. Cash used in financing activities in 1997 totaled $12.8 million compared to $25.2 million in 1996 and $109.1 million in 1995. In 1997, the Company prepaid $7.1 million in principal, without premium, on its senior notes. This payment was in addition to the $7.1 million principal amount the Company was scheduled to pay under the senior note agreement. Long-term debt payments in 1995 were $22.2 million primarily reflecting the partial redemption of senior notes with the proceeds from the sale of Cleo. The 1996 decrease in short-term borrowings resulted from the collection of the note receivable from the sale of Cleo and from improved cash flows 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 flows from operations resulting in a decrease in the need for short-term financing. Management will seek to extend the existing revolving credit facility due to expire in late April 1998. 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 1998 are expected to be $25.0 to $30.0 million higher than the 1997 level. Included in the potential increased spending on capital expenditures are significant expenditures related to the Company's business information systems. Management has analyzed its computer hardware and software in connection with the Company's need for improved information systems as well as the potential dating problems that may arise with the Year 2000. Management has decided to replace core business applications which support sales and customer services, procurement and manufacturing, distribution, and finance and accounting with Enterprise Resource Planning (ERP) software. The primary purpose of the ERP software is to add functionality and efficiency to the business processes of the Company as well as address the Year 2000 issue. In addition, the Company will upgrade software systems not addressed by the ERP software to correct potential problems associated with the Year 2000. Although the ability of third parties, with whom the Company transacts business, to address adequately their Year 2000 issues is outside the Company's control, the Company intends to discuss with its vendors and customers the possibility of any interface difficulties which may affect the Company. To upgrade or replace existing business information systems will require the Company to invest an estimated $30.0 to $35.0 million over the next thirty months. Although the systems project will extend beyond December 31, 1999, management believes substantially all Year 2000 issues will be addressed prior to that date. A significant portion of the projected expenditures for hardware and software will be capitalized in accordance with the recently issued AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The remainder will be expensed as incurred. The cost of the project and the expected completion date is based on management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. 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 $5.2 million to $32.6 million per year for the next five years, as well as for financing existing operations, currently projected capital expenditures including those for information systems, anticipated long-term sales agreements consistent with industry practices and other contingencies. 11 12 SUBSEQUENT EVENT On March 31, 1998, the Company announced a restructuring plan (the Plan), which is expected to result in a total cost of $26.1 million before income taxes and is designed to enhance the Company's flexibility and operating efficiency, lower fixed costs and improve customer service. In connection with the Plan, the Company will outsource all of the card, gift wrap and other manufacturing operations currently performed at its Cincinnati, Ohio headquarters. Implementation of the Plan will begin in the second quarter of 1998 and is expected to be substantially complete by the end of the fourth quarter of 1998. In addition, the Company announced the investment in business information systems discussed above. The Company expects these plans to generate annual savings of approximately $10.0 million before income taxes by the year 2000 and be accretive to earnings beginning in 1999. See Note 15 of Notes to Consolidated Financial Statements set forth in Item 8 below. Management does not believe that there are any trends, events, commitments or uncertainties, except for the plans discussed above and for previously disclosed items (see Notes 12 and 15 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. However, except for the historical information contained herein, the matters discussed are forward-looking statements which involve risks and uncertainties. There are numerous important factors that could adversely affect the Company, including but not limited to competitive pressures with regard to price and terms of sale, unforeseen financial difficulties of significant customers, lack of market acceptance of the Company's new products and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Because of these, as well as other factors, historical information should not be relied upon as an indicator of future financial performance. For additional financial information see Consolidated Financial Statements and Notes to Consolidated Financial Statements set forth in Item 8 below. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable 12 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA GIBSON GREETINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1997, 1996 and 1995 (Dollars in thousands except per share amounts)
1997 1996 1995 ------------ ------------ ------------- REVENUES: Net sales $ 397,115 $ 389,421 $ 540,145 Royalty income 602 825 676 ------------ ------------ ------------- Total revenues 397,717 390,246 540,821 ------------ ------------ ------------- COSTS AND EXPENSES: Operating expenses: Cost of products sold 159,648 152,229 268,702 Selling, distribution and administrative expenses 202,109 199,490 239,922 Loss on sale of Cleo, Inc. - - 83,012 ------------ ------------ ------------- Total operating expenses 361,757 351,719 591,636 ------------ ------------ ------------- OPERATING INCOME (LOSS) 35,960 38,527 (50,815) ------------ ------------ ------------- Financing expenses: Interest expense 5,432 8,822 13,178 Interest income (5,776) (3,364) (915) ------------ ------------ ------------- Total financing expenses, net (344) 5,458 12,263 ------------ ------------ ------------- INCOME (LOSS) BEFORE INCOME TAXES 36,304 33,069 (63,078) Income tax provision (benefit) 14,706 11,107 (16,589) ============ ============ ============= NET INCOME (LOSS) $ 21,598 $ 21,962 $ (46,489) ============ ============ ============= NET INCOME (LOSS) PER SHARE: Basic $ 1.32 $ 1.36 $ (2.89) ============ ============ ============= Diluted $ 1.27 $ 1.34 $ (2.89) ============ ============ =============
See accompanying notes to consolidated financial statements. 13 14 GIBSON GREETINGS, INC. CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (Dollars in thousands except per share amounts)
1997 1996 -------- -------- ASSETS CURRENT ASSETS: Cash and equivalents $114,267 $ 98,155 Trade receivables, net 30,325 42,423 Inventories 59,424 65,069 Prepaid expenses 4,435 2,958 Deferred income taxes 41,399 44,598 -------- -------- Total current assets 249,850 253,203 PLANT AND EQUIPMENT, NET 85,376 92,649 DEFERRED INCOME TAXES 18,524 16,592 OTHER ASSETS, NET 89,572 89,115 -------- -------- $443,322 $451,559 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Debt due within one year $ 7,890 $ 7,901 Accounts payable 11,810 13,420 Income taxes payable 14,502 15,816 Other current liabilities 68,443 81,438 -------- -------- Total current liabilities 102,645 118,575 LONG-TERM DEBT 24,158 40,898 SALES AGREEMENT PAYMENTS DUE AFTER ONE YEAR 11,612 14,274 OTHER LIABILITIES 23,163 21,496 -------- -------- Total liabilities 161,578 195,243 -------- -------- 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, 17,023,306 and 16,708,059 shares issued, respectively 170 167 Paid-in capital 52,872 47,474 Retained earnings 235,353 213,755 Foreign currency translation adjustment 733 871 -------- -------- 289,128 262,267 Less treasury stock, at cost, 556,601 and 494,601 shares, respectively 7,384 5,951 -------- -------- Total stockholders' equity 281,744 256,316 ======== ======== $443,322 $451,559 ======== ========
See accompanying notes to consolidated financial statements. 14 15 GIBSON GREETINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1996 and 1995 (Dollars in thousands)
1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 21,598 $ 21,962 $ (46,489) --------- --------- --------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation including write-down of display fixtures 22,948 22,774 26,896 (Gain ) loss on disposal of plant and equipment 1,339 (123) 5,492 Loss on sale of Cleo, Inc. -- -- 83,012 Deferred income taxes 1,267 (1,434) (2,901) Amortization of deferred costs and intangibles 22,206 24,121 23,590 Change in assets and liabilities: Trade receivables, net 12,098 4,197 17,820 Inventories 5,645 3,234 2,821 Income taxes receivable -- 10,698 (10,698) Prepaid expenses (1,477) 1,096 221 Other assets, net of amortization (18,519) (7,782) (27,260) Accounts payable (1,610) 5,425 (2,617) Income taxes payable (1,314) 15,816 (4,742) Other current liabilities (12,995) 9,796 (19,267) Other liabilities (995) (4,751) (316) All other, net 44 2,218 (379) --------- --------- --------- Total adjustments 28,637 85,285 91,672 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 50,235 107,247 45,183 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of plant and equipment (17,677) (26,507) (19,872) Investment in The Virtual Mall, Inc. (4,144) -- -- Proceeds from sale of plant and equipment 481 2,480 926 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 (21,340) 547 77,491 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in short-term borrowings -- (19,000) (86,950) Payments on long-term debt (16,751) (7,628) (22,207) Issuance of common stock 5,401 1,434 49 Acquisition of common stock for treasury (1,433) -- (11) --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES (12,783) (25,194) (109,119) --------- --------- --------- NET INCREASE IN CASH AND EQUIVALENTS 16,112 82,600 13,555 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 98,155 15,555 2,000 ========= ========= ========= CASH AND EQUIVALENTS AT END OF YEAR $ 114,267 $ 98,155 $ 15,555 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid (received) during the year for: Interest $ 2,537 $ 3,455 $ 10,489 Income taxes 14,753 (13,973) 1,751 Noncash investing and financing activities: Purchase of plant and equipment through capital lease obligation -- -- 19,135 Note received in connection with sale of Cleo, Inc. -- -- 24,574
See accompanying notes to consolidated financial statements. 15 16 GIBSON GREETINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1997, 1996 and 1995 (Dollars in thousands except per share amounts)
1997 1996 1995 --------- --------- --------- COMMON STOCK, PAR VALUE $.01: Balance at beginning of year $ 167 $ 166 $ 166 Exercise of stock options 3 1 -- --------- --------- --------- 170 167 166 --------- --------- --------- PAID-IN CAPITAL: Balance at beginning of year 47,474 46,041 45,992 Exercise of stock options 5,398 1,433 49 --------- --------- --------- 52,872 47,474 46,041 --------- --------- --------- RETAINED EARNINGS: Balance at beginning of year 213,755 191,793 238,282 Net income (loss) 21,598 21,962 (46,489) --------- --------- --------- 235,353 213,755 191,793 --------- --------- --------- FOREIGN CURRENCY TRANSLATION ADJUSTMENT: Balance at beginning of year 871 (1,807) (1,000) Aggregate adjustments resulting from: Translation of financial statements into U.S. dollars (138) 513 (807) Liquidation of Gibson de Mexico S.A. de C.V -- 2,165 -- --------- --------- --------- 733 871 (1,807) --------- --------- --------- LESS TREASURY STOCK, AT COST: Balance at beginning of year 5,951 5,951 5,940 Common stock acquired 1,433 -- 11 --------- --------- --------- 7,384 5,951 5,951 --------- --------- --------- Total stockholders' equity $ 281,744 $ 256,316 $ 230,242 ========= ========= =========
See accompanying notes to consolidated financial statements. 16 17 GIBSON GREETINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996 and 1995 (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 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. 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's management does not believe a concentration of business risk exists due to the diversity of channels of distribution and geographic location of the Company's retail customers; however, management does believe the Company 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 on a diluted basis. One customer in 1997 and 1996 accounted for approximately 15% and 16% of net sales, respectively. 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. 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 1997, 1996 and 1995. 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. 17 18 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 three to 11 years; and display fixtures are depreciated over three to five 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, investments, goodwill and other intangibles. Deferred and prepaid costs principally represent costs incurred relating to long-term customer sales agreements. Deferred and prepaid costs are amortized ratably over the terms of the agreements, generally three to five years. Investments consist of assets held in grantor tax trusts, known as "Rabbi" trusts, for certain of the Company's retirement plans and of an investment in The Virtual Mall, Inc. doing business as Greet Street, a pioneer in providing digital greetings through the Internet. Assets held in Rabbi trusts, which are recorded at fair value, are subject to claims of the Company's creditors, but otherwise must be used only for purposes of providing benefits under the retirement plans. The market value of the investment in The Virtual Mall, Inc. is not readily determinable and the investment is therefore recorded at cost. 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 three to 20 years, using the straight-line method. Accumulated goodwill amortization at December 31, 1997 and 1996 was $5,995 and $4,687, 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. 18 19 COMPUTATION OF NET INCOME (LOSS) PER SHARE The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 128 - "Earnings per Share" in February 1997. The statement replaced the presentation of primary and fully diluted earnings per share of common stock (EPS) with basic and diluted EPS. Basic EPS excludes all dilution. It is based upon the weighted average number of shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if contracts to issue common stock were exercised. However, if the effect on EPS assuming the exercise of contracts to issue common stock is antidilutive, which it would have been in 1995, such exercises are not considered. The Company adopted SFAS No. 128 in the fourth quarter of 1997. All previously reported EPS amounts have been restated to conform to the new presentation. The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding for the years ended December 31, 1997, 1996 and 1995. There are no adjustments to net income (loss) for the basic or diluted EPS computations:
1997 1996 1995 ---------- ---------- ---------- Basic weighted average shares outstanding 16,379,250 16,094,381 16,084,929 Effect of dilutive securities - stock options held by employees 560,791 235,118 -- ---------- ---------- ---------- Diluted weighted average shares outstanding 16,940,041 16,329,499 16,084,929 ========== ========== ==========
RECENTLY ISSUED ACCOUNTING STANDARDS The FASB issued SFAS No. 130 - "Reporting Comprehensive Income" in June 1997. The statement, which must be adopted in the first quarter of 1998, will require the Company to report comprehensive income, a measure of performance that includes all non-owner sources of changes in equity. In addition to net income reported in these financial statements, comprehensive income would include unrealized gains and losses on securities available for sale and foreign currency translation adjustments. 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, 1997 and 1996, consist of the following:
1997 1996 -------- -------- Trade receivables $85,537 $101,712 Less reserves for returns, allowances, cash discounts and doubtful accounts 55,212 59,289 ======= ======== $30,325 $ 42,423 ======= ========
19 20 NOTE 3-INVENTORIES Inventories at December 31, 1997 and 1996, consist of the following:
1997 1996 -------- -------- Finished goods $ 43,098 $ 47,666 Work-in-process 10,082 11,710 Raw materials and supplies 6,244 5,693 -------- -------- $ 59,424 $ 65,069 ======== ========
NOTE 4-PLANT AND EQUIPMENT Plant and equipment at December 31, 1997 and 1996, consist of the following:
1997 1996 --------- -------- Land and buildings $ 32,074 $ 32,155 Machinery and equipment 53,386 52,948 Display fixtures 83,899 81,480 Leasehold improvements 12,047 11,700 Construction in progress 1,217 3,257 -------- -------- 182,623 181,540 Less accumulated depreciation 97,247 88,891 ======== ======== $ 85,376 $ 92,649 ======== ========
At December 31,1997 and 1996, land and buildings include assets acquired under capital lease obligations of $19,135. Accumulated depreciation on such assets totals $2,249 and $1,190 at December 31, 1997 and 1996, respectively. NOTE 5-OTHER ASSETS Other assets at December 31, 1997 and 1996, consist of the following:
1997 1996 --------- --------- Deferred and prepaid costs $ 123,378 $ 127,394 Investments 9,273 4,262 Goodwill and other intangibles 26,160 26,160 --------- --------- 158,811 157,816 Less accumulated amortization 69,239 68,701 --------- --------- $ 89,572 $ 89,115 ========= =========
20 21 NOTE 6-DEBT Debt at December 31, 1997 and 1996, consists of the following:
1997 1996 ------- ------- Senior notes bearing interest at 9.33%, with annual serial maturities through 1999 $11,428 $25,714 Notes payable to former shareholders of The Paper Factory bearing interest at 5.01%, payable in annual installments of $2,019 -- 2,019 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 $8,168 and $8,664 at December 31, 1997 and 1996, respectively 600 1,200 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 301 441 ------- ------- 12,329 29,374 Capital lease obligation payable in monthly installments through 2013 (see Note 11) 19,719 19,425 ------- ------- 32,048 48,799 Less debt due within one year 7,890 7,901 ------- ------- $24,158 $40,898 ======= =======
The Company has a 364-day revolving credit agreement providing $40,000 for general corporate purposes which expires in late April 1998. No borrowings were outstanding under the agreement at December 31, 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. 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, 1997 was $12,694. The annual principal payments due on long-term debt (excluding capital lease obligations) are $7,890 and $4,439 for the years ended December 31, 1998 and 1999, respectively. 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, 1997, the amount of unrestricted retained earnings available for dividends was $22,615. At December 31, 1997 and 1996, the Company had two outstanding interest rate swap positions with a total notional amount of $1,200. 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, 1997 was $79. 21 22 NOTE 7-INCOME TAXES The income tax provision (benefit) for the years ended December 31, 1997, 1996 and 1995, consists of the following:
1997 1996 1995 -------- -------- -------- Federal: Current $ 10,942 $ 10,216 $(19,093) Deferred 1,038 (1,251) (2,252) Alternative minimum tax credit carryforward -- 200 -- Deferred investment tax credits, net (64) (64) (79) -------- -------- -------- 11,916 9,101 (21,424) -------- -------- -------- State and local: Current 2,497 2,325 5,405 Deferred 293 (319) (570) -------- -------- -------- 2,790 2,006 4,835 -------- -------- -------- $ 14,706 $ 11,107 $(16,589) ======== ======== ========
The effective income tax rate for the years ended December 31, 1997, 1996 and 1995, varied from the statutory federal income tax rate as follows:
1997 1996 1995 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 4.9 3.9 3.2 Liquidation of subsidiary -- (7.4) -- Nondeductible losses -- 0.3 (8.5) Other 0.6 1.8 (3.4) ---- ---- ---- 40.5% 33.6% 26.3% ==== ==== ====
The above schedule includes the effect of state and foreign net operating losses for which no benefits have been provided. The net deferred taxes for the years ended December 31, 1997 and 1996, consist of the following:
1997 1996 -------- -------- Current deferred taxes: Gross assets $ 41,600 $ 44,852 Gross liabilities (201) (254) -------- -------- 41,399 44,598 -------- -------- Noncurrent deferred taxes: Gross assets 25,076 23,854 Valuation allowance (830) (830) Gross liabilities (5,658) (6,304) Deferred investment tax credits (64) (128) -------- -------- 18,524 16,592 -------- -------- $ 59,923 $ 61,190 ======== ========
22 23 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. The tax balances of significant temporary differences representing deferred tax assets and liabilities for the years ended December 31, 1997 and 1996, consist of the following:
1997 1996 ------- ------- Reserves for returns, allowances, cash discounts and doubtful accounts $23,134 $24,911 Reserve for inventories and related items 8,218 6,103 Postretirement benefits 2,261 2,238 Depreciation of plant and equipment (5,517) (6,188) Reserve for display fixtures 817 1,006 Accrued compensation and benefits 16,527 17,802 Sales agreement payments due 7,485 7,697 Other accruals and reserves, net 7,892 8,579 Deferred investment tax credits (64) (128) ------- ------- 60,753 62,020 Valuation allowance (830) (830) ------- ------- $59,923 $61,190 ======= =======
NOTE 8-OTHER CURRENT LIABILITIES Other current liabilities at December 31, 1997 and 1996, consist of the following:
1997 1996 ------- ------- Compensation, payroll taxes and related withholdings $13,487 $18,074 Customer allowances 13,709 14,525 Accrued insurance 10,259 10,810 Sales agreement payments due within one year 8,002 8,592 Accrued interest 7,760 8,189 Property and other taxes 4,221 4,259 Other 11,005 16,989 ------- ------- $68,443 $81,438 ======= =======
NOTE 9-RETIREMENT AND POSTRETIREMENT 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. 23 24 The following table sets forth the Retirement Plan's funded status on the measurement dates, December 31, 1997 and 1996, and a reconciliation of the funded status to the amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996:
1997 1996 ------- -------- Actuarial present value of benefit obligations: Vested benefit obligation $65,880 $ 60,741 ======= ======== Accumulated benefit obligation $69,825 $ 64,152 ======= ======== Projected benefit obligation for services rendered to date $79,306 $ 71,117 Plan assets at fair market value 87,709 78,656 ------- -------- Projected benefit obligation less than plan assets (8,403) (7,539) Unrecognized prior service cost (500) (837) Unrecognized net gain 21,520 19,858 ------- -------- Accrued pension expense included in other liabilities $12,617 $ 11,482 ======= ========
The market value of the Retirement Plan assets exceeded assumed market value by $7,425. The changes in asset values relative to the measurement dates are primarily due to fluctuations in the market value of the Retirement Plan's equity investments. In 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, 1997 and 1996, although assets for these plans totaling $5,129 and $4,262, respectively, are held in Rabbi trusts. The following table sets forth the nonqualified defined benefit plans' benefit obligations on the measurement dates, December 31, 1997 and 1996, and a reconciliation of those obligations to the amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996:
1997 1996 ------- ------- Actuarial present value of benefit obligations: Vested benefit obligation $ 5,340 $ 4,263 ======= ======= Accumulated benefit obligation $ 6,003 $ 4,840 ======= ======= Projected benefit obligation for services rendered to date $ 6,613 $ 5,081 Unrecognized prior service cost (1,274) (1,414) Unrecognized net gain (loss) (816) 248 ------- ------- Accrued pension expense included in other liabilities $ 4,523 $ 3,915 ======= =======
The assumed weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation for the plans was 7.25% and 4.50% in 1997 and 7.75% and 4.50% in 1996, respectively. The change in the discount rate from 7.75% to 7.25% increased the Retirement Plan's projected benefit obligation by $5,072 in 1997. The assumed long-term rate of return on plan assets used for valuation purposes was 9.0% for 1997 and 1996. 24 25 A summary of the components of net pension expense for all of the Company's defined benefit plans for the years ended December 31, 1997, 1996 and 1995, is as follows:
1997 1996 1995 -------- -------- -------- Service cost-benefits earned during the period $ 2,170 $ 2,158 $ 2,652 Interest cost on projected benefit obligation 6,021 5,635 5,833 Net amortization and deferral 7,554 6,494 7,409 Actual return on plan assets (13,671) (11,744) (13,178) -------- -------- -------- $ 2,074 $ 2,543 $ 2,716 ======== ======== ========
The Company combined its two defined contribution plans during 1997. The combined plan incorporates the provisions of the former plans which, pursuant to Section 401(k) of the Internal Revenue Code, 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 plan and makes contributions based upon a percentage of the employee's salary deferral and an annual additional contribution at the discretion of the Board of Directors consistent with the terms of the former plans. Eligible employees of Cleo participated in one of these former 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, 1997, 1996 and 1995, was $385, $752 and $452, 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 year ended December 31, 1995 was $218. 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 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. A reconciliation of the accumulated postretirement benefit obligation (APBO) measured as of December 31, 1997 and 1996 to the amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996, is as follows:
1997 1996 ----- ----- Retirees $1,340 $ 930 Fully eligible active employees 1,158 1,030 Other active employees 1,089 1,020 ------ ------ Accumulated benefit obligation (unfunded) 3,587 2,980 Unrecognized prior service cost 78 89 Unrecognized net gain 1,521 2,042 ------ ------ Accrued APBO included in other liabilities $5,186 $5,111 ====== ======
The accumulated benefit obligation for 1997 and 1996 was determined using the following assumptions:
1997 1996 ---------- ---------- Discount rate 7.25% 7.75% Health care cost trend rate 8.0% for 8.5% for 1998 1997 graded graded down per down per year to 6% year to 6% in the in the year 2002, year 2002, 5.5% 5.5% thereafter thereafter
25 26 Net periodic cost of these benefits for the years ended December 31, 1997, 1996 and 1995, is as follows:
1997 1996 1995 ----- ----- ---- Service cost-benefits earned during the period $ 146 $ 152 $ 161 Interest cost on accumulated benefits 248 219 349 Net amortization (123) (142) (70) ===== ===== ===== $ 271 $ 229 $ 440 ===== ===== =====
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, 1997, and the net periodic cost for the year then ended, by approximately $18 and $131, respectively. 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 4,842,500 shares of common stock. All incentive options are granted at the fair market value on the date of grant. Incentive stock options become exercisable equally over three years beginning one year after the date granted and expire ten years after the date granted. 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. Nonqualified stock options were granted in 1997 and 1996 at exercise prices at least equal to the fair market value of the common stock on the date of grant. Of these, nonqualified stock options for 30,000 shares of common stock in 1997 and 300,000 shares of common stock in 1996 were granted to certain of the Company's officers contingent on stockholder approval of an increase in the number of shares authorized for issuance under one of the Company's employee stock plans. For financial reporting purposes, these 330,000 options are deemed to have been granted on April 24, 1997, the date stockholder approval was obtained. At that date, the exercise prices were less than the market price of the common stock. As a result, the contingent options are reported as having been granted at exercise prices below the fair market value of the common stock. Under certain employee stock 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 1997, 1996 or 1995. 26 27 A summary of stock option activity during the years ended December 31, 1997, 1996 and 1995, is as follows:
1997 1996 1995 ------------------------- -------------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------------- ---------- ---------- ------------ --------- ---------- Outstanding beginning of year 1,424,273 $13.29 1,033,166 $14.58 1,321,619 $ 18.79 Granted - Exercise price on date of grant: Equal to market price of stock 623,500 22.62 445,750 12.57 65,900 10.99 Greater than market price of stock 22,000 20.19 350,000 14.64 -- -- Less than market price of stock 330,000 16.67 -- -- -- -- Effect of cancelled and reissued stock options -- -- -- -- -- (8.43) Exercised (312,481) 12.59 (119,077) 10.16 (5,600) 13.16 Forfeited (92,036) 16.01 (285,566) 19.81 (340,503) 18.04 Expired -- -- -- -- (8,250) 20.00 ---------- ------ -------- ------ ---------- --------- Outstanding end of year 1,995,256 $16.80 1,424,273 $13.29 1,033,166 $ 14.58 ========== ====== ========= ====== ========== ========= Exercisable end of year 860,516 $13.76 694,694 $14.07 388,999 $ 20.47 ========== ====== ========= ====== ========== =========
The range of exercise prices on shares outstanding as of December 31, 1997 is as follows:
Outstanding Exercisable ----------------------------------------- ---------------------- Weighted Average -------------------------- Weighted Remaining Average Range of Exercise Contractual Exercise Exercise Prices Shares Price Life in Years Shares Price --------------- ------ ----- ------------- ------ ----- $ 9.75-14.50 908,256 $12.69 8.17 779,849 $13.14 14.63-19.25 435,500 16.69 8.27 50,667 18.11 19.50-28.00 651,500 22.61 7.93 30,000 22.50
For the years ended 1997, 1996 and 1995, compensation expense recognized under stock-based employee compensation plans was not material. During 1995, 476,600 options outstanding at the beginning of the year were cancelled and reissued at $9.75. At December 31, 1997, 653,640 shares were available under the stock option and incentive plans, of which 615,640 shares could be issued as restricted shares. Of the total shares available, 38,000 were reserved for issuance pursuant to the Company's Stock Option Plan for Nonemployee Directors. 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 disclose pro forma net income (loss) and net income (loss) per share as if the fair-value-based method had been applied in measuring compensation costs. Pro forma information for the years ended December 31, 1997, 1996 and 1995, is as follows:
1997 1996 1995 ------- ------- -------- Pro forma net income (loss) $19,822 $20,264 $(46,748) ======= ======= ======== Pro forma net income (loss) per share: Basic $ 1.21 $ 1.26 $ (2.91) ======= ======= ======== Diluted $ 1.17 $ 1.24 $ (2.91) ======= ======= ========
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. 27 28 The weighted average fair values at date of grant for options granted during 1997, 1996 and 1995 were $7.23, $3.70 and $3.10 per option, respectively. The fair values were determined using the Black-Scholes option-pricing model with the following assumptions for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ---- ---- ---- Expected life in years 5 5 5 Interest rate 5.90% 6.50% 6.70% Volatility 36.81% 36.46% 36.07% Dividend yield 0.30% 0.90% 1.90%
STOCK REPURCHASE PROGRAM On July 30, 1997, the Company announced a program to repurchase up to one million shares of its common stock over a twelve month period. The repurchases will be made on the open market or in private negotiated transactions at prevailing market prices. The dates and amount of repurchases will be determined by market conditions. The common stock acquired will be held as treasury stock and used in the Company's employee stock plans and for general corporate purposes. As of December 31, 1997, the Company had repurchased 60,000 shares of its common stock under this program. 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, 1997, 1996 and 1995, on all real and personal property, was $15,743, $15,292 and $23,663, respectively. Minimum rental commitments under noncancelable leases as of December 31, 1997 are as follows:
Capital Operating Year Ending December 31, Lease Leases ----------------------------- --------- ---------- 1998 $ 3,100 $ 13,575 1999 3,100 10,653 2000 3,152 5,227 2001 3,720 2,737 2002 3,720 1,249 Thereafter 49,240 1,209 --------- -------- Net minimum commitments 66,032 $ 34,650 ======== Less amount representing interest 46,313 --------- Present value of net minimum lease commitments $ 19,719 =========
28 29 CONTRACT COMMITMENTS The Company has several long-term customer sales agreements which require payments and credits for each of the years in the five-year period ended December 31, 2002, of $8,002, $6,651, $4,250, $511 and $200, 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, 1997. EMPLOYMENT AGREEMENTS The Company has employment agreements with certain executives which provide for, among other things, minimum annual base salaries which may be adjusted periodically, 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 common 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 certified the case as a class action. The Court subsequently concluded that the certified class representative could represent only those class members who purchased Gibson stock after April 19, 1994 and before July 1, 1994. Class members purchasing Gibson stock from November 3, 1993 to April 19, 1994 were given until January 29, 1998 to move for class certification. No such motion was filed. 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 is defending the suit vigorously and has filed motions to dismiss and for summary judgment on the latest Complaint. It has also filed a Third Party Complaint against its former auditor for contribution against any judgment adverse to the Company. Discovery has closed; however, no trial date has been set. The Company presently is unable to predict the effect of the ultimate resolution of the matter described above upon the Company's results of operations and cash flows. As of this date, however, management does not expect that such resolution would result in a material adverse effect upon the Company's total net worth. In addition, the Company is a defendant in certain other routine litigation which is not expected to result in a material adverse effect on the Company's net worth, total cash flows or operating results. NOTE 13-SALE OF CLEO, INC. Effective November 15, 1995, the Company consummated an 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 an income tax benefit of $28,541, which has been included in operations for the year ended December 31, 1995. 29 30 The following is a summary of Cleo's net assets as of November 14, 1995 and results of operations of Cleo for the period then ended:
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 November 14 1995 --------- Revenues $ 151,937 ========= Loss before income taxes $ (17,110) ========= Net loss $ (12,446) =========
NOTE 14-QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- 1997 - ----------------------- Net sales $99,418 $92,474 $91,987 $113,236 $397,115 Total revenues 99,613 92,663 92,145 113,296 397,717 Cost of products sold 36,214 31,072 38,645 53,717 159,648 Other operating expenses 52,034 51,501 48,890 49,684 202,109 Interest expense (income), net (1) 806 860 (35) (1,975) (344) Net income 6,073 5,351 2,671 7,503 21,598 Net income per share: Basic 0.37 0.33 0.16 0.46 1.32 Diluted 0.36 0.32 0.15 0.44 1.27 1996 - ----------------------- 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 34,338 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: Basic 0.35 0.36 0.25 0.40 1.36 Diluted 0.34 0.36 0.25 0.39 1.34
(1) In the first and second quarters of 1997, the Company recorded estimates for interest expense totaling $1,775 on a potential obligation which did not materialize and the interest expense was therefore reversed in the fourth quarter. 30 31 NOTE 15-SUBSEQUENT EVENT On March 31, 1998, the Company announced a restructuring plan (the Plan) under which the Company will outsource its principal manufacturing operations currently performed at its Cincinnati, Ohio headquarters. Implementation of the Plan will begin in the second quarter of 1998 and is expected to be substantially complete by the end of the fourth quarter of 1998. The total cost of this plan is expected to be $26,100 before income taxes and will be recognized as a separate component of operating expenses in the first quarter of 1998. In addition, the Company will invest an estimated $30,000 to $35,000 over the next 30 months to significantly upgrade or replace its existing business information systems. The investment in business information systems will be expensed as incurred or capitalized as appropriate in accordance with the recently issued AICPA Statement of Position 98-1, "Accounting for the Costs of Software Developed or Obtained for Internal Use." Management believes these plans will enhance the Company's flexibility and operating efficiency while lowering fixed costs and improving customer service. The Company has recognized within the total restructuring costs approximately $17,100 representing costs related to the facility, $5,800 related to involuntary employee severance, and $3,200 in other costs. As a result of the restructuring and the information systems plans, approximately 480 employees will be terminated, consisting of approximately 415 plant operations and manufacturing personnel and approximately 65 employees from various support and administrative functions within the Company. The involuntary severance package which was communicated to employees on March 31, 1998 includes salary continuation, subsidized medical coverage during the salary continuation period, professional outplacement assistance and career counseling. The termination of these employees will result in the curtailment of a defined benefit pension plan. The curtailment is expected to result in a gain of approximately $3,900 before income taxes, as estimated by an actuary, which will be recognized as positions are eliminated. 31 32 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 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 16, 1998, except for Note 15, as to which the date is March 31, 1998. 32 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 33 34 PART III Except as set forth below, the information required by this Part is included in the Company's definitive Proxy Statement filed with the Securities and Exchange Commission in connection with the Company's 1998 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, 1998) are as follows:
NAME AGE TITLE ------------------- ----- ------------------------------------------ Frank J. O'Connell 54 Chairman of the Board, President and Chief Executive Officer James T. Wilson 49 Executive Vice President-Finance and Operations, and Chief Financial Officer Gregory Ionna 46 Executive Vice President, Card Division Karen L. Kemp 47 Senior Vice President, Human Resources Gregory A. Brown 48 Senior Vice President, Sales, Card Division Paul W. Farley 53 Vice President-Controller, and Assistant Treasurer
FRANK J. O'CONNELL. Mr. O'Connell has been the Company's Chairman since April 1997, and the 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 1991 to 1995. Prior to joining Skybox, he was a venture capital consultant from 1990 to 1991 and served as President of Reebok Brands, North America from 1989 to 1990. He became a director of the Company in August 1996. JAMES T. WILSON. Mr. Wilson joined the Company in September 1997 as Executive Vice President-Finance and Operations, and the Chief Financial Officer. Previously, from 1995 to 1996, Mr. Wilson served as Chief Financial Officer of Datatec Industries Inc., a national leader in the implementation of enterprise-wide information networks for major retail chains, financial institutions and multi-branch commercial and industrial companies. From 1992 to 1994, Mr. Wilson served as Chief Financial Officer of Marvel Entertainment Group, Inc., an international publisher of comic books, and distributor of sports and entertainment cards. Prior to 1992, Mr. Wilson held positions as Chief Operating Officer of Andrews Group Inc. and Chief Financial Officer of Technicolor Holdings, Inc., companies controlled by MacAndrews and Forbes Holdings. GREGORY IONNA. Mr. Ionna has been Executive Vice President of the Company's Card Division since September 1993. Prior to that he served in various management capacities within the sales and marketing functions of the Card Division. KAREN L. KEMP. Ms. Kemp joined the Company in April 1997 as Senior Vice President with responsibility for Human Resources, Legal and Corporate Communications. From 1990 to 1997, Ms. Kemp was employed by Fisher-Price, Inc., a leading toy company. At Fisher-Price, she held a series of increasingly responsible management positions, most recently serving as Senior Vice President of Administration and Human Resources. Previously, Ms. Kemp held management positions with Goldome Bank and New England Electric System. GREGORY A. BROWN. Mr. Brown joined the Company in May 1997 as Senior Vice President with responsibility for the sales function of the Company's Card Division. From 1996 to 1997, Mr. Brown was Vice President of Sales for the baby food business of Gerber Baby Products Corp. From 1989 until 1996, Mr. Brown served as Vice President of Sales for Tombstone Pizza Corporation, a division of Kraft General Foods. Previously, Mr. Brown held sales and marketing management positions with Frito-Lay, Incorporated, Polaroid Corporation and the Procter & Gamble Distributing Company. PAUL W. FARLEY. Mr. Farley has been Vice President-Controller since April 1997 and has served as the Principal Accounting Officer since September 1996. From 1992 to 1996 he served as Vice President-Finance of the Company's Card Division. Previously, he served as Corporate Controller from 1986 to 1992. He was appointed Assistant Treasurer in 1981. Officers serve with the approval of the Board of Directors. 34 35 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) The following documents are filed as part of this report: 1. Financial Statements:
PAGE HEREIN FINANCIAL STATEMENT ------ ------------------- 13 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 14 Consolidated Balance Sheets as of December 31, 1997 and 1996 15 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 16 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 17 Notes to Consolidated Financial Statements 32 Independent Auditors' Report
2. Financial Statement Schedules required to be filed by Item 8 of this Form 10-K: PAGE HEREIN SCHEDULE ------ -------- 37 Valuation and Qualifying Accounts 3. Exhibits: See Index of Exhibits (page 38) for a listing of all exhibits filed with this annual report on Form 10-K b) Reports on Form 8-K: The Company filed a Form 8-K with the Securities and Exchange Commission on December 22, 1997 (date of report: December 15, 1997) attaching the Company's press release dated December 15, 1997. No financial statements were required to be filed in connection with the above report. 35 36 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 31st day of March 1998. Gibson Greetings, Inc. By /s/ FRANK J. O'CONNELL --------------------------- Frank J. O'Connell Chairman of the Board, 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 31st day of March 1998.
Signature Title --------- ----- /s/ Frank J. O'Connell Chairman of the Board, President and ------------------------------ Chief Executive Officer Frank J. O'Connell /s/ James T. Wilson Executive Vice President-Finance and Operations ------------------------------ and Chief Financial Officer James T. Wilson (principal financial officer) /s/ Paul W. Farley Vice President-Controller, and Assistant Treasurer ------------------------------ (principal accounting officer) Paul W. Farley /s/ George M. Gibson Director ------------------------------ George M. Gibson /s/ Robert P. Kirby Director ------------------------------ Robert P. Kirby /s/ Charles D. Lindberg Director ------------------------------ Charles D. Lindberg /s/Albert R. Pezzillo Director ------------------------------ Albert R. Pezzillo /s/ Charlotte St. Martin Director ------------------------------ Charlotte St. Martin /s/ C. Anthony Wainwright Director ------------------------------ C. Anthony Wainwright
36 37 GIBSON GREETINGS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (THOUSANDS OF DOLLARS)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions ------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period ----------- --------- -------- -------- ---------- ------ Deducted from trade receivables- Allowance for doubtful accounts: Twelve months ended 12/31/97 $13,654 $ 288 $ -- $ 252(A) $13,690 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 Allowance for sales returns, allowances and cash discounts: Twelve months ended 12/31/97 $45,635 $ 94,368 $ -- $ 98,481(B) $41,522 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
- ------------------------- (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) Included 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. 37 38 INDEX OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ --------------------------------------------------------------------------------------------------------- 3(a) Restated Certificate of Incorporation as amended (*1) 3(b) Bylaws (*2) 10(a) Lease Agreement dated January 25, 1982 between Corporate Property Associates 2 and Corporate Property Associates 3 and Gibson Greeting Cards, Inc. (*3) 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. (*4) 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 Bank of New York, as agent (*5) 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 (*6) 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 Incentive Plan (*2) (v) 1989 Stock Option Plan for Nonemployee Directors (*2) (vi) 1996 Nonemployee Director Stock Plan (*7) (vii) 1991 Stock Incentive Plan (*8) (viii) Employment Agreement between Gibson Greetings, Inc. and Benjamin J. Sottile dated April 1, 1993 (*9) (ix) ERISA Makeup Plan (*10) (x) Supplemental Executive Retirement Plan (*10) (xi) Agreement dated August 25, 1996 between Gibson Greetings, Inc. and Frank J. O'Connell (*11) (xii) Agreement dated December 28, 1996 between Gibson Greetings, Inc. and Gregory Ionna (*12) (xiii) Agreements dated January 24, 1991 and December 10, 1993 between Gibson Greetings, Inc. and Paul W. Farley (*12) (xiv) Settlement Agreement dated February 18, 1997 between Gibson Greetings, Inc. and Benjamin J. Sottile (*12) (xv) Agreement dated May 13, 1997 between Gibson Greetings, Inc. and Karen L. Kemp (*13) (xvi) Agreement dated September 29, 1997 between Gibson Greetings, Inc. and James T. Wilson (*14) (xvii) Agreement dated May 2, 1997 between Gibson Greetings, Inc. and Gregory A. Brown 10(f) Stock Purchase Agreement, dated October 3, 1995, by and between CSS Industries, Inc. and Gibson Greetings, Inc. (*15) 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. (*16) 10(h) Amendment No. 1 and Restatement dated April 4, 1997 to Credit Agreement dated as of April 26, 1996 (*13)
38 39 EXHIBIT NUMBER DESCRIPTION ------ --------------------------------------------------------- 11 Computation of Income (Loss) per Share 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule (contained in EDGAR filing only) - --------- * Filed as an Exhibit to the document indicated and incorporated herein by reference:
(1) The Company's Report on Form 10-K for the year ended December 31, 1988. (2) The Company's Report on Form 10-K/A (Amendment No. 1) for the year ended December 31, 1993. (3) The Company's Registration Statement on Form S-1 (No. 2-82990). (4) The Company's Report on Form 10-K for the year ended December 21, 1985. (5) The Company's Report on Form 10-Q for the quarter ended June 30, 1996. (6) The Company's Report on Form 10-Q for the quarter ended June 30, 1991. (7) The Company's definitive Proxy Statement dated April 26, 1996. (8) The Company's definitive Proxy Statement dated March 17, 1997. (9) The Company's Report on Form 10-Q for the quarter ended June 30, 1993. (10) The Company's Report on Form-10-K for the year ended December 31, 1992. (11) The Company's Report on Form 10-Q for the quarter ended September 30, 1996. (12) The Company's Report on Form 10-K for the year ended December 31, 1996. (13) The Company's Report on Form 10-Q for the quarter ended June 30, 1997. (14) The Company's Report on Form 10-Q for the quarter ended September 30, 1997. (15) The Company's Report on Form 8-K dated November 15, 1995, filed November 30, 1995 (16) The Company's Report on Form 10-K for the year ended December 31, 1995.
- -------- The Company will furnish to the Commission upon request its long-term debt instruments not listed above. 39 EX-10.E 2 EXHIBIT 10(E) 1 Exhibit 10(e) Executive Compensation Plans and Arrangements Agreement dated May 2, 1997 between Gibson Greetings, Inc. and Gregory A. Brown May 2, 1997 Mr. Gregory A. Brown 1577 Hilltop Avenue Barrington, IL 60010 Dear Greg: Gibson Greetings, Inc. and I are very pleased that you have agreed to serve as Senior Vice President, Sales of Gibson Greetings, Inc. (the Company). As Senior Vice President, Sales, you will report directly to me. The following terms and conditions will govern your service to the Company. 1. You will serve the Company on a full-time basis as a senior executive employee, and the Company will employ you as such, commencing May 19, 1997. This Agreement will extend indefinitely until terminated by the Company, or by you upon thirty days' advance written notice to the Company. In the event that this Agreement and your employment are terminated by the Company other than for cause, you will be entitled to receive in a lump sum from the Company in lieu of all other monies or benefits provided under this Agreement, and in lieu of severance pay pursuant to Company policy, an amount equal to your base salary for a period of one year or to severance pay in an amount equal to 24 months' salary. The amount of said severance pay shall, during the your first year of employment, reduce by one month for each month you are employed. This Agreement will at all times remain subject to earlier termination for cause. 2. Your annual salary will be $225,000, which amount will be reviewed every fifteen months and which may be adjusted from time to time by the Company in accordance with the Company's salary administration program. 3. A signing bonus in the amount of $80,000 will be paid to you soon after you begin employment with the Company. 4. Every three years, you will be provided a new automobile of such class as may be set forth in the Company's then current automobile program, which automobile will be owned or leased by the Company. 5. As a participant in the Company's Management Bonus Plan, you will be eligible for an annual bonus for 1997 and for each calendar year during the term of this Agreement up to a maximum of 112.5% of your base salary, subject to the terms and conditions of the Management Bonus Plan in effect for each such year. For the 1997 fiscal year, you will be guaranteed a bonus of at least $100,000. Further, your bonus for 1997 will be calculated on the premise of $225,000 of earnings, as though you will have worked for Gibson for the full year. 6. As additional consideration for this Agreement, and contingent upon approval by the Compensation Committee, you will be granted a stock option for 50,000 shares of the common stock of the Company at the closing market price of the stock on the official grant date. One third of such options shall become vested on each of the first three anniversaries of the grant. Such vesting shall be conditioned upon your continuing to be employed by the Company on each such date. 7. The Company will reimburse you in accordance with the terms of the Company's Executive Relocation and Moving Expense policy for your reasonable expenses of moving from Barrington, Illinois to Cincinnati, Ohio, including, but not limited to: household moving costs; your travel expenses for house-hunting trips as approved in advance by the Company; realtor fees and transfer taxes on the sale of your present home in Barrington; and closing costs related to your purchase of a home in the Cincinnati area. We will provide you temporary housing in Cincinnati for up to six months. 8. You will be covered by the Company's special benefit programs for executives which include: executive physical examinations, life insurance, tax preparation and estate planning assistance. The amount of your life insurance shall be three (3) times your annual salary, not to exceed $600,000. 40 2 9. Upon approval of the Compensation Committee, you will be named a participant in the Company's ERISA Makeup Plan and its Supplemental Executive Retirement Plan (SERP). 10. You will be eligible for participation in all other benefit plans available to the employees of the Company, in accordance with the terms of those plans, including participation in the Voluntary Deferred Compensation Plan, the 401(k) Plan, the Retirement Income Plan and health insurance. 11. You will be eligible for four weeks of paid vacation during each year this Agreement remains in effect. 12. Your employment and this agreement shall terminate automatically upon your disability or death. All other benefits due you following termination of your employment and this agreement for disability or death shall be determined in accordance with the plans, policies and practices of the Company. 13. In the event you voluntarily terminate your employment during the term of this Agreement, or if the Company terminates this Agreement and your employment for cause, your right to all compensation hereunder shall cease as of the date of termination. As used in this Agreement, "cause" shall mean fraud, gross negligence, or willful misconduct in the performance of your duties or a willful and material breach of this Agreement. Termination of employment shall terminate this Agreement with the exception of the provisions of Paragraphs 14, 15 and 16. 14. Also in the event you voluntarily terminate your employment hereunder or retire, or if the Company terminates this Agreement and your employment for cause, 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 the Company or participate as a director, officer, employee, consultant, advisor, partner or joint venturer in any business engaged in the manufacture and/or sale at wholesale of greeting cards, gift wrap or other products produced or sold by the Company, or by any division, subsidiary or affiliate of the Company, without the Company's prior written consent. If the Company chooses to terminate this Agreement and you continue to be employed by the Company as an employee, agent, consultant or otherwise, you agree that this paragraph shall continue to bind you for a period of one (1) year after your separation from the Company as an employee, agent, consultant or otherwise. 15. In the event that your employment with the Company is terminated for any reason, by you or the Company, you agree that, for a period of one year following such termination of employment, you shall not in any way solicit or recruit any employee of the Company, its affiliates or subsidiaries, for any employment, consulting or other arrangement for your benefit or that of any third party. 16. In connection with this Agreement, you may receive confidential information of the Company. You agree, both during the term of this Agreement and after termination, 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 or returned promptly to 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. You agree that this paragraph will continue to bind you notwithstanding the termination of this Agreement or your employment for any reason whatsoever. If the Company chooses to terminate this Agreement and you continue to be employed by the Company as an employee, agent, consultant or otherwise, you agree that this paragraph will continue to bind you after your separation from the Company as an employee, agent or consultant. 17. Other than as set forth in Paragraph 1, 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. 18. This Agreement will 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. 19. If any provision of this Agreement is later deemed to be void, that provision may be stricken and the remaining portions of this Agreement enforced as if the provision so stricken had never been included herein. 20. The Company will reimburse you for membership in a country club of your choice, and any business related expenses. 41 3 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/ FRANK J. O'CONNELL ---------------------------- Frank J. O'Connell President and Chief Executive Officer ACCEPTED AND AGREED TO: /s/ GREGORY A. BROWN - ------------------------------ Gregory A. Brown Date: May 5, 1997 42 EX-11 3 EXHIBIT 11 1 Exhibit 11 GIBSON GREETINGS, INC. COMPUTATION OF INCOME (LOSS) PER SHARE (In thousands except per share amounts)
Twelve Months Ended December 31, -------------------------------- 1997 1996 1995 ------- ------- -------- Net income (loss) $21,598 $21,962 $(46,489) ======= ======= ======== Basic weighted average shares outstanding 16,379 16,094 16,085 Effect of dilutive securities - stock options held by employees 561 235 -- ------- ------- -------- Diluted weighted average shares outstanding 16,940 16,329 16,085 ======= ======= ======== Net income (loss) per share: Basic $ 1.32 $ 1.36 $ (2.89) ======= ======= ======== Diluted $ 1.27 $ 1.34 $ (2.89) ======= ======= ========
During the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 128--"Earnings Per Share." All previously reported net income (loss) per share amounts have been restated to conform to the new presentation under SFAS No. 128. 43 EX-21 4 EXHIBIT 21 1 Exhibit 21 GIBSON GREETINGS, INC. Subsidiaries of the Registrant As of December 31, 1997
NAME STATE OF INCORPORATION - ---- ---------------------- Gibson Greetings International Limited Delaware The Paper Factory of Wisconsin, Inc. Wisconsin
44 EX-23 5 EXHIBIT 23 1 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, 33-67784 and 333-35787 of Gibson Greetings, Inc. on Form S-8 of our report dated February 16, 1998, appearing in this Annual Report on Form 10-K of Gibson Greetings, Inc. for the year ended December 31, 1997. DELOITTE & TOUCHE LLP /s/ Deloitte & Touche LLP Cincinnati, Ohio March 31, 1998 45 EX-27 6 EXHIBIT 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, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 114,267 0 85,537 55,212 59,424 249,850 182,623 97,247 443,322 102,645 24,158 0 0 170 281,574 443,322 397,115 397,717 159,648 361,757 0 0 5,432 36,304 14,706 21,598 0 0 0 21,598 1.32 1.27
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