Item 1. Business Gibson Greetings, Inc. and its wholly-owned and majority-owned subsidiaries (the "Company") operate in a single industry segment -- the design, manufacture and sale of everyday and seasonal greeting cards, gift wrap and accessories, paper partywares and related specialty products.
Products The Company's major products are extensive lines of greeting cards (both everyday and seasonal) and gift wrap. 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 1994, approximately 61% of net sales of cards were derived from everyday cards and approximately 39% from seasonal cards. The Company produces gift wrap and gift wrap accessories (including tissue and kraft paper, gift bags, tags, ribbons, bows and gift trims) predominately for the Christmas season. The Company's products also include paper partywares, candles, calendars, gift items and holiday decorations. The following table sets forth, in thousands of dollars for the years indicated, the Company's net sales attributable to each of the principal classes of the Company's products:
Years Ended December 31, ---------------------------------- 1994 1993 1992 -------- -------- -------- Greeting cards $243,313 $268,952 $243,647 Gift wrap 202,439 192,862 187,965 Other products 102,290 84,351 52,506 -------- -------- -------- Total net sales $548,042 $546,165 $484,118 ======== ======== ========
Many of the Company's products incorporate well-known proprietary characters. Net sales associated with licensed properties accounted for approximately 17% of overall 1994 net sales. The Company believes it benefits from the publication of cartoon strips, television programming, advertising and other promotional activities by the creators of such licensed characters. The Company has also developed proprietary properties of its own. See "Trademarks, Copyrights and Licenses."
Approximately 3% of the Company's revenues in 1994 were attributable to export sales and royalty income from foreign sources. During 1993, the Company acquired The Paper Factory of Wisconsin, Inc. ("The Paper Factory"), a Wisconsin corporation, to strengthen the Company's position in the rapidly-growing party area of the industry. During 1992, the Company formed Gibson de Mexico, S.A. de C.V., a Mexican corporation, which purchased the net assets of a Mexican manufacturer and marketer of greeting cards, to market the Company's products primarily in Mexico. During 1991, the Company formed Gibson Greetings International Limited, a Delaware corporation, to market the Company's products in the United Kingdom and other European countries. PAGE
Sales and Marketing The Company's products are sold in more than 50,000 retail outlets worldwide. Because of the value consumers place on convenience, the Company continues to concentrate its distribution through one-stop-shopping outlets. To market effectively through these outlets, the Company has developed specific product programs and new product lines and introduced new in-store displays. The Company's products are primarily sold under the Gibson and Cleo brand names and are primarily distributed to deep discounters, supermarkets, mass merchandisers, drug stores and variety stores. During 1994, the Company's five largest customers accounted for approximately 35% of the Company's net sales and only one customer, Wal-Mart Stores Inc., accounted for more than 10% of the Company's net sales.
The Company's products under the Gibson brand name are usually stocked in a department where only these products are displayed. Product displays are expressly designed for the presentation of greeting cards, gift wrap, paper partywares, candles and other products. The Company also supplies corrugated displays for seasonal specialties. The Company's method of selling greeting cards requires frequent and attentive merchandising service and fast delivery of reorders. The Company employs a direct field sales force that regularly visits most of the Company's customers, supported by a larger, nationwide merchandising service force.
In order to properly display and service these products, a sizable initial investment is made in store display fixtures, sometimes totaling 300 linear feet, and in the hiring and training of service associates. To minimize costs and disruption, in the short-term, caused by the loss of a customer, the Company has entered into longer term contracts with certain retailers, consistent with general industry practice. These contracts generally have terms of from three to six years, and sometimes specify a minimum sales volume commitment. Some of the advantages to the Company include: less disruption to its distribution channels; the ability to plan product offerings into the future; and establishment of a reliable service network to ensure the best product display and salability. In certain of these contracts, cash payments or credits are negotiated constituting advance discounts against future sales. These payments are capitalized and amortized over the initial term of the contract. In the event of contract default by a retailer, such as bankruptcy or liquidation, a contract may be deemed impaired and unamortized amounts may be charged against operations immediately following the default. Use of these contracts has expanded in recent years within the industry and the Company currently has contracts with a number of customers including two of its top five customers.
Most of the Company's gift wrap is Christmas-related and is sold under the Cleo brand name. These products are usually shipped in corrugated cartons which may be used as temporary free-standing displays. Separate free-standing product displayers and display planning services are also made available for the purpose of enhancing the presentation of Cleo products. The Company's Cleo brand gift wrap is typically sold at lower unit retail price levels than the Company's other brands of gift wrap. In general, the Company does not provide in-store merchandising services with respect to Cleo products but rather ships these products directly to the retailers' stores or their warehouses for subsequent distribution to individual stores. PAGE
It is characteristic of the Company's business and of the industry that accounts receivable for seasonal merchandise are carried for relatively long periods, typically as long as six months. Consistent with general industry practice, the Company allows customers to return for credit certain seasonal greeting cards.
Design and Production Most of the Company's greeting cards are designed, printed and finished at its Cincinnati, Ohio facility and then sent to its facilities in Berea or Covington, Kentucky for shipment directly to retail stores. Most of the Company's gift wrap is designed, printed, finished and distributed at the Company's facilities in Memphis, Tennessee. The Company also purchases for resale certain finished and semi-finished products, such as gift items, from both domestic and foreign sources.
The Company maintains a full-time staff of artists, writers, art directors and creative planners who design a majority of the Company's products. Design of everyday products begins approximately 12 months in advance of shipment. The Company's seasonal greeting cards and other items are designed and printed over longer periods than the everyday cards. Designing seasonal products begins approximately 18 months before the holiday date. Seasonal designs go into production about 12 months before the holiday date.
Production of the Company's products increases throughout the year until late September. Because a substantial portion of the Company's shipments are typically concentrated in the latter half of the year, the Company normally is required to carry large inventories.
The Company believes that adequate quantities of raw materials used in its business are and will continue to be available from many suppliers. Paper costs are the most significant component of the Company's product cost structure.
Competition The greeting card and gift wrap 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 and gift wrap in the United States. The Company's principal competitors are Hallmark Cards, Inc. and American Greetings Corporation, which are predominant in the industry, and CPS/Artfaire, Inc. Certain of the Company's competitors have greater financial and other resources than the Company.
The Company believes that the principal areas of competition with respect to its products are quality, design, service to the retail outlet, price and terms, which may include payments and other concessions to retail customers under long-term agreements, and that it is competitive in all of these areas. See "Sales and Marketing." PAGE
Trademarks, Copyrights and Licenses The Company has approximately 40 registrations of trademarks in the United States and foreign countries. Although the Company does not generally register its creative artwork and editorial text with the U.S. Copyright Office, it does obtain certain copyright protection by printing notice of a claim of copyright on its products. The Company has rights under various license agreements to incorporate well-known proprietary characters into its products. These licenses, most of which are exclusive, are generally for terms of one to four years and are subject to certain renewal options. There can be no assurance that the Company will be able to renew license agreements as to any particular proprietary character. The Company believes that its business is not dependent upon any individual trademark, copyright or license.
Employees As of December 31, 1994, the Company employed approximately 4,500 persons on a full-time basis. In addition, as of December 31, 1994, the Company employed approximately 6,100 persons on a part-time basis. Because of the seasonality of the Company's sales, the number of the Company's production and warehousing employees varies during the year, normally reaching a peak level in September. Approximately 800 hourly employees in the Company's Memphis, Tennessee facilities are represented by a local union affiliated with the United Paper Workers International Union and are employed under a contract which expires in 1996. Approximately 200 hourly employees currently on the payroll at the Company's Berea, Kentucky facility are represented by a local union affiliated with the International Brotherhood of Firemen and Oilers Union. Unfair labor practice charges have been filed against the Company as an outgrowth of a strike at the Berea facility in 1989. See "Legal Proceedings."
Environmental Issues The Company, over the past decade, has taken a proactive approach to environmental concerns. In 1986, the Company's subsidiary Cleo, Inc. ("Cleo") converted its printing operations to water-based inks. Likewise, in early 1990, the Gibson Card Division (the"Card Division") converted its card and related products production to water-based inks. Previously, the Card Division had its Cincinnati-produced waste solvents incinerated. All but one underground storage tank on Company owned and leased premises were removed in or before 1988. In 1990, the last underground storage tank, which had contained isopropyl alcohol, was also removed in accordance with governmental closure regulations. For the past seven years, the Company has consulted 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: PAGE
Diaz Refinery - Jackson County, Arkansas In 1989, the Company was identified by the Arkansas Department of Pollution Control and Ecology ("ADPC&E") as a potentially responsible party ("PRP") in connection with the Diaz Refinery site in Jackson County, Arkansas. The Company is participating with approximately 700 other PRPs in a settlement with ADPC&E for remediation of the site. To date, the Company's share of total site costs has been approximately $46,000, which has been paid. A site investigation and remedial action alternatives study has been conducted. The study found that there are no immediate risks posed by the site soils and groundwater, but recommended that the groundwater be monitored for an additional five years at which time the risk will be reevaluated. If current trends which show improvements in groundwater constituents continue, remediation efforts at the site may be terminated at the end of five years. The Company has been informed by the PRP Common Counsel that there are sufficient PRP funds available to cover the costs of ongoing and planned remediation activities.
Kirk Heathcott Site - Dyer County, Tennessee In December 1993, the Company was advised by the Tennessee Department of Environment and Conservation ("TDEC") that Cleo had been identified by the State as a potentially liable party for reimbursement of Superfund expenditures made by the State of Tennessee for site identification, investigation, containment and clean-up, including monitoring and maintenance activities. The Company has ascertained that Cleo's alleged responsibility involves the alleged disposal of certain waste solvents by a third party at the site during the period 1972-1977. At this time, insufficient information is available to determine the Company's potential liability, although such liability could exceed $200,000. Originally, the TDEC requested payment of approximately $13,000 in costs. The state has since identified twelve other PRPs, and has recently undertaken an investigation as to each PRP's involvement in the site. The Company has identified two insurance companies that issued policies to a predecessor company during the applicable time period. These companies have been notified of the occurrence. The Company believes that this insurance may provide coverage for Cleo's potential liability at this site. PAGE
Item 2.
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
Memphis, Tennessee Manufacturing, distribution and administration 1,002,800
Berea, Kentucky Manufacturing and distribution 597,100
Mexico City, Mexico Manufacturing and distribution 25,900
Telford, England Manufacturing, distribution and administration 58,800
Memphis, Tennessee Manufacturing and distribution 1,153,200
Covington, Kentucky Manufacturing and distribution 293,000
Florence, Kentucky Manufacturing and distribution 80,000
Reynosa, Tamaulipas, Mexico Manufacturing 86,800
Bloomington, Indiana Distribution 167,700
Memphis, Tennessee Distribution (3 facilities) 796,600
Neenah, Wisconsin Distribution 36,600 --------- Total 4,892,200 =========
The first three facilities listed above are all currently leased for an initial term expiring in 2002. The Company has the right to renew the lease for two additional terms of five years each. The Company also has an option to purchase these facilities in 2002 at the higher of $35,400,000 or the fair market value of the properties at that time. For accounting purposes, this lease has been treated as an operating lease. See Note 11 of Notes to Consolidated Financial Statements set forth in Item 8 below.
The Company's 1.1 million square foot manufacturing and distribution facility in Memphis, Tennessee has been financed primarily through the issuance, by the Industrial Development Board of the City of Memphis and County of Shelby, Tennessee (the "Development Board"), of both taxable and tax-exempt economic development revenue bonds for the benefit of Cleo. Title to the facility will be held until 2004 by the Development Board. See Note 6 of Notes to Consolidated Financial Statements set forth in Item 8 below. PAGE
The Telford, England, Covington, Kentucky and Bloomington, Indiana manufacturing and distribution facilities are owned by the Company. The Covington, Kentucky facility has been financed principally through tax-exempt debt and is pledged to secure the repayment of such debt. See Note 6 of Notes to Consolidated Financial Statements set forth in Item 8 below.
The Florence, Kentucky facility, the Mexico City, Mexico facility, the Reynosa, Tamaulipas, Mexico facility and the distribution facilities at Memphis, Tennessee, and Neenah, Wisconsin are leased. The Company also leases sales offices, other manufacturing, distribution and administrative facilities and, on a temporary basis, uses public warehouse space in various locations throughout the United States. The Paper Factory leases approximately 160 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 2003.
The Company believes that its facilities are adequate for its present needs and that its properties, including machinery and equipment, are generally in good condition, well maintained and suitable for their intended uses.
Item 3.
Item 3. Legal Proceedings
On July 1, 1994, the Company announced that it had determined that the inventory of Cleo at December 31, 1993 had been overstated, resulting in an overstatement of the Company's previously reported 1993 consolidated net income. See Item 7 hereof.
Immediately following the announcement of the inventory misstatement at Cleo, five purported class actions were commenced by certain stockholders against the Company and its Chairman, President and Chief Executive Officer in the United States District Court for the Southern District of Ohio. These suits were consolidated and a Consolidated Amended Class Action Complaint against the Company, its Chairman, President and Chief Executive Officer, its Chief Financial Officer and the former President and Chief Executive Officer of Cleo was filed on October 7, 1994 (In Re Gibson Securities Litigation). This Complaint alleged violations of the federal securities laws and sought unspecified damages for an asserted public disclosure of false information regarding the Company's earnings. The Company intends to defend the suit vigorously and has filed an Answer denying any wrongdoing, a Third Party Complaint against its former auditor for contribution against any judgment adverse to the Company and a motion to dismiss one count of the Complaint. On December 6, 1994 the Court ruled that neither of the two named plaintiffs qualified as a class representative. On March 3, 1995 the Court granted plaintiffs' Motion for Leave to File An Amended Complaint to name a substitute class representative.
The Securities and Exchange Commission is conducting a private investigation to determine whether the Company or any of its officers, directors and employees have engaged in conduct in violation of certain provisions of the Securities Exchange Act of 1934 and the rules and regulations thereunder. The Company believes that such investigation is focused principally on the Company's derivative transactions and the Company's public statements and accounting with respect thereto. The Company is cooperating in such investigation. PAGE
In March 1995 the previously reported litigation captioned Rocks v. Gibson Greetings, et al. was voluntarily dismissed by the plaintiff with the Court's approval.
On April 10, 1995, two purported class action lawsuits were commenced against the Company, its Chairman, President and Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Southern District of Ohio (Kurtz v. Gibson Greetings, Inc., et al. and Komine v. Gibson Greetings, Inc., et al.). The Complaints allege violations of the federal securities law for an asserted failure to disclose allegedly material information regarding the Company's financial performance. The Company intends to defend the suits vigorously.
The litigation described above is in early stages of proceedings. Accordingly, management is unable to predict their likely effect upon the Company's results of operations and financial condition.
In 1989, unfair labor practice charges were filed against the Company as an outgrowth of a strike at its Berea, Kentucky facility. Remedies sought include back pay from August 8, 1989 and reinstatement of employment for approximately 200 employees. In February 1990, the General Counsel of the National Labor Relations Board ("NLRB") issued a complaint based on certain of the allegations of these charges (In the Matter of Gibson Greetings, Inc. and International Brotherhood of Firemen and Oilers, AFL-CIO, Cases 9-CA-26706, 27660, 26875.) On December 18, 1991, an Administrative Law Judge of the NLRB issued a recommended order, which included reinstatements and back pay affecting approximately 160 strikers, based on findings that the Company had violated certain provisions of the National Labor Relations Act. On May 7, 1993, the NLRB upheld the Administrative Law Judge's decision in some respects, and enlarged the number of strikers entitled to back pay to approximately 240. An appeal was filed in the United States Court of Appeals for the District of Columbia Circuit. The Company believes it has substantial defenses to the charges, and these defenses were presented in briefs and in appellate oral argument which was heard on September 14, 1994. A decision is expected in 1995. Management does not believe that an adverse outcome as to this matter would have a material adverse effect on the Company's net worth or total cash flows; however, the impact on the statement of operations in a given year could be material.
In addition, the Company is a defendant in certain other litigation.
Item 4.
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.
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PART II
Item 5.
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, 1994, the amount of unrestricted retained earnings available for dividends (in thousands of dollars) was $20,250. There were approximately 9,400 stockholders of record on February 28, 1995.
[FN] (1) Per share prices are based on the closing price as quoted in the Nasdaq National Market. PAGE
Item 6.
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, 1994. Selected financial data should be read in conjunction with the Consolidated Financial Statements set forth in Item 8 below.
[FN]
(1) The full year results for 1993 have been restated to correct the Cleo inventory overstatement and to record unrealized net losses
on derivative transactions (Refer to Note 1 of Notes to Consolidated Financial Statements). The Cleo inventory restatement reduced income before income taxes for 1993 by $8,806. The derivatives' net impact on income before income taxes was a reduction of $5,689 for 1993. The aggregate effect of these changes was to reduce net income by $10,584, and to reduce net income per share by $.66. (2) Includes the current portion of long-term debt which consisted of $11,164 in 1994, $3,917 in 1993, $1,811 in 1992, $708 in 1991, and $6,702 in 1990. PAGE
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
As announced on July 1, 1994, the Company determined that the inventory of its Cleo, Inc. gift wrap subsidiary (Cleo) had been overstated, resulting in an overstatement of the Company's previously reported 1993 consolidated net income. As a result of this overstatement, as well as the accrual of an unrealized market value net loss on certain derivative transactions which did not qualify as hedges, it was necessary for the Company to amend and restate its consolidated financial statements for the third quarter ended September 30, 1993, the fourth quarter ended December 31, 1993, the twelve months ended December 31, 1993 and for the first quarter ended March 31, 1994. The adjustments made are described in Note 1 to the Consolidated Financial Statements included in this report and should be reviewed in conjunction with the discussions of "Results of Operations" and "Liquidity and Capital Resources" presented below. Also see Note 13 of Notes to Consolidated Financial Statements set forth in Item 8
Item 8 below. PAGE
Item 8. Financial Statements and Supplementary Data
[FN]
See accompanying notes to consolidated financial statements.
PAGE
[FN]
See accompanying notes to consolidated financial statements.
PAGE
[FN]
See accompanying notes to consolidated financial statements.
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[FN]
See accompanying notes to consolidated financial statements.
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Gibson Greetings, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993, and 1992 (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. The Company conducts business based upon periodic credit evaluations of its customers' financial condition and generally does not require collateral. The Company does not believe a concentration of business risk exists due to the diversity of channels of distribution and geographic location of its retail customers; however, the Company does believe it has certain risks related to up-front contract payments. During the year ended December 31, 1994, the Company's largest customer accounted for approximately 12% of total revenues and during the years ended December 31, 1993 and 1992, the same customer accounted for approximately 12% and 11% of total revenues, respectively.
Retail Operations On June 1, 1993, the Company acquired The Paper Factory of Wisconsin, Inc. (The Paper Factory) for $25,100 in a business combination accounted for as a purchase. The Paper Factory operates retail stores located primarily in manufacturers' outlet shopping centers. The results of The Paper Factory are not material and are included in the consolidated financial statements since the date of acquisition. The total cost of the acquisition exceeded the fair value of the net assets of The Paper Factory by $26,200. In connection with the acquisition, the Company assumed liabilities of approximately $11,600.
International Operations During 1992, the Company formed Gibson de Mexico, S.A. de C.V. (Gibson de Mexico) to purchase certain assets and assume certain liabilities of Pagina Once, S.A. de C.V. (Pagina Once). Pagina Once was primarily engaged in the manufacturing and marketing of greeting cards. Minority stockholders of Gibson de Mexico are principal officers of Gibson de Mexico. The total cost of the acquisition exceeded the fair value of the net assets by $583.
During 1991, the Company formed Gibson Greetings International Limited (Gibson International) to market 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. PAGE
The activities of these subsidiaries were not material to consolidated operations in either 1994 or 1993.
Cash and equivalents Cash and equivalents are stated at cost. Cash equivalents include time deposits, money market instruments and short-term debt obligations with original maturities of three months or less. The carrying amount approximates fair value because of the short maturity of these instruments.
Inventories Inventories are stated at the lower of cost (first-in, first-out) or market.
Plant and equipment Plant and equipment are stated at cost. Plant and equipment, except for leasehold improvements, are depreciated over their related estimated useful lives, using the straight-line method. Leasehold improvements are amortized over the terms of the respective leases, using the straight-line method. Expenditures for maintenance and repairs are charged to operations currently; renewals and betterments are capitalized.
Other assets Other assets include deferred and prepaid costs, goodwill and other intangibles. Deferred and prepaid costs principally represent costs incurred relating to long-term customer sales agreements. Deferred and prepaid costs are amortized ratably over the terms of the agreements, generally three to six years. Goodwill and other intangibles are amortized over periods ranging from three to twenty years, using the straight-line method. Accumulated goodwill amortization at December 31, 1994 was $3,926.
Income taxes Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of currently enacted tax laws. Investment tax credits are amortized to income over the lives of the related assets.
Interest rate swap agreements The difference between the amount of interest to be paid and the amount of interest to be received under interest rate swap agreements (used for hedging purposes) due to changing interest rates is charged or credited to interest expense over the life of the agreements. Interest rate swap and derivative transactions that do not qualify as hedges are recorded at their fair value. The fair value of interest rate swaps and derivative transactions is the estimated amount that the Company would receive or pay to terminate the swap agreements at the reporting date as determined by a financial institution's valuation model based on the projected value of the transactions at maturity.
Postemployment Benefits Effective January 1, 1994, the Company adopted SFAS No. 112 - "Employers' Accounting for Postemployment Benefits." This statement requires accrual accounting for benefits provided to former or inactive employees after employment but before retirement. The Company previously accounted for a certain portion of these postemployment benefits on a pay-as-you-go-basis. PAGE
Other Postretirement Benefits Effective January 1, 1992, the Company adopted SFAS No. 106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement requires that the cost of these benefits be recognized in the financial statements during the employee's active working career.
Computation of net income (loss) per share The computation of net income (loss) per share is based upon the weighted average number of shares of common stock and equivalents outstanding during the year: 16,130,140 shares for 1994, 16,102,709 shares for 1993, and 16,103,897 shares for 1992.
Restatements and Reclassifications On July 1, 1994, the Company announced that it had determined that the inventory of Cleo, Inc. (Cleo), a wholly-owned subsidiary, at December 31, 1993 had been overstated, resulting in an overstatement of the Company's 1993 consolidated net income. The overstatement of inventory and income before income taxes was $8,806 and the effect on net income was $5,346 at December 31, 1993 and for the year then ended. The accompanying 1993 Consolidated Financial Statements have been amended and restated to reflect the correction of such overstatement. See Note 12.
In addition, the accompanying 1993 Consolidated Financial Statements have been restated for the reasons set forth in Note 13.
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the 1994 presentation.
Note 2--Trade Receivables
Trade receivables at December 31, 1994 and 1993, consist of the following:
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Note 3--Inventories
Inventories at December 31, 1994 and 1993, consist of the following:
Note 4--Plant and Equipment
Plant and equipment at December 31, 1994 and 1993, consist of the following:
Note 5--Other Assets
Other assets at December 31, 1994 and 1993, consist of the following:
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Note 6--Debt
Debt at December 31, 1994 and 1993, consists of the following:
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In 1993, the Company entered into a three-year revolving credit agreement, replacing a similar existing facility, which expires April 26, 1996. The amount which can be borrowed under this agreement is $210,000.
The fair value of the Company's long-term debt 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, 1994 was $76,716.
The Company periodically has entered into interest rate swap or derivative transactions with the intent to manage the interest rate sensitivity of portions of its debt. On March 4, 1994, the Company felt compelled to enter into two interest rate derivative transactions to cap its exposure on two prior uncapped interest rate derivative transactions that had a negative market value in excess of $17,000. These two new transactions imposed caps on the Company's total exposure and replaced the previous uncapped positions that were entered into subsequent to December 31, 1993 in an attempt to limit the Company's exposure against rising short-term interest rates.
In September 1994, the Company filed suit against Bankers Trust Company and its affiliate BT Securities (Bankers Trust) alleging that in connection with the sale of these and earlier derivatives to the Company, Bankers Trust had breached fiduciary duties, made fraudulent representations, and failed to make adequate disclosures, in violation of common law and statutory obligations to the Company. The suit was settled on November 23, 1994. The Company agreed to pay Bankers Trust $6,180 which included $3,344 of cash payments made to the Company which had been recorded as gains with respect to a number of earlier transactions. In return, the remaining transactions were terminated with no further liability to the Company. See Note 13.
At December 31, 1994, the Company had two outstanding interest rate swap positions with a total notional amount of $4,800. These two agreements, with terms similar to the related bonds, are constituted as hedges and effectively reduce the Company's interest on $2,400 of industrial revenue bonds from 9.25% to 6.67% through February 1998.
The annual principal payments due on long-term debt for each of the years in the five-year period ended December 31, 1999, are $11,164, $11,269, $11,116, $9,205 and $8,713, respectively.
Capitalized interest for the year ended December 31, 1992 was $74. No interest was capitalized for the years ended December 31, 1994 and 1993.
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, 1994, the amount of unrestricted retained earnings available for dividends was $20,250. PAGE
Note 7--Income Taxes The Company adopted the provisions of SFAS No. 109 effective January 1, 1992, and recorded a credit of $1,038 and increased net income per share by $.06 for the cumulative effect of this change in accounting principle. There was no effect on income before income taxes for the year ended December 31, 1992, resulting from the adoption of SFAS No. 109.
The provision for income taxes for the years ended December 31, 1994, 1993 and 1992 consists of the following:
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For the year ended December 31, 1992, provision for income taxes was included in the financial statements as follows:
Tax laws raised the statutory tax rate for corporations from 34% to 35%, retroactive to January 1, 1993. Partially offsetting the adverse impact of the 1% increase in effective tax rates in 1993 and future periods is the favorable adjustment of $700 recorded in 1993 due to the revaluation of certain deferred tax assets.
The effective income tax rate for the years ended December 31, 1994, 1993 and 1992, varied from the statutory federal income tax rate as follows:
The above schedule includes the effect of a foreign net operating loss for which no benefit has been provided.
Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of currently enacted tax laws. PAGE
The net deferred taxes are comprised of the following:
The Company did not record any valuation allowances against U.S. deferred tax assets at January 1, 1992 or December 31, 1992, due to the substantial amounts of taxable income generated over the last three to five years. The Company has recorded a valuation allowance with respect to the deferred tax assets reflected in the table below as a result of recent capital losses and uncertainties with respect to the amount of taxable capital gain income which will be generated in future years. PAGE
The tax balances of significant temporary differences representing deferred tax assets and liabilities for the years ended December 31, 1994 and 1993 were as follows:
Note 8--Other Current Liabilities Other current liabilities at December 31, 1994 and 1993, consist of the following:
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Note 9--Postretirement Benefits The Company sponsors a defined benefit pension plan (the Retirement Plan) covering substantially all employees who meet certain eligibility requirements. Benefits are based upon years of service and average compensation levels. The Company's general funding policy is to contribute amounts deductible for federal income tax purposes. Contributions are intended to provide not only for benefits earned to date, but also for benefits expected to be earned in the future.
The following table sets forth the Retirement Plan's funded status on the measurement dates, December 31, 1994 and September 30, 1993, and a reconciliation of the funded status to the amounts recognized in the Company's consolidated balance sheets at December 31, 1994 and 1993:
The fair market value of the Retirement Plan's assets at December 31, 1994 and 1993, was $58,235 and $61,559, respectively. The changes in asset values relative to the measurement dates are primarily due to fluctuations in the market value of the plan's equity investments. PAGE
In 1990, the Company established a nonqualified defined benefit plan for employees whose benefits under the Retirement Plan are limited by provisions of the Internal Revenue Code. Additionally in 1990, the Company established a nonqualified defined benefit plan to provide supplemental retirement benefits for selected executives in addition to benefits provided under other Company plans. A nonqualified plan was also established to provide retirement benefits for members of the Company's Board of Directors who are not covered under any of the Company's other plans. All plans established in 1990 were unfunded at December 31, 1994 and 1993, although assets for those plans are held in certain grantor tax trusts known as "Rabbi" trusts. These assets are subject to claims of the Company's creditors but otherwise must be used only for purposes of providing benefits under the plans.
The following table sets forth the nonqualified defined benefit plans' benefit obligations on the measurement dates, December 31, 1994 and September 30, 1993, and a reconciliation of those obligations to the amounts recognized in the Company's consolidated balance sheets at December 31, 1994 and 1993:
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 8.5% and 5.0% in 1994 and 7.0% and 5.0% in 1993, respectively. The assumed long-term rate of return on plan assets used for valuation purposes was 9.0% for 1994 and 1993. PAGE
A summary of the components of net pension expense for all of the Company's defined benefit plans for the years ended December 31, 1994, 1993 and 1992, is as follows:
The Company has a defined contribution pension plan for employees who are members of a collective bargaining unit. Benefits under this plan are determined based upon years of service and an hourly contribution rate. Pension expense for this plan for the years ended December 31, 1994, 1993 and 1992, was $409, $451 and $479, respectively.
During 1994, Cleo offered a voluntary early retirement program to eligible employees resulting in curtailments of certain employee benefit plans. Consequently, the Company recognized curtailment losses of $284 and $68 in a defined benefit plan and medical and life insurance plan, respectively, for the year ended December 31, 1994.
The Company has two defined contribution plans pursuant to Section 401(k) of the Internal Revenue Code. The plans provide that employees meeting certain eligibility requirements may defer a portion of their salary subject to certain limitations. The Company pays certain administrative costs of the plans and contributes to the plans based upon a percentage of the employee's salary deferral and an annual additional contribution at the discretion of the Board of Directors. The total expense for these plans for the years ended December 31, 1994, 1993 and 1992, was $550, $501 and $481, respectively. PAGE
In addition to providing pension benefits, the Company provides medical and life insurance benefits for certain eligible employees upon retirement from the Company. Substantially all employees may become eligible for such benefits upon retiring from active employment of the Company. Medical and life insurance benefits for employees and retirees are paid by a combination of company and employee or retiree contributions. Retiree insurance benefits are provided by insurance companies whose premiums are based on claims paid during the year. The Company adopted the provisions of SFAS No. 106 effective January 1, 1992. This standard requires companies to accrue an actuarially determined charge for postretirement benefits during the period in which active employees become eligible, under existing plan agreements, for such future benefits. The cumulative effect of this change resulted in a charge to net income of $2,487 or $.15 per share after taxes of $1,609. Prior to January 1, 1992, the Company recognized these costs, which were not significant to operations, on a cash basis.
Net periodic cost of these benefits for the years ended December 31, 1994, 1993 and 1992 is as follows:
A reconciliation of the accumulated postretirement benefit obligation (APBO) measured as of December 31, 1994 and September 30, 1993 to the Company's consolidated balance sheets at December 31, 1994 and 1993 is as follows:
PAGE
The accumulated benefit obligation for 1994 and 1993 was determined using the following assumptions:
1994 1993 ---------------- ------------------ Discount rate 8.5% 7% Health care cost 10% for 1995 11% for 1994 trend rate graded down per graded down 1% per year to 6% in the year to 5% in the year 2002, 5.5% year 2000, 5% thereafter thereafter
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, 1994, and the net periodic cost for the year then ended by approximately 5% and 4%, respectively.
Effective January 1, 1994, the Company adopted SFAS No. 112 - "Employers' Accounting for Postemployment Benefits." The statement requires accrual accounting for benefits provided to former or inactive employees after employment but before retirement. The Company previously accounted for a certain portion of these postemployment benefits on a pay-as-you-go-basis. Adoption of SFAS No. 112 did not have a material effect on the consolidated financial statements of the Company.
Note 10--Stockholders' Equity
Employee stock plans Under various stock option and incentive plans, the Company may grant incentive and nonqualified stock options to purchase its common stock. All incentive options are granted at the fair market value on the date of grant. Incentive stock options generally become exercisable one year after the date granted and expire ten years after the date granted, if not earlier expired due to termination of employment. Nonqualified stock options become exercisable according to a vesting schedule determined at the date granted and expire on the date set forth in the option agreement, if not earlier expired due to termination of employment. PAGE
A summary of stock option activity during the years ended December 31, 1994, 1993 and 1992, is as follows:
The exercise prices of options granted in 1994 ranged from $13.88 to $21.13. The exercise prices of options granted in 1993 ranged from $18.88 to $21.25 and the exercise price of options granted in 1992 ranged from $18.38 to $28.63. Options exercised were at prices of $2.38 to $22.50, in 1994, 1993 and 1992. Options outstanding at December 31, 1994, are at prices ranging from $11.38 to $28.63.
Under certain stock incentive plans, the Company may grant the right to purchase restricted shares of its common stock. Such shares are subject to restriction on transfer and to repurchase by the Company. The purchase price of restricted shares is determined by the Company and may be nominal. In 1992, 5,000 restricted shares were purchased at a price of $1.00 per share. No restricted shares were purchased in 1994 or 1993.
At December 31, 1994, 308,662 shares were available under the stock option and incentive plans, of which 216,369 shares could be issued as restricted shares.
Stock rights On December 4, 1987, the Company's Board of Directors declared a dividend distribution of one right for each outstanding share of the Company's common stock to stockholders of record on December 21, 1987. Each right entitles the holder to purchase, for the exercise price of $40 per share, 1/100th of a share of Series A Preferred Stock. Until exercisable, the rights are attached to all shares of the Company's common stock outstanding. PAGE
The rights are exercisable only in the event that a person or group of persons (i) acquires 20% or more of the Company's common stock and there is a public announcement to that effect, (ii) announces an intention to commence or commences a tender or exchange offer which would result in that person or group owning 30% or more of the Company's common stock, or (iii) beneficially owns a substantial amount (at least 15%) of the Company's common stock and is declared to be an Adverse Person (as defined in the Rights Agreement) by the Company's Board of Directors. Upon a merger or other business combination transaction, each right may entitle the holder to purchase common stock of the acquiring company worth two times the exercise price of the right. Under certain other circumstances (defined in the Rights Agreement) each right may entitle the holder (with certain exceptions) to purchase common stock, or in certain circumstances, cash, property or other securities of the Company, having a value worth two times the exercise price of the right.
The rights are redeemable at one cent per right at anytime prior to 20 days after the public announcement that a person or group has acquired 20% of the Company's common stock. Unless exercised or redeemed earlier by the Company, the rights expire on December 28, 1997.
Note 11--Commitments
Lease commitments The Company has a long-term lease agreement for certain of its principal facilities. The initial lease term runs through January 31, 2002, with two five-year renewal options available. The basic rent under the lease is subject to adjustment based on changes in the Consumer Price Index for the preceding five years, effective March 1, 1987, and every five years thereafter including renewal periods. The lease provides a purchase option exercisable in 2002. The option price is the higher of $35,400 or the fair market value on 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.
The Company also leases additional manufacturing, distribution and administrative facilities, sales offices and personal property under noncancellable leases which expire on various dates through 2003. Certain of these leases contain renewal and escalating rental payment provisions.
Rental expense for the years ended December 31, 1994, 1993 and 1992, on all real and personal property, was $24,493, $20,297 and $15,846, respectively. Minimum future annual rentals under noncancellable leases for each of the years in the five-year period ended December 31, 1999 are $20,757, $18,290, $14,712, $11,744 and $9,835, respectively. After 1999, these commitments aggregate $17,752.
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, 1999, of $17,048, $6,439, $4,929, $4,724 and $2,922, respectively. After December 31, 1999, these commitments aggregate $2,093. All of these amounts have been recorded as other current liabilities or other liabilities in the accompanying consolidated balance sheet as of December 31, 1994. PAGE
Employment agreements The Company has employment agreements with certain executives which provide for, among other things, minimum annual salaries adjusted for cost-of-living changes, continued payment of salaries in certain circumstances and incentive bonuses. Certain agreements further provide for signing bonuses, deferred compensation payable upon expiration of the agreements and employment termination payments, including payments contingent upon any person becoming the beneficial owner of 50% or greater of the Company's outstanding stock.
Note 12--Legal Proceedings
On July 1, 1994, the Company announced that it had determined that the inventory of Cleo at December 31, 1993 had been overstated, resulting in an overstatement of the Company's previously reported 1993 consolidated net income. See Note 1.
Immediately following the announcement of the inventory misstatement at Cleo, five purported class actions were commenced by certain stockholders against the Company and its Chairman, President and Chief Executive Officer in the United States District Court for the Southern District of Ohio. These suits were consolidated and a Consolidated Amended Class Action Complaint against the Company, its Chairman, President and Chief Executive Officer, its Chief Financial Officer and the former President and Chief Executive Officer of Cleo was filed on October 7, 1994 (In Re Gibson Securities Litigation). This Complaint alleged violations of the federal securities laws and sought unspecified damages for an asserted public disclosure of false information regarding the Company's earnings. The Company intends to defend the suit vigorously and has filed an Answer denying any wrongdoing, a Third Party Complaint against its former auditor for contribution against any judgment adverse to the Company and a motion to dismiss one count of the Complaint. On December 6, 1994 the Court ruled that neither of the two named plaintiffs qualified as a class representative. On March 3, 1995 the Court granted plaintiffs' Motion for Leave to File An Amended Complaint to name a substitute class representative.
The SEC is conducting a private investigation to determine whether the Company or any of its officers, directors and employees have engaged in conduct in violation of certain provisions of the Securities Exchange Act of 1934 and the rules and regulations thereunder. The Company believes that such investigation is focused principally on the derivative transactions discussed in Note 6 and the Company's public statements and accounting with respect thereto. The Company is cooperating in such investigation. PAGE
On September 12, 1994 the Company filed suit against Bankers Trust Company and its affiliate BT Securities in the United States District Court for the Southern District of Ohio (Gibson Greetings, Inc. v. Bankers Trust Company and BT Securities Corporation) alleging that in connection with the sale of derivatives to the Company they had breached fiduciary duties, made fraudulent misrepresentations, and failed to make adequate disclosures, in violation of common law and statutory obligations to the Company. The suit sought damages and asked that the court declare the Company's existing derivative transactions with Bankers Trust to be unenforceable. Bankers Trust filed an Answer denying the allegations and a counterclaim seeking enforcement of the existing derivative transactions. On November 23, 1994 the Company settled its claims against Bankers Trust. As part of the settlement, the Company paid Bankers Trust $6,180, which included the reimbursement of approximately $3,344 of cash payments previously made to the Company by Bankers Trust and recorded as income in 1993. In return, the remaining transactions were terminated with no further liability to the Company.
In March 1995 the previously reported litigation captioned Rocks v. Gibson Greetings, et al. was voluntarily dismissed by the plaintiff with the Court's approval.
On April 10, 1995, two purported class action lawsuits were commenced against the Company, its Chairman, President and Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Southern District of Ohio (Kurtz v. Gibson Greetings, Inc., et al. and Komine v. Gibson Greetings, Inc., et al.) The Complaints allege violations of the federal securities law for an asserted failure to disclose allegedly material information regarding the Company's financial performance. The Company intends to defend the suits vigorously.
The litigation described above is in early stages of proceedings. Accordingly, management is unable to predict their likely effect upon the Company's results of operations and financial condition.
In 1989, unfair labor practice charges were filed against the Company as an outgrowth of a strike at its Berea, Kentucky facility. Remedies sought include back pay from August 8, 1989 and reinstatement of employment for approximately 200 employees. In February 1990, the General Counsel of the National Labor Relations Board (NLRB) issued a complaint based on certain of the allegations of these charges (In the Matter of Gibson Greetings, Inc. and International Brotherhood of Firemen and Oilers, AFL-CIO, Cases 9-CA-26706, 27660, 26875). On December 18, 1991, an Administrative Law Judge of the NLRB issued a recommended order, which included reinstatements and back pay affecting approximately 160 strikers, based on findings that the Company had violated certain provisions of the National Labor Relations Act. On May 7, 1993, the NLRB upheld the Administrative Law Judge's decision in some respects, and enlarged the number of strikers entitled to back pay to approximately 240. An appeal was filed in the United States Court of Appeals for the District of Columbia Circuit. The Company believes it has substantial defenses to the charges, and these defenses were presented in briefs and in appellate oral argument which was heard on September 14, 1994. A decision is expected in 1995. Management does not believe that an adverse outcome as to this matter would have a material adverse effect on the Company's net worth or total cash flows; however, the impact on the statement of operations in a given year could be material. PAGE
In addition, the Company is a defendant in certain other litigation.
Note 13--Subsequent Event
As discussed in Note 12, the SEC is investigating the Company's accounting and reporting of derivative transactions during the year ended December 31, 1993.
In an institution and settlement of administrative proceedings dated December 22, 1994 against Bankers Trust (the Bankers Trust Order), the SEC alleged that Bankers Trust misled the Company about the value of the Company's derivative positions by providing the Company with fair values that were significantly different from the values determined by Bankers Trust's computer model and recorded on Bankers Trust's financial records, which difference of $4,571 as of December 31, 1993 resulted in a significant understatement of the magnitude of the Company's losses. In late March 1995, the SEC advised the Company that it believed that the Company should restate its 1993 consolidated financial statements due to the SEC's allegation that Bankers Trust caused the Company to materially understate its unrealized losses related to certain derivative transactions during 1993.
The Company has restated the accompanying 1993 year-end consolidated financial statements to reflect derivative values based on Bankers Trust's computer model as set forth in the Bankers Trust Order. Such restatement resulted in a $4,571 reduction in previously reported 1993 consolidated net income and a corresponding decrease in 1994 consolidated net loss. This restatement, coupled with the November 23, 1994 settlement between the Company and Bankers Trust, as discussed in Note 12, resulted in a net gain (loss) on derivative transactions and settlement in 1994 and 1993 of $1,641 and ($5,689), respectively, as shown in the accompanying consolidated statements of operations.
Bankers Trust has yet to provide the Company and its independent auditors with either support for the $4,571 differential or with the effects of such net differential on the Company's 1994 and 1993 consolidated quarterly results. Accordingly, the Company has prepared its 1994 and 1993 annual consolidated financial statements based solely on the net differential amount contained in the Bankers Trust Order. The Company has had continuing discussions with the SEC regarding the Company's ongoing attempts to obtain supporting year-end and quarterly amounts from Bankers Trust in order to complete the 1994 and 1993 consolidated financial statements so that the Company's independent auditors can complete their audits of such consolidated financial statements.
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Note 14--Quarterly Financial Data (Unaudited)
[FN]
(1) As discussed in Note 13 of the Notes to the Consolidated Financial Statements, Bankers Trust has not provided the Company with quarterly fair values of certain derivative transactions. Such fair values are required for the Company to determine the quarterly impact of the restatement described in Note 13.
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Independent Auditors' Report
The audits of the consolidated financial statements, as restated, for the years ended December 31, 1994 and 1993 have not been completed due to matters discussed in Note 13 of the Notes to Consolidated Financial Statements. Auditors' reports will be filed in an amended Form 10-K as soon as possible after the Company's independent auditors have completed their audits of such financial statements.
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Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The disclosure called for by this item has been previously reported in the Company's Current Report on Form 8-K, as amended, dated September 29, 1994.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Board of Directors of the Company (at April 1,1995) are as follows:
THOMAS M. COONEY, age 69. Mr. Cooney was the Company's Chairman of the Board from 1986 until 1989 and currently serves as Chairman Emeritus of the Company and as President of Gibson Foundation, Inc., a charitable foundation established by the Company. He joined the Company as its President and Chief Executive Officer in 1978 and served as President until 1986 and as Chief Executive Officer until 1987. He is also a director of Genovese Drug Stores, Inc. Mr. Cooney has been a director of the Company since 1982 and a member of the Nominating Committee since 1990.
CHARLES D. LINDBERG, age 66. Mr. Lindberg has been a partner in the law firm of Taft, Stettinius & Hollister, counsel to the Company, for more than the past five years and currently serves as Managing Partner. He has been a director of the Company since May 1991 and has been a member of the Audit Committee since 1994.
ALBERT R. PEZZILLO, age 66. Mr. Pezzillo is currently a business consultant. He retired in 1990 from his position as Senior Vice President of American Home Products Corporation, a manufacturer and marketer of ethical pharmaceuticals, medical supplies and hospital, consumer health care, food and household products. Prior to joining American Home Products in 1981, he held a variety of executive positions with Warner Lambert Company and Colgate Palmolive Company. Mr. Pezzillo became a director of the Company in April 1990. He has been a member of the Audit Committee since 1990 and a member of the Compensation Committee since 1994.
CHARLOTTE A. ST. MARTIN, age 49. Ms. St. Martin has been Executive Vice President of Loews Hotels and President and Chief Executive Officer of Loews Anatole Hotel, Dallas, Texas, since 1989. Previously she served Loews Hotels in a variety of other executive capacities. Loews Hotels owns and operates fourteen hotels nationally and internationally. Ms. St. Martin is also a former President of the Dallas Convention and Visitors' Bureau. She has been a director of the Company since August 1993 and a member of the Compensation Committee since 1994. PAGE
BENJAMIN J. SOTTILE, age 57. Mr. Sottile has been the Company's Chairman of the Board since 1989, its Chief Executive Officer since 1987 and its President since 1986. From 1986 to 1987 he was the Company's Chief Operating Officer. Mr. Sottile was President of Group I, Revlon Beauty Group, Revlon Corp., a manufacturer of cosmetic and beauty supplies, from 1984 to 1986. From 1981 to 1984 he was a Senior Vice President of Warner Communications, Inc., where he was chiefly responsible for the operating activities of consumer product companies including The Franklin Mint, Warner Cosmetics and Fragrances and Knickerbocker Toy Company. He became a director of the Company in January 1987 and has been a member of the Nominating Committee since 1989.
FRANK STANTON, age 65. Until his retirement in 1990, Mr. Stanton had served as Chairman and Chief Executive Officer of MRB Group, Inc., a world-wide media and marketing research organization, which he founded in 1987. From 1974 until 1989 he was President and Chief Executive Officer of Simmons Market Research Bureau, a leading rating service for the magazine industry and now a subsidiary of MRB Group, Inc. He has been a director of the Company since June 1985. He has been a member of the Audit and Compensation Committees since 1986.
ROGER T. STAUBACH, age 53. Mr. Staubach has been Chairman of the Board and Chief Executive Officer of The Staubach Company, a Dallas, Texas-based integrated real estate service company, since 1990. He was President of that company from 1981 until 1990 and was active in other real estate brokerage businesses prior to 1981. From 1969 through 1979 he was a member of The Dallas Cowboys professional football team. He is also a director of Brinker International, Inc., Columbus Realty Trust, First USA, Inc., Halliburton Company and Life Partner's Group, Inc. Mr. Staubach became a director of the Company in January 1992. He has been a member of the Nominating Committee since 1994.
C. ANTHONY WAINWRIGHT, age 61. Mr. Wainwright has been Chairman of Compton Partners, Saatchi & Saatchi (formerly Campbell-Mithun-Esty), a national advertising agency, since May 1994. He had served as Vice Chairman of that company since 1989. From 1980 until 1989 he was President, Chief Operating Officer and a director of The Bloom Companies, Inc., a holding company for a national advertising agency group. Prior to 1980, Mr. Wainwright held various executive positions with companies in the advertising and marketing industries. He is also a director of American Woodmark Corporation, Del Webb Corp. and Specialty Retail Group, Inc. He has been a director of the Company since March 1988 and has been a member of the Compensation Committee since 1993 and a member of the Nominating Committee since 1991. PAGE
The Executive Officers of the Company (at April 1,1995) are as follows:
Name Age Title ------------------- --- ---------------------------- Benjamin J. Sottile 57 Chairman of the Board, President and Chief Executive Officer
William L. Flaherty 47 Vice President, Finance and Chief Financial Officer
Nelson J. Rohrbach 54 Vice President
Stephen M. Sweeney 58 Vice President, Human Resources
Information about Mr. Sottile is given above.
WILLIAM L. FLAHERTY. Mr. Flaherty has been Vice President, Finance and Chief Financial Officer of the Company since November 1993. Prior to that time, he served as Vice President and Corporate Treasurer of FMR Corp., the parent company of Fidelity Investments Group, a mutual fund management and discount stock brokerage firm (1989 - 1992) and as Vice President and Treasurer of James River Corporation, an integrated manufacturer of pulp, paper and converted paper and plastic products (1987 - 1989).
NELSON J. ROHRBACH. Mr. Rohrbach has been a Vice President of the Company since April 21, 1994 and President and Chief Executive Officer of Cleo, Inc. since April 12, 1994. Prior to that time, he served as the President and Chief Executive Officer of The Paper Factory of Wisconsin, Inc. (1989 - 1994) , a factory outlet chain acquired by the Company in 1993. Mr. Rohrbach continues to serve as The Paper Factory's Chief Executive Officer. From 1980 to 1989 he served as President of CPS/Artfaire, a manufacturer of personal expression products.
STEPHEN M. SWEENEY. Mr. Sweeney joined the Company as Vice President, Human Resources in 1987. He held similar positions with Coca Cola Enterprises, Inc. from 1985 until 1987, the Tribune Company from 1983 until 1985 and Contel, Inc. from 1976 to 1983.
Officers serve with the approval of the Board of Directors.
Compliance with Section 16(a) of the Securities and Exchange Act of
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors, and persons who beneficially own more than ten percent of the Company's equity securities, to file reports of security ownership and changes in such ownership with the SEC. These persons also are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. PAGE
Based upon a review of such forms and written representations from its executive officers and directors, the Company believes that all Section 16(a) filing requirements were complied with on a timely basis during and for 1994 except that a 1993 stock option grant was not timely reported by Mr. William L. Flaherty and Form 3 was filed after its due date by Mr. Anthony L. Forcellini.
Item 11.
Item 11. Executive Compensation
Summary Information. The following table sets forth, for each of the three years in the period ending December 31, 1994, amounts of cash and certain other compensation paid by the Company in respect of the year to (i) Mr. Sottile, (ii) each of the three other executive officers of the Company who were serving as executive officers at the end of 1994 and whose 1994 salary and bonus exceeded $100,000, and (iii) Ralph J. Olson, an executive officer of the Company until November 1994. Mr. Sottile and these other persons are sometimes referred to hereafter as the "named executive officers."
[FN] - --------------------------
(1) For 1994, perquisites did not exceed the lesser of $50,000 or 10% of salary and bonus for any named executive officer.
(2) At December 31, 1994, Mr. Sottile held 5,000 shares of restricted stock having an aggregate award value (based upon the closing price of $14.75 per share on that date for the Company's common stock less the consideration paid) of $68,750.
(3) For 1994, includes the following: (i) matching contributions to the Company's Matched PaySaver (401(k)) Plan on behalf of each of Messrs. Sottile ($1,125), Flaherty ($0), Rohrbach ($900), Sweeney ($1,125) and Olson ($0) in respect of their 1994 contributions to the Plan; (ii) group term life insurance payments for Mr. Sottile ($5,400), Mr. Flaherty ($1,827), Mr. Rohrbach ($3,245), Mr. Sweeney ($4,158) and Mr. Olson ($3,456); (iii) whole-life insurance premiums of $46,500 for the benefit of Mr. Sottile; (iv) reimbursement of temporary living and travel expenses of $49,556 for Mr. Flaherty and $24,174 for Mr. Rohrbach; (v) miscellaneous insurance-related compensation of $1,398 for Mr. Flaherty; and (vi) termination costs of $745,981 for Mr. Olson.
(4) Mr. Flaherty and Mr. Rohrbach were first employed by the Company in 1993.
PAGE
Stock Options. The Company has six existing plans pursuant to which options for shares of common stock may be granted to key employees. These are the 1982, 1983, 1985 and 1987 Stock Option Plans and the 1989 and 1991 Stock Incentive Plans (together, the "Plans"). None of the Plans provides for the grant of stock appreciation rights ("SARs"). The following table contains information concerning stock option grants under the Plans to the named executive officers during the year ended December 31, 1994.
[FN] (1) All options vest at an annual rate of one-third per year commencing (i) April 11, 1995 for Mr. Rohrbach's options that expire April 10, 2004 and (ii) June 15, 1995 for all other options. The exercise price of all options may be paid in cash or, if permitted by the Stock Option Committee, by the transfer of shares of the Company's common stock valued at their fair market value on the date of exercise. Each option becomes exercisable in full (i) if any person becomes, or commences a tender offer which could result in the person becoming, the beneficial owner of more than 50% of the outstanding shares of the Company's common stock or (ii) unless the survivor or transferee corporation agrees to continue the option, in the event of the execution of an agreement of merger, consolidation or reorganization pursuant to which the Company is not to be the surviving corporation or the execution of an agreement of sale or transfer of all or substantially all of the assets of the Company.
(2) In accordance with Securities and Exchange Commission rules, the Black-Scholes option pricing model was used to estimate the grant date present value of the options shown. The Company's use of this model should not be construed as an endorsement of its accuracy at valuing options. All stock option valuation models, including the Black-Scholes model, require a prediction about the future movement of the stock price. The real value of an option, if any, depends upon the actual performance of the Company's stock during the applicable period.
(3) The options granted to Mr. Olson terminated unexercised as a result of his termination of employment with the Company.
PAGE
With respect to each named executive officer, the following table sets forth information concerning unexercised options held at December 31, 1994. No named executive officer exercised options during 1994.
[FN] (1) All options terminated unexercised prior to fiscal year-end as a result of Mr. Olson's termination of employment with the Company.
Pension Plans. The Pension Plan Table set forth below shows estimated annual pension benefits payable to a covered participant under the Company's Retirement Income Plan (the "Retirement Plan"), a qualified defined benefit pension plan, and under the Gibson Greetings, Inc. ERISA Makeup Plan (the "Makeup Plan"), a nonqualified supplemental pension plan providing benefits that would otherwise be denied participants because of certain Internal Revenue Code limitations on qualified plan benefits. Benefits shown are computed as a straight life annuity for an employee retiring at age 65 in 1994 with no offsets. PAGE
[FN] (1) Except as indicated, the percentage of shares held by each person is less than 1%. Includes shares which may be purchased upon exercise of presently exercisable options and options exercisable within 60 days after February 28, 1995, in the following amounts: Mr. Cooney, 2,000 shares; Mr. Sottile, 205,000 shares; Messrs. Stanton and Wainwright, 6,000 shares each; Mr. Pezzillo, 5,000 shares; Messrs. Lindberg and Staubach, 3,000 shares each; Ms. St. Martin, 1,000 shares; Mr. Flaherty, 5,000 shares; Mr. Rohrbach, 10,000 shares; Mr. Sweeney, 19,500 shares; and all directors and executive officers as a group, 265,500 shares. No information is presented for Mr. Olson whose employment with the Company terminated prior to February 28, 1995.
(2) Includes the following numbers of shares as to which beneficial ownership is disclaimed: 300 shares held by the wife of Mr. Stanton and 100 shares held by the wife of Mr. Wainwright.
(3) The Company has also been advised by two institutional investors, Heartland Advisors, Incorporated and Hughes Investment Management Company, that each is the beneficial owner of in excess of 5% of the Company's outstanding shares of Common Stock. However, neither of these institutional investors has at this time filed a formal report of ownership, and the Company is not aware of the exact number of shares of which each claims beneficial ownership.
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Item 13.
Item 13. Certain Relationships and Related Transactions
Certain Transactions. The Staubach Company, of which Mr. Staubach is Chairman and Chief Executive Officer, has been retained to sell certain property owned by the Company. If the property is sold in 1995, The Staubach Company anticipates receiving a net commission in excess of $60,000. During 1994, The Staubach Company received a $20,000 advance from the Company for expenses in connection with this project and also received fees of $26,487 from the Company for its representation of the Company in a lease transaction.
PAGE
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a) The following documents are filed as part of this report:
Financial Statements: 1. Page Herein Financial Statement ------ --------------------------------------------- 12 Consolidated Statements of Operations for the years ended December 31, 1994, 1993 and 1992 13 Consolidated Balance Sheets as of December 31, 1994 and 1993 14 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 15 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992 16 Notes to Consolidated Financial Statements 29 Independent Auditors' Report
2. Exhibits: See Index of Exhibits (page 41) 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 October 4, 1994 (date of report: September 29, 1994) reporting a change in the Company's independent auditors.
The Company filed a Form 8-K/A (Amendment No. 1) with the Securities and Exchange Commission on October 10, 1994 (date of report: September 29, 1994) further relating to the change in the Company's independent auditors.
The Company filed a Form 8-K with the Securities and Exchange Commission on November 23, 1994 (date of report: November 23, 1994) attaching the Company's press release dated November 23, 1994.
The Company filed a Form 8-K with the Securities and Exchange Commission on December 7, 1994 (date of report: December 7, 1994) attaching the Company's press release dated December 7, 1994.
No financial statements were required to be filed in connection with any of the foregoing reports.
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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 17th day of April 1995.
Gibson Greetings, Inc.
By /s/ Benjamin J. Sottile ----------------------- Benjamin J. Sottile 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 17th day of April 1995. Signature Title ---------- ----- Chairman of the Board, /s/ Benjamin J. Sottile President and Chief Executive Officer ------------------------- Benjamin J. Sottile (principal executive officer)
Vice President, Finance /s/ William L. Flaherty Chief Financial Officer ------------------------- William L. Flaherty (principal financial and accounting officer)
/s/ Thomas M. Cooney ------------------------- Thomas M. Cooney Director
/s/ Charles D. Lindberg ------------------------- Charles D. Lindberg Director
/s/ Albert R. Pezzillo ------------------------- Albert R. Pezzillo Director
------------------------- Frank Stanton Director
/s/ Charlotte St. Martin ------------------------- Charlotte St. Martin Director
/s/ Roger T. Staubach ------------------------- Roger T. Staubach Director
/s/ C. Anthony Wainwright ------------------------- C. Anthony Wainwright Director PAGE
Index of Exhibits
Exhibit Number Description ------- ----------------------------------------------------------------- 3(a) Restated Certificate of Incorporation as amended (*1)
3(b) Bylaws (*2)
4(a) Article 4.01 of Restated Certificate of Incorporation (included in Exhibit 3(a))
4(b) Rights Agreement dated as of December 4, 1987, between Gibson Greetings, Inc. and The First National Bank of Boston, Rights Agent, including Certificate of Designation, Preferences and Rights of Series A Preferred Stock (*3)
10(a) Lease Agreement dated January 25, 1982 between Corporate Property Associates 2 and Corporate Property Associates 3 and Gibson Greeting Cards, Inc. (*4)
10(b) Sublease Agreement dated January 1, 1977 between B.F. Goodrich and Cleo Wrap Division of Gibson Greetings Card, Inc. (*4)
10(c) Amendment and Extension of Term of Sublease dated June 26, 1983, between B.F. Goodrich Company and Gibson Greeting Cards, Inc. (*5)
10(d) 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. (*6)
10(e) Lease and Agreement dated March 7, 1986 between Associated Warehouses, Inc. and Cleo Wrap Division of Gibson Greetings, Inc. (*6)
10(f) Commercial Paper Issuing Agent Agreement dated as of July 11, 1986, between Gibson Greetings, Inc. and Irving Trust Corporation (*7)
10(g) Commercial Paper Dealer Agreement dated July 16, 1986, between Gibson Greetings, Inc. and The First Boston Corporation (*7)
10(h) Credit Agreement, dated as of April 26, 1993, by and among Gibson Greetings, Inc.; Bankers Trust Company; The Bank of New York; Mellon Bank, N.A.; The Fifth Third Bank; Harris Trust and Savings Bank; NBD Bank, N.A.; Royal Bank of Canada; The Sanwa Bank, Ltd.; Society National Bank; Union Bank of Switzerland; Wachovia Bank of Georgia, N.A.; and Bankers Trust Company, as agent (*8)
10(i) 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 (*9)
10(j) Executive Compensation Plans and Arrangements
(i) 1982 Stock Option Plan (*2)
(ii) 1983 Stock Option Plan (*2)
(iii) 1985 Stock Option Plan (*2)
(iv) 1987 Stock Option Plan (*2)
(v) 1989 Stock Option Plan (*2)
(vi) 1989 Stock Option Plan for Nonemployee Directors (*2)
(vii) 1991 Stock Option Plan (*2)
(viii) Employment Agreement with Mr. Cooney (*10)
(ix) Form of Second Amendment to Employment Agreement with Mr. Cooney (*1)
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Exhibit Number Description ------- ----------------------------------------------------------------- (x) Employment Agreement between Gibson Greetings, Inc. and Benjamin J. Sottile, dated April 1, 1993 (*8)
(xi) ERISA Makeup Plan (*12)
(xii) Supplemental Executive Retirement Plan (*12)
(xiii) Agreements dated January 2, 1991 and December 10, 1993 between Gibson Greetings, Inc. and Stephen M. Sweeney (*2)
(xiv) Agreement dated November 18, 1993 between Gibson Greetings, Inc. and William L. Flaherty (*2)
(xv) Agreement dated February 22, 1994 between Gibson Greetings, Inc. and Michael A. Pietrangelo
(xvi) Agreement dated May 28, 1993 between Gibson Greetings, Inc. and Nelson J. Rohrbach (*12)
(xvii) Agreement dated June 24, 1994 between Gibson Greetings, Inc. and Ralph J. Olson (*13)
(xviii) Agreement dated December 21, 1994 between Gibson Greetings, Inc. and Ralph J. Olson
(xix) Agreement dated November 21, 1994 between Gibson Greetings, Inc. and Nelson J. Rohrbach
11 Computation of Income per Share
21 Subsidiaries of the Registrant
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* Filed as an Exhibit to the document indicated and incorporated herein by reference:
(1) The Company's Report on Form 10-K for the year ended December 31, 1988.
(2) The Company's Report on Form 10-K/A (Amendment No. 1) for the year ended December 31, 1993.
(3) The Company's Report on Form 8-K dated December 28, 1987, filed January 4, 1988.
(4) The Company's Registration Statement on Form S-8 (No. 2-82990).
(5) The Company's Registration Statement on Form S-8 (No. 2-96396).
(6) The Company's Report on Form 10-K for the year ended December 31, 1985.
(7) The Company's Report on Form 10-Q for the quarter ended September 30, 1986.
(8) The Company's Report on Form 10-Q for the quarter ended June 30, 1993.
(9) The Company's Report on Form 10-Q for the quarter ended June 30, 1991.
(10) The Company's Report on Form 10-K for the year ended December 31, 1986.
(11) The Company's Report on Form 10-K for the year ended December 31, 1992.
(12) The Company's Report of Form 10-Q/A (Amendment No.1) for the quarter ended March 31, 1994.
(13) The Company's Report on Form 10-Q for the quarter ended September 30, 1994.
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The Company will furnish to the Commission upon request its long-term debt instruments not listed above.
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