PAGE
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-11902
GIBSON GREETINGS, INC.
Incorporated under the laws IRS Employer
of the State of Delaware Identification No. 52-1242761
2100 Section Road, Cincinnati, Ohio 45237
Telephone Number: Area Code 513-841-6600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 16,146,979 shares of common
stock, par value $.01, outstanding at November 6, 1996.
PAGE
<PAGE>
<TABLE>
Part I. Item 1. Financial Statements
GIBSON GREETINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
(Unaudited)
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 60,713 $ 15,555 $ 1,100
Note receivable - 24,574 -
Trade receivables, net 26,406 46,620 96,402
Inventories 74,188 68,303 184,490
Income taxes receivable 11,273 10,698 24,678
Prepaid expenses 3,499 4,054 5,946
Deferred income taxes 42,143 45,011 45,239
--------- --------- ---------
Total current assets 218,222 214,815 357,855
--------- --------- ---------
Plant and equipment, net 94,413 90,813 112,916
Deferred income taxes 13,529 14,745 8,942
Other assets, net 92,833 105,454 96,457
--------- --------- ---------
$ 418,997 $ 425,827 $ 576,170
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt due within one year $ 7,899 $ 28,894 $ 79,253
Accounts payable 11,014 7,995 22,619
Other current liabilities 74,244 71,642 75,489
Accrued loss on sale of Cleo, Inc. - - 82,758
--------- --------- ---------
Total current liabilities 93,157 108,531 260,119
--------- --------- ---------
Long-term debt 40,867 46,533 52,093
Sales agreement payments due
after one year 15,390 18,564 19,912
Other liabilities 21,003 21,957 21,328
--------- --------- ---------
Total liabilities 170,417 195,585 353,452
--------- --------- ---------
Stockholders' Equity:
Preferred stock, par value $1.00;
5,000,000 shares authorized,
none issued - - -
Preferred stock, Series A, par
value $1.00; 300,000 shares
authorized, none issued - - -
Common stock, par value $.01;
50,000,000 shares authorized,
16,638,380 shares issued at September
30, 1996, 16,585,130 shares issued at
December 31, 1995 and 16,579,930
shares at September 30, 1995 166 166 166
Paid-in capital 46,628 46,041 46,050
Retained earnings 207,308 191,793 183,986
Foreign currency adjustment 429 (1,807) (1,538)
--------- --------- ---------
254,531 236,193 228,664
Less treasury stock, at cost,
494,601 shares at September 30,1996
and December 31, 1995 and 489,701
shares at September 30, 1995 5,951 5,951 5,946
--------- --------- ---------
Total stockholders' equity 248,580 230,242 222,718
--------- --------- ---------
$ 418,997 $ 425,827 $ 576,170
========= ========= =========
</TABLE>
[FN]
See accompanying notes to condensed consolidated financial statements.
PAGE
<PAGE>
<TABLE>
GIBSON GREETINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 92,551 $ 144,323 $ 278,915 $ 342,080
--------- --------- --------- ---------
Costs and expenses
Operating expenses:
Cost of products sold 38,721 82,520 104,165 159,208
Selling, distribution
and administrative
expenses 50,710 57,679 148,999 169,717
Loss on sale of
Cleo, Inc. - 82,758 - 82,758
--------- --------- --------- ---------
Total operating
expenses 89,431 222,957 253,164 411,683
--------- --------- --------- ---------
Operating income (loss) 3,120 (78,634) 25,751 (69,603)
--------- --------- --------- ---------
Financing expenses:
Interest expense 1,812 3,386 5,794 9,529
Interest income (910) (132) (2,313) (357)
--------- --------- --------- ---------
Total financing
expenses, net 902 3,254 3,481 9,172
--------- --------- --------- ---------
Income (loss) before
income taxes 2,218 (81,888) 22,270 (78,775)
Income taxes (1,836) (26,680) 6,751 (24,479)
--------- --------- --------- ---------
Net income (loss) $ 4,054 $ (55,208) $ 15,519 $ (54,296)
========= ========= ========= =========
Net income (loss)
per share $ 0.25 $ (3.41) $ 0.95 $ (3.35)
========= ========= ========= =========
Dividends per share $ - $ - $ - $ -
========= ========= ========= =========
</TABLE>
[FN]
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<PAGE>
<TABLE>
GIBSON GREETINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,519 $ (54,296)
---------- ----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and write-down of display fixtures 16,067 17,279
Loss on disposal of plant and equipment 433 3,424
Deferred income taxes 4,084 2,674
Loss on sale of Cleo, Inc. - 82,758
Amortization of deferred costs and other
intangibles 17,863 14,004
Change in assets and liabilities:
Decrease in trade receivables, net 20,214 101,397
Increase in inventories (5,885) (57,030)
Increase in income tax receivable (575) (24,678)
(Increase) decrease in prepaid expenses 555 (227)
Increase in other assets, net of amortization (5,242) (7,590)
Increase in accounts payable 3,019 840
Decrease in income taxes payable - (4,742)
Increase (decrease) in other current
liabilities 2,602 (11,501)
Increase (decrease)in other liabilities (4,132) 403
All other, net 2,198 (351)
---------- ----------
Total adjustments 51,201 116,660
---------- ----------
Net cash provided by operating activities 66,720 62,364
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (20,302) (14,655)
Proceeds from sale of plant and equipment 240 361
Collection of note receivable 24,574 -
---------- ----------
Net cash provided by (used in)
investing activities 4,512 (14,294)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net decrease in short-term borrowings (19,000) (37,950)
Payments on long-term debt, net (7,661) (11,072)
Issuance of common stock 587 58
Acquisition of common stock for treasury - (6)
---------- ----------
Net cash used in financing activities (26,074) (48,970)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 45,158 (900)
CASH AND EQUIVALENTS BEGINNING OF PERIOD 15,555 2,000
---------- ----------
CASH AND EQUIVALENTS END OF PERIOD $ 60,713 $ 1,100
========== ==========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 2,155 $ 6,631
Income taxes 3,241 2,266
</TABLE>
[FN]
See accompanying notes to condensed consolidated financial statements.
PAGE
<PAGE>
GIBSON GREETINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1996 and 1995
(Dollars in thousands except per share amounts)
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of Gibson Greetings, Inc. and its subsidiaries (the Company).
Intercompany transactions and balances have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been prepared
in accordance with Article 10-01 of Regulation S-X of the Securities and
Exchange Commission and, as such, do not include all information required by
generally accepted accounting principles. However, in the opinion of the
Company, these financial statements contain all adjustments, consisting of
only normal recurring adjustments, necessary to present fairly the financial
position as of September 30, 1996, December 31, 1995 and September 30, 1995,
the results of its operations for the three and nine months ended September
30, 1996 and 1995 and its cash flows for the nine months ended September 30,
1996 and 1995. The accompanying financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123 - "Accounting for Stock-Based
Compensation." This statement establishes expanded financial accounting and
disclosure standards for stock-based compensation plans. SFAS No. 123 permits
companies to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. The Company will continue to apply APB Opinion No. 25 to its stock
based compensation awards and will disclose the required pro forma effect of
compensation costs based on the fair value of the equity instrument awarded on
net income and earnings per share.
The Company began the process of liquidating Gibson de Mexico, S.A. de C.V.
(Gibson de Mexico), its majority-owned Mexican subsidiary. In connection with
the liquidation, the Company recognized a pretax charge of $2,107 in the third
quarter to cover certain liquidation costs and recognized an income tax
benefit of $3,673. Net income increased $1,566 or $.10 per share due to the
liquidation.
Note 2 - Seasonal Nature of Business
Because of the seasonal nature of the Company's business, results of
operations for interim periods are not necessarily indicative of results for
the full year.
PAGE
<PAGE>
Note 3 - Trade Receivables
Trade receivables consist of the following:
September 30, December 31, September 30,
1996 1995 1995
---------- ---------- ----------
Trade receivables $ 75,176 $ 105,898 $ 146,271
Less reserve for returns,
allowances, cash discounts
and doubtful accounts 48,770 59,278 49,869
--------- --------- ---------
$ 26,406 $ 46,620 $ 96,402
========= ========= =========
Note 4 - Inventories
Inventories consist of the following:
September 30, December 31, September 30,
1996 1995 1995
---------- --------- ----------
Finished goods $ 56,159 $ 47,967 $ 137,004
Work-in-process 11,884 12,409 14,224
Raw materials and supplies 6,145 7,927 33,262
--------- --------- ---------
$ 74,188 $ 68,303 $ 184,490
========= ========= =========
Note 5 - Interest Expense
There was no capitalized interest for the three and nine month periods ended
September 30, 1996 and 1995.
Note 6 - Net Income (Loss) Per Share
The weighted average number of shares of common stock and equivalents
outstanding used in computing net income (loss) per share is as follows:
1996 1995
---------- ----------
Three months ended September 30, 16,293 16,272
========== ==========
Nine months ended September 30, 16,266 16,197
========== ==========
PAGE
<PAGE>
Note 7 - Condensed Consolidated Statement of Operations - Pro Forma
Three Months Ended Nine Months Ended
September 30, 1995 (1) September 30, 1995 (1)
---------------------- ----------------------
REVENUES $ 89,546 $ 269,733
--------- ---------
COSTS AND EXPENSES
Operating expenses:
Cost of products sold 38,383 100,385
Selling, distribution and
administrative expenses 45,463 142,236
--------- ---------
Total operating expenses 83,846 242,621
--------- ---------
OPERATING INCOME 5,700 27,112
--------- ---------
Financing expenses:
Interest expense 1,991 6,654
Interest income 225 -
--------- ---------
Total financing expenses,
net 2,216 6,654
--------- ---------
INCOME BEFORE INCOME TAXES 3,484 20,458
Income taxes 1,547 8,999
--------- ---------
NET INCOME $ 1,937 $ 11,459
========= =========
NET INCOME PER SHARE $ 0.12 $ 0.71
========= =========
(1) The unaudited Condensed Consolidated Statements of Operations - Pro Forma
are based upon the Statements of Operations of the Company for the three and
nine months ended September 30, 1995 and give effect to the sale in November
1995 of Cleo, Inc. (Cleo), the Company's wholly-owned gift wrap subsidiary,
as if it had occurred as of January 1, 1995 after giving effect to the pro
forma adjustments. Pro forma adjustments represent management fee allocations
including legal, tax and administrative expenses that are not expected to be
eliminated, reduction in interest expense as a result of prepayment of
short-term debt with sale proceeds and additional commitment fees on the
unused portion of the revolving credit facility and an increase in income tax
resulting from the income tax on reversal of loss on sale of Cleo net of pro
forma expenses. Senior notes were assumed not to be prepaid. The pro forma
financial data set forth above does not purport to represent what the
Company's financial position or results of operations actually would have been
if the sale, in fact, occurred on the date referred to above. This pro forma
financial data should be read in conjunction with the condensed consolidated
financial statements and notes thereto contained herein, as well as the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
PAGE
<PAGE>
Note 8 - Legal Matters
In July 1994, immediately following the Company's announcement of an inventory
misstatement at Cleo, which resulted in an overstatement of the Company's
previously reported 1993 consolidated net income, five purported class actions
were commenced by certain stockholders. These suits were consolidated and a
Consolidated Amended Class Action Complaint against the Company, its then
Chairman, President and Chief Executive Officer, its then Chief Financial
Officer and the former President and Chief Executive Officer of Cleo was filed
in October 1994 in the United States District Court for the Southern District
of Ohio (In Re Gibson Securities Litigation). In August 1996 the Court
reconsidered its prior rulings and certified the case as a class action. It
also denied the Company's motion to dismiss. The Complaint alleges violations
of the federal securities laws and seeks unspecified damages for an asserted
public disclosure of false information regarding the Company's earnings. The
Company intends to defend the suit vigorously and has filed an Answer denying
any wrongdoing and a Third Party Complaint against its former auditor for
contribution against any judgment adverse to the Company. The case currently
is scheduled to be tried in June 1997.
On April 10, 1995, two purported class action lawsuits were commenced against
the Company, its then Chairman, President and Chief Executive Officer and its
then Chief Financial Officer in the United States District Court for the
Southern District of Ohio. The Complaints alleged violations of the federal
securities law for an asserted failure to disclose allegedly material
information regarding the Company's financial performance. On August 1, 1995,
the two lawsuits were consolidated and captioned In Re Gibson Greetings
Securities Litigation II. On August 9, 1995, the plaintiffs filed a
Consolidated Amended Class Action Complaint which restated the basic claims
which had been presented in the original complaints. The Company intends to
defend the action vigorously.
The Company presently is unable to predict the effect of the ultimate
resolutions of the matters described above upon the Company's results of
operations and cash flows; as of this date, however, Management does not
expect that such resolutions would result in a material adverse effect upon
the Company's total net worth, although a substantially unfavorable outcome
could be material to such net worth.
On March 6, 1996, two purported class actions were filed against the Company's
directors (as well as certain former directors) and the Company in the New
Castle County, Delaware Court of Chancery (Crandon Capital Partners v. Cooney,
et al. and Weiss v. Lindberg, et al.). The Complaints allege that the
individual defendants breached their fiduciary duties to the plaintiffs by
refusing to negotiate in response to an acquisition proposal for the Company
by American Greetings Corporation. The Complaints seek to require the
directors to do a number of things, including pursuing merger or acquisition
discussions with American Greetings and others. The Complaints also seek
unspecified damages against those directors. On March 20, 1996, a third
action, Krim, et al. v. Pezzillo, et al., was filed in the same court. While
it generally follows the allegations and demands of the other two Complaints,
it specifically seeks injunctive relief against the exercise of the
shareholder rights plan that has been a part of the Company's corporate
governance for nearly ten years. While the Company is a named defendant in
all three actions, none of the Complaints appear to seek any other specific
relief against the Company. The defendants intend to defend the suits
vigorously.
PAGE
<PAGE>
In 1989, unfair labor practice charges were filed against the Company as an
outgrowth of a strike at its Berea, Kentucky facility (In the Matter of Gibson
Greetings, Inc. and International Brotherhood of Firemen and Oilers, AFL-CIO
Cases 9-CA-26706, 27660, 26875). On May 19, 1995, a unanimous panel of the
United States Court of Appeals for the District of Columbia Circuit found that
the strike was not an unfair labor practice strike. The Court remanded the
case to the National Labor Relations Board for a factual determination on the
issue of permanency with respect to approximately 52 replacements. On August
2, 1996 a decision was rendered dismissing the remaining charges and finding
that the strikers were permanently replaced. Since no exceptions were filed,
the decision became final and the matter has been concluded.
In addition, the Company is a defendant in certain other routine litigation
which is not expected to result in a material adverse effect on the Company's
net worth, total cash flows or operating results.
PAGE
<PAGE>
Part I., Item 2., Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
In mid-November 1995, the Company sold Cleo, Inc. (Cleo), its wholly-owned
gift wrap subsidiary. In addition to gift wrap and related products, Cleo
manufactured and sold boxed Christmas cards and Valentines. Revenues of Cleo
included in the condensed consolidated financial statements for the three and
nine months ended September 30, 1995 were $54.8 million and $72.3 million,
respectively. The results of operations for the three and nine months ended
September 30, 1995 included Cleo's results of operations. For comparative
purposes, the discussion below presents results of operations for the three
and nine months ended September 30, 1995 on a pro forma basis, excluding Cleo,
as well as on an historical basis. See Note 7 of Notes to Condensed
Consolidated Financial Statements set forth in Item 1 for certain comparative
pro forma data for the three and nine months ended September 30, 1995.
Pro Forma Results of Operations - Three Months Ended September 30, 1996
Compared with Three Months Ended September 30, 1995
Revenues in the third quarter of 1996 increased 3.4% to $92.6 million from pro
forma revenues of $89.5 million in the third quarter of 1995, reflecting
growth at The Paper Factory of Wisconsin, Inc. (The Paper Factory) and higher
greeting card sales. Domestic greeting card sales continue to be impacted by
the previously announced 1995 loss of a major greeting card customer, however,
new rooftops and increased selling prices have largely offset the impact of
this loss. Returns and allowances were 16.7% of sales for the three months
ended September 30, 1996 compared to pro forma returns and allowances of 16.5%
for the same period in 1995.
Total operating expenses were $89.4 million in the third quarter of 1996
representing a 6.7% increase from the total pro forma operating expenses of
$83.8 million in the third quarter of 1995. Cost of products sold as a
percent of revenues was 41.8% for the third quarter of 1996 versus pro forma
cost of product sold as a percent of revenues of 42.9% for the third quarter
of 1995. The decrease as a percent of revenues was primarily due to an
increase in selling price partially offset by a change in the product mix and
higher customer allowances. Selling, distribution and administrative expenses
as a percent of revenues increased to 54.8% in the third quarter of 1996 as
compared to 50.8% in the third quarter of 1995, primarily due to a one-time
charge of $2.1 million on the liquidation of Gibson de Mexico, S.A. de C.V.
(Gibson de Mexico), new store operating expenses at The Paper Factory and
increased selling and marketing expenses in the Card Division due to new
business activity. Excluding the charge for Gibson de Mexico, selling,
distribution and administrative expenses as a percent of revenues for the
third quarter of 1996 would have been 52.5%. The Company continues to face
strong competitive pressures with regard to both price and terms of sale.
Interest expense, net reflected no short-term borrowings, reduced long-term
debt and increased interest income on invested balances in the third quarter
of 1996 compared to the pro forma third quarter of 1995.
PAGE
<PAGE>
Third quarter 1996 pretax income of $2.2 million, including the loss on the
liquidation of Gibson de Mexico of $2.1 million, compared with pro forma
pretax income for 1995 of $3.5 million. The effective income tax rate,
excluding the pretax charge of $2.1 million and related income tax benefit of
$3.7 million on the loss on the liquidation of Gibson de Mexico, was 42.5% for
the third quarter of 1996 compared to a pro forma effective income tax rate of
44.4% for the third quarter of 1995.
Net income for the third quarter of 1996 was $4.1 million compared with pro
forma 1995 net income of $1.9 million. The net effect of the loss on the
liquidation of Gibson de Mexico increased net income by $1.6 million or $.10
per share.
Pro Forma Results of Operations - Nine Months Ended September 30, 1996
Compared with Nine Months Ended September 30, 1995
Revenues for the nine months ended September 30, 1996 increased 3.4% to $278.9
million from pro forma revenues of $269.7 million for the nine months ended
September 30, 1995, reflecting growth at The Paper Factory and higher
international greeting card sales. Domestic greeting card sales reflect the
previously announced 1995 loss of a major greeting card customer offset by new
rooftops and increased selling prices. Returns and allowances were 18.8% of
sales for the nine months ended September 30, 1996 compared to pro forma
returns and allowances of 18.4% for the same period in 1995.
Total operating expenses were $253.2 million for the nine months ended
September 30, 1996 representing a 4.4% increase from the total pro forma
operating expenses of $242.6 million for the nine months ended September 30,
1995. Cost of products sold as a percent of revenues was 37.4% for the nine
months ended September 30, 1996 versus pro forma cost of product sold as a
percent of revenues of 37.2% for the nine months ended September 30, 1995.
The increase was primarily due to a change in product mix and higher customer
allowances partially offset by an increase in selling price. Selling,
distribution and administrative expenses as a percent of revenues increased to
53.4% for the nine months ended September 30, 1996 as compared to 52.7% for
the nine months ended September 30, 1995, primarily due to a one-time charge
of $2.1 million on the liquidation of Gibson de Mexico, increased fees in
connection with various legal matters and the accrual of one-time contractual
termination costs and related expenses for certain of the Company's employees
combined with new store operating expenses at The Paper Factory. Excluding
the charge for Gibson de Mexico, selling, distribution and administrative
expenses as a percent of revenues for the nine months ended September 30, 1996
would have been 52.7%. The Company continues to face strong competitive
pressures with regard to both price and terms of sale.
Interest expense, net reflected lower average short-term borrowings, reduced
long-term debt and increased interest income on invested balances for the nine
months ended September 30, 1996 compared to the pro forma expense for the nine
months ended September 30, 1995.
PAGE
<PAGE>
For the nine months ended September 30, 1996 pretax income of $22.3 million,
including the loss on the liquidation of Gibson de Mexico of $2.1 million,
compared with pro forma pretax income for 1995 of $20.5 million. The
effective income tax rate, excluding the pretax charge of $2.1 million and
related income tax benefit of $3.7 million on the loss on the liquidation of
Gibson de Mexico, was 42.8% for the nine months ended September 30, 1996
compared to a pro forma effective income tax rate of 44.0% for the nine months
ended September 30, 1995.
Net income for the nine months ended September 30, 1996 was $15.5 million
compared with pro forma 1995 net income of $11.5 million. The net effect of
the loss on the liquidation of Gibson de Mexico increased net income by $1.6
million or $.10 per share.
Results of Operations - Three Months Ended September 30, 1996 Compared with
Three Months Ended September 30, 1995
Revenues in the third quarter of 1996 decreased 35.9% to $92.6 million from
revenues of $144.3 million in the third quarter of 1995 reflecting the
reduction of revenue as a result of the sale of Cleo partially offset by
growth at The Paper Factory and increased greeting card sales. Returns and
allowances were 16.7% of sales for the three months ended September 30, 1996
compared to returns and allowances of 11.9% for the same period in 1995. The
increase represents the combination of an increase in the provision for
everyday returns and a decrease in sales due to the sale of Cleo which
resulted in a greater percentage of sales subject to returns and allowances.
Total operating expenses were $89.4 million in the third quarter of 1996
representing a 36.2% decrease from the total operating expenses of $140.2
million, excluding the loss on the sale of Cleo of $82.8 million, in the third
quarter of 1995. Cost of products sold as a percent of revenues was 41.8% for
the third quarter of 1996 versus cost of product sold as a percent of revenues
of 57.2% for the third quarter of 1995. The decrease was primarily due to the
sale of Cleo which resulted in a change in the Company's product mix which now
consists of higher margin products. Selling, distribution and administrative
expenses as a percent of revenues were 54.8% for the third quarter of 1996
versus 40.0% for the third quarter of 1995 reflecting a one-time charge of
$2.1 million on the liquidation of Gibson de Mexico and new store operating
expenses at The Paper Factory, partially offset by the reduction of expenses
as a result of the sale of Cleo. The Company continues to face strong
competitive pressures with regard to both price and terms of sale.
Interest expense, net reflected no short-term borrowings, reduced long-term
debt and increased interest income on invested balances in the third quarter
of 1996 compared to the third quarter of 1995.
Third quarter 1996 pretax income of $2.2 million, including the loss on the
liquidation of Gibson de Mexico of $2.1 million, compared with pretax loss for
1995 of $81.9 million, including the loss on the sale of Cleo of $82.8
million. The effective income tax rate, excluding the pretax charge of $2.1
million and related income tax benefit of $3.7 million on the loss on the
liquidation of Gibson de Mexico, was 42.5% for the third quarter of 1996
compared to an effective income tax rate of 32.6% for the third quarter of
1995.
PAGE
<PAGE>
Net income for the third quarter of 1996 was $4.1 million compared with 1995
net loss of $55.2 million. The net effect of the loss on the liquidation of
Gibson de Mexico increased net income by $1.6 million or $.10 per share.
Results of Operations - Nine Months Ended September 30, 1996 Compared with
Nine Months Ended September 30, 1995
Revenues for the nine months ended September 30, 1996 decreased 18.5% to
$278.9 million from revenues of $342.1 million for the nine months ended
September 30, 1995 reflecting the reduction of revenue as a result of the sale
of Cleo, partially offset by growth at The Paper Factory and increased
international greeting card sales. Returns and allowances were 18.8% of sales
for the nine months ended September 30, 1996 compared to returns and
allowances of 15.6% for the same period in 1995. The increase represents the
combination of an increase in the provision for everyday returns and a
decrease in sales due to the sale of Cleo which resulted in a greater
percentage of sales subject to returns and allowances.
Total operating expenses were $253.2 million for the nine months ended
September 30, 1996 representing a 23.0% decrease from the total operating
expenses of $328.9 million, excluding the loss on the sale of Cleo of $82.8
million, for the nine months ended September 30, 1995. Cost of products sold
as a percent of revenues was 37.4% for the nine months ended September 30,
1996 versus cost of product sold as a percent of revenues of 46.5% for the
nine months ended September 30, 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 as a percent of revenues were 53.4% for the nine
months ended September 30, 1996 versus 49.6% for the nine months ended
September 30, 1995 primarily due to a one-time charge of $2.1 million on the
liquidation of Gibson de Mexico, increased fees in connection with various
legal matters and the accrual of one-time contractual termination costs and
related expenses for certain of the Company's employees combined with new
store operating expenses at The Paper Factory. The Company continues to face
strong competitive pressures with regard to both price and terms of sale.
Interest expense, net reflected lower average short-term borrowings, reduced
long-term debt and increased interest income on invested balances for the nine
months ended September 30, 1996 compared to the nine months ended September
30, 1995.
For the nine months ended September 30, 1996 pretax income of $22.3 million,
including the loss on the liquidation of Gibson de Mexico of $2.1 million,
compared with pretax loss for 1995 of $78.8 million, including the loss on the
sale of Cleo of $82.8 million. The effective income tax rate, excluding the
pretax charge of $2.1 million and related income tax benefit of $3.7 million
on the loss on the liquidation of Gibson de Mexico, was 42.8% for the nine
months ended September 30, 1996 compared to an effective income tax rate of
31.1% for the nine months ended September 30, 1995.
Net income for the nine months ended September 30, 1996 was $15.5 million
compared with 1995 net loss of $54.3 million. The net effect of the loss on
the liquidation of Gibson de Mexico increased net income by $1.6 million or
$.10 per share.
PAGE
<PAGE>
Liquidity and Capital Resources
Cash flow from operating activities for the nine months ended September 30,
1996 provided $66.7 million in cash compared to $62.4 million for the same
period in 1995. The increase from 1995 reflected an improvement in net income
partially offset by a substantial reduction in trade receivables outstanding
at the beginning of the year as a result of the disposition of Cleo. Cleo
historically comprised the largest percentage of the Company's trade
receivables at the beginning of the year. The significantly lower increase in
inventory levels from the prior year also reflects the change from the
previously necessary substantial build-up of inventory for Cleo's Christmas
season.
Cash provided by investing activities in 1996 was $4.5 million compared to
cash used in investing activities of $14.3 million in 1995. Capital
expenditures for the full 1996 fiscal year are expected to be higher than 1995
although consistent with historical trends.
Cash used in financing activities for the nine months ended September 30, 1996
was $26.1 million compared to $49.0 million in 1995. The decrease reflects
the repayment of lower short-term borrowing levels outstanding at December 31,
1995 compared to December 31, 1994.
Management believes that its cash flow from operations and credit sources will
provide adequate funds, both on a short-term and on a long-term basis, for
currently foreseeable debt payments, lease commitments and payments under
existing customer agreements, as well as for financing existing operations,
currently projected capital expenditures, anticipated long-term sales
agreements consistent with industry trends and other contingencies. (See Note
8 of Notes to Condensed Consolidated Financial Statements.)
With the sale of Cleo, the Company anticipates minimal short-term borrowing
requirements for the remainder of 1996 compared with the Company's historical
levels. As previously discussed, capital expenditures for 1996 are expected
to be consistent with historical trends for the remaining operating units.
The note receivable outstanding at December 31, 1995 received in connection
with the sale of Cleo was collected on January 29, 1996 and short-term debt at
December 31, 1995 was repaid by mid-January utilizing cash flow from
operations and proceeds from the sale of Cleo.
Except for the historical information contained herein, the matters discussed
in this report are forward-looking statements which involve risks and
uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices.
PAGE
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The information presented in Note 8 of Notes to Condensed Consolidated
Financial Statement (Part I. Item 1.) is incorporated by reference in response
to this Item.
Item 2. Changes In Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 10(A) Employment Agreement between Gibson
Greetings, Inc. and F. J. O'Connell,
dated August 25, 1996.
Exhibit 27 Financial Data Schedule (contained in
EDGAR filing only).
b) Reports on Form 8-K None.
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Gibson
Greetings, Inc. has duly caused this amended report to be signed on its behalf
by the undersigned thereunto duly authorized.
GIBSON GREETINGS, INC.
Date: November 13, 1996 By:/s/ Frank J. O'Connell
------------------------
Frank J. O'Connell
President and
Chief Executive Officer
By:/s/ Paul W. Farley
------------------------
Paul W. Farley
Assistant Treasurer
Principal Accounting Officer
PAGE
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 60713
<SECURITIES> 0
<RECEIVABLES> 75176
<ALLOWANCES> 48770
<INVENTORY> 74188
<CURRENT-ASSETS> 218222
<PP&E> 180277
<DEPRECIATION> 85864
<TOTAL-ASSETS> 418997
<CURRENT-LIABILITIES> 93157
<BONDS> 0
<COMMON> 166
0
0
<OTHER-SE> 248414
<TOTAL-LIABILITY-AND-EQUITY> 418997
<SALES> 278915
<TOTAL-REVENUES> 278915
<CGS> 104165
<TOTAL-COSTS> 253164
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5794
<INCOME-PRETAX> 22270
<INCOME-TAX> 6751
<INCOME-CONTINUING> 15519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15519
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
</TABLE>
PAGE
<PAGE>
Exhibit 10(A)
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the 25th day of August, 1996,
by and between GIBSON GREETINGS, INC., a Delaware corporation
(the "Corporation"), and FRANK J. O'CONNELL, residing in
Woodstock, Vermont ("Executive").
W I T N E S S E T H:
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WHEREAS, the Corporation desires to assure itself of
the services of Executive and Executive is willing to make his
services available to the Corporation on the terms and conditions
set forth below:
NOW, THEREFORE, in consideration of the premises and
mutual promises contained in this Agreement, IT IS AGREED:
1. Employment. The Corporation hereby employs
Executive and Executive hereby accepts employment with the
Corporation on the terms and conditions set forth in this
Agreement.
2. Term. The Term of Executive's employment
hereunder shall commence as of the date hereof. Unless sooner
terminated pursuant to Paragraph 6 hereof, Executive's employment
hereunder shall continue until December 31, 1999 (the "Term"),
which Term shall renew automatically from year to year thereafter
unless notice of an intention not to renew is given by either
party to the other at least six (6) months before the end of the
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Term or any renewal term, in which event Executive's employment
shall cease as of the end of such Term or renewal term, as
applicable.
3. Duties. Executive shall serve as, and have the
duties and responsibilities of, the President and Chief Executive
Officer of the Corporation and will, under the direction of the
Board of Directors of the Corporation (the "Board"), devote
substantially all of his working time and effort to the
performance of the duties of such offices provided, however, that
nothing herein shall prohibit Executive from participating in
charitable and other activities described in a letter to the
Corporation delivered contemporaneously herewith. The
Corporation shall take such actions as necessary to (i) elect
Executive as a Director promptly after the execution of this
Agreement and (ii) elect Executive as Chairman of the Board of
Directors not later than the time of the Corporation's next
annual meeting.
4. Compensation. Executive's compensation for the
services performed under this Agreement shall be as follows:
(a) Base Salary. Executive shall receive a base
salary of Three Hundred Fifty Thousand ($350,000) Dollars per
year (the "Base Salary"), payable in regular semimonthly
installments, which Base Salary shall be reviewed by the Board in
August of each year beginning with 1997 for possible increases.
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(b) Incentive Compensation. In addition to Base
Salary, Executive shall earn incentive compensation ("Incentive
Compensation") as follows:
(i) in respect of fiscal year 1996, a signing
bonus of Two Hundred Thousand ($200,000) Dollars payable on
the commencement of Executive's employment hereunder;
(ii) in respect of fiscal year 1997 and each
fiscal year thereafter during the Term or any renewal term
of this Agreement (provided Executive has served as
President and Chief Executive Officer for part or all of
such fiscal year), a payment, to be made on or before each
April 1 of the succeeding year, based upon the percentage
increase in the Corporation's operating income for such
fiscal year (on a consolidated basis using generally
accepted accounting principles consistently applied) over
the operating income of the previous fiscal year (but
disregarding, in each case, extraordinary revenues or
extraordinary costs and expenses), with no payment if the
growth rate is less than five (5%) percent and with a
payment equal to thirty-six (36%) percent of base salary for
operating income growth of five (5%) percent, increasing
proportionately thereafter to a payment equal to one hundred
forty-three (143%) percent of base salary for operating
income growth of fifteen percent (15%) or more. Nothing
herein shall prohibit the Board from granting in its
discretion additional incentive compensation to Executive if
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a percentage increase exceeds 15% or otherwise. If the
operating income as computed above for any previous base
measuring year is less than the operating income for the
fiscal year ended December 31, 1996 in the Corporation's
audited financial statements (the "Base Operating Income"),
then the operating income for such previous year shall be
deemed to be the Base Operating Income for purposes of the
calculation hereunder.
(c) Stock Options. Effective on the date of the
commencement of Executive's employment hereunder, Executive shall
be granted one or more non-qualified stock options (each a "Stock
Option") to purchase an aggregate of 1,000,000 shares of common
stock of the Corporation, par value $.01 per share (the "Common
Stock"), to be issued under, and pursuant to the terms of, the
Corporation's 1989 and 1991 Stock Incentive Plans (each a "Stock
Plan") (but in no event will any portion of a Stock Option be
exercisable if such exercise would result in an issuance of
shares in excess of the maximum number of shares available under
such Stock Plans). The Stock Options granted hereby will have
the following exercise schedule and exercise prices, and each
such Stock Option will become exercisable, except as otherwise
provided therein, only if Executive is a full time employee of
the Corporation on the dates set forth below with respect to such
Stock Option:
(i) 400,000 shares of Common Stock,
exercisable on and after the date of the commencement of
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<PAGE>
Executive's employment hereunder, with an exercise price per
share equal to the fair market value of the Common Stock on
such date (the "Grant Date FMV").
(ii) 300,000 shares of Common Stock,
exercisable on and after the date that is one (1) year from
the date of the commencement of Executive's employment
hereunder, with an exercise price per share equal to the
Grant Date FMV plus $2.
(iii) 300,000 shares of Common Stock,
exercisable on and after the date that is two (2) years from
the date of the commencement of Executive's employment
hereunder, with an exercise price per share equal to (x) the
Grant Date FMV plus $3 with respect to the first 200,000 of
such shares of Common Stock and (y) the Grant Date FMV plus
$4 with respect to the remaining 100,000 shares of Common
Stock.
All such Stock Options shall expire ten (10)
years from the date of the grant of the Stock Options, subject to
the other terms and conditions of the applicable Stock Option
Agreements and Stock Plans.
The Corporation also has advised Executive
that as of the date of this Agreement, the Corporation's 1989 and
1991 Stock Incentive Plans have insufficient shares available for
issuance to satisfy the full 1,000,000 share Stock Option grant
to Executive (750,000 shares of Common Stock are currently
available to satisfy this grant to Executive). The Corporation
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agrees to use its best efforts to take steps to obtain the
approval of its shareholders at the next annual meeting of
shareholders to amend the existing Stock Plans to increase the
number of shares available pursuant thereto such that there shall
be a sufficient number of available shares to provide Executive
with the economic benefit of the Stock Options. In the event
that the necessary shareholder approval is not received, then
Executive's sole and exclusive remedy, provided the Corporation
has used its best efforts, shall be the right, for a period of up
to 60 days following the date of such annual meeting of
shareholders (which meeting shall occur no later than June 30,
1997), to terminate this Agreement upon 30 days advance written
notice given at any time during such 60 day period, and Executive
shall not have the right to assert a claim for damages,
injunctive relief or any other relief in law or equity.
Notwithstanding the foregoing, in the event Executive exercises
his right to terminate this Agreement pursuant to the provisions
of this Paragraph 4(c), Executive shall be paid his pro-rata
portion (based on the number of days of employment in 1997) of
the amount of Incentive Compensation payable with respect to 1997
in accordance with the terms of Paragraph 4(b), and Executive
shall be entitled to receive all compensation and other benefits
under Paragraphs 4(a), 4(b) and 5(a)-(h) accruing through the
date of termination.
5.Fringe Benefits.
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(a) Vacation. Executive shall be entitled to
four (4) weeks of paid vacation annually.
(b) Club Memberships. The Corporation shall pay
all of Executive's dues (including initiation dues) and
membership assessments for such club or clubs which membership(s)
are determined by the Board to be useful in connection with
Executive's duties on behalf of the Corporation. The Corporation
also shall reimburse Executive for all expenses incurred by
Executive at such clubs on behalf of the Corporation.
(c) Reimbursement for Reasonable Business
Expenses. The Corporation shall reimburse Executive for
reasonable expenses incurred by him in connection with the
performance of his duties pursuant to this Agreement, including,
but not limited to, travel expenses, expenses in connection with
seminars, professional conventions or similar professional
functions and other reasonable business expenses.
(d) Automobile. The Corporation shall provide
Executive with full use of a luxury automobile (e.g. Cadillac,
STS, or motor vehicle of comparable cost), owned or leased by the
Corporation, for use in carrying out his duties for the
Corporation and otherwise. The Corporation agrees to provide
adequate liability and collision insurance for the automobile,
protecting the Executive and the Corporation, and to pay all
lease, maintenance and operating costs appropriate or necessary
to maintain and operate such automobile in prime condition.
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(e) Generally. Executive shall be eligible to
participate in such health, welfare and other fringe benefits as
are currently available (and as may be made available in the
future) to other senior executive-level employees of the
Corporation.
(f) Relocation Expenses. The Corporation shall
promptly (i) reimburse Executive for the travel expenses and, for
a period ending 60 days from the date hereof (renewable for up to
an additional 60 days if needed, based on Executive's statement
that he is actively seeking permanent housing) temporary living
expenses, including lodging and food, previously or hereafter
incurred by him or his family in connection with the move to the
Cincinnati, Ohio area and (ii) provide Executive with a one-time
payment of $200,000 for all of Executive's other relocation and
moving expenses relating hereto, including any loss on the sale
of Executive's home in North Carolina, payable upon the
commencement of Executive's employment hereunder.
(g) Life and Disability Insurance. The
Corporation shall provide Executive with life insurance (not less
than $600,000) and disability insurance in accordance with the
Corporation's general policies.
(h) Supplemental Retirement Benefits. The
Corporation shall provide Executive with a supplemental
retirement benefit to be mutually agreed upon and implemented by
December 31, 1996.
6. Termination of Employment.
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<PAGE>
(a) Termination for Disability. If during the
Term or any renewal term of employment set forth in Paragraph 2
Executive shall be unable to perform his duties hereunder on
account of illness or other incapacity, and such illness or other
incapacity shall continue for a period of more than six (6)
months in any twelve-month period, the Corporation shall
thereafter have the right to terminate Executive's employment
prior to conclusion of the Term or renewal term set forth in
Paragraph 2. In the event of termination of employment under
this Paragraph 6(a), all compensation and other benefits accruing
after such date of termination pursuant to Paragraphs 4(a), 4(b)
and 5(a)-(h) of this Agreement shall terminate on the date of
employment termination, provided:
(1) Incentive Compensation under Paragraph
4(b) with respect to the fiscal year immediately preceding
the year in which employment termination occurs shall be
paid Executive if it has not been paid by the time of
termination and a pro-rata portion (based on the number of
days of employment in the year of termination) of the amount
of Incentive Compensation payable with respect to the fiscal
year in which employment termination occurs;
(2) Outstanding Stock Options granted
pursuant to Paragraph 4(c) which are exercisable at the time
of Executive's termination for disability shall be
exercisable in accordance with the terms of the applicable
Stock Option agreements and Stock Plans;
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<PAGE>
(3) Semi-monthly installments of Base Salary
under Paragraph 4(a) shall be continued for a period of 3
full months after termination but not beyond the Term or
renewal term of employment set forth in Paragraph 2; and
(4) Medical and health coverage to the
extent provided under Paragraph 5(e) shall be continued (at
the Corporation's expense) for a period of six (6) months
after termination.
(b) Termination for Death. In the event of
Executive's death during the Term or any renewal term of
employment set forth in Paragraph 2, all compensation and other
benefits accruing after such date of termination pursuant to
Paragraphs 4(a), 4(b) and 5(a)-(h) of this Agreement shall
terminate on the date of death, provided:
(1) Incentive Compensation under Paragraph
4(b) with respect to the fiscal year immediately preceding
the year in which death occurs shall be paid Executive's
estate if it has not been paid by the time of termination
and a pro-rata portion (based on the number of days of
employment in the year of termination) of the amount of
Incentive Compensation payable with respect to the fiscal
year in which employment termination occurs;
(2) Outstanding Stock Options granted
pursuant to Paragraph 4(c) which are exercisable at the time
of Executive's death shall be exercisable in accordance with
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<PAGE>
the terms of the applicable Stock Option agreements and
Stock Plan;
(3) Semi-monthly installments of base salary
under Paragraph 4(a) shall be paid to Executive's wife or,
if deceased, to his estate for a period of three (3) full
months after death but not beyond the Term or renewal term
of employment set forth in Paragraph 2; and
(4) Medical and health coverage to the
extent provided under Paragraph 5(e) shall be continued (at
the Corporation's expense) for Executive's wife and family,
if living, for a period equal to six (6) months.
(c) Termination for Just Cause. During the Term
or any renewal term of employment set forth in Paragraph 2, the
Corporation shall be entitled to terminate Executive's Employment
at any time for Just Cause upon written notice to Executive. For
the purposes of this Agreement, "Just Cause" shall mean
intentional dishonest conduct, intentional willful misconduct or
intentional fraud by Executive in administering the affairs of
the Corporation, conviction of a felony, Executive's material
breach of any of Executive's material agreements or covenants set
forth in this Agreement or Executive's gross negligence in the
performance of Executive's duties under this Agreement and
Executive's failure to remedy or discontinue such breach or gross
negligence within 30 days after written notice from the Board of
Directors specifying such breach or gross negligence. With
respect to the definition of Just Cause, an act, or failure to
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<PAGE>
act, on the part of the Executive shall be deemed "intentional"
only if done, or omitted to be done, by the Executive not in good
faith and without reasonable belief that his action or omission
was in, or not opposed to, the best interest of the Corporation.
Failure to meet performance standards or objectives of the
Corporation shall not constitute Just Cause for purposes hereof.
In the event of termination of employment under this Paragraph
6(c), all compensation and other benefits accruing after such
date of termination pursuant to Paragraphs 4(a), 4(b) and 5(a)-
(h) of this Agreement shall terminate on the date of employment
termination, provided:
(1) Incentive Compensation under Paragraph
4(b) with respect to the fiscal year immediately preceding
the year in which employment termination occurs shall be
paid Executive if it has not been paid by the time of
termination and Executive shall receive no Incentive
Compensation with respect to the year of termination; and
(2) Outstanding Stock Options granted
pursuant to Paragraph 4(c) which are exercisable at the time
of Executive's termination shall be exercisable in
accordance with the terms of the applicable Stock Option
agreements and Stock Plan.
(d) Termination without Just Cause. During the
Term or any renewal term of employment set forth in Paragraph 2,
the Corporation shall be entitled to terminate Executive's
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employment upon written notice to Executive for any reason and
without meeting the standards of Just Cause set forth in
Paragraph 6(c) above. In the event of termination of employment
under this Paragraph 6(c), all compensation and other benefits
accruing after such date of termination pursuant to Paragraphs
4(a), 4(b) and 5(a)-(h) of this Agreement shall terminate on the
date of employment termination, provided:
(1) Incentive Compensation under Paragraph
4(b) with respect to the fiscal year immediately preceding
the year in which employment termination occurs shall be
paid Executive if it has not been paid by the time of
termination;
(2) All outstanding Stock Options granted
pursuant to Paragraph 4(c) shall become immediately
exercisable; and
(3) Executive as and for severance pay shall
be paid (i) on the date of such termination, three (3) years
of Base Salary then being received pursuant to paragraph
4(a) plus (ii) a pro-rata portion (based on the number of
days of employment in the year of termination) of the amount
of Incentive Compensation paid or payable with respect to
the fiscal year in which employment termination occurs,
payable at the time provided by Paragraph 4(b); provided
however that if such termination occurs before January 1,
1998, the amount payable pursuant to clause (ii) shall be
75% of Executive's Base Salary immediately prior to such
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termination and shall be paid on the date of such
termination.
(e) Termination by Executive for Good Reason.
During the Term or any renewal term of employment set forth in
Paragraph 2, the Executive shall be entitled to terminate his
employment upon written notice to the Corporation for Good
Reason. For purposes of this Paragraph 6(e), "Good Reason" shall
mean a reduction in Executive's titles as President and Chief
Executive Officer and, commencing immediately after the next
annual shareholders meeting, Chairman of the Board of Directors;
a material reduction in Executive's duties or responsibilities
hereunder; the relocation of the Corporation's principal
executive offices to a location more than 25 miles from
Cincinnati, Ohio; or the Corporation's material breach of any of
the Corporation's material agreements or covenants set forth in
this Agreement, which breach shall not have been remedied or
discontinued within 30 days after written notice by Executive
specifying such breach to the Corporation. In the event of
termination of employment under this Paragraph 6(e), all
compensation and other benefits accruing after such date of
termination pursuant to Paragraphs 4(a), 4(b) and 5(a)-(h) of
this Agreement shall terminate on the date of employment
termination, provided:
(1) Incentive Compensation under Paragraph
4(b) with respect to the fiscal year immediately preceding
the year in which employment termination occurs shall be
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paid Executive if it has not been paid by the time of
termination;
(2) All outstanding Stock Options granted
pursuant to Paragraph 4(c) shall become immediately
exercisable; and
(3) Executive as and for severance pay shall
be paid (i) on the date of such termination, three (3) years
of Base Salary then being received pursuant to paragraph
4(a) plus (ii) a pro-rata portion (based on the number of
days of employment in the year of termination) of the amount
of Incentive Compensation paid or payable with respect to
the fiscal year in which employment termination occurs,
payable at the time provided by Paragraph 4(b); provided
however that if such termination occurs before January 1,
1998, the amount payable pursuant to clause (ii) shall be
75% of Executive's Base Salary immediately prior to such
termination and shall be paid on the date of such
termination.
(f) Failure to Renew Employment Agreement. In
the event this Employment Agreement is not renewed in accordance
with the terms of Paragraph 2 hereof all compensation and other
benefits accruing after such date of termination pursuant to
Paragraphs 4(a), 4(b) and 5(a)-(h) of this Agreement shall
terminate on the date employment ceases, provided:
(1) Incentive Compensation under Paragraph
4(b) with respect to the fiscal year in which the notice of
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<PAGE>
non-renewal is given shall be paid Executive in accordance
with the provisions of Paragraph 4(b);
(2) Outstanding Stock Options granted
pursuant to Paragraph 4(c) which are exercisable at the time
of the expiration of Executive's employment shall be
exercisable in accordance with the terms of the applicable
Stock Option agreements and Stock Plan; and
(3) In the event the failure to renew is a
result of the Corporation giving Executive notice of non-
renewal under Paragraph 2, Executive will be paid an amount
equal to Executive's Base Salary then in effect (payable two
(2) business days after the date employment ceases) and
medical and health coverage, to the extent provided under
Paragraph 5(e), shall be continued (at the Corporation's
expense) for a period of 6 full months after the date
employment ceases.
7. Change of Control.
(a) In General. In the event that during the
Term or any renewal term of employment set forth in Paragraph 2
(i) Executive voluntary terminates employment no sooner than
thirty (30) but not later than sixty (60) days after a Change in
Control (as hereinafter defined) or (ii) the Corporation
terminates Executive's employment within one (1) year after a
Change in Control, but excepting termination of employment
pursuant to Paragraphs 6(a), (b) and (c) hereof, then the
Corporation shall pay to Executive, within three (3) business
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<PAGE>
days following Executive's termination, the sum of 2.99 times the
sum of (A) Executive's annual Base Salary in effect immediately
prior to such Change in Control and (B) Executive's average
annual Incentive Compensation computed for the period after the
fiscal year ending December 31, 1996. In addition, if a Change
in Control occurs, all the unexercisable Stock Options previously
granted and available for exercise by Executive hereunder shall
become immediately exercisable, and if Executive's employment is
terminated thereafter in accordance with the preceding sentence,
Executive shall be entitled to all other benefits generally
available to senior executives of the Corporation after
termination of employment (excluding severance, if any). The
foregoing payments and benefits shall be in lieu of all other
severance, termination, unexercisable Stock Options, future stock
awards, unpaid or future Incentive Compensation and continuing
pay benefits to which Executive would be entitled under this
Agreement or otherwise.
Notwithstanding the foregoing, in the event
that Executive's termination pursuant to this paragraph 7(a)
occurs in 1996 or 1997, the amount of Incentive Compensation used
in Clause (B) of the foregoing payment formula shall be (x)
$87,500 if the termination occurs in 1996 or (y) a pro-rata
portion (based on the number of days of employment in 1997) of
the amount of Incentive Compensation payable with respect to 1997
(payable in accordance with the terms of paragraph 4(b)) if the
termination occurs in 1997.
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A Change in Control as used herein shall be
deemed to have occurred if the conditions set forth in any one of
the following subparagraphs shall have been satisfied:
(1) Any Person is or becomes the Beneficial
Owner ("Beneficial Owner"), as defined in Rule 13d-3 of the
Securities Exchange Act of 1934, as amended from time to
time ("Exchange Act"), directly or indirectly, of securities
of the Corporation representing 50% or more of the combined
voting power of the Corporation's then outstanding
securities; or
(2) If any action relating to termination is
taken by the Corporation pursuant to the request or
direction of any Person who by agreement, whether actual,
implied or otherwise, will become a Beneficial Owner with
ownership as described in (1) above, or pursuant to the
request or direction of any Person who requests or directs
such action as a condition to becoming a Beneficial Owner
with ownership as described in (1) above, then a Change in
Control shall be deemed to have occurred with respect to
such action and to have preceded such action; or
(3) During any period of two consecutive
years (not including any period prior to the execution of
this Agreement), individuals who at the beginning of such
period constitute the Board and any new director (other than
a director designated by a Person who has entered into an
agreement with the Corporation, to effect a transaction
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described in clause (1), (4) or (5) of this definition)
whose election by the Board or nomination for election by
the Corporation's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office
who either were directors at the beginning of the period or
whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority of
the Board; or
(4) The stockholders of the Corporation
approve a merger or consolidation of the Corporation with
any other corporation, other than (a) a merger or
consolidation which would result in the voting securities of
the Corporation outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving
entity or any parent thereof), in combination with the
ownership of any trustee or other fiduciary holding
securities prior to such merger or consolidation under an
employee benefit plan of the Corporation at least 50% of the
combined voting power of the voting securities of the
Corporation or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation,
or (b) a merger or consolidation effected to implement a
recapitalization of the Corporation (or similar transaction)
in which no Person acquires more than 50% of the combined
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voting power of the Corporation's then outstanding
securities; or
(5) The stockholders of the Corporation
approve a plan of complete liquidation of the Corporation or
an agreement for the sale or disposition by the Corporation
of all or substantially all the Corporation's assets.
As used in this Paragraph, "Person" shall
have the meaning given in Section 3(a)(9) of the Exchange Act, as
modified and used in Sections 13(d) and 14(d) thereof; however, a
Person shall not include (i) the Corporation or any of its
subsidiaries, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Corporation or
any of its subsidiaries, which held stock of the Corporation
prior to the Change in Control, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or
(iv) a corporation owned, directly or indirectly, both
immediately before and immediately after the Change of Control
event, by the stockholders of the Corporation in substantially
the same proportions as their ownership of stock of the
Corporation.
(b) Limitation on Payments. Notwithstanding
anything in Paragraph 7(a) to the contrary, if any of the
benefits payable to the Executive as a result of a Change in
Control constitute Parachute Payments, the following provisions
shall apply. If the Threshold Amount is less than (x) the
Parachute Payments but greater than (y) the Parachute Payments
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reduced by the sum of (i) the Excise Tax and (ii) the total of
the Federal, state and local income and employment taxes on the
amount of the Parachute Payments in excess of the Threshold
Amount, then the benefits payable under Paragraph 7(a) of this
Agreement shall be reduced (but not below zero) to the extent
necessary so that the maximum Parachute Payments shall not exceed
the Threshold Amount. In all other circumstances the Executive
shall be entitled to the full benefits payable under Paragraph
7(a) of this Agreement. The Executive shall select a firm of
independent certified public accountants to determine which of
the foregoing provisions shall apply, and such determination
shall be binding on the parties hereto. For the purposes of this
Paragraph 7, "Parachute Payments" shall mean any payment or
provision by the Corporation of any amount or benefit to and for
the benefit of the Executive, whether paid or payable or provided
or to be provided under the terms of this Agreement or otherwise,
that would be considered "parachute payments" within the meaning
of Section 280G(b)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code") and the regulations promulgated thereunder;
"Threshold Amount" shall mean three times the Executive's "base
amount" within the meaning of Section 280G(b)(3) of the Code and
the regulations promulgated thereunder, less one dollar; and
"Excise Tax" shall mean the excise tax imposed by Section 4999 of
the Code.
8. Noncompetition. The Corporation and Executive
agree that the Corporation's customer contacts and relations are
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established and maintained at great expense and that Executive by
virtue of employment under this Agreement, will have unique and
extensive exposure to the Corporation's customers and that he
will be able to establish a unique relationship with those
customers and the opportunity, both during and after employment,
to unfairly compete with the Corporation (which term, for
purposes of this Paragraph 8, shall include the Corporation, or
any affiliate or subsidiary of the Corporation which provides
similar products and services). Therefore, Executive and the
Corporation agree as follows:
(a) During Term of Employment. During the Term
or renewal term of his employment, Executive agrees that he shall
not, directly or indirectly, either individually or as an
employee, agent, partner, shareholder, consultant or in any other
capacity participate in, engage in or have an ownership interest
in any business that competes with the Corporation's Business.
The "Corporation's Business" shall mean the business of the
Corporation and its subsidiaries of selling greeting cards and
gift wrapping. The ownership of an interest constituting not
more than two (2%) percent of the outstanding debt or equity in a
corporation the shares of which are traded on a recognized stock
exchange or trade in the over-the-counter market, even though
that corporation may be a competitor of the Corporation, shall
not be deemed financial participation in a competitor.
(b) Upon Termination of Employment. Executive
agrees that, for a period of one (1) year after the termination
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of his employment with the Corporation, he will not, directly or
indirectly, individually or as an employee, agent, partner,
shareholder, consultant or in any other capacity, canvass,
contact, solicit or accept on behalf of himself or any other
corporation, any customers of the Corporation, for the purpose of
providing services, products or business competitive with those
then being provided by the Corporation nor shall Executive during
said one (1) year period solicit or otherwise induce any then
employee of the Corporation to leave his or her employment with
the Corporation.
9. Confidential Information. During the Term of this
Agreement or any renewal term and at all times subsequent
thereto, Executive shall keep secret and shall not exploit or
disclose or make accessible to any person or entity, except in
furtherance of the business of the Corporation, and except as may
be required by law or legal process, any confidential business
information of any type relating to the business of the
Corporation that was acquired or developed by either the
Corporation or any of its subsidiaries or affiliates, or
Executive, prior to or during the Term or renewal term. In
addition, the term "confidential business information" shall not
include information which (i) is or becomes generally available
to the public other than as a result of a disclosure by
Executive; or (ii) was available to Executive prior to any
employment by the Corporation.
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10. Relief. Executive acknowledges that the
provisions of Paragraphs 8 and 9 of this Agreement are reasonable
and necessary for the protection of the Corporation and that the
corporation will be irreparably damaged if such covenants are not
specifically enforced. Accordingly, it is agreed that the
Corporation will be entitled to injunctive relief for the purpose
of restraining Executive from violating such covenants (and no
bond or other security shall be required in connection
therewith), in addition to any other relief to which the
Corporation may be entitled.
11. Sale, Consolidation or Merger. In the event of a
sale of the stock of the Corporation, or consolidation or merger
of the Corporation with or into another corporation or entity, or
the sale of substantially all of the operating assets of the
Corporation to another corporation, entity or individual, the
Corporation's successor-in-interest shall be deemed to have
assumed all liabilities of the Corporation under this Agreement
but the Corporation shall not be relieved of any of its
obligations hereunder.
12. Waiver. The failure of any party to insist, in
any one or more instances, upon performance of the terms or
conditions of this Agreement shall not be construed as a waiver
or a relinquishment of any right granted hereunder or of the
future performance of any such terms, covenant or condition.
13. Notices. Any notice to be given hereunder shall
be deemed sufficient if addressed in writing, and delivered by
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registered or certified mail or delivered personally, in the case
of the Corporation, to its principal business office with a copy
to Taft, Stettinius & Hollister, 1800 Star Bank Center, 425
Walnut Street, Cincinnati, Ohio 45202-2957, Attention: Charles D.
Lindberg, Esq., and in the case of Executive, to his address
appearing on the records of the Corporation or to such other
addresses as he may designate in writing to the Corporation with
a copy to Goodwin, Procter & Hoar LLP, Exchange Place, Boston,
Massachusetts 02109, Attention: Stephen W. Carr, P.C.
14. Severability. In the event that any provision of
this Agreement shall be held to be invalid or unenforceable for
any reason whatsoever, it is agreed such invalidity or
unenforceability shall not affect any other provision of this
Agreement, the remaining covenants, restrictions and provisions
hereof shall remain in full force and effect and any court of
competent jurisdiction may so modify the objectionable provision
as to make it valid, reasonable and enforceable.
15. Amendment. This Agreement may be amended only by
an agreement in writing signed by the parties hereto.
16. Entire Agreement. This Agreement contains the
entire agreement of the parties with respect to Executive's
employment by the Corporation and supersedes any prior or
simultaneous agreements between them, whether oral or written.
17. Governing Law. This Agreement shall be governed
by and construed and enforced in accordance with the laws of the
State of Ohio.
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18. Benefit. This Agreement shall be binding upon and
inure to the benefit of and shall be enforceable by and against
the Corporation, its successors and assigns, and Executive, his
heirs, beneficiaries and legal representatives. It is agreed
that the rights and obligations of Executive may not be delegated
or assigned except as specifically set forth in this Agreement.
19. Attorneys' Fees. Executive's reasonable
attorneys' fees incurred in connection with the negotiation of
the terms of this Agreement shall be paid by the Corporation.
IN WITNESS WHEREOF, the parties hereto have executed or
caused this Agreement to be executed as of the day, month and
year first above written.
GIBSON GREETINGS, INC.
("Corporation")
By:/s/ Albert R. Pezzillo
-----------------------
ALBERT R. PEZZILLO
Chairman of the Board
/s/ Frank J. O'Connell
--------------------------
FRANK J. O'CONNELL
("Executive")
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