<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
X
- -----------------
For the quarterly period ended May 31, 1997
-------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
- -----------------
For the transition period from to
--------------------- --------------------------
Commission file number 0-502
----------
AMERICAN GREETINGS CORPORATION
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0065325
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One American Road, Cleveland, Ohio 44144
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 252-7300
--------------------------------------------------
Registrant's telephone number, including area code
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
-------- ----------
As of May 31, 1997, the date of this report, the number of shares outstanding of
each of the issuer's classes of common stock was:
Class A Common 70,850,213
Class B Common 4,391,286
<PAGE> 2
<TABLE>
<CAPTION>
AMERICAN GREETINGS CORPORATION
INDEX
Page
Number
------
<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements............................................................................1
Item 2. Management's Discussion and Analysis............................................................6
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings...............................................................................8
Item 5. Other Information ............................................................................. 8
Item 6. Exhibits and Reports on Form 8-K................................................................9
SIGNATURES....................................................................................................... 9
- ----------
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
May 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 475,059 $ 438,212
Other income 2,277 1,915
----------- -----------
Total revenue 477,336 440,127
Costs and expenses:
Material, labor and other production costs 161,474 154,667
Selling, distribution and marketing 204,990 181,791
Administrative and general 58,868 54,317
Interest 5,808 7,590
----------- -----------
Total costs and expenses 431,140 398,365
----------- -----------
Income before income taxes 46,196 41,762
Income taxes 15,937 13,990
----------- -----------
Net income $ 30,259 $ 27,772
=========== ===========
Net income per share $ 0.40 $ 0.37
=========== ===========
Dividends per share $ 0.17 $ 0.16
=========== ===========
Average number of common shares outstanding 75,127,722 74,735,967
</TABLE>
See notes to consolidated financial statements.
Page 1
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AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
May 31, 1997 Feb. 28, 1997 May 31, 1996
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 53,263 $ 35,050 $ 42,970
Trade accounts receivable, less allowances
of $93,762, $137,120 and $113,444, respectively
(principally for sales returns) 351,112 375,324 352,691
Total inventories 340,747 303,611 376,471
Deferred income taxes 87,322 100,732 88,340
Prepaid expenses and other 191,419 190,174 156,599
---------- ---------- ----------
Total current assets 1,023,863 1,004,891 1,017,071
Other assets 646,240 667,442 611,930
Property, plant and equipment - at cost 925,285 920,194 867,846
Less accumulated depreciation 468,082 457,407 421,280
---------- ---------- ----------
Property, plant and equipment - net 457,203 462,787 446,566
---------- ---------- ----------
$2,127,306 $2,135,120 $2,075,567
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 170,538 $ 133,171 $ 228,994
Accounts payable and accrued liabilities 157,166 157,628 132,183
Accrued compensation and benefits 50,644 82,569 57,157
Income taxes 4,395 5,475 8,403
Other current liabilities 38,494 63,900 70,525
---------- ---------- ----------
Total current liabilities 421,237 442,743 497,262
Long-term debt 215,838 219,639 235,224
Other liabilities 62,426 67,839 46,812
Deferred income taxes 43,190 43,244 44,863
Shareholders' equity 1,384,615 1,361,655 1,251,406
---------- ---------- ----------
$2,127,306 $2,135,120 $2,075,567
========== ========== ==========
</TABLE>
Page 2
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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
May 31,
------------------------
1997 1996
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES: $ 30,259 $ 27,772
Net income
Adjustments to reconcile to net cash
provided (used) by operating
activities:
Depreciation 16,684 15,857
Deferred income taxes 13,371 14,346
Change in operating assets and liabilities (59,558) (128,338)
Other - net 1,960 1,898
-------- ---------
Cash Provided (Used) by Operating Activities 2,716 (68,465)
INVESTING ACTIVITIES:
Property, plant & equipment additions (13,376) (23,324)
Investment in corporate-owned life insurance 3,979 6,876
Other - net (1,620) (3,670)
-------- ---------
Cash Used by Investing Activities (11,017) (20,118)
FINANCING ACTIVITIES:
Increase in long-term debt 11,412 8,917
Reduction of long-term debt (1,188) (6,924)
Increase in short-term debt 24,922 110,539
Sale of stock under benefit plans 4,460 1,361
Purchase of treasury shares (305) (513)
Dividends to shareholders (12,787) (11,957)
-------- ---------
Cash Provided by Financing Activities 26,514 101,423
-------- ---------
INCREASE IN CASH AND EQUIVALENTS 18,213 12,840
Cash and Equivalents at Beginning of Year 35,050 30,130
-------- ---------
Cash and Equivalents at End of Period $ 53,263 $ 42,970
======== =========
</TABLE>
See notes to consolidated financial statements.
Page 3
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AMERICAN GREETINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of dollars)
Three Months Ended May 31, 1997 and 1996
Note A - Basis of Presentation
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q. Although they are unaudited, the Corporation believes
that all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the results of operations have been made.
Note B - Seasonal Nature of Business
The Corporation's business is seasonal in nature. Therefore, the results of
operations for interim periods are not necessarily indicative of the results for
the fiscal year taken as a whole.
Note C - Inventories
Components of inventories are as follows:
<TABLE>
<CAPTION>
May 31, 1997 February 28, 1997 May 31, 1996
------------ ----------------- ------------
<S> <C> <C> <C>
Raw materials $ 43,298 $ 48,299 $ 53,368
Work in process 52,572 47,113 58,308
Finished products 292,830 253,096 312,873
-------- -------- --------
388,700 348,508 424,549
Less LIFO reserve 90,703 89,061 93,002
-------- -------- --------
297,997 259,447 331,547
Display materials and factory supplies 42,750 44,164 44,924
-------- -------- --------
Inventories $340,747 $303,611 $376,471
======== ======== ========
</TABLE>
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Note D - Deferred Costs
Deferred costs relating to agreements with certain customers are charged to
operations on a straight-line basis over the effective period of each agreement,
generally three to six years. Deferred costs estimated to be charged to
operations during the next year are classified with prepaid expenses and other.
Total commitments under the agreements are capitalized as deferred costs and
future payment commitments, if any, are recorded as liabilities when the
agreements are consummated.
As of May 31, 1997, February 28, 1997 and May 31, 1996 deferred costs and future
payment commitments are included in the following financial statement captions:
<TABLE>
<CAPTION>
May 31, 1997 February 28, 1997 May 31, 1996
------------ ----------------- ------------
<S> <C> <C> <C>
Prepaid expenses and other $ 158,844 $ 161,601 $ 125,498
Other assets 445,761 464,599 429,425
Other current liabilities (25,703) (51,153) (58,544)
Other liabilities (48,951) (54,199) (31,135)
--------- --------- ---------
$ 529,951 $ 520,848 $ 465,244
========= ========= =========
</TABLE>
Note E - Stock Options
The Corporation has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options and intends to continue to do so.
Because the exercise price of the Corporation's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Note F - Earnings Per Share
Income per share information is based on the average number of shares
outstanding during each year. For the years presented, stock options do not have
a material dilutive effect. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard No. 128 "Earnings Per
Share". This statement simplifies the standards for computing earnings per share
("EPS") and makes them comparable to international EPS standards. The
Corporation plans to adopt this standard, as required, in fiscal year 1998. The
Corporation is currently analyzing the effect of adopting the Statement.
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Part 1., Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------
Results of Operations
- ---------------------
Net sales of $475.1 million for the first quarter ended May 31, 1997 were up
8.4% over the same period in the prior year. The increase was due primarily to
sales of everyday cards and accessories and other non-card products. Unit sales
of greeting cards decreased 1% from the same period in the prior year.
Material, labor and other production costs were 34.0% of net sales for the
quarter, down from 35.3% in the prior year. These improvements were due to
generally overall improved cost controls.
Selling, distribution and marketing expenses were 43.2% of net sales for the
quarter, up from 41.5% in the same period in the prior year. The increase is due
to competitive costs and the timing of field sales costs.
Administrative and general expenses were $58.9 million for the quarter, up from
$54.3 million for the same period in the prior year due primarily to the timing
of expenses, and to a lesser extent, some costs associated with the conversion
of information systems to be year 2000 compliant. The Corporation has
established a task force to coordinate the identification, evaluation and
implementation of changes to computer systems and applications necessary to
ensure that the systems and applications will recognize and process the year
2000 and beyond. Major areas of potential business impact have been identified
and project plans, which may include the replacement of certain systems, are
underway.
Interest expense decreased from the prior year by $1.8 million for the quarter
due primarily to lower borrowing requirements resulting from the strong cash
flow provided by operating activities.
The effective tax rate for the quarter was 34.5%, up from 33.5% in the prior
year due to the decreased tax benefit from the corporate owned life insurance
program.
Liquidity and Capital Resources
- -------------------------------
The seasonality of the Corporation's business precludes a useful comparison of
the current period and the year-end financial statements; therefore, a Statement
of Financial Position for May 31, 1996 has been included.
Operations provided $2.7 million for the first three months, a $71.2 million
improvement from the $68.5 million cash use for the same period last year. This
improvement was due to the increase in net income, the improvement in
receivables, improved management of payables, and reduced growth of deferred
costs.
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Accounts receivable decreased $23.1 million from February 28, 1997, compared to
no change during the same period in the prior year, reflecting strong
collections. Net accounts receivable were 16.0% of the prior twelve months'
sales at May 31, 1997, compared to 17.6% at May 31, 1996.
Inventories increased by $36.4 million from February 28, 1997, compared to an
increase of $41.9 million during the same period in the prior year. Inventories
as a percent of the prior twelve months' material, labor, and other production
costs improved to 42.0% at May 31, 1997, compared to 48.7% at May 31, 1996.
Investing activities used $9.1 million less cash for the three months than in
the same period in the prior year, reflecting a lower level of capital spending.
Financing activities provided $74.9 million less cash during the three months
than in the same period in the prior year, due to lower borrowing requirements
during the period compared to prior year.
Debt as a percentage of debt plus equity was 21.8% at May 31, 1997, a decrease
from 27.1% in the prior year, reflecting the lower debt levels. On a per share
basis, shareholders' equity increased from $16.74 at May 31, 1996 to $18.40 at
May 31, 1997.
There were no material changes in the financial condition, liquidity or capital
resources of the Corporation from February 28, 1997, the end of its preceding
fiscal year, to May 31, 1997, the end of its last fiscal quarter and the date of
the most recent balance sheet included in this report, nor from May 31, 1996,
the end of the corresponding fiscal quarter last year, to May 31, 1997, except
the changes discussed above and aside from normal seasonal fluctuations.
Prospective Information
- -----------------------
Although management is not aware of any current trends, events, demands,
commitments or uncertainties which reasonably can be expected to have a material
effect on the liquidity, capital resources, financial position or results of
operations of the Corporation, the Corporation's future results could be
negatively impacted by such factors as retail bankruptcies, a weak retail
environment and competitive terms of sale offered to customers to expand and
maintain business. Please see the Corporation's Form 10-K for the year ended
February 28, 1997 for other risks and uncertainties that may affect future
results.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) Kentucky Department of Environmental Protection, Division of Waste
Management, I.D. No. 1528-063. The Corporation received a Notice of
Violation dated May 28, 1997, alleging that a release of hazardous
waste occurred at the Corbin, Kentucky plant. A site investigation has
commenced.
(b) Custom Expression Royalty, Inc., et al. v. American Greetings
Corporation, Case No. 3:97CV356-H, United States District Court,
Northern District of North Carolina.
On June 24, 1997, the above lawsuit was filed against the Corporation
alleging a breach of fiduciary duties, breach of contract, and
violation of the North Carolina trade practices act. The complaint
arises out of the merger on July 16, 1992, between Custom Expressions,
Inc. and American Greetings. The complaint alleges that American
Greetings has acted unfairly by manipulating commercial dealings to
benefit itself at the expense of Custom Expressions, Inc. and that
American Greetings has failed to account for and pay royalties to
Custom Expressions Royalty, Inc. under a related patent license
agreement.
The complaint seeks damages in the amount of at least $30 million, and
treble damages for violation of North Carolina law.
The Corporation denies the allegations and will vigorously defend
against all of the claims.
Item 5. Other Information
-----------------
On June 19, 1997 the Corporation signed a binding letter agreement to sell
principally all of the net assets of two subsidiaries, Acme Frame Products, a
manufacturer and distributor of picture frames, and Wilhold, Inc., a
manufacturer and distributor of hair accessories. The transaction is subject to
customary conditions, including Hart-Scott-Rodino approval. As a result of the
transaction, the Corporation expects to record a one-time pre-tax gain of
approximately $22 million ($14 million after taxes) upon closing.
Also, on June 19, 1997, the Corporation's Board of Directors authorized the
repurchase of up to 4.5 million shares of its stock (or about 6 percent of the
current 75.2 million shares outstanding) over time on open market transactions.
Page 8
<PAGE> 11
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation
S-K)
11 (a) Calculation of Primary Earnings Per Share
11 (b) Calculation of Fully-Diluted Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements 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.
AMERICAN GREETINGS CORPORATION
By: /s/ Patricia L. Ripple
--------------------------------
Patricia L. Ripple
Controller
Chief Accounting Officer
July 14, 1997
Page 9
<PAGE> 1
Exhibits 11 (a) and (b)
AMERICAN GREETINGS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended May 31,
-----------------------------------
1997 1996
--------------- -----------
<S> <C> <C>
Average number of
common shares outstanding 75,127,722 74,735,967
=============== ===========
Net income (thousands) $ 30,259 $ 27,772
=============== ===========
Primary earnings per share $ 0.40 $ .37
=============== ===========
</TABLE>
Computation of Fully-diluted Earnings Per Share (a)
-----------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended May 31,
-----------------------------------
1997 1996
--------------- -----------
<S> <C> <C>
Average number of common shares
outstanding on a fully diluted basis assuming
exercise of stock options based on the treasury
stock method using the higher of average
market price or ending market price (b) 76,506,975 75,673,431
=============== ===========
Net income (thousands) $ 30,259 $ 27,772
=============== ===========
Fully-diluted earnings per share $ 0.40 $ .37
=============== ===========
</TABLE>
(a) This calculation is submitted in accordance with the Securities Exchange
Act of 1934, although not required by Accounting Principles Board Opinion
No. 15, since less than a 3% dilution results.
(b) Ending market price was used for three months ended May 31, 1997. Average
market price was used for the three months ended May 31, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PART I, ITEM
1 OF THE FIRST-QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 53,263
<SECURITIES> 0
<RECEIVABLES> 351,112
<ALLOWANCES> 16,519
<INVENTORY> 340,747
<CURRENT-ASSETS> 1,023,863
<PP&E> 925,285
<DEPRECIATION> 468,082
<TOTAL-ASSETS> 2,127,306
<CURRENT-LIABILITIES> 421,237
<BONDS> 0
<COMMON> 75,241
0
0
<OTHER-SE> 1,309,374
<TOTAL-LIABILITY-AND-EQUITY> 2,127,306
<SALES> 475,059
<TOTAL-REVENUES> 477,336
<CGS> 161,474
<TOTAL-COSTS> 161,474
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,983
<INTEREST-EXPENSE> 5,808
<INCOME-PRETAX> 46,196
<INCOME-TAX> 15,937
<INCOME-CONTINUING> 30,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,259
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
