<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
X SECURITIES EXCHANGE ACT OF 1934
- -----------------
For the quarterly period ended August 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 August 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 69,246,504
Class B Common 4,384,155
<PAGE> 2
AMERICAN GREETINGS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements........................................ 1
Item 2. Management's Discussion and Analysis......................... 7
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings............................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.......... 10
Item 6. Exhibits and Reports on Form 8-K............................. 10
SIGNATURES..................................................................... 11
- ---------
</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)
Six Months Ended
August 31,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 959,801 $ 904,748
Other income 4,501 4,403
------------ ------------
Total revenue 964,302 909,151
Costs and expenses:
Material, labor and other production costs 349,410 342,926
Selling, distribution and marketing 421,091 377,749
Administrative and general 118,756 114,264
Non-recurring gain (22,125) --
Interest 11,130 15,264
------------ ------------
Total costs and expenses 878,262 850,203
------------ ------------
Income before income taxes 86,040 58,948
Income taxes 29,684 19,747
------------ ------------
Net income $ 56,356 $ 39,201
============ ============
Net income per share $ 0.75 $ 0.52
============ ============
Dividends per share $ 0.35 $ 0.33
============ ============
Average number of common shares outstanding 74,775,937 74,752,729
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 1
<PAGE> 4
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
August 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 484,742 $ 466,536
Other income 2,224 2,488
------------ ------------
Total revenue 486,966 469,024
Costs and expenses:
Material, labor and other production costs 187,936 188,259
Selling, distribution and marketing 216,101 195,958
Administrative and general 59,888 59,947
Non-recurring gain (22,125) --
Interest 5,322 7,674
------------ ------------
Total costs and expenses 447,122 451,838
------------ ------------
Income before income taxes 39,844 17,186
Income taxes 13,747 5,757
------------ ------------
Net income $ 26,097 $ 11,429
============ ============
Net income per share $ 0.35 $ 0.15
============ ============
Dividends per share $ 0.18 $ 0.17
============ ============
Average number of common shares outstanding 74,424,152 74,769,491
</TABLE>
See notes to consolidated financial statements.
Page 2
<PAGE> 5
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Aug. 31, 1997 Feb. 28, 1997 Aug. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 38,606 $ 35,050 $ 26,565
Trade accounts receivable, less allowances
of $73,112, $137,120 and $83,561, respectively
(principally for sales returns) 367,185 375,324 389,623
Total inventories 339,563 303,611 390,112
Deferred income taxes 86,692 100,732 85,105
Prepaid expenses and other 183,469 190,174 170,442
---------- ---------- ----------
Total current assets 1,015,515 1,004,891 1,061,847
Other assets 602,250 667,442 631,322
Property, plant and equipment - at cost 915,025 920,194 878,606
Less accumulated depreciation 473,135 457,407 433,324
---------- ---------- ----------
Property, plant and equipment - net 441,890 462,787 445,282
---------- ---------- ----------
$2,059,655 $2,135,120 $2,138,451
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 159,372 $ 133,171 $ 283,488
Accounts payable and accrued liabilities 159,927 157,628 144,761
Accrued compensation and benefits 55,500 82,569 61,943
Income taxes 13,746 5,475 2,852
Other current liabilities 22,144 63,900 61,416
---------- ---------- ----------
Total current liabilities 410,689 442,743 554,460
Long-term debt 211,005 219,639 236,124
Other liabilties 58,282 67,839 51,976
Deferred income taxes 40,938 43,244 44,534
Shareholders' equity 1,338,741 1,361,655 1,251,357
---------- ---------- ----------
$2,059,655 $2,135,120 $2,138,451
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE> 6
AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
August 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 56,356 $ 39,201
Adjustments to reconcile to net cash
provided (used) by operating activities:
Non-recurring gain (22,125) --
Depreciation 33,688 31,862
Deferred income taxes 11,764 17,235
Change in operating assets and liabilities (84,609) (193,842)
Other - net 2,054 4,380
--------- ---------
Cash Used by Operating Activities (2,872) (101,164)
INVESTING ACTIVITIES:
Proceeds from divestiture 82,000 --
Property, plant & equipment additions (23,578) (39,272)
Investment in corporate-owned life insurance 4,406 4,350
Other - net (372) (10,292)
--------- ---------
Cash Provided (Used) by Investing Activities 62,456 (45,214)
FINANCING ACTIVITIES:
Increase in long-term debt 21,347 8,550
Reduction of long-term debt (3,478) (9,115)
Increase in short-term debt 6,613 166,832
Sale of stock under benefit plans 7,021 1,706
Purchase of treasury shares (61,326) (513)
Dividends to shareholders (26,205) (24,647)
--------- ---------
Cash (Used) Provided by Financing Activities (56,028) 142,813
--------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 3,556 (3,565)
Cash and Equivalents at Beginning of Year 35,050 30,130
--------- ---------
Cash and Equivalents at End of Period $ 38,606 $ 26,565
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE> 7
\
AMERICAN GREETINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of dollars)
Six Months Ended August 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 - Non-Recurring Gain
- ---------------------------
On August 12, 1997, the Corporation divested the net assets of two subsidiaries,
Acme Frame Products, Inc., a manufacturer and distributor of picture frames, and
Wilhold, Inc., a manufacturer and distributor of hair accessories. As a result
of the transaction, the Corporation recorded a one-time pre-tax gain of $22,125
($13,192 net of tax, or $.18 per share).
Note D - Inventories
- --------------------
Components of inventories are as follows:
<TABLE>
<CAPTION>
August 31, February August 31,
1997 28, 1997 1996
---------- -------- ----------
<S> <C> <C> <C>
Raw materials $ 38,230 $ 48,299 $ 50,886
Work in process 39,773 47,113 51,650
Finished products 311,144 253,096 337,578
-------- -------- --------
389,147 348,508 440,114
Less LIFO reserve 90,217 89,061 93,652
-------- -------- --------
298,930 259,447 346,462
Display materials and factory supplies 40,633 44,164 43,650
-------- -------- --------
Inventories $339,563 $303,611 $390,112
======== ======== ========
</TABLE>
Page 5
<PAGE> 8
Note E - 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 August 31, 1997, February 28, 1997 and August 31, 1996 deferred costs and
future payment commitments are included in the following financial statement
captions:
<TABLE>
<CAPTION>
August 31, February August 31,
1997 28, 1997 1996
---------- -------- ----------
<S> <C> <C> <C>
Prepaid expenses and other $ 154,313 $ 161,601 $ 137,686
Other assets 409,106 464,599 439,961
Other current liabilities (22,145) (51,153) (61,416)
Other liabilities (45,454) (54,199) (36,311)
--------- --------- ---------
$ 495,820 $ 520,848 $ 479,920
========= ========= =========
</TABLE>
Note F - 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 G - Recently Issued Accounting Standards
- ---------------------------------------------
During the first half of calendar 1997, the Financial Accounting Standards Board
issued final statements that change the method for calculating and reporting
earnings per share (EPS), that require the disclosure of total comprehensive
income, and that change the method for determining and reporting business
segment information. The Corporation will adopt Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, in fiscal 1998. The
Corporation will adopt the disclosure requirements of SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in fiscal 1999. The Corporation is currently
assessing the impact of these statements.
Page 6
<PAGE> 9
Part 1., Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------
Results of Operations
- ---------------------
Net sales of $484.7 million for the second quarter and $959.8 million for the
six months ended August 31, 1997 were up 3.9% and 6.1%, respectively, over the
same periods in the prior year. The increases were due primarily to sales of
everyday cards and accessories, which more than offset the decrease in sales
resulting from the divestiture of the Acme Frame Products, Inc. and Wilhold,
Inc. subsidiaries on August 12, 1997. Unit sales of greeting cards increased 1%
over the same period in the prior year for the quarter and were flat with the
prior year for the six months. The unit sales increases are due to increased
everyday card volume.
Material, labor and other production costs were 38.8% of net sales for the
quarter, compared to 40.4% for the second quarter last year and 36.4% for the
six months, down from 37.9% in the same period last year. These decreases
reflect the strength of everyday card sales, which have higher margins than
other product categories.
Selling, distribution and marketing expenses were 44.6% of net sales for the
quarter, compared to 42.0% in the same period in the prior year. For the six
month period, selling, distribution and marketing expenses were 43.9% of net
sales, up from 41.8% in the prior year. These increases were due primarily to
higher amortization of competitive costs.
Administrative and general expenses were $59.9 million for the second quarter,
flat with $59.9 million for the same period in the prior year. For the six
months, administrative and general expenses were $118.8 million, up from $114.3
million in the prior year. The increase from prior year is due to costs related
to the conversion of information systems to be year 2000 compliant. During the
second quarter, these costs were offset by lower expenses in other areas.
A non-recurring gain of $22.1 million ($13.2 million net of tax, or $.18 per
share) was recorded during the quarter for the divestiture of the net assets of
two subsidiaries, Acme Frame Products, Inc., a manufacturer and distributor of
picture frames, and Wilhold, Inc., a manufacturer and distributor of hair
accessories.
Interest expense decreased from the prior year by $2.4 million for the quarter
and by $4.1 million for the six months. These decreases were due primarily to
lower borrowing requirements resulting from the strong cash flow provided by
operating and investing activities.
The effective tax rate for the second quarter and six months was 34.5%, up from
33.5% in the prior year due to the decreased tax benefit from the corporate
owned life insurance program.
Page 7
<PAGE> 10
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 August 31, 1996 has been included.
Operations used $2.9 million for the first six months of the fiscal year, an
improvement of $98.3 million from the same period last year. This improvement
was due to the reduced growth of deferred costs and trade accounts receivable,
as well as improved management of accounts payable.
Accounts receivable increased $12.5 million from February 28, 1997, compared to
an increase of $37.3 million during the same period in the prior year. This
slower growth was attained despite the increase in net sales year-to-year, due
to strong cash collections. Net accounts receivable were 16.6% of the prior
twelve months' sales at August 31, 1997, compared to 19.1% at August 31, 1996.
Inventories increased by $59.2 million from February 28, 1997, compared to an
increase of $54.7 million during the same period in the prior year. Inventories
as a percent of the prior twelve months' material, labor, and other production
costs were 41.8% at August 31, 1997, an improvement from 49.4% at August 31,
1996.
Investing activities provided $62.5 million in cash for the six months,
including $82.0 million in proceeds from the divestiture of subsidiaries.
Excluding these proceeds, investing activities used $19.5 million for the six
months, an improvement of $25.7 million from the prior year, reflecting a lower
level of capital spending. Financing activities used $56.0 million for the six
months compared to providing $142.8 million during the same period in the prior
year. The current period use includes $59.7 million expended to purchase 1.7
million shares of the Corporation's common stock. Financing activities in the
prior year period included higher short-term borrowings required to meet higher
working capital requirements.
Debt as a percentage of debt plus equity was 21.7% at August 31, 1997, a
decrease from 29.3% at August 31, 1996, reflecting the significant improvement
in cash flow. On a per share basis, shareholders' equity increased from $16.73
per share at August 31, 1996 to $18.18 at August 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 August 31, 1997, the end of its last fiscal quarter and the date
of the most recent balance sheet included in this report, nor from August 31,
1996, the end of the corresponding fiscal quarter last year, to August 31, 1997,
except the changes discussed above and aside from normal seasonal fluctuations.
Page 8
<PAGE> 11
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, loss of retail accounts and competitive terms of sale offered to
customers to expand or 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) J.E. and Z.B. Butler Foundation, Inc. v. American Greetings
Corporation, et al.
This class action, securities lawsuit against the Corporation
and certain of its officers has been settled. The Court
approved the settlement on August 18, 1997 and entered the
Final Judgment and Order of Dismissal. The attorneys
representing the plaintiff class are responsible for claims
administration and distribution of the Settlement Fund.
(b) Kentucky Department of Environmental Protection
The Corporation has settled the Notices of Violation dated
April and May, 1997, alleging that a release of hazardous
waste occurred at the Corbin, Kentucky plant. The Corporation
is in the process of conducting an on-site clean up under
procedures approved by the Kentucky Department of
Environmental Protection. The cost of the clean up will not be
material and has been fully provided in the Corporation's
financial results.
(c) Custom Expression Royalty, Inc. et al. v. American Greetings
Corporation
There have been no material developments in this proceeding
since it was reported in the Corporation's Form 10-Q for the
period ending May 31, 1997.
Page 9
<PAGE> 12
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Shareholders of the Corporation was held
on June 27, 1997.
(b) The following individuals were elected to Class II of the
Corporation's Board of Directors with term expiring in 2000:
Albert B. Ratner, Harry H. Stone and Edward Fruchtenbaum.
The following individuals are continuing directors with term
expiring in 1998 (Class III): Scott S. Cowen, Irving I. Stone
and Milton A. Wolf.
The following individuals are continuing directors with term
expiring in 1999 (Class I): Herbert H. Jacobs, Jeanette
Sarkisian Wagner and Morry Weiss.
(c)-1 The vote total was as follows for the election of directors
(Class II):
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
Albert B. Ratner 103,880,936 2,111,226
Harry H. Stone 103,349,189 2,642,973
Edward Fruchtenbaum 103,821,423 2,170,739
</TABLE>
(c)-2 A proposal to approve the 1997 Equity and Performance Incentive
Plan was approved by the shareholders. The vote was as follows:
<TABLE>
<CAPTION>
<S> <C>
Affirmative 70,594,242
Negative 28,562,002
Abstain 495,365
</TABLE>
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
Page 10
<PAGE> 13
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
October 14, 1997
Page 11
<PAGE> 1
Exhibit 11(a) and (b)
AMERICAN GREETINGS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Six Months Ended August 31, Three Months Ended August 31,
--------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average number of
common shares outstanding 74,775,937 74,752,729 74,424,152 74,769,491
========== ========== ========== ===========
Net inome (thousands) $ 56,356 $ 39,201 $ 26,097 $ 11,429
========== ========== ========== ===========
Primary earnings per share $ .75 $ .52 $ .35 $ .15
========== ========== ========== ===========
</TABLE>
Computation of Fully-diluted Earnings Per Share (a)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Six Months Ended August 31, Three Months Ended August 31,
----------------------------- ------------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <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) 76,129,012 75,608,970 75,811,941 75,548,141
========== ========== ========== ===========
Net income (thousands) $ 56,356 $ 39,201 $ 26,097 $ 11,429
========== ========== ========== ===========
Fully-diluted earnings per share $ .74 $ .52 $ .34 $ .15
========== ========== ========== ===========
</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 the six months ended August 31, 1997
and the three months ended August 31, 1996. Average market price was
used for the three months ended August 31, 1997 and the six months
ended August 31, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PART I, ITEM
1 OF THE SECOND-QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 38,606
<SECURITIES> 0
<RECEIVABLES> 367,185
<ALLOWANCES> 16,588
<INVENTORY> 339,563
<CURRENT-ASSETS> 1,015,515
<PP&E> 915,025
<DEPRECIATION> 473,135
<TOTAL-ASSETS> 2,059,655
<CURRENT-LIABILITIES> 410,689
<BONDS> 0
<COMMON> 73,631
0
0
<OTHER-SE> 1,265,110
<TOTAL-LIABILITY-AND-EQUITY> 2,059,655
<SALES> 959,801
<TOTAL-REVENUES> 964,302
<CGS> 349,410
<TOTAL-COSTS> 349,410
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,394
<INTEREST-EXPENSE> 11,130
<INCOME-PRETAX> 86,040
<INCOME-TAX> 29,684
<INCOME-CONTINUING> 56,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,356
<EPS-PRIMARY> .75
<EPS-DILUTED> .74
</TABLE>
