<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
X EXCHANGE ACT OF 1934
- ----------
For the quarterly period ended May 31, 1998
---------------------------------------------
OR
--
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number 1-13859
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AMERICAN GREETINGS CORPORATION
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(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
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As of May 31, 1998, the date of this report, the number of shares outstanding of
each of the issuer's classes of common stock was:
Class A Common 66,463,331
Class B Common 4,153,065
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AMERICAN GREETINGS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
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PART I - FINANCIAL INFORMATION
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<S> <C> <C>
Item 1. Financial Statements...................................................1
Item 2. Management's Discussion and Analysis...................................8
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.....................................................10
Item 6. Exhibits and Reports on Form 8-K......................................10
SIGNATURES..........................................................................11
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</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,
-----------------------------
1998 1997
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<S> <C> <C>
Net sales $ 487,908 $ 475,059
Costs and expenses:
Material, labor and other production costs 159,719 161,474
Selling, distribution and marketing 214,884 204,990
Administrative and general 58,164 56,210
Interest expense 6,573 5,808
Other expense (income) (4,709) 381
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Total costs and expenses 434,631 428,863
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Income before income taxes 53,277 46,196
Income taxes 19,446 15,937
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Net income $ 33,831 $ 30,259
============ ============
Earnings per share $ 0.47 $ 0.40
============ ============
Earnings per share - assuming dilution $ 0.47 $ 0.40
============ ============
Dividends per share $ 0.18 $ 0.17
============ ============
Average number of common shares outstanding 71,310,434 75,127,722
</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, 1998 Feb. 28, 1998 May 31, 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 43,497 $ 47,623 $ 53,263
Trade accounts receivable, less allowances
of $98,399, $151,245 and $93,762, respectively
(principally for sales returns) 357,659 373,594 351,112
Total inventories 296,008 271,205 340,747
Deferred and refundable income taxes 96,571 120,507 87,322
Prepaid expenses and other 214,498 210,316 191,419
----------- ----------- -----------
Total current assets 1,008,233 1,023,245 1,023,863
Goodwill 134,125 84,741 101,452
Other assets 595,888 605,846 558,335
Property, plant and equipment - at cost 945,907 938,743 925,285
Less accumulated depreciation 504,883 491,111 468,082
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Property, plant and equipment - net 441,024 447,632 457,203
----------- ----------- -----------
$ 2,179,270 $ 2,161,464 $ 2,140,853
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 276,469 $ 199,640 $ 170,538
Accounts payable and accrued liabilities 130,470 145,554 145,166
Accrued compensation and benefits 57,519 84,997 50,644
Income taxes 11,124 22,536 4,395
Other current liabilities 78,836 64,489 50,494
----------- ----------- -----------
Total current liabilities 554,418 517,216 421,237
Long-term debt 148,712 148,800 215,838
Other liabilities 92,695 107,509 75,973
Deferred income taxes 37,749 42,722 43,190
Shareholders' equity
Accumulated other comprehensive income (20,269) (23,437) (20,640)
Other shareholders' equity 1,365,965 1,368,654 1,405,255
----------- ----------- -----------
Total shareholders' equity 1,345,696 1,345,217 1,384,615
----------- ----------- -----------
$ 2,179,270 $ 2,161,464 $ 2,140,853
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
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,
-----------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 33,831 $ 30,259
Adjustments to reconcile to net cash
provided (used) by operating activities:
Depreciation 16,752 16,684
Deferred income taxes 18,896 13,371
Change in operating assets and liabilities,
net of effects from acquisitions (64,152) (59,558)
Other - net 1,404 1,960
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Cash Provided by Operating Activities 6,731 2,716
INVESTING ACTIVITIES:
Business acquisitions (52,957) -
Property, plant & equipment additions (10,009) (13,376)
Investment in corporate-owned life insurance 7,308 3,979
Other - net 7,261 (1,620)
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Cash Used by Investing Activities (48,397) (11,017)
FINANCING ACTIVITIES:
Increase in long-term debt 5,410 11,412
Reduction of long-term debt (403) (1,188)
Increase in short-term debt 68,569 24,922
Sale of stock under benefit plans 5,100 4,460
Purchase of treasury shares (28,229) (305)
Dividends to shareholders (12,907) (12,787)
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Cash Provided by Financing Activities 37,540 26,514
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(DECREASE) INCREASE IN CASH AND EQUIVALENTS (4,126) 18,213
Cash and Equivalents at Beginning of Year 47,623 35,050
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Cash and Equivalents at End of Period $ 43,497 $ 53,263
============ ============
</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, 1998 and 1997
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 - Reclassifications
- --------------------------
Certain amounts in the prior fiscal year financial statements have been
reclassified to conform with the 1998 presentation.
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Note D - Earnings Per Share
- ---------------------------
The following table sets forth the computation of earnings per share and
earnings per share - assuming dilution:
<TABLE>
<CAPTION>
Three Months Ended
May 31,
-------
1998 1997
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<S> <C> <C>
Numerator:
Net income, earnings per share
and earnings per share -
assuming dilution $ 33,831 $ 30,259
============ ============
Denominator (thousands):
Weighted average shares outstanding 71,310 75,128
Effect of dilutive securities - stock options 1,028 632
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Adjusted weighted average shares
outstanding 72,338 75,760
============ ============
Earnings per share $ 0.47 $ 0.40
============ ============
Earnings per share - assuming dilution $ 0.47 $ 0.40
============ ============
</TABLE>
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Note E - Comprehensive Income
- -----------------------------
The Corporation has adopted SFAS No. 130, Reporting Comprehensive Income, as
required, which established standards for reporting and displaying comprehensive
income and its components in an annual financial statement that is displayed
with the same prominence as other financial statements. This Standard also
requires that an entity report a total of comprehensive income in financial
statements of interim periods. Comprehensive income represents all changes in
shareholders' equity during the period except those resulting from investments
by owners and distributions to owners.
The Corporation's total comprehensive income was as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
May 31,
-----------------------
1998 1997
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<S> <C> <C>
Net income $ 33,831 $ 30,259
Other comprehensive (loss) income
Foreign currency translation adjustments (3,063) (994)
Unrealized gain on available-for-sale securities 6,231 -
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Other comprehensive income 3,168 (994)
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Total comprehensive income $ 36,999 $ 29,265
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</TABLE>
Note F - New Accounting Standards
- ---------------------------------
The Corporation will adopt the disclosure requirements of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, for the
fiscal year ending February 28, 1999, as required. The Corporation is currently
evaluating the effect of this Standard on its segment reporting.
The Corporation will adopt SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, for the fiscal quarter beginning March 1, 2000, as
required. Because of the Corporation's current minimal use of derivatives, the
Corporation does not anticipate that the adoption of SFAS No. 133 will have a
significant effect on its earnings or its financial position.
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Note G - Inventories
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<TABLE>
<CAPTION>
May 31, February May 31,
1998 28, 1998 1997
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<S> <C> <C> <C>
Raw materials $ 41,654 $ 42,641 $ 43,298
Work in process 41,792 37,204 52,572
Finished products 265,161 240,845 292,830
----------- ----------- -----------
348,607 320,690 388,700
Less LIFO reserve 91,170 90,130 90,703
----------- ----------- -----------
257,437 230,560 297,997
Display materials and factory supplies 38,571 40,645 42,750
----------- ----------- -----------
Inventories $296,008 $271,205 $340,747
=========== =========== ===========
</TABLE>
Note H - 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, 1998, February 28, 1998 and May 31, 1997 deferred costs and future
payment commitments are included in the following financial statement captions:
<TABLE>
<CAPTION>
May 31, February May 31,
1998 28, 1998 1997
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<S> <C> <C> <C>
Prepaid expenses and other $177,366 $179,818 $158,844
Other assets 476,490 481,236 445,761
Other current liabilities (65,948) (51,676) (37,703)
Other liabilities (64,399) (81,080) (48,951)
---------- ---------- ----------
$523,509 $528,298 $517,951
========== ========== ==========
</TABLE>
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Part 1., Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------
Results of Operations
- ---------------------
Net sales of $487.9 million for the quarter ended May 31, 1998 were up 2.7% over
the same period in the prior year. The increase was moderated by the divestiture
of the net assets of Acme Frame Products, Inc. and Wilhold, Inc. during the
second quarter last year. On a normalized basis, net sales would have increased
nearly 6%, due primarily to strong sales of everyday cards and accessories. Unit
sales of greeting cards increased 2% from the same period in the prior year.
Material, labor and other production costs were 32.7% of net sales for the
quarter, down from 34.0% in the prior year. The improvement was primarily due to
the divestiture of the two business units which had higher product costs.
Selling, distribution and marketing expenses were 44.0% of net sales for the
quarter, up from 43.2% in the prior year. The increase was due to the cost of a
national consumer advertising campaign which was launched during the quarter.
Administrative and general expenses were $58.2 million for the quarter, up
slightly from $56.2 million in the prior year due primarily to the timing of
expenses related to the Corporation's corporate owned life insurance program.
Interest expense increased from the prior year by $0.8 million for the quarter.
The increase was due primarily to higher borrowing levels to fund the
acquisitions of two greeting card companies in the United Kingdom; Camden
Graphics Group was acquired on March 11, 1998, and Hanson White, Ltd. was
acquired on May 11, 1998.
Other expense(income) was $4.7 million of income for the quarter compared to
$0.4 million of expense in the prior year. The improvement was due primarily to
the gain on the sale of the Corporation's equity investment in Artistic
Greetings, Inc., partially offset by higher costs related to the conversion of
information systems to be year 2000 compliant.
The effective tax rate for the quarter was 36.5%, up from 34.5% in the prior
year due to the reduced 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, 1997 has been included.
Operations provided $6.7 million for the first three months, an improvement of
$4.0 million from the same period last year. This improvement was due primarily
to the increase in net income and reduced growth of inventories offset somewhat
by the timing of income tax payments.
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Accounts receivable, which provided $25.1 million for the three months compared
to providing $23.1 million during the same period in the prior year, were 16.2%
of the prior twelve months' sales at May 31, 1998, compared to 16.0% at May 31,
1997.
Inventories, which continue to benefit from aggressive management focus, used
$22.7 million for the three months, lower than the use of $36.4 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 37.5% and 42.0% at May
31, 1998, and May 31, 1997, respectively.
Investing activities used $48.4 million in cash for the quarter, including $53.0
million for the acquisitions in the United Kingdom. Excluding the acquisitions,
investing activities provided $4.6 million for the quarter, an improvement of
$15.6 million from the prior year, reflecting the sale of the Artistic Greetings
stock and a lower level of capital spending.
On May 21, 1998, the Corporation filed a shelf registration for up to $600
million in debt with the Securities and Exchange Commission, and expects to
borrow $300 million, to reduce commercial paper outstanding, in the near future.
Also during the quarter, 545,000 shares of the Corporation's common stock were
repurchased, of the 4.0 million shares authorized, at an average price of $47.65
per share or $26.0 million. Debt as a percentage of debt plus equity was 24.0%
at May 31, 1998 compared to 21.8% at May 31, 1997. On a per share basis,
shareholders' equity increased from $18.40 per share at May 31, 1997 to $18.92
at May 31, 1998.
There were no material changes in the financial condition, liquidity or capital
resources of the Corporation from February 28, 1998, the end of its preceding
fiscal year, to May 31, 1998, the end of its last fiscal quarter and the date of
the most recent balance sheet included in this report, nor from May 31, 1997,
the end of the corresponding fiscal quarter last year, to May 31, 1998, except
the changes discussed above and aside from normal seasonal fluctuations.
Prospective Information
- -----------------------
The Corporation has included in the Form 10-Q certain information other than
historical facts that may constitute "forward-looking" 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 actual results may differ materially from those
projected in the "forward-looking" statements, including but not limited to 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, 1998 for other risks and uncertainties that may affect future
results.
Page 9
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) Zucker, Ham & Mandell v. American Greetings Corporation (Nicholas J.
Bua, Arbitrator)
The Zucker Group claimed that it presented the Corporation with the
idea for using the National Football League logo on greeting cards and
the Corporation misappropriated the idea. The Zucker Group brought
suit in 1994, which was subsequently transferred to arbitration by
agreement of the parties. The Zucker Group sought more than $400
million in compensatory and punitive damages. On June 8, 1998,
Arbitrator Bua announced an award in favor of The Zucker Group in the
amount of $750,000. The Corporation believes the decision is incorrect
and is considering all of its legal options.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation
S-K)
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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 2, 1998
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<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-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<CASH> 43,497
<SECURITIES> 0
<RECEIVABLES> 357,659
<ALLOWANCES> 18,385
<INVENTORY> 296,008
<CURRENT-ASSETS> 1,008,233
<PP&E> 945,907
<DEPRECIATION> 504,883
<TOTAL-ASSETS> 2,179,270
<CURRENT-LIABILITIES> 554,418
<BONDS> 0
0
0
<COMMON> 71,126
<OTHER-SE> 1,274,570
<TOTAL-LIABILITY-AND-EQUITY> 2,179,270
<SALES> 487,908
<TOTAL-REVENUES> 487,908
<CGS> 159,719
<TOTAL-COSTS> 159,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,135
<INTEREST-EXPENSE> 6,573
<INCOME-PRETAX> 53,277
<INCOME-TAX> 19,446
<INCOME-CONTINUING> 33,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,831
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
