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
X EXCHANGE ACT OF 1934
- ------------------------
For the quarterly period ended August 31,November 30, 1998
-------------------------------------------------
OR
--
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES - ------- EXCHANGE ACT OF 1934
For the transition period from________________________to_______________________from ___________________ to _____________________
Commission file number 1-13859
------------------------
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,November 30, 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 66,188,93865,263,920
Class B Common 4,655,7204,656,836
2
AMERICAN GREETINGS CORPORATION
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements..........................................1Statements.....................................1
Item 2. Management's Discussion and Analysis..........................9Analysis.....................9
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings............................................14
Item 4. Submission of Matters to a Vote of Security Holders..........15
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES.................................................................168-K........................14
SIGNATURES................................................................14
- ----------
3
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
--------------------
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars except per share amounts)
(Unaudited)
SixNine Months Ended
August 31,
-------------------------------November 30,
---------------------------------
1998 1997
--------------- -------------------------- ------------
Net sales $ 967,6411,606,004 $ 959,8011,599,456
Costs and expenses:
Material, labor and other production costs 330,206 349,410556,537 591,741
Selling, distribution and marketing 440,916 421,091660,855 633,784
Administrative and general 109,506 111,876165,662 168,200
Non-recurring gain -items 13,925 (22,125)
Interest 13,918 11,13020,651 17,462
Other expense (income) (1,524) 2,379
--------------- --------------(2,747) 3,686
------------ ------------
Total costs and expenses 893,022 873,761
--------------- --------------1,414,883 1,392,748
------------ ------------
Income before income taxes 74,619 86,040191,121 206,708
Income taxes 26,863 29,684
--------------- --------------68,804 71,314
------------ ------------
Net income $ 47,756122,317 $ 56,356
=============== ==============135,394
============ ============
Earnings per share $ 0.671.73 $ 0.75
=============== ==============1.82
============ ============
Earnings per share - assuming dilution $ 0.671.71 $ 0.75
=============== ==============1.80
============ ============
Dividends per share $ 0.370.56 $ 0.35
=============== ==============0.53
============ ============
Average number of common shares outstanding 70,862,530 74,775,93770,625,300 74,324,220
See notes to consolidated financial statements.
Page 1
4
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars except per share amounts)
(Unaudited)
Three Months Ended
August 31,
------------------------------------November 30,
---------------------------------
1998 1997
------------- -------------------------- ------------
Net sales $ 479,733638,363 $ 484,742639,655
Costs and expenses:
Material, labor and other production costs 170,487 187,936226,331 242,331
Selling, distribution and marketing 226,032 216,101219,939 212,693
Administrative and general 51,342 55,66656,156 56,324
Non-recurring gainitems 13,925 --
(22,125)
Interest 7,345 5,3226,733 6,332
Other expense (income) 3,185 1,998(1,223) 1,307
------------ ------------
Total costs and expenses 458,391 444,898521,861 518,987
------------ ------------
Income before income taxes 21,342 39,844116,502 120,668
Income taxes 7,417 13,74741,941 41,630
------------ ------------
Net income $ 13,92574,561 $ 26,09779,038
============ ============
Earnings per share $ 0.201.06 $ 0.351.07
============ ============
Earnings per share - assuming dilution $ 0.201.04 $ 0.351.05
============ ============
Dividends per share $ 0.19 $ 0.18
============ ============
Average number of common shares outstanding 70,524,337 74,424,15270,150,852 73,420,783
See notes to consolidated financial statements.
Page 2
5
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)
(Unaudited) (Unaudited)
August 31,Nov. 30, 1998 Feb. 28, 1998 August 31,Nov. 30, 1997
--------------- ------------- ---------------
ASSETS------------- -------------
ASSETS
Current assets
Cash and equivalents $ 76,48338,318 $ 47,623 $ 38,60631,220
Trade accounts receivable, less allowances
of $87,303,$150,106, $151,245 and $73,112,$140,245, respectively
(principally for sales returns) 392,884555,343 373,594 367,185581,763
Total inventories 336,664301,085 271,205 339,563283,113
Deferred and refundable income taxes 98,844120,254 120,507 86,692101,393
Prepaid expenses and other 221,524214,222 210,316 183,469207,769
---------- ---------- ----------
Total current assets 1,126,3991,229,222 1,023,245 1,015,5151,205,258
Goodwill 132,176136,064 84,741 93,26186,702
Other assets 568,171675,847 605,846 523,089593,581
Property, plant and equipment - at cost 943,453954,771 938,743 915,025917,396
Less accumulated depreciation 512,755527,619 491,111 473,135482,127
---------- ---------- ----------
Property, plant and equipment - net 430,698427,152 447,632 441,890435,269
---------- ---------- ----------
$2,257,444$2,468,285 $2,161,464 $2,073,755$2,320,810
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 27,31267,838 $ 199,640 $ 159,372286,106
Accounts payable and accrued liabilities 178,654176,913 145,554 159,927123,742
Accrued compensation and benefits 64,58275,043 84,997 55,50068,056
Income taxes 12,82055,207 22,536 13,74633,342
Other current liabilities 59,44496,340 64,489 22,14469,227
---------- ---------- ----------
Total current liabilities 342,812471,341 517,216 410,689580,473
Long-term debt 457,506482,578 148,800 211,005214,134
Other liabilities 93,817122,362 107,509 72,382115,313
Deferred income taxes 37,49837,656 42,722 40,93839,950
Shareholders' equity 1,325,8111,354,348 1,345,217 1,338,7411,370,940
---------- ---------- ----------
$2,257,444$2,468,285 $2,161,464 $2,073,755$2,320,810
========== ========== ==========
See notes to consolidated financial statements.
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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
SixNine Months Ended
August 31,
-----------------------------------November 30,
---------------------------
1998 1997
------------- ------------
OPERATING ACTIVITIES:--------- ---------
OPERATING ACTIVITIES:
Net income $ 47,756122,317 $ 56,356135,394
Adjustments to reconcile to net cash
provided (used) by operating activities:
Non-recurring gain --items 12,479 (22,125)
Depreciation 33,741 33,68850,247 49,601
Deferred income taxes 13,777 11,764(7,924) (3,874)
Change in operating assets and liabilities,
net of effects from acquisitions and divestitures (90,301) (84,609)(224,150) (252,750)
Other - net 3,027 2,0543,873 5,970
--------- ---------
Cash Provided (Used)Used by Operating Activities 8,000 (2,872)(43,158) (87,784)
INVESTING ACTIVITIES:
Business acquisitions and divestitures (52,957) 82,000
Property, plant & equipment additions (21,381) (23,578)(33,652) (37,608)
Investment in corporate-owned life insurance 6,007 4,40622,067 3,196
Other - net 12,021 (372)14,066 205
--------- ---------
Cash (Used) Provided by Investing Activities (56,310) 62,456(50,476) 47,793
FINANCING ACTIVITIES:
Increase in long-term debt 319,233 21,347342,703 37,048
Reduction of long-term debt (25,785) (3,478)(19,940) (3,512)
(Decrease) increase in short-term debt (149,016) 6,613(120,456) 127,794
Sale of stock under benefit plans 9,676 7,02115,681 10,616
Purchase of treasury shares (50,616) (61,326)(94,059) (96,645)
Dividends to shareholders (26,322) (26,205)(39,600) (39,140)
--------- ---------
Cash Provided (Used) by Financing Activities 77,170 (56,028)84,329 36,161
--------- ---------
INCREASEDECREASE IN CASH AND EQUIVALENTS 28,860 3,556(9,305) (3,830)
Cash and Equivalents at Beginning of Year 47,623 35,050
--------- ---------
Cash and Equivalents at End of Period $ 76,48338,318 $ 38,60631,220
========= =========
See notes to consolidated financial statements.
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AMERICAN GREETINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of dollars)
SixNine Months Ended August 31,November 30, 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.
Note D - Non-recurring GainItems
- -------------------------------------------------------
During the period ended November 30, 1998, the Corporation recorded a
restructuring charge of $13,925 ($8,342 net of tax, or earnings per share of
$0.12). The primary components of this charge were employee severance and
termination benefit costs associated with a headcount reduction of approximately
300 management, salaried and clerical positions. The balance of the charge is
comprised of costs associated with exiting the Corporation's kiosk business and
lease exit costs due to the closure of certain sales offices.
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 earnings per share of $0.18).$0.18.)
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Note E - Earnings Per Share
- ---------------------------
The following table sets forth the computation of earnings per share and
earnings per share - assuming dilution:
SixNine Months Ended
August 31,
------------------------------November 30,
------------------------
1998 1997
---------- ----------------- --------
Numerator:
Net income, earnings per share
and earnings per share -
assuming dilution $47,756 $56,356
======= =======$122,317 $135,394
======== ========
Denominator (thousands):
Weighted average shares outstanding 70,863 74,77670,625 74,324
Effect of dilutive securities - stock options 943 728
------- -------831 780
-------- --------
Adjusted weighted average shares
outstanding 71,806 75,504
======= =======71,456 75,104
======== ========
Earnings per share $ 0.671.73 $ 0.75
======= =======1.82
======== ========
Earnings per share - assuming dilution $ 0.671.71 $ 0.75
======= =======1.80
======== ========
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9
Note F - 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:
(Unaudited)
SixNine Months Ended
August 31,
---------------------------------November 30,
-------------------------
1998 1997
---------- ------------------ --------
Net income $ 47,756 $ 56,356$122,317 $135,394
Other comprehensive (loss) income
Foreign currency translation adjustments (5,331) (1,087)(1,317) (3,266)
Unrealized gain on available-for-sale securities 5,4316,109 --
-------- --------
Other comprehensive income 100 (1,087)4,792 (3,266)
-------- --------
Total comprehensive income $ 47,856 $ 55,269$127,109 $132,128
======== ========
Note G - 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 financial position.
Page 7
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Note H - Inventories
- --------------------
August 31,
November 30, 1998 February 28, 1998 August 31,November 30, 1997
------------------------------------------------------------------------------ ----------------- -----------------
Raw materials $ 39,04037,773 $ 42,641 $ 38,23036,282
Work in process 38,32127,203 37,204 39,77328,727
Finished products 308,736280,449 240,845 311,144270,725
-------- -------- --------
386,097345,425 320,690 389,147335,734
Less LIFO reserve 91,37091,260 90,130 90,21790,618
-------- -------- --------
294,727254,165 230,560 298,930245,116
Display materials and factory supplies 41,93746,920 40,645 40,63337,997
-------- -------- --------
Inventories $336,664$301,085 $271,205 $339,563$283,113
======== ======== ========
Note I - 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,November 30, 1998, February 28, 1998 and August 31,November 30, 1997 deferred costs
and future payment commitments are included in the following financial statement
captions:
August 31,November 30, 1998 February 28, 1998 August 31,November 30, 1997
------------------------------------------------------------------------------ ----------------- -----------------
Prepaid expenses and other $ 186,850184,814 $ 179,818 $ 154,313175,411
Other assets 451,240568,532 481,236 409,106477,020
Other current liabilities (59,444)(83,055) (51,676) (22,145)(56,124)
Other liabilities (67,093)(92,083) (81,080) (45,454)(87,440)
--------- --------- ---------
$ 511,553578,208 $ 528,298 $ 495,820508,867
========= ========= =========
Page 8
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Part 1., Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------
Results of Operations
- ---------------------
Net sales were $479.7 million and $967.6of $638.4 million for the quarter and six months
ended August 31,November 30, 1998 were down
1.0% and up .8% over0.2% compared to the same periodsperiod in the prior year, respectively. Excludingyear. However, for the nine months
ended November 30, 1998, net sales were up 0.4% to $1,606.0 million. For the
quarter, excluding the negative impact of foreign currency exchange rate
movements, net sales would have increased 1.0%. On a year-to-date basis, net
sales would have increased 3.5% excluding the impact of foreign exchange ratesrate
movements and the divestiture of two subsidiary businesses which occurred during
the second quarter of last year,year. The increases in net sales would have increased nearly 3% in the second quarter and more than 5%
for the first six months. These increases were due primarily
to sales of everyday cards and accessories, andprimarily giftwrap, partially offset
by lower seasonal product shipments. In the impactfirst quarter of fiscal year 1999,
the acquisitionsCorporation strengthened its position in the United Kingdom duringsocial
expression product market through the first quarter.acquisition of two greeting card
companies. These acquisitions contributed 2.8% and 2.4% to the increases for the
quarter and nine months, respectively. Unit sales of total greeting cards
increased approximately 3%1% for both the three monthsquarter and the six months2% year-to-date from the same
periods in the prior year, favorably impacted by the acquisitions in the United
Kingdom.year.
Material, labor and other production costs were 35.5% and 34.1%34.7% of net sales for
the quarter and sixnine months, respectively, a significant decrease from 38.8%37.9% and
36.4%37.0% from the same periods in the prior year. This improvement was dueGross profit margins continued to
a more favorable
product mix, includingimprove during the divestiturethird quarter as the Corporation reduced shipments of
low-margin seasonal products.
For the business units which had lower
margins.
Selling,third quarter, selling, distribution and marketing expenses were 47.1% and 45.6%34.5%
of net sales, for the quarter and six months, up from 44.6% and 43.9%33.3% in the same periodsprior year, due primarily to higher
competitive costs. On a year-to-date basis, selling, distribution and marketing
expenses were 41.1% of net sales, compared to 39.6% last year. The increases reflectIn addition to
increased competitive costs, the cost of a national consumer advertising
campaign and selling expenses resulting from store remodelings due to retailer
consolidations.consolidations contributed to this increase.
Administrative and general expenses were $4.3$165.7 million lowerfor the nine month
period, down slightly from $168.2 million for the same period in the quarter and
$2.4 million lower for the six months compared to the prior yearyear.
The decrease is due primarily to overall cost controlcontainment programs. For the
quarter, administrative and general expenses were $56.2 million, comparable with
the $56.3 million last year.
During the third quarter, the Corporation recorded a restructure charge of $13.9
million ($8.3 million net of tax, or earnings per share of $0.12) which reflects
management's efforts to optimize the Corporation's cost structure and to provide
for operational streamlining initiatives. Approximately 60% of the restructure
charge consists of employee severance and termination benefits due to employee
headcount reductions of approximately 300 management, salaried and clerical
positions. The balance of the restructure charge is comprised of costs
associated with exiting the Corporation's kiosk business and lease exit costs
due to the closure of certain sales offices. While these initiatives are
expected to result in annualized pre-tax savings of approximately $12 to $15
million when completed, future incremental earnings may not be impacted
proportionately due to management's commitment to invest in competitive business
strategies, new markets and growth opportunities.
Page 9
12
Interest expense increased from the prior year by $2.0$0.4 million for the quarter
and $2.8$3.2 million for the sixnine months. The increase was due primarily to higher
borrowing to fund the Corporation's common stock repurchase program and the
acquisitions in the United Kingdom.
Other expense (income) was $3.2$1.2 million of expenseincome for the quarter compared to
$2.0$1.3 million of expense in the prior year due primarily to highertiming of costs
related to the conversion of information systems to be Year 2000 compliant.compliant .
Other expense (income) was $1.5$2.7 million of income for the sixnine months compared
to $2.4$3.7 million of expense for the same period in the prior year. The
improvement was due primarily to the gain on the sale of the Artistic Greetings'Greetings
stock partially offset by higher Year 2000 costs.an increase in foreign currency exchange losses.
The effective tax rate for the sixnine months was 36.0%, up from 34.5% in the prior
year due to the decreasedreduced tax benefit from the corporate-owned life insurance
program.
Page 9
12Excluding non-recurring items, net income for the quarter increased 4.9% to
$82.9 million from $79 million last year while earnings per share rose 10.3% to
$1.18 from $1.07 last year. For the first nine months, excluding non-recurring
items, net income increased to $130.7 million compared to $122.2 million last
year for the same period while earnings per share increased 12.8% to $1.85 from
$1.64 last year.
Year 2000
- ---------
The Year 2000 issue is the result of information technology ("IT") system
programs being written using two digits rather than four digits to define the
application year. Any of the Corporation's IT systems that have date-sensitive
software may be unable to interpret appropriately the calendar Year 2000 and
thus could cause the disruption of normal business activities. The Corporation
uses IT systems in various aspects of its business, including manufacturing,
distribution, product development, and many administrative functions, and much
of this software will need to be modified or replaced. The Corporation is
currently in the process of working toward Year 2000 compliance so that all of
its material business processes and components will properly handle dates prior
to, during and after the Year 2000.
The Corporation has prioritized its IT systems into three categories: critical,
necessary or other. Failure of a "critical" system would result in a serious
disruption of revenue and would critically impact competitive advantages.
Failure of a "necessary" system would result in serious processing delays and a
significant reduction in productivity. The Corporation believes its critical
systems will be Year 2000 compliant by the end of the first quarter of calendar
1999. The Corporation also believes its necessary systems will be Year 2000
compliant by the end of the second quarter of calendar 1999. The remainder of
the Corporation's systems should be remediated by the end of the third quarter
of calendar 1999. However, material slippage in the schedule and number of
systems that are Year 2000 compliant could occur.
The Corporation's non-IT systems include embedded technology such as
microcontrollers included in production equipment, environmental control
equipment and timeclocks. These non-IT systems are currently beingcontinuing to be assessed,
in
orderand plans continue to be updated. Remediation actions have a plan of remediation by the end of calendar 1998 with remediation
beginning during calendar 1999.begun.
Page 10
13
The Corporation is also in the process of ensuring the continuity and stability
of its normal business functions by identifying and assessing potential Year
2000 compliance risks associated with its external business relationships,
including those with vendors, customers, financial institutions and employee
benefit providers. This process is currently in the assessment phase with
potential risks being identified and implementation plans being developed.
The Corporation's current estimate of total cost to achieve Year 2000 compliance
in both its IT and non-IT systems is approximately $35 million for both
modifications to existing software and software replacement. Through August 31,November
30, 1998, $12$19 million has been cumulatively expended on Year 2000 compliance,
with approximately $24 million anticipated to be expended cumulatively through
the end of fiscal 1999, and the balance anticipated for fiscal 2000.
Page 10
13
The Corporation is also currently assessing what contingency plans will be
needed in the event any of the Corporation's critical or necessary systems or
any of its business partners' critical or necessary systems are not Year 2000
compliant when required. Although the Corporation does not currently anticipate
such a situation, business partner assessment and contingency plans will beplanning are in
process, by the end of calendar
1998 and the Corporation expects that they will be completed during the
second quarter of calendar 1999.
In addition, the Corporation is also currently developing a program to provide
independent validation of its Year 2000 compliance efforts and plans to have
that program in place by the end of the first quarter of calendar 1999. This
program will likely include engaging independent consultants for audits of its
completed coding corrections and for providing guidance and suggestions for the
remediation efforts.
The Corporation believes, but cannot warrant, that with timely modifications to
its existing software and conversion to new software, by both the Corporation
and its significant business partners, the Year 2000 compliance issue should not
have a material impact on the Corporation's operations. Specific factors which
might cause a material adverse effect include the availability and cost of
trained personnel and the ability to recruit and retain them, as well as the
ability to locate all system coding requiring correction. Based upon information
available at this time, the Corporation believes that the cost of modifications,
replacements and related testing will not have a material impact on the
Corporation's liquidity or results of operations. Year 2000 expenditures are
being funded through operations.
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,November 30, 1997 has been included.
Operating activities provided $8.0Page 11
14
Operations used $43.2 million of cash for the sixnine months, an improvement of
$10.9$44.6 million from the same period last year. Contributing to this improvement
was an increase in net income over the prior year, after adjusting for
non-recurring items. Also contributing to this improvement was a reduction in
the non-recurring gain last year.growth of trade accounts receivable and improved management of trade
accounts payable partially offset by an increase in inventories and deferred
costs.
As of November 30,1998, the cash outlay for restructuring expenditures totaled
approximately $1.4 million, primarily for employee termination benefits.
Accounts receivable, net of the effect of acquisitions and divestitures,
used
cash at a rate similar to thatincreased $174.0 million from February 28,1998, down from an increase of $228.7
million during the same period in the prior year.year, due to strong collections and
lower seasonal product shipments. Net accounts receivable were
17.5%improved to 24.8% of
the prior twelve months' sales at August 31,November 30, 1998, compared to 17.1%27.0% at
August 31,November 30, 1997, net of the effect of acquisitions and divestitures, reflecting
an increase in extended payment terms to customers.divestitures.
Inventories, net of the effect of acquisitions and divestitures, increased by
$70.8$32.3 million from February 28, 1998, compared to an increase of $59.2$5.2 million
during the same period in the prior year due to timing of production. However,
inventoriesan increase in non-card product
relating to new products and to support future sales growth. Inventories as a
percent of the prior twelve months' material, labor, and other production costs
were 43.4% and 44.3%increased to 40.4% at August 31,November 30, 1998 and August 31,from 36.7% at November 30, 1997,
respectively, net of
the effect of acquisitions and divestitures, as the focus
on controlling inventory levels continued.
Page 11
14divestitures.
Investing activities used $56.3$50.5 million in cash for the sixnine months this year,
including $53.0 million for the acquisition of two greeting card companies in
the United Kingdom, compared to providing $62.5$47.8 million for the same period last
year, includingwhich included $82.0 million in proceeds from the divestiture of two
subsidiaries. Excluding the acquisitions and divestitures, investing activities
used $3.3$2.5 million for the six months, annine months. This improvement of $16.2$31.7 million from
the prior year reflectingreflects cash distributions received from the Corporation's
investment in corporate owned life insurance, proceeds from the sale of the
Artistic Greetings stock and a lower level of capital expenditures.
On May 20, 1998, the Corporation filed a Form S-3 Registration Statement with
the Securities and Exchange Commission for a shelf registration to issue up to
$600 million of debt securities. Under the registration, the Corporation on July
27, 1998 completed the sale of $300 million of 30-year senior notes with a 6.10%
coupon rate. The majority of the proceeds were used to retire commercial paper
and other short-term debt, with the remainder used for other general corporate
purposes and short-term investments.
On August 7, 1998, the Corporation entered into a new multi-currency credit
facility to provide liquidity and working capital financing for the Corporation
and its subsidiaries in the United States, Canada, the United Kingdom,
Australia, New Zealand and France. The aggregate availability under this
facility is approximately $713 million. A portion of the facility matures on
August 7, 2003. The balance of the facility matures on August 6, 1999. This
portion of the facility is annually renewable for an additional 364-day period
and is convertible to a term loan with a maturity of August 7, 2003.
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Financing activities provided $77.2$84.3 million for the sixnine months compared to
using
$56.0$36.2 million during the same period in the prior year. The Corporation utilized
a portion of the proceeds from the sale of the $300 million of debt securities
to effectively shift much of its previously short-term debt to long-term. The
remaining portion of the proceeds were used to fund various other activities
during the sixnine months, including the purchase of 1.02.0 million shares of the
Corporation's Class A common stock for $47.7$87.5 million at an average price of
$47.73$43.74 per share. During the same period last year, 1.72.7 million shares of stock
had been purchased for $59.7$95.9 million. Total debt less cash increased from $331.8$469.0
million at August 31,November 30, 1997 to $408.3$512.1 million at August 31,November 30, 1998. Debt as a
percentage of debt plus equity also increased to 26.8%28.9% at August 31,November 30, 1998 from
21.7%26.7% at August 31,November 30, 1997.
On a per-share basis, shareholders' equity increased from $18.18$18.83 per share at
August 31,November 30, 1997 to $18.71$19.37 at August 31,November 30, 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 August 31,November 30, 1998, the end of its last fiscal quarter and the
date of the most recent balance sheet included in this report, nor from August 31,November
30, 1997, the end of the corresponding fiscal quarter last year, to August 31,November 30,
1998, except the changes discussed above and aside from normal seasonal
fluctuations.
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Prospective Information
- -----------------------
On September 17, 1998, the Corporation announced plans to enhance profitability
by targeting removal of $20 to $30 million from the cost structure of the
Corporation. A corporate-wide reassessment of management resources is underway
that is expected to result in a pre-tax charge of $10 to $20 millionAs noted above, during the third quarter, of fiscal 1999, generating pre-tax savings in the same range
beginning in fiscal 2000. Additionally, during the next 12 months, the Corporation initiated
the first phase of this restructure by recording a pretax charge of $13.9
million. The Corporation will continue to conduct an evaluation of its worldwide
manufacturing and distribution capabilities, expecting to identifyfocusing on additional cost savings
and potential chargesexpects to record an additional restructure charge during the fiscal year
ending February 2000 as part of this initiative.
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, except those mentioned above. However, the Corporation's future
results could be negatively impacted by such factors as retail bankruptcies, a
weak retail environment, loss of retail accounts to other suppliers or as a
result of retail consolidation and competitive terms of sale offered to
customers to expand or maintain business. Other risks, which are not
all-inclusive, include costs associated with correcting the Year 2000 issues,
unforeseen circumstances which may affect the Corporation's plans to reduce its
cost structure, as well as economic conditions in the various markets served by
the Corporation's operations. 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.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
(a) Custom Expressions Royalty Inc., et al v. American Greetings
Corporation, Case No. 3:97CV356-H, US District Court, Northern
District of North Carolina
On August 8, 1998, the court referred certain parts of the case
to arbitration and stayed further litigation until resolution of
the arbitration proceedings. The dispute over royalties under the
Patent License Agreement and the accounting issues involved in
the determination of Adjusted Net Earnings for the Put/Call Year
1996 were each referred to arbitration. The parties are
scheduling the arbitrations and further discovery related to the
arbitrations now, and have moved the court to continue the
January 11, 1999 trial date in order to allow the arbitrations to
be completed.
(b) Thorntons Plc v. Carlton Cards Limited, in the High Court of
Justice, Queen's Bench Division, Birmingham District Registry,
1997 No. ML40017A.
This matter was previously reported in the Form 10-K for the
fiscal year ended February 28, 1998. The parties agreed to
mediation pending a hearing on the appeal in this case. At
mediation, the parties agreed to a settlement on terms not
material to the Corporation.
(c) Zucker, Ham and Mandell v. American Greetings Corporation
(Nicholas J. Bua, Arbitrator)
This matter was previously reported in the Form 10-Q for the
quarterly period ended May 31, 1998. After reviewing its legal
options, the Corporation decided not to appeal the arbitration
decision and paid the award, an amount not material to the
Corporation.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(a) The Annual Meeting of Shareholders of the Corporation was held on
June 26, 1998.
(b) The following individuals were elected to Class III of the
Corporation's Board of Directors with term expiring in 2001: Scott
S. Cowen, Irving I. Stone and Harriet Mouchly-Weiss.
The following individuals are continuing directors with term
expiring in 1999 (Class I): Herbert H. Jacobs, James C. Spira and
Morry Weiss.
The following individuals are continuing directors with term
expiring in 2000 (Class II): Albert B. Ratner, Harry H. Stone and
Edward Fruchtenbaum.
(c)-1 The vote total was as follows for the election of directors (Class
III):
Nominee Votes For Votes Withheld
------- --------- --------------
Scott S. Cowen 98,762,070 1,629,096
Irving I. Stone 98,598,918 1,792,248
Harriet Mouchly-Weiss 98,732,831 1,658,335
(c)-2 A proposal to increase the quorum requirements at shareholder
meetings with respect to new or additional securities of the
company proposed to be listed on the New York Stock Exchange from
25% to 50% was approved by the shareholders. The vote was as
follows:
Affirmative 95,258,704
Negative 902,160
Abstain 360,369
Broker non-votes 3,869,933
(c)-3 A proposal to approve an increase in the authorized number of
Class A Common Shares and Class B Common Shares was approved by
the shareholders. The vote was as follows:
Affirmative 90,278,038
Negative 9,718,988
Abstain 394,140
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18---------------------------
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
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 15, 1998January 14, 1999
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