Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Commission File
Ended February 28, 1995 Number 0-1502
----------------- ------
AMERICAN GREETINGS CORPORATION
------------------------------
(Exact name of registrant as specified in Charter)
OHIO 34-0065325
- ------------------------ -------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
One American Road , Cleveland, Ohio 44144
- ----------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (216) 252-7300
---------------
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Title of Each Class
-------------------
Class A Common Shares, Par Value $1.00
Class B Common Shares, Par Value $1.00
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
- -
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
2
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of May 1, 1995 - $1,957,392,952.
Number of shares outstanding as of May 1, 1995:
CLASS A COMMON - 69,944,527
CLASS B COMMON - 4,631,391
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement filed with the Securities and Exchange
Commission on May 12, 1995 with respect to the 1995 Annual Meeting of
Shareholders called for June 23, 1995, are incorporated by reference into Part
III.
PART I
Item 1. Business
American Greetings Corporation and its subsidiaries operate
predominantly in a single industry: the design, manufacture and sale of
everyday and seasonal greeting cards and other personal communication
products. Greeting cards, gift wrap, paper party goods, candles and giftware
are manufactured and /or sold in the United States by American Greetings
Corporation, Plus Mark, Inc., Carlton Cards Retail, Inc., and Quality Greeting
Card Distributing Company; in Canada by Carlton Cards Ltd. (Canada); in the
United Kingdom by Carlton Cards Limited (UK), Maiden and Kemp Ltd., Someone
Somewhere, Ltd., Carlton (UK) Retail, Ltd., and Carlton Cards Ltd. (Ireland);
in France by Carlton Cards (France) SNC; and in Mexico by Carlton Mexico, S.A.
de C.V. Personalized greeting cards are sold through CreataCard machines by
CreataCard, Inc. in the United States, by CreataCard Canada, Inc. in Canada
and by CreataCard (UK) Ltd. in the United Kingdom. Wilhold, a division of Plus
Mark, Inc., produces and sells hair accessory items, Acme Frame Products, Inc.
produces and sells picture frames, while Magnivision, Inc. produces and sells
non-prescription reading glasses and eyeware accessories. Design licensing and
character licensing are done by AGC, Inc. and Those Characters From Cleveland,
Inc., respectively. AG Industries, Inc. manufactures custom display fixtures
for the Corporation's products and products of others. Although other
subsidiaries of American Greetings Corporation exist, they are either
inactive, of minor importance or of a holding company nature.
Many of the Corporation's products are manufactured at common
production facilities and marketed by a common sales force. In fiscal 1995,
marketing and manufacturing functions in the United States and Canada were
combined. Dual priced cards are produced and distributed in both countries.
Information concerning sales by major product classifications is included in
Part II, Item 7. Additionally, information by geographic area is included in
Note J to the Consolidated Financial Statements included in Part II, Item 8.
- 2 -
3
The Corporation's products are primarily sold in approximately 110,000 retail
outlets throughout the world. The greeting card and gift wrap industry is
intensely competitive. Competitive factors include quality, design, customer
service and terms, which may include payments and other concessions to retail
customers under long-term agreements. These agreements are discussed in greater
detail below. There are an estimated 500 companies in this industry. The
Corporation's principal competitors, however, are Hallmark Cards, Incorporated
and Gibson Greetings, Inc. Based upon its general familiarity with the greeting
card and gift wrap industry and limited information as to its competitors, the
Corporation believes that it is the second largest company in the industry and
the largest publicly owned company in the industry.
The greeting card and gift wrap industry is generally mature. The
Corporation's presence in the growing mass retail channels of distribution has
enabled it to grow at a rate of one to two percent per year in greeting card
units, and this unit growth is expected to continue.
Production of the Corporation's products is on a level basis throughout
the year. Everyday inventories remain relatively constant throughout the year,
while seasonal inventories peak in advance of each major holiday season,
including Christmas, Valentine, Easter, Mother's Day, Father's Day and
Graduation. Also characteristic of the business, accounts receivable for
seasonal merchandise are carried for relatively long periods, as product is
normally shipped three to five months prior to a holiday. Payments for
seasonal shipments are generally received during the month in which the major
holiday occurs, or shortly thereafter. Extended payment terms may also be
offered in response to competitive situations with individual customers. The
Corporation and many of its competitors sell seasonal greeting cards with the
right of return.
During the fiscal year, the Corporation experienced no difficulty in
obtaining raw materials from suppliers.
The weighted average interest rate on short-term borrowings outstanding
as of February 28, 1995 was 6.5% (3.6% at February 28, 1994).
At February 28, 1995, the Corporation employed approximately 15,700
full-time employees and approximately 19,900 part-time employees which, when
jointly considered, equate to approximately 21,100 full-time employees.
Approximately 3,000 of the Corporation's hourly plant employees are unionized.
The locations and unions are: Cleveland, Ohio, International Association of
Greeting Card Workers; Bardstown, Kentucky, and Corbin, Kentucky, International
Brotherhood of Teamsters; Greeneville, Tennessee, Amalgamated Clothing &
Textile Workers Union; and Toronto, Ontario (Carlton Cards Ltd.), Canadian
Paperworkers Union. Labor relations at each location have been satisfactory.
The Corporation's headquarters and other manufacturing locations are not
unionized.
The Corporation has a number of patents and registered trademarks which
are used in connection with its products. The Corporation's designs and verses
are protected by copyright. Although the licensing of copyrighted designs and
trademarks produces additional revenue, in the opinion of the Corporation, the
Corporation's
- 3 -
4
operations are not dependent upon any individual patent, trademark, copyright
or intellectual property license. The collective value of the Corporation's
copyrights and trademarks is substantial and the Corporation follows an
aggressive policy of protecting its patents, copyrights and trademarks.
In fiscal 1995, the Corporation's major channels of distribution, in
order of importance, were: drug stores, mass merchandisers, supermarkets,
stationery and gift shops, combo stores (stores combining food, general
merchandise and drug items), variety stores, military post exchanges, and
department stores.
Sales to the Corporation's five largest customers, which include mass
merchandisers and major drug stores, accounted for approximately 23.4% of net
sales. Sales to retail customers are made through 25 regional and 62 district
sales offices in the United States, Canada, United Kingdom, France and Mexico.
The Corporation has agreements with various customers for the supply of
greeting cards and related products. Contracts are separately negotiated to
meet competitive situations; therefore, while some aspects of the agreements
may be the same or similar, important contractual terms often vary from
contract to contract. No one contract is significant to the Corporation's
financial position. Under the agreements, customers typically receive
allowances, discounts and/or advances in consideration for the Corporation
being allowed to supply customers' stores for a stated term. Some of these
competitive agreements have been negotiated with customers covering a period
following that covered by current agreements and requiring the Corporation to
make advances prior to the start of such future period. The Corporation views
the use of such agreements as advantageous in developing and maintaining
business with retail customers. Although risk is inherent in the granting of
advances, payments and credits, the Corporation subjects such customers to its
normal credit review. Losses attributable to these agreements have historically
been immaterial. Advances, payments and credits made under these agreements are
accounted for as deferred costs. The current and long-term portions of such
deferred costs, which are material in the aggregate, are disclosed in Note B
and Note C, respectively, to the Consolidated Financial Statements included in
Part II, Item 8. Note C also discusses the amortization policy. The
Corporation believes that these agreements represent a common practice within
the industry. Since Hallmark Cards, one of the Corporation's two principal
competitors, is a non-public company, public disclosure of its practices has
been limited. Gibson Greetings, the Corporation's other principal competitor
and a public company, has made comparable disclosures with respect to such
agreements.
Item 2. Properties
As of February 28, 1995, the Corporation owns or leases approximately
15.6 million square feet of plant, warehouse, store and office space, of which
approximately 6.8 million square feet are leased. Space needs in the United
States have been met primarily through long-term leases of properties
constructed and financed by community development corporations and
municipalities.
- 4 -
5
The following table summarizes the principal plants and materially
important physical properties of the Corporation:
Expiration
Approximate Square Date of
Feet Occupied Material Principal
Location Owned Leased Leases Activity
- -------- ----- ------ ------ --------
Bardstown, 413,500 Cutting, folding,
Kentucky finishing, and
packaging of
greeting cards
Cleveland, 1,312,500 International
Ohio headquarters; general
(2 locations) offices of U.S.
Greeting Card Division,
Plus Mark, Inc., AG
Industries, Inc., Wilhold,
Carlton Cards Retail, Inc.,
CreataCard, Inc., and Acme
Frame Products, Inc., ;
creation and design
of greeting cards and
related products
Corbin, 1,010,000 1997 Printing of greeting
Kentucky cards, gift wrapping
and paper party goods
and manufacture of
other related products
Danville, 1,374,000 2001 Distribution of
Kentucky everyday greeting
cards and related
products
Forest City, 498,000 327,600 1996 Manufacture of the
North Carolina and Corporation's display
1999 fixtures and other
custom display
fixtures for AG
Industries, Inc.
Greeneville, 1,410,000 Printing and
Tennessee packaging of seasonal
(2 locations) wrapping items for
Plus Mark, Inc.
- 5 -
6
Expiration
Approximate Square Date of
Feet Occupied Material Principal
Location Owned Leased Leases Activity
- -------- ----- ------ ------ --------
Harrisburg, 417,000 2007 Manufacture and
Arkansas distribution facility of
metal picture frames
for Acme Frame Products, Inc.
Huntington Valley, 18,800 1997 Manufacture, order
Pennsylvania filling, and distribution
of eyeglass
accessories for
Magnivision, Inc.
Lafayette, 194,000 Manufacture of
Tennessee envelopes for greeting
cards and packaging
of cards
McCrory, 771,000 1996 Order filling and
Arkansas and shipping of everyday
2005 and seasonal products
Milton, 46,000 1996 Order filling and
Pennsylvania shipping of hair
accessory products for
Wilhold
Osceola, 2,800,800 Cutting, folding,
Arkansas finishing and
packaging of seasonal
greeting cards and
warehousing;
distribution of
seasonal products
Pembroke Pines, 68,000 1998 Manufacture, order
Florida filling and shipping of
non-prescription
reading glasses for
Magnivision, Inc.
Philadelphia, 120,000 2017 Hand finishing of
Mississippi greeting cards
- 6 -
7
Expiration
Approximate Square Date of
Feet Occupied Material Principal
Location Owned Leased Leases Activity
- -------- ----- ------ ------ --------
Ripley, 165,000 Seasonal card printing
Tennessee and forms
Shelbyville, 250,000 1997 Warehousing for
Kentucky Carlton Cards Retail,
Inc.
Sunbury, 145,000 Manufacture of hair
Pennsylvania accessory products for
Wilhold
Corby, 85,000 Distribution of
England greeting cards and
related products for
Carlton Cards
Limited (UK)
Dewsbury, 361,000 87,000 2002, General offices of
England 2008, Carlton Cards Limited
(5 locations) and (UK) and manufacture
2015 of greeting cards and
related products
Mexico City, 166,000 General offices of
Mexico Carlton Mexico, S.A. de
C.V. and manufacture
of greeting cards and
related products
Paris, France 70,000 1997 Distribution of
greeting cards and
related products for
Carlton Cards
(France) SNC
Toronto, 1,084,500 General offices of
Ontario, Carlton Cards Ltd.
Canada (Canada); manufacture
(2 locations) of greeting cards and
related products
- 7 -
8
Item 3. Legal Proceedings
As of May 1, 1995, the Corporation is a party to nine legal proceedings
relating to state and federal environmental laws. One or more governmental
authorities is a party to each proceeding. The proceedings allege, among other
things, that hazardous waste material generated by the Corporation was
improperly disposed of by others. In eight of these cases the Corporation has
entered into consent decrees under which the Corporation has agreed to pay a
pro rata share of clean-up costs. Costs of remediation in each of the
proceedings cannot be estimated at this time; however, in the opinion of
management, based on the amounts involved in each proceeding and in the
aggregate, such liabilities will not have a material effect on the
Corporation's consolidated financial position.
Item 4. Submission of Matters to Vote of Security Holders
None
Executive Officers of the Registrant
- ------------------------------------
The following is a list of the Corporation's executive officers, their
ages as of May 1, 1995, their positions and offices, and number of years in
executive office:
Years as
Name Age Executive Officer Current Position and Office
- ---- --- ----------------- ---------------------------
Irving I. Stone 86 45 Founder-Chairman and Chairman
of the Executive Committee
Morry Weiss 55 23 Chairman and Chief Executive
Officer
Edward Fruchtenbaum 47 9 President and Chief Operating
Officer
Henry Lowenthal 63 23 Senior Vice President and
Chief Financial Officer
James R. Van Arsdale 56 12 Senior Vice President
John M. Klipfell 45 12 Senior Vice President
Harvey Levin 62 14 Senior Vice President
William R. Mason 50 13 Senior Vice President
Erwin Weiss 46 5 Senior Vice President
Jon Groetzinger, Jr. 46 7 Senior Vice President, General
Counsel and Secretary
William S. Meyer 48 7 Senior Vice President, Controller
Dale A. Cable 48 3 Treasurer
Mr. Irving I. Stone is the father-in-law of Morry Weiss. Morry Weiss
and Erwin Weiss are brothers. The Board of Directors annually elects all
executive officers; however, executive officers are subject to removal, with or
without cause, at any time.
- 8 -
9
All of the executive officers listed above, with the exception of Dale
A. Cable, have served in the capacity shown or similar capacities with the
Corporation (or major subsidiary) over the past five years. Mr. Cable was
Treasurer-Assistant Secretary of Standard Products Company from 1989 to 1992,
and Corporate Treasurer of Sheller-Globe Corporation from 1987 to 1989.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
(a) MARKET INFORMATION
- ----------------------
The high and low stock prices for the Corporation's Class A Common
Shares, as reported in the NASDAQ National Market Listing, for the years ended
February 28, 1995 and 1994:
1995 1994
------------------ ------------------
High Low High Low
------- ------- ------- -------
1st Quarter $30-1/2 $25-7/8 $29-1/4 $23-7/8
2nd Quarter 31-3/8 27 29-7/8 26-1/2
3rd Quarter 30-1/8 26-1/8 33-1/2 27-7/8
4th Quarter 29-1/2 25-3/4 34-1/4 27-7/8
The Corporation's Class A Common Shares, $1.00 par value per share, are
traded on the NASDAQ National Market under the trading symbol: AGREA. Society
National Bank, Cleveland, Ohio, is the Corporation's registrar and transfer
agent. There is no public market for the Class B Common Shares of the
Corporation. Pursuant to the Corporation's Amended Articles of Incorporation,
a holder of Class B Common Shares may not transfer such Class B Common Shares
(except to permitted transferees, a group that generally includes members of
the holder's extended family, family trusts and charities) unless such holder
first offers such shares to the Corporation for purchase at the most recent
closing price for the Corporation's Class A Common Shares. If the Corporation
does not purchase such Class B Common Shares, the holder must convert such
shares, on a share for share basis, into Class A Common Shares prior to any
transfer.
(b) SHAREHOLDERS
- ----------------
At May 1, 1995, there were approximately 20,700 holders of Class A
Common Shares and 271 holders of Class B Common Shares of record and individual
participants in security position listings.
- 9 -
10
(c) CASH DIVIDENDS
- ------------------
Dividends Per Share 1995 1994
------------------- ----- ------
1st Quarter (paid June 10, 1994 and 1993) $.125 $.1075
2nd Quarter (paid September 9, 1994 and September 10, 1993) $.14 $.125
3rd Quarter (paid December 9, 1994 and December 10, 1993) $.14 $.125
4th Quarter (paid March 10, 1995 and 1994) $.14 $.125
----- ------
$.545 $.4825
- 10 -
11
Item 6. Selected Financial Data
Years ended February 28 or 29
Thousands of dollars except per share amounts *
Summary of Operations
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------
Net sales ........................................... $ 1,868,927 $ 1,769,964 $ 1,671,692 $ 1,553,961 $ 1,412,716
Material, labor and other production costs .......... 676,085 672,020 661,183 645,951 597,109
Interest expense .................................... 16,871 16,897 26,924 30,423 31,378
Income before cumulative effect of
accounting changes ................................ 148,792 130,884 112,288 97,462 82,497
Cumulative effect of accounting
changes, net of tax ............................... - 17,182 - - -
Net income ......................................... 148,792 113,702 112,288 97,462 82,497
Income per share:
Before cumulative effect of
accounting changes .............................. 2.00 1.77 1.55 1.40 1.30
Cumulative effect of accounting
changes, net of tax ............................. - .23 - - -
Net income ........................................ 2.00 1.54 1.55 1.40 1.30
Cash dividends per share ............................ .55 .48 .42 .38 .35
Fiscal year end market price per share .............. 29.38 27.88 24.00 21.25 18.88
Average number of shares outstanding ................ 74,305,346 73,809,132 72,440,114 69,514,436 63,291,126
Financial Position
Accounts receivable ................................. $ 324,329 $ 322,675 $ 276,932 $ 264,125 $ 272,179
Inventories ......................................... 279,270 243,357 228,123 275,955 277,630
Working capital ..................................... 531,199 474,280 581,651 628,997 484,169
Total assets ........................................ 1,761,751 1,565,234 1,548,400 1,437,760 1,234,461
Capital expenditures ................................ 97,290 102,859 77,099 67,328 45,303
Long-term debt ...................................... 74,480 54,207 169,381 255,711 246,181
Shareholders' equity ................................ 1,159,541 1,053,442 952,535 865,046 656,606
Shareholders' equity per share ...................... 15.61 14.21 13.07 12.05 10.39
Net return on average shareholders' equity
before cumulative effect of
accounting changes ................................ 13.4% 13.0% 12.4% 12.8% 13.1%
Return on net sales before income
taxes and cumulative effect of accounting
changes ........................................... 12.2% 11.8% 10.8% 9.8% 9.2%
* Share and per share amounts for 1993 and prior have been restated to reflect
the 1994 stock split.
- 11 -
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Strategic and Financial Objectives
- ----------------------------------
Increasing shareholder value, through both stock appreciation and dividends,
remains management's primary objective. The business strategies to accomplish
this include offering products, programs and services superior to the
competition, developing and maintaining relationships with key retailers and
challenging current business processes to preserve and improve profit margins.
During 1995, these strategies resulted in implementation of the Corporation's
North American Plan, a major initiative to increase market penetration in the
United States and Canada. Through this initiative, the marketing and
manufacturing efforts in both countries have been combined to both improve
efficiencies and provide a superior product line to the Canadian market.
Features of this plan include production of dual priced cards in both countries
and conversion of the Canadian production facility to just in time
manufacturing. While 1995 results reflect expenses from implementation of this
plan, which were not material, the positive impact in both the United States
and Canadian markets will begin next year.
Program and product development initiatives included new card lines designed to
appeal to specific segments of consumers and the introduction of decorative
flags and mylar balloons, products planned to complement existing card lines.
Also during 1995, the growth of the Corporation's technology based businesses
continued with the addition of the interactive marketing division to CreataCard
to pursue rapidly evolving electronic markets.
Results of Operations
- ---------------------
Revenues
- --------
The Corporation derives its revenues from the sale of greeting cards and
related social expression products in a market that is highly competitive.
Despite this competitive environment, net sales increased 5.6% in 1995 from
1994, marking the 89th consecutive annual increase. In 1994, net sales
increased 5.9% over 1993. The increases in both years were due to strong sales
of the Corporation's core products of everyday, seasonal and personalized
greeting cards. Greeting card unit sales increased 1% in both years while net
sales in dollars increased 7.8% in 1995 and 6.9% in 1994. While the
unfavorable impact of foreign exchange rates moderated during 1995, the
additional weakening of the Canadian dollar and Mexican peso against the United
States dollar reduced net sales growth from 6.2% to 5.6%. In 1994, the
unfavorable foreign exchange impact on the revenue increase was 1.4 percentage
points.
- 12 -
13
The percent of net sales contributed by each major product classification is as
follows:
1995 1994 1993
---- ---- ----
Everyday Greeting Cards............................. 44% 41% 41%
Holiday Greeting Cards.............................. 22% 24% 24%
Gift Wrapping and Party Goods....................... 18% 18% 18%
Consumer Products................................... 12% 13% 10%
Stationery And Miscellaneous........................ 4% 4% 7%
Expenses and Profit Margins
- ---------------------------
The Corporation's success in improving margins continued in 1995. Material,
labor and other production costs were 36.2% of net sales, down from 38.0% in
1994 and 39.6% in 1993. These improvements reflect higher selling prices and a
product mix more heavily weighted with lower cost card products. The
improvements in 1994 and 1993 also reflected reductions in card material costs
in the United States which decreased 1.1% and 1.8%, respectively. United
States card material costs remained stable in 1995 despite rising prices in the
paper market. This cost containment was due to the Corporation's long-term
commitments with certain paper suppliers, the benefit of which should extend
into the next year. In 1993, material, labor and other production costs also
included a $4.8 million LIFO inventory reduction which reduced costs in this
category.
Selling, distribution and marketing expenses were 38.9% of net sales compared
to 37.1% in 1994 and 36.9% in 1993. The increases in both years were due
primarily to higher amortization of deferred costs related to agreements with
certain retail customers. The Corporation enters into these agreements to
develop and maintain business with retail customers when a long-term business
relationship is advantageous. In 1995, the Corporation successfully negotiated
new agreements with certain retailers to continue the existing business
relationship beyond periods covered by current agreements. The new agreements
required cash advances to the retailers in 1995 and in the future. The deferred
costs related to these agreements will be amortized over the effective period
of the agreements, beginning primarily in 1997. When related to total
operations, the increased and prudent use of these agreements has not had a
material impact on operations and the impact of unamortized deferred costs
related to existing agreements and commitments should not be material to total
operations. See Notes A, B and C to the Consolidated Financial Statements for
further discussion of payment commitments and deferred costs related to these
agreements. Contributing to the increase in 1995 was an expanded national
advertising program, primarily related to the CreataCard business. Advertising
expenses, all of which were expensed as incurred, were $58.3 million in 1995,
$48.2 million in 1994 and $48.1 million in 1993.
Administrative and general expenses increased just 2% in 1995 and represented
12.4% of net sales. These expenses were 12.8% of net sales in 1994 and 12.1%
of net sales in 1993. In 1994, certain new operating units, including
Magnivision and CreataCard, experienced higher administrative and general
expenses than the traditional business. The impact of these units on this
expense category diminished in 1995 as the businesses grew. Contributions to
the United States profit sharing plan in 1995 were comparable to 1994 after
increasing $4.3 million from 1993 due to higher pre-tax income in the United
States.
- 13 -
14
The pre-tax costs of corporate owned life insurance included in administrative
and general expenses, which were again more than offset by the related tax
benefits, increased $4.5 million in 1995 after increasing $2.5 million in
1994. The tax benefits of corporate owned life insurance are discussed below.
Interest expense for the year reflected a more efficient mix of debt between
the United States and the United Kingdom and, despite rising interest rates,
the Corporation's interest expense did not increase in 1995. In 1994, interest
expense decreased $10 million due primarily to the repayment of the $100
million 8.375% notes on March 1, 1993 with funds on hand.
Interest expense in 1994 and 1993 also included amortization of an option
premium on an interest rate swap which reduced interest expense by $1.1 million
in 1994 and $2.1 million in 1993. See Note D to the Consolidated Financial
Statements for further discussion of the interest rate swap.
The Corporation's effective tax rate decreased significantly to 34.5% in 1995
from 37.5% in 1994. The effective tax rate was 38.0% in 1993. The decrease in
1995 was due to higher tax benefits related to corporate owned life insurance
and lower foreign losses with no tax benefit. In 1994, the increase in the
United States statutory rate was more than offset by the tax benefits from the
corporate owned life insurance. These tax benefits, which increased in each of
the three years, resulted from non-taxable death benefits and increases in cash
surrender value of the policies which exceeded the related premium and interest
expenses.
Net income in 1995 rose to $148.8 million or $2.00 per share, up 13.7% compared
to 1994 income before the cumulative effect of accounting changes. In 1994,
net income of $113.7 million included a one-time charge of $22.5 million or
$.31 per share resulting from the full recognition of the transition obligation
associated with the adoption of Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
and a one-time benefit of $5.3 million or $.08 per share resulting from the
adoption of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". (Throughout this discussion, per share amounts for 1993
reflect the two-for-one common stock split effected in the form of a 100% share
dividend which was distributed on September 10, 1993 to shareholders of record
on August 27, 1993.) Income before the cumulative effect of these accounting
changes was $130.9 million or $1.77 per share, a 16.6% increase from $112.3
million or $1.55 per share in 1993.
Liquidity and Capital Resources
The Corporation's financial strength, stability and capacity to fund
operational needs through strong operating cash flows and worldwide credit
facilities continued in 1995. Working capital increased to $531.1 million from
$474.3 million in 1994. In 1993, working capital was $581.6 million. As of
the end of 1995, the ratio of total debt to total capitalization (equity plus
short and long-term debt) was 14.6%, down from 15.0% in 1994 and 22.9% in 1993.
The current ratio also improved to 2.5 in 1995 from 2.3 in 1994 and compares to
2.8 in 1993.
- 14 -
15
Cash flow from operations in 1995 increased $31.4 million to $107.0 million
from $75.6 million in 1994 and compared to $169.3 million in 1993. The
improvement from 1994 to 1995 was due to slower growth in accounts receivable
and payments related to deferred costs, offset somewhat by an increase in
inventories while additional cash was required during 1994 to support increases
in these three asset categories.
Trade accounts receivable improved to 17.4% of net sales in 1995 from 18.2% at
the end of 1994. As of the end of 1993, trade accounts receivable were 16.6%
of net sales. In 1995, the Corporation effectively managed the use of
extended payment terms which had caused the increase from 1993 to 1994.
Inventories as a percent of material, labor and other production costs were
41.3% in 1995 compared to 36.2% in 1994 and 34.5% in 1993. The higher
inventory balances as of the end of 1995 were due primarily to increases in
finished goods inventory in the United States to meet forecasted requirements,
particularly for new programs. The increase also reflected advance purchases
of paper for gift wrap production. The increase from 1993 to 1994 was due to
the production of a new card line in the United Kingdom, advance purchases of
favorably priced raw material and the Magnivision acquisition.
The agreements with retailers that result in deferred costs were a significant
factor in cash flow from operations. These agreements are discussed above and
in Notes A, B and C to the Consolidated Financial Statements. Funding of these
agreements with retailers required $22.9 million less cash (net of the related
amortization) in 1995 than in 1994, but increased $26.5 million from the cash
required in 1993.
Capital expenditures included in investing activities in 1995 were $97.3
million, down from $102.9 million in 1994. In 1993, capital expenditures were
$77.0 million. The deployment of the CreataCard machines, which caused the
increase in 1994 due to the mass introduction, slowed during 1995 as the focus
shifted to maximizing returns on existing machines. Capital expenditures for
1996 are expected to be $95.0 million. Total cash used by investing activities
increased to $95.0 million in 1995 from $81.6 million and $86.5 million in 1994
and 1993, respectively. In 1994, additional policy loans under the corporate
owned life insurance program, net of the increase in cash surrender value,
provided $18.9 million of cash which mitigated the impact of the higher capital
expenditures. In both 1995 and 1993, the net insurance investment did not
increase as policy loans offset increases in cash surrender value.
Financing activities used $102.2 million less cash in 1995 than in 1994, and at
$25.9 million was comparable to the $24.9 million used in 1993. In 1994, the
Corporation's $100 million 8.375% notes were paid with funds on hand. The
Corporation's commitment to increase overall return to shareholders resulted in
an increase in dividends each of the three years from an annual rate of $.43
per share at the end of 1993 to $.56 per share at the end of 1995.
The seasonal nature of the business results in peak working capital
requirements which are financed primarily through short term borrowings.
During 1995, the Corporation replaced its $250 million revolving credit
agreement with a $400 million revolving credit agreement to
- 15 -
16
support its commercial paper borrowing arrangement and provide a six year term
option for up to $200 million. The agreement extends through June, 1999 and is
renewable thereafter on an annual basis. See Note D to the Consolidated
Financial Statements for further discussion on this credit agreement. This
credit facility, along with funds generated by operations are expected to meet
the Corporation's currently anticipated funding requirements.
Prospective Information
Management is not aware of any adverse trends that would materially affect the
Corporation's financial strength. Management believes that the Corporation is
in a position to meet unanticipated working capital needs or investment
opportunities with additional financing based on its strong balance sheet,
ability to generate cash and history of growth.
- 16 -
17
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENT OF INCOME
Years ended February 28, 1995, 1994 and 1993
Thousands of dollars except per share amounts
1995 1994 1993
----------- ----------- -----------
Net sales $ 1,868,927 $ 1,769,964 $ 1,671,692
Other income 9,513 10,851 16,492
----------- ----------- -----------
TOTAL REVENUE 1,878,440 1,780,815 1,688,184
Costs and expenses:
Material, labor and other production costs 676,085 672,020 661,183
Selling, distribution and marketing 727,087 655,823 616,538
Administrative and general 231,234 226,661 202,429
Interest 16,871 16,897 26,924
----------- ----------- -----------
1,651,277 1,571,401 1,507,074
----------- ----------- -----------
Income before income taxes and
cumulative effect of accounting changes 227,163 209,414 181,110
Income taxes 78,371 78,530 68,822
----------- ----------- -----------
Income before cumulative
effect of accounting changes 148,792 130,884 112,288
Cumulative effect of accounting changes,
net of tax - 17,182 -
----------- ----------- -----------
NET INCOME $ 148,792 $ 113,702 $ 112,288
=========== =========== ===========
Income per share:
Before cumulative effect of
accounting changes $ 2.00 $ 1.77 $ 1.55
Cumulative effect of
accounting changes, net of tax - .23 -
----------- ----------- -----------
NET INCOME PER SHARE $ 2.00 $ 1.54 $ 1.55
=========== =========== ===========
Average number of shares outstanding 74,305,346 73,809,132 72,440,114
See notes to consolidated financial statements.
1993 share and per share amounts have been restated to reflect the 1994 stock
split.
- 17 -
18
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
February 28, 1995 and 1994
Thousands of dollars
ASSETS 1995 1994
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 87,151 $ 101,066
Trade accounts receivable, less allowances for
sales returns of $102,004 ($97,903 in 1994) and
for doubtful accounts of $14,968 ($13,084 in 1994) 324,329 322,675
Inventories:
Raw material 54,196 48,845
Work in process 40,608 38,956
Finished products 225,959 202,620
----------- -----------
320,763 290,421
Less LIFO reserve 86,169 84,970
----------- -----------
234,594 205,451
Display material and factory supplies 44,676 37,906
----------- -----------
Total inventories 279,270 243,357
Deferred income taxes 66,409 62,075
Prepaid expenses and other 136,290 121,022
----------- -----------
Total current assets 893,449 850,195
OTHER ASSETS 419,477 286,117
PROPERTY, PLANT AND EQUIPMENT
Land 5,533 5,975
Buildings 266,375 265,220
Equipment and fixtures 590,071 522,770
----------- -----------
861,979 793,965
Less accumulated depreciation 413,154 365,043
----------- -----------
Property, plant and equipment - net 448,825 428,922
----------- -----------
$ 1,761,751 $ 1,565,234
=========== ===========
See notes to consolidated financial statements.
- 18 -
19
CONSOLIDATED STATEMENT OF FINANCIAL POSITION - CONTINUED
February 28, 1995 and 1994
Thousands of dollars
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
----------- -----------
CURRENT LIABILITIES
Debt due within one year $ 123,407 $ 132,036
Accounts payable 140,660 127,792
Payroll and payroll taxes 53,136 53,164
Retirement plans 20,633 20,766
Dividends payable 10,426 9,300
Income taxes 13,988 32,857
----------- -----------
Total current liabilities 362,250 375,915
LONG-TERM DEBT 74,480 54,207
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 17,815 19,427
OTHER LIABILITIES 90,969 -
DEFERRED INCOME TAXES 56,696 62,243
SHAREHOLDERS' EQUITY
Common shares - par value $1:
Class A - 69,825,377 shares issued
less 151,619 Treasury shares in 1995
and 69,590,011 shares issued less
43,886 Treasury shares in 1994 69,674 69,546
Class B - 6,066,096 shares issued
less 1,438,083 Treasury shares in 1995
and 6,066,096 shares issued less
1,493,152 Treasury shares in 1994 4,628 4,573
Capital in excess of par value 255,022 249,192
Treasury stock (30,585) (28,240)
Cumulative translation adjustment (22,226) (16,421)
Retained earnings 883,028 774,792
----------- -----------
Total shareholders' equity 1,159,541 1,053,442
----------- -----------
$ 1,761,751 $ 1,565,234
=========== ===========
See notes to consolidated financial statements.
- 19 -
20
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended February 28, 1995, 1994 and 1993
Thousands of dollars
1995 1994 1993
--------- --------- ---------
OPERATING ACTIVITIES:
Net income $ 148,792 $ 113,702 $ 112,288
Adjustments to reconcile to net cash
provided (used) by operating activities:
Postretirement benefit obligation - 22,530 -
Depreciation 68,438 59,575 48,450
Deferred income taxes (9,736) (15,809) (9,286)
Changes in operating assets and liabilities:
Increase in trade accounts receivable (4,973) (37,940) (17,498)
(Increase) decrease in inventories (37,944) (13,196) 39,279
Increase in other current assets (14,860) (31,256) (35,263)
Increase in deferred cost - net (45,746) (52,887) (16,942)
(Decrease) increase in accounts
payable and other liabilities (4,879) 23,008 43,401
Other - net 7,906 7,886 4,851
--------- --------- ---------
Cash Provided by Operating Activities 106,998 75,613 169,280
INVESTING ACTIVITIES:
Property, plant and equipment additions (97,290) (102,859) (77,099)
Proceeds from sale of fixed assets 3,447 1,009 592
Investment in corporate-owned life insurance 1,813 18,930 471
Other (2,966) 1,344 (10,473)
--------- --------- ---------
Cash Used by Investing Activities (94,996) (81,576) (86,509)
FINANCING ACTIVITIES:
Increase in long-term debt 30,914 19,519 19,103
Reduction of long-term debt (29,862) (216,892) (3,911)
Increase (decrease) in short-term debt 9,919 89,456 (16,717)
Sale of stock under benefit plans 7,130 21,792 15,100
Purchase of treasury shares (3,462) (6,399) (8,028)
Dividends to shareholders (40,556) (35,633) (30,494)
--------- --------- ---------
Cash Used by Financing Activities (25,917) (128,157) (24,947)
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (13,915) (134,120) 57,824
Cash and Equivalents at Beginning of Year 101,066 235,186 177,362
--------- --------- ---------
Cash and Equivalents at End of Year $ 87,151 $ 101,066 $ 235,186
========= ========= =========
See notes to consolidated financial statements.
- 20 -
21
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended February 28, 1995, 1994 and 1993
Thousands of dollars except per share amounts
Common Shares Capital in Cumulative
--------------------- Excess of Treasury Translation Retained
Class A Class B Par Value Stock Adjustment Earnings Total
------- ------- --------- ----- ---------- -------- -----
BALANCE FEBRUARY 29, 1992 $33,869 $2,015 $241,164 $(28,524) $ (551) $617,073 $ 865,046
Net income 112,288 112,288
Cash dividends-$.42 per share (30,494) (30,494)
Exchange of shares (23) 23
Sale of shares under benefit
plans, including tax benefits 258 177 8,497 5,274 (2,921) 11,285
Purchase of treasury shares (1) (177) (7,850) (8,028)
Sale of treasury shares 89 2,948 777 3,814
Translation adjustment (11,029) (11,029)
Issuance of stock in acquisition 221 9,432 9,653
------- ------ -------- -------- -------- -------- ----------
BALANCE FEBRUARY 28, 1993 34,324 2,127 259,093 (28,152) (11,580) 696,723 952,535
Net income 113,702 113,702
Cash dividends-$.48 per share (35,633) (35,633)
Exchange of shares 16 (16)
Sale of shares under benefit
plans, including tax benefits 251 24 7,279 430 7,984
Purchase of treasury shares (2) (210) (6,857) (7,069)
Sale of treasury shares 418 8,551 5,509 14,478
Translation adjustment (4,841) (4,841)
Issuance of stock in acquisition 252 12,034 12,286
Issuance of 34,704,750 class A
shares and 2,229,618 class B
shares to effect two-for-one
stock split 34,705 2,230 (37,765) 830
------- ------ -------- -------- -------- -------- ----------
BALANCE FEBRUARY 28, 1994 69,546 4,573 249,192 (28,240) (16,421) 774,792 1,053,442
Net income 148,792 148,792
Cash dividends-$.55 per share (40,556) (40,556)
Exchange of shares 19 (19)
Sale of shares under benefit
plans, including tax benefits 239 5 4,854 123 5,221
Purchase of treasury shares (130) (5) (3,469) (3,604)
Sale of treasury shares 74 976 1,001 2,051
Translation adjustment (5,805) (5,805)
------- ------ -------- -------- -------- -------- ----------
BALANCE FEBRUARY 28, 1995 $69,674 $4,628 $255,022 $(30,585) $(22,226) $883,028 $1,159,541
======= ====== ======== ======== ======== ======== ==========
See notes to consolidated financial statements.
- 21 -
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 28, 1995, 1994 and 1993
Thousands of dollars except per share amounts
NOTE A - ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts of
the Corporation and its subsidiaries. All intercompany transactions are
eliminated.
Cash Equivalents: The Corporation considers all highly liquid instruments
purchased with a maturity of less than three months to be cash equivalents.
Financial Instruments: The carrying value of the Corporation's financial
instruments approximate their fair market values.
Concentration of Credit Risks: The Corporation sells primarily to customers in
the retail trade, including those in the mass merchandiser, drug store,
supermarket and other channels of distribution. These customers are located
throughout the United States, Canada, the United Kingdom, France and Mexico.
The Corporation conducts business based on periodic evaluations of its
customers' financial condition and generally does not require collateral.
While the competitiveness of the retail industry presents an inherent
uncertainty, the Corporation does not believe a significant risk of loss from a
concentration of credit exists.
Inventories: Finished products, work in process and raw material inventories
are carried at cost, principally last-in, first-out (LIFO), not in excess of
market. Display material and factory supplies are carried at average cost.
In 1993, certain inventory quantities were reduced, resulting in liquidations
of LIFO inventory quantities carried at lower costs prevailing in prior years.
The effect was to increase net income by $2,716 in that year.
Investment in Life Insurance: The Corporation's investment in corporate-owned
life insurance policies is recorded net of policy loans in other assets. The
net life insurance expense, including interest expense, is included in
administrative and general expenses in the Consolidated Statement of Income.
The related interest expense, which approximates amounts paid, is $59,344,
$43,543 and $31,851 in 1995, 1994 and 1993, respectively.
Property and Depreciation: Property, plant and equipment is carried at cost.
Depreciation and amortization of buildings, equipment and fixtures is computed
principally by the straight-line method over the useful lives of the various
assets.
- 22 -
23
NOTE A - ACCOUNTING POLICIES (CONT'D)
Other Liabilities: The other liabilities classification represents payment
commitments relating to agreements with certain customers due primarily in
1997.
Revenue Recognition: Sales and related costs are recorded by the Corporation
upon shipment of products to non-related retailers and upon the sale of
products at Corporation-owned retail locations. Seasonal cards are sold with
the right of return on unsold merchandise. The Corporation provides for
estimated returns of seasonal cards when those products are shipped to
non-related retailers.
Advertising Expense: Advertising costs are expensed as incurred. Advertising
expense was $58,342, $48,228 and $48,069 in 1995, 1994 and 1993, respectively.
Income Taxes: Deferred income taxes are provided for temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Stock Split and Earnings Per Share: Income per share information is based on
the average number of shares outstanding during each year. On June 25, 1993,
the Corporation declared a two-for-one stock split of the Corporation's common
stock, effected in the form of a 100% share dividend. Such distribution was
made on September 10, 1993 to shareholders of record at the close of business
on August 27, 1993. All 1993 share and per share amounts have been restated to
retroactively reflect the stock split. For the years presented, stock options
do not have a material dilutive effect.
NOTE B - PREPAID EXPENSES AND OTHER
The prepaid expenses and other classification consists of deferred costs
relating to agreements with certain customers, cash and short-term investments
held in trust for the payment of medical benefits, and prepaid rent and
insurance.
The largest component of prepaid expenses and other is deferred costs estimated
to be charged to operations during the next year and are $110,890 and $98,004
at February 28, 1995 and 1994, respectively.
NOTE C - OTHER ASSETS
The other assets classification consists of various long-term assets such as
deferred costs relating to agreements with certain customers, corporate-owned
life insurance, goodwill and equity investments. The largest component of
other assets is deferred costs, which are $311,503 and $174,524 at February 28,
1995 and 1994, respectively. Deferred costs are charged to operations on a
straight-line basis over the effective period of the agreement, generally three
to six years. At February 28, 1995, these costs include amounts which, during
1995, were committed for future payment. Deferred costs estimated to be charged
to operations during the next year are classified with prepaid expenses and
other.
- 23 -
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - LONG AND SHORT-TERM DEBT
The Corporation has a $400,000 domestic revolving credit agreement which
supports its commercial paper borrowing arrangement. The agreement provides an
option to convert up to $200,000 to a term loan. The agreement extends through
June 1999 and can be extended annually for one year to the June 30 next
following the expiration date. A commitment fee is due on the unused portion
of the credit facility and can range from 1/10 of 1% to 1/4 of 1%. As of
February 28, 1995, the commitment fee is 1/8 of 1%. The Corporation also has a
$100,000 domestic uncommitted line of credit available for short-term
financing. No borrowings are outstanding under the domestic revolving credit
agreement or the uncommitted line of credit as of February 28, 1995. In
addition, the Corporation's subsidiaries in Canada, the United Kingdom and
France have credit agreements permitting borrowing of up to $157,271 of which
$79,184 is convertible to term loans. At February 28, 1995, $93,973 is
outstanding under these foreign revolving credit facilities, which expire at
various dates, the earliest of which is June 1995. All of the Corporation's
revolving credit agreements provide for various borrowing alternatives in their
respective currencies with interest rates ranging from 7.2% to 8.4% for amounts
borrowed as of February 28, 1995.
At February 28, 1995 and 1994, debt due within one year consists of the
following:
1995 1994
---- ----
Current maturities of long term debt $ 868 $ 19,120
Notes payable 20,758 45,970
Commercial paper 101,781 66,946
-------- --------
Total $123,407 $132,036
======== ========
At February 28, 1995 and 1994, long-term debt consists of the following:
1995 1994
-------- --------
Revolving credit agreements $ 74,321 $ 71,196
Other 1,027 2,131
-------- --------
75,348 73,327
Less current maturities 868 19,120
-------- --------
$ 74,480 $ 54,207
======== ========
Aggregate maturities of long-term debt are as follow:
1996 $ 868
1997 49,302
1998 20
1999 -
2000 -
Thereafter 25,158
-------
$75,348
=======
- 24 -
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - LONG AND SHORT-TERM DEBT (CONT'D)
At February 28, 1995 the Corporation had credit arrangements to support the
issuance of letters of credit in the amount of $40,000 with $31,727 of open
credits outstanding.
Interest paid on short-term and long-term debt was $16,081 in 1995, $17,495 in
1994 and $27,386 in 1993.
During 1993 the Corporation sold an option to enter into an interest rate swap
agreement to hedge a notional amount of $100,000. The cash consideration
received from the sale of the option is recorded as a reduction of interest
expense over the period of the option. On July 15, 1993, the $100,000 8.125%
notes originally due July 15, 1996 were called and replaced with short-term
borrowings. Also on that date, the interest rate swap was exercised. Under the
terms of the swap, the Corporation pays 8.125% fixed and receives the US Dealer
Commercial Paper Composite Rate floating until July 15, 1996, the maturity date
of the swap agreement. At February 28, 1995, the cost to the Corporation upon
cancellation of the swap would be $2,362. However, the Corporation intends to
hold the swap agreement until maturity.
- 25 -
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation sponsors a defined benefit health care plan that provides
postretirement medical benefits to full-time employees who are age 65 or over
at retirement with 15 or more years of service and who were hired on or before
December 31, 1991. In addition, for retirements on or after January 2, 1992
the retiree must have been continuously enrolled for health care for a minimum
of five years or since January 2, 1992. The plan is contributory, with retiree
contributions adjusted periodically, and contains other cost-sharing features
such as deductibles and coinsurance. The Corporation maintains a trust for the
payment of retiree health care benefits. This trust is funded at the
discretion of management.
On March 1, 1993 the Corporation adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions." The statement requires the Corporation to recognize the cost
of providing certain retiree benefits on an accrual basis. The Corporation
elected to immediately recognize the cumulative effect of this accounting
change at March 1, 1993 and reduced income by $36,048 ($22,530 net of tax) in
1994. Postretirement benefit costs for 1993, which were recorded on a cash
basis, have not been restated.
The following table presents the plan's funded status at February 28, 1995 and
1994 as recognized in the Corporation's Consolidated Statement of Financial
Position:
1995 1994
-------- --------
Accumulated postretirement benefit obligation:
Retirees $ 19,318 $ 16,005
Fully eligible active plan participants 5,686 4,994
Other active plan participants 16,701 18,304
-------- --------
Accumulated postretirement benefit obligation 41,705 39,303
Plan assets, primarily listed stocks and bonds (21,970) (18,475)
-------- --------
Accumulated postretirement benefit obligation
in excess of plan assets 19,735 20,828
Unrecognized net loss (1,920) (1,401)
-------- --------
Postretirement benefit obligation $ 17,815 $ 19,427
======== ========
Net periodic postretirement cost includes the following components:
1995 1994
-------- --------
Service cost $ 1,313 $ 1,381
Interest cost 2,965 3,118
Actual return on plan assets (1,209) (897)
-------- --------
$ 3,069 $ 3,602
======== ========
- 26 -
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - OTHER POSTRETIREMENT BENEFITS (CONT'D)
Assumptions used in the computations:
1995 1994
---- ----
Assumed discount rate 8.0% 7.5%
Expected long-term rate of return on plan assets 8.0% 7.0%
A 9% annual rate of increase in per capita cost of covered benefits is assumed
through 1996. This rate decreases to 7.5% in 1997 and to 6% in 2002 and
remains at that level thereafter. This health care trend rate has a
significant impact on the amount reported. For example, a 1% increase in the
trend rate in each year would increase the accumulated postretirement benefit
obligation at February 28, 1995 by $6,465 and increase aggregate service and
interest cost for the year by $915.
NOTE F - LONG TERM LEASES
The Corporation is committed under noncancelable operating leases for
commercial properties (many of which have been subleased) and equipment, terms
of which are generally less than 25 years. Rental expense under operating
leases for the years ended February 28, 1995, 1994 and 1993 follows:
1995 1994 1993
-------- -------- --------
Gross rentals ............................ $ 63,247 $ 63,377 $ 65,707
Less sublease rentals .................... 8,378 7,733 6,196
-------- -------- --------
Net rental expense ....................... $ 54,869 $ 55,644 $ 59,511
======== ======== ========
At February 28, 1995, future minimum rental payments for noncancelable
operating leases, net of aggregate minimum noncancelable sublease rentals to be
received, follow:
Gross Rentals:
1996 ..................................................... $ 50,222
1997 ..................................................... 44,407
1998 ..................................................... 39,289
1999 ..................................................... 36,504
2000 ..................................................... 33,391
Later years .............................................. 168,432
--------
372,245
Sublease rentals ......................................... (72,364)
---------
Net rentals .............................................. $ 299,881
=========
- 27 -
28
NOTE G - INCOME TAXES
Income (loss) before income taxes and the cumulative effect of accounting
changes:
1995 1994 1993
-------- -------- --------
United States $235,515 $222,957 $192,990
Foreign (8,352) (13,543) (11,880)
-------- -------- --------
$227,163 $209,414 $181,110
======== ======== ========
Income taxes have been provided as follows:
1995 1994 1993
-------- -------- --------
Current:
Federal $ 72,242 $ 78,274 $ 63,721
Foreign 1,416 1,936 3,677
State and local 14,393 10,376 12,062
-------- -------- --------
88,051 90,586 79,460
Deferred (principally federal) (9,680) (12,056) (10,638)
-------- -------- --------
$ 78,371 $ 78,530 $ 68,822
======== ======== ========
Significant components of the Corporation's deferred tax liabilities and assets
at February 28, 1995 and 1994 are as follow:
1995 1994
-------- --------
Deferred tax liabilities:
Depreciation $ 58,249 $ 60,872
Other 23,971 26,013
-------- --------
Total deferred tax liabilities 82,220 86,885
Deferred tax assets:
Sales returns 31,980 30,228
Other 69,701 70,808
-------- --------
101,681 101,036
Valuation allowance (9,748) (14,321)
-------- --------
Total deferred tax assets 91,933 86,715
-------- --------
Net deferred assets/(liabilities) $ 9,713 $ (170)
======== ========
The decrease in the valuation allowance was primarily due to the reduction of
net operating loss carryforwards in the United Kingdom.
- 28 -
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - INCOME TAXES (CONT'D)
The statutory federal income tax rate and the effective income tax rate are
reconciled as follows:
1995 1994 1993
----- ---- ----
Statutory rate 35.0% 35.0% 34.0%
State and local income taxes, net
of federal tax benefit 3.8 3.4 4.4
Subsidiaries' losses without tax benefit 1.3 3.1 4.1
Corporate-owned life insurance investments (6.7) (5.4) (4.3)
Other 1.1 1.4 (.2)
---- ---- ----
Effective tax rate 34.5% 37.5% 38.0%
==== ==== ====
Income taxes paid were $101,982 in 1995, $83,290 in 1994, and $67,108 in 1993.
No deferred taxes have been provided on approximately $43,000 of undistributed
earnings of foreign subsidiaries since substantially all of these earnings are
necessary to meet their business requirements. It is not practicable to
calculate the deferred taxes associated with these earnings, however, foreign
tax credits would be available to reduce federal income taxes in the event of
distribution. At February 28, 1995 the Corporation had approximately $28,000
of foreign operating loss carryforwards with no expiration date.
The Corporation adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" effective March 1, 1993. This statement required
the Corporation to change its method of accounting for income taxes from the
deferred method to the liability method. Under the liability method, deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The cumulative effect of adopting the
statement as of March 1, 1993 was to increase net income by $5,348.
- 29 -
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - COMMON SHARES AND STOCK OPTIONS
At February 28, 1995 and 1994, common shares authorized consisted of 93,800,000
Class A and 7,916,484 Class B shares. At February 28, 1993, common shares
authorized consisted of 46,900,000 Class A and 3,958,242 Class B shares. On
June 25, 1993, the shareholders approved increases in the authorized number of
Class A and Class B shares to 93,800,000 and 7,916,484, respectively. On that
date, the Board of Directors of the Corporation declared a two-for-one stock
split of the Corporation's Class A and Class B common stock, to be effected in
the form of a 100% share dividend. Such distribution was made on September 10,
1993, to shareholders of record at the close of business August 27, 1993.
Class A shares have one vote per share and Class B shares have ten votes per
share. There is no public market for the Class B common shares of the
Corporation. Pursuant to the Corporation's Amended Articles of Incorporation,
a holder of Class B common shares may not transfer such Class B common shares
(except to permitted transferees, a group that generally includes members of
the holder's extended family, family trusts and charities) unless such holder
first offers such shares to the Corporation for purchase at the most recent
closing price for the Corporation's Class A common shares. If the Corporation
does not purchase such Class B common shares, the holder must convert such
shares, on a share for share basis, into Class A common shares prior to any
transfer. During 1994, the Corporation purchased 165,762 Class B shares from
a Director of the Corporation at the then-current market price of the shares.
Under the Corporation's Stock Option Plans, options to purchase Class A and
Class B shares are granted to officers and other key employees at the
then-current market price. In general, subject to continuing employment,
options become exercisable commencing one year after date of grant in four
equal annual installments and expire over a period of not more than ten years
from the date of grant. The options for certain Class B shares become
exercisable commencing one year after date of grant in ten equal annual
installments.
- 30 -
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - COMMON SHARES AND STOCK OPTIONS (CONT'D)
Stock option transactions and prices are summarized as follow:
Options Price Range
Number of Options Per Share
----------------------- --------------------------------------
Class A Class B Class A Class B
--------- -------- ---------------- ----------------
Options outstanding
February 29, 1992 1,163,112 865,750 $ 5.85 - $20.25 $7.16
Granted 1,743,600 296,000 19.25 - 24.25 19.25 - 19.82
Exercised (516,740) (353,500) 5.85 - 20.25 7.16
Cancelled (85,900) -
--------- --------
Options outstanding
February 28, 1993 2,304,072 808,250 6.75 - 24.25 7.16 - 19.81
Granted 219,475 1,590 24.94 - 31.25 26.75
Exercised (373,207) (34,750) 6.75 - 27.31 7.16 - 19.81
Cancelled (106,800) -
--------- --------
Options outstanding
February 28, 1994 2,043,540 775,090 6.75 - 31.25 19.25 - 26.75
Granted 76,791 - 26.13 - 30.00 -
Exercised (235,366) (5,000) 6.75 - 29.31 19.25
Cancelled (58,000) -
--------- --------
Options outstanding
February 28, 1995 1,826,965 770,090 $ 6.75 - $31.25 $19.25 - $26.75
========= ========
Options exercisable at February 28:
1995 1,202,865 439,590
1994 949,654 285,590
- 31 -
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - RETIREMENT PLANS
The Corporation has a non-contributory profit-sharing plan with a contributory
401(k) provision covering most of its United States employees. Contributions
to the profit-sharing plan were $20,414, $20,445 and $16,966 for 1995, 1994 and
1993, respectively. The Corporation matches a portion of 401(k) employee
contributions contingent upon meeting specified annual operating results goals.
The Corporation's matching contributions were $2,557, $2,577 and $1,750 for
1995, 1994 and 1993, respectively.
The Corporation also has several defined benefit and defined contribution
pension plans covering certain employees in foreign countries. The cost of
these plans was not material in any of the years presented. In the aggregate,
the actuarially computed plan benefit obligation was fully funded.
- 32 -
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - BUSINESS SEGMENT INFORMATION
The Corporation operates predominantly in a single industry: the design,
manufacture and sale of greeting cards and other social expression products.
While the Corporation offers a wide range of items for sale, many of them are
manufactured at common production facilities and marketed by a common sales
force.
In addition to its North American operations, which include the United States
and Canada, the Corporation has subsidiaries in Europe and Mexico.
Revenue transfers between geographic areas and other intergeographic
eliminations are not material. The Corporation does not derive more than 10%
of its total revenue from any individual customer, government agency or export
sales. Operating profit (loss) by geographic segment is revenue less operating
costs, excluding interest, income taxes and cumulative effect of accounting
changes.
Segment information by geographic area for the years ended February 28, 1995,
1994 and 1993 follows:
North Other
America Foreign Consolidated
----------- ----------- ------------
1995
- ----
Total revenue $ 1,775,957 $ 102,483 $ 1,878,440
Operating profit (loss) 251,990 (7,956) 244,034
Total assets excluding
cash and equivalents 1,565,973 108,627 1,674,600
1994
- ----
Total revenue $ 1,679,753 $ 101,062 $ 1,780,815
Operating profit (loss) 239,721 (13,410) 226,311
Total assets excluding
cash and equivalents 1,363,638 100,530 1,464,168
1993
- ----
Total revenue $ 1,582,650 $ 105,534 $ 1,688,184
Operating profit (loss) 221,724 (13,690) 208,034
Total assets excluding
cash and equivalents 1,215,236 97,978 1,313,214
- 33 -
34
QUARTERLY RESULTS OF OPERATIONS
- -------------------------------
(Unaudited)
Thousands of dollars except per share amounts *
The following is a summary of the unaudited quarterly results of operations for
the years ended February 28, 1995 and 1994.
Quarter Ended
------------------------
May 31 August 31 November 30 February 28
--------- --------- ----------- -----------
Fiscal 1995
- -----------
Net sales $ 416,403 $ 401,136 $ 551,036 $ 500,352
Total revenue 418,792 403,089 552,740 503,819
Material, labor and
other production costs 137,741 153,663 211,365 173,316
Net income 33,162 13,416 58,890 43,324
Per share .45 .18 .79 .58
Fiscal 1994
- -----------
Net sales $ 391,959 $ 385,706 $ 518,987 $ 473,312
Total revenue 395,441 388,381 522,504 474,489
Material, labor and
other production costs 143,626 158,840 210,215 159,339
Income before
cumulative effect
of accounting changes 29,027 10,919 51,466 39,472
Cumulative effect of
accounting changes,
net of tax 17,182 - - -
Net income 11,845 10,919 51,466 39,472
Income per share:
Before cumulative
effect of accounting
changes .39 .15 .70 .53
Cumulative effect of
accounting changes,
net of tax .23 - - -
Net income .16 .15 .70 .53
* Per share amounts have been restated, as appropriate, to reflect the 1994
stock split.
- 34 -
35
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
American Greetings Corporation
We have audited the accompanying consolidated statements of financial position
of American Greetings Corporation and subsidiaries as of February 28, 1995 and
1994, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended February 28,
1995. Our audits also included the financial statement schedule listed in the
Index at Item 14. These financial statements and schedule are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and related
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and related schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Greetings Corporation and subsidiaries as of February 28, 1995 and
1994, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended February 28, 1995 in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Notes E and G to the consolidated financial statements, in 1994
the Corporation changed its methods of accounting for postretirement benefits
other than pensions and income taxes.
Ernst & Young LLP
Cleveland, Ohio
March 30, 1995
- 35 -
36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the Corporation's independent
accountants on accounting and financial disclosure matters within the two year
period ended February 28, 1995, or in any period subsequent to such date.
PART III
The Corporation hereby incorporates by reference the information called
for by Part III of Form 10-K from the Corporation's Notice of Annual Meeting of
Shareholders to be held June 23, 1995, and related Proxy Statement filed with
the Securities and Exchange Commission on May 12, 1995.
(Next Item is Part IV)
- 36 -
37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements Page No.
-------------------- --------
Included in Part II of this report:
Consolidated Statement of Income - Years ended 17
February 28, 1995, 1994 and 1993
Consolidated Statement of Financial Position 18 - 19
February 28, 1995 and 1994
Consolidated Statement of Cash Flows - Years ended
February 28, 1995, 1994 and 1993 20
Consolidated Statement of Shareholders' Equity-
Years ended February 28, 1995, 1994 and 1993 21
Notes to Consolidated Financial Statements - Years ended
February 28, 1995, 1994 and 1993 22 - 33
Quarterly Results of Operations (Unaudited) 34
Report of Ernst & Young LLP, Independent Auditors 35
2. Exhibits required by Item 601 of Regulation S-K:
------------------------------------------------
(3) Articles of Incorporation and By-laws
(i) Amended Articles of Incorporation of the Registrant
This Exhibit has been previously filed as an Exhibit to the
Registrant's Form S-3 Registration Statement (Registration No.
33-50255) filed on September 15, 1993, and is incorporated
herein by reference.
(ii) Amended Regulations of the Registrant
This Exhibit has been previously filed as an Exhibit to
Amendment No. 1 to the Registrant's Form S-3 Registration
Statement (Registration No. 33-39726) filed on May 17, 1991,
and is incorporated herein by reference.
- 37 -
38
PART IV - Continued Page No.
--------
(10) Material Contracts
(i) (A) (i) Shareholders Agreement dated November 19, 1984
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1985, and is
incorporated herein by reference.
(ii) Officers' contracts
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1985, and is
incorporated herein by reference.
(iii) Employment Agreement with Edward Fruchtenbaum,
dated May 18, 1992 (as amended).
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1994, and is
incorporated herein by reference.
(ii)(A) (i) Executive Bonus Plan
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1981, and is
incorporated herein by reference.
(ii) Executive Incentive Compensation Plan (as
Amended and Restated as at March 6, 1989)
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1989, and is
incorporated herein by reference.
(iii) Executive Deferred Compensation Plan
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1993, and is
incorporated herein by reference.
- 38 -
39
PART IV - Continued Page No.
--------
(iv) 1982 Incentive Stock Option Plan
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1983, and is
incorporated herein by reference.
(v) 1985 Incentive Stock Option Plan
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1985, and is
incorporated herein by reference.
(vi) Supplemental Executive Retirement Plan
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1993, and is
incorporated herein by reference.
(vii) 1987 Class B Stock Option Plan
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1987, and is
incorporated herein by reference.
(viii) Stock Option Agreement with Morry Weiss dated
January 25, 1988
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 29, 1988, and is
incorporated herein by reference.
(ix) Loan Agreement with Edward Fruchtenbaum dated March 1, 1990
This Exhibit has been previously filed as an Exhibit
to the Registrant's Form 10-K Annual Report for the
Fiscal Year ended February 28, 1991, and is
incorporated herein by reference.
- 39 -
40
PART IV - Continued Page No.
--------
(x) 1992 Stock Option Plan
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form 10-K Annual Report
for the Fiscal Year ended February 28, 1993, and is
incorporated herein by reference.
(xi) CEO/COO Compensation Plans E - 1
(11) Statement Re Computation of Per Share Earnings E - 3
(21) Subsidiaries of the Registrant E - 4
(23) Consent of Independent Auditors E - 5
(27) Financial Data Schedule
Executive Compensation Plans and Arrangements
The Corporation's executive compensation plans and
arrangements are listed under Exhibit 10 hereof.
(b) Reports on Form 8-K
None
(c) Exhibits listed in Item 14(a) 3. are included herein or
incorporated herein by reference
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted
on Page 41.
- 40 -
41
PART IV - Continued Page No.
--------
3. Financial Statement Schedules
-----------------------------
Included in Part IV of the report:
Schedule II - Valuation and Qualifying Accounts S - 1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
- 41 -
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
------------------------------
(Registrant)
Date: May 26, 1995 By: /s/ Jon Groetzinger, Jr.
------------ ------------------------
Jon Groetzinger, Jr.
Secretary
- 42 -
43
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Irving I. Stone Founder-Chairman; )
- ------------------------- Chairman of the )
Irving I. Stone Executive Committee; )
Director )
)
/s/ Morry Weiss Chairman of the Board; )
- ------------------------- Chief Executive Officer; )
Morry Weiss Director )
)
/s/ Edward Fruchtenbaum President; )
- ------------------------- Chief Operating Officer; )
Edward Fruchtenbaum Director )
)
/s/ Scott S. Cowen Director ) May 26, 1995
- ------------------------- )
Scott S. Cowen )
)
/s/ Herbert H. Jacobs Director )
- ------------------------- )
Herbert H. Jacobs )
)
/s/ Albert B. Ratner Director )
- ------------------------- )
Albert B. Ratner )
)
/s/ Harry H. Stone Director )
- ------------------------- )
Harry H. Stone )
)
/s/ Jeanette S. Wagner Director )
- ------------------------- )
Jeanette S. Wagner )
)
/s/ Milton A. Wolf Director )
- ------------------------- )
Milton A. Wolf )
)
/s/ Abraham Zaleznik Director )
- ------------------------- )
Abraham Zaleznik )
)
- 43 -
44
SIGNATURE TITLE DATE
--------- ----- ----
)
/s/ Henry Lowenthal Senior Vice President; ) May 26, 1995
- --------------------- Chief Financial Officer )
Henry Lowenthal (principal financial )
officer) )
)
/s/ William S. Meyer Senior Vice President; )
- --------------------- Controller; Chief )
William S. Meyer Accounting Officer )
(principal accounting )
officer) )
- 44 -
45
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AMERICAN GREETINGS CORPORATION AND SUBSIDIARIES
(000)
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------------
(1) (2)
Balance at Beginning Charged to Costs Charged to Other Deduction-Describe Balance at End
DESCRIPTION of Period and Expenses Accounts-Describe of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended February 28, 1995:
Deduction from asset account:
Allowance for doubtful accounts $ 13,084 $ 8,674 $ (36)(A) $ 6,754(B) $ 14,968
======== ========= ======= ========= =========
Allowance for sales returns $ 97,903 $ 297,899 $ 41 (A) $ 293,839(C) $ 102,004
======== ========= ======= ========= =========
Year ended February 28, 1994:
Deduction from asset account:
Allowance for doubtful accounts $ 13,816 $ 8,827 $ (57)(A) $ 9,502(B) $ 13,084
======== ========= ======= ========= =========
Allowance for sales returns $ 72,054 $ 225,283 $ (581)(A) $ 198,853(C) $ 97,903
======== ========= ======= ========= =========
Year ended February 28, 1993:
Deduction from asset account:
Allowance for doubtful accounts $ 12,576 $ 9,738 $ (305)(A) $ 8,193(B) $ 13,816
======== ========= ======= ========= =========
Allowance for sales returns $ 64,093 $ 167,718 $ (670)(A) $ 159,087(C) $ 72,054
======== ========= ======= ========= =========
Note A: Includes translation adjustment on foreign subsidiary balances and other
minor reclasses and adjustments.
Note B: Accounts charged off, less recoveries.
Note C: Sales returns charged to the allowance account for actual returns for the year.
S - 1