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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, 1998 Number 1-13859
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AMERICAN GREETINGS CORPORATION
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(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
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Securities registered pursuant to Section 12 (b) of the Act:
Class A Common Shares, Par Value $1.00
Securities registered pursuant to Section 12 (g) of the Act:
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
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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. [ X ]
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State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of May 1, 1998 - $3,502,834,313
Number of shares outstanding as of May 1, 1998:
CLASS A COMMON - 71,411,970
CLASS B COMMON - 6,066,096
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement filed with the Securities and Exchange
Commission on May 13 , 1998 with respect to the 1998 Annual Meeting of
Shareholders called for June 26, 1998, 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 social expression products. Greeting
cards, gift wrap, paper party goods, candles, balloons, stationery 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 Limited; in the United
Kingdom by Carlton Cards Limited and Carlton Cards Ltd. (Ireland); in France by
Carlton Cards (France) SNC; in Mexico by Carlton Mexico, S.A. de C.V. ; in
Australia by John Sands (Australia) Ltd.; in New Zealand by John Sands (N.Z.)
Ltd.; and in South Africa by S.A. Greetings Corporation (PTY) Ltd. (80% owned).
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. CreataCard Interactive, Inc. markets
e-mail greetings, personalized greeting cards and other social expression
products through the Corporation's website www.americangreetings.com, co-branded
websites and on-line services. CreataCard Interactive, Inc. also provides design
and verse content which is included in various CD-Rom software products for use
on personal computers. Magnivision, Inc. produces and sells non-prescription
reading glasses and eyeware accessories, and Learning Horizons distributes
supplemental educational products. 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.)
In March 1998, the Corporation acquired Camden Graphics Group
in the United Kingdom. In May 1998, the Corporation acquired Hanson White Ltd.,
also in the United Kingdom. While the acquisition of these greeting card
companies combined with Carlton Cards Limited gives the Corporation a strong
position with the second-largest market share in the UK, the impact on the
Corporation's results as a whole will not be material.
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Many of the Corporation's products are manufactured at common
production facilities and marketed by a common sales force. Marketing and
manufacturing functions in the United States and Canada are 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 M to the
Consolidated Financial Statements included in Part II, Item 8.
The Corporation's products are primarily sold in about 100,000
retail outlets worldwide. In addition, the Corporation licenses its designs to
various foreign licensees, so that in total, the Corporation's products and
designs are available in more than 84 nations around 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.
Total unit sales of greeting cards increased 1% in 1998 after increasing 2% in
1997.
Production of the Corporation's products is generally 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's Day, 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.
At February 28, 1998, the Corporation employed approximately
15,000 full-time employees and approximately 20,600 part-time employees which,
when jointly considered, equate to approximately 20,400 full-time employees.
Approximately 3,400 of the Corporation's hourly plant employees are unionized,
of which approximately 2,500 are covered by the following collective bargaining
agreements:
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Union Plant Location Contract Expiration Date
- ---------------------------- ----------------------------- ------------------------
International Brotherhood Bardstown, Kentucky 4/15/03
of Teamsters Corbin, Kentucky 12/01/02
Amalgamated Clothing & Greeneville, Tennessee 10/20/98
Textile Workers Union (Plus Mark)
Communication, Energy Toronto, Ontario 1/31/98
and Paperworkers Canada (Carlton Cards Limited) (continued
negotiations)
Other locations with unions are Cleveland, Ohio, the United
Kingdom, Mexico, Australia, New Zealand, and South Africa. The Corporation's
headquarters and other manufacturing locations are not unionized.
While labor relations at each location have generally been
satisfactory, unionized employees at the Corporation's Bardstown, Kentucky plant
initiated a ten-day work stoppage that ended April 30, 1998 under an amended
five-year contract. There was no impact on sales attributable to the work
stoppage. Also, contract negotiations continue at the Toronto, Canada
manufacturing and distribution facilities.
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 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 1998, the Corporation's major channel of
distribution continues to be mass retail (which is comprised of mass
merchandisers, chain drug stores and supermarkets), where it is the social
expression industry leader. Other major channels of distribution include card
and gift shops, combo stores (stores combining food, general merchandise and
drug items), military post exchanges, variety stores, and department stores.
Sales to the Corporation's five largest customers, which
include mass merchandisers and major drug stores, accounted for approximately
32.6% of net sales in fiscal 1998. Sales to retail customers are made through 22
sales offices in the United States, Canada, United Kingdom, Australia, New
Zealand, France, Mexico and South Africa.
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 and/or specify a minimum
sales volume commitment.
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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 not been material. Advances, payments and credits made under
these agreements are accounted for as deferred costs. The current and long-term
portions of such deferred costs, including future payment commitments, are
disclosed in Note F to the Consolidated Financial Statements included in Part
II, Item 8. Note F 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.
The operations of the Corporation, like those of other
companies in our industry, are subject to various federal, state and local
environmental laws and regulation. These laws and regulations may give rise to
claims, uncertainties or possible loss contingencies for future environmental
remediation liabilities and costs. The Corporation believes it conducts its
operations in compliance with applicable environmental laws and regulations and
has implemented various programs designed to protect the environment and ensure
continued compliance. The costs associated with these compliance and remediation
efforts have not and are not expected to have a material adverse effect on the
financial condition, cash flows, or operating results of the Corporation.
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Item 2. Properties
As of February 28, 1998, the Corporation owns or leases
approximately 16.2 million square feet of plant, warehouse, store and office
space, of which approximately 5.8 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.
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
- ----------------- ------------- -------------- -------------- ---------
Cleveland, 1,635,000 International headquarters;
Ohio general offices of U.S. Greeting
Card Division, Plus Mark, Inc., AG
Industries, Inc., Carlton Cards Retail,
Inc., CreataCard Inc., CreataCard
Interactive, Inc., Learning Horizons,
Inc., and AGC, Inc.; creation and design
of greeting cards, gift wrap, paper
party goods, candles, balloons,
stationery and giftware
Bardstown, 413,500 Cutting, folding, finishing, and
Kentucky packaging of greeting cards
Corbin, 1,010,000 Printing of greeting cards,
Kentucky gift wrapping and paper party
goods and manufacture of
other related products
Danville, 1,374,000 2001 Distribution of everyday greeting
Kentucky cards and related products
Harrisburg, 417,000 2007 Warehousing for seasonal
Arkansas greeting cards and related
products
Lafayette, 194,000 Manufacture of envelopes
Tennessee for greeting cards and
packaging of cards
McCrory, 771,000 2005 Order filling and shipping of
Arkansas everyday and seasonal
products
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Expiration
Approximate Square Date of
Feet Occupied Material Principal
Location Owned Leased Leases Activity
- -------------- ----------------------------- --------------- ----------
Osceola, 2,800,800 Cutting, folding, finishing and
Arkansas packaging of seasonal greeting
cards and warehousing;
distribution of seasonal
products
Ripley, 165,000 Seasonal card printing and
Tennessee forms
Philadelphia, 120,000 2017 Hand finishing of greeting cards
Mississippi
Shelbyville, 250,000 2002 Warehousing for Carlton
Kentucky Cards Retail, Inc. and distribution
for Learning Horizons, Inc.
Forest City, 498,000 327,500 1998 Manufacture of the
North Carolina and Corporation's display
1999 fixtures and other custom display
fixtures by AG Industries, Inc.
Greeneville, 1,410,000 Printing and packaging of
Tennessee seasonal wrapping items
(2 locations) and order filling and shipping for
Plus Mark, Inc.
Ft. Lauderdale/ 108,000 1999 General offices of Magnivision,
Miami and Inc.; manufacture, order filling and
Florida 2000 shipping of non-prescription
(2 locations) reading glasses
Toronto, 1,084,500 General offices of Carlton
Ontario, Cards (Canada) Limited;
Canada manufacture and distribution
(2 locations) of greeting cards and related
products
Clayton, 208,000 General offices of John Sands
Victoria, (Australia) Ltd.; manufacture of
Australia greeting cards and related
products
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Expiration
Approximate Square Date of
Feet Occupied Material Principal
Location Owned Leased Leases Activity
- -------------- ----------------------------- --------------- ----------
Auckland, 80,000 General offices of John
New Zealand Sands (New Zealand) Ltd.;
manufacture of greeting
cards and related products
Dewsbury, 361,000 87,000 2001 General offices of Carlton
England and Cards (UK) Limited;
(5 locations) 2014 manufacture of greeting
cards and related products
Corby, 85,000 Distribution of greeting cards
England and related products for
Carlton Cards (UK) Limited
Mexico City, 166,000 General offices of Carlton
Mexico Mexico, S.A. de C.V. and
manufacture of greeting
cards and related products
Paris, 70,000 2000 General offices of Carlton
France Cards (France) SNC;
distribution of greeting cards
and related products
Roodepoort, 105,000 2000 General offices of
South Africa S.A. Greetings Corporation;
manufacture and distribution
of greeting cards and related
products
Item 3. Legal Proceedings
1) BEC Group, Inc. v. American Greetings Corporation, Magnivision, Inc., and
Erwin Weiss, in the District Court of Dallas County, Texas, 160th Judicial
District, Case Number 97-00761-H
On January 27, 1997, BEC Group filed suit alleging breach of
confidentiality agreement, unfair competition, and other tort claims
following the termination of the purchase negotiations in September 1996.
The Corporation was contemplating purchase of the Foster Grant business
from BEC Group. The Complaint seeks in excess of $18 million in damages.
The Corporation, Magnivision, and Mr. Weiss deny liability, and Mr. Weiss
has moved to dismiss for lack of jurisdiction.
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2) Custom Expressions Royalty, Inc. et al. v. American Greetings Corporation,
Case No. 3:97CV356-H, United States District Court, Northern District of
North Carolina.
On June 24, 1997, Custom Expressions Royalty, Inc. and its shareholders
individually filed suit against American Greetings Corporation alleging
breach of fiduciary duties, breach of contract, and violation of the North
Carolina Trade Practices Act. The Complaint arises out of a merger on June
16, 1992 between Custom Expressions and American Greetings Corporation. The
Complaint alleges American Greetings has acted unfairly by manipulating
commercial dealings to benefit itself at the expense of Custom Expressions
Royalty, Inc. and that American Greetings has failed to account for and pay
royalties under related Patent License Agreements. The Complaint seeks
damages in the amount of at least $30 million and treble damages for
violation of North Carolina law. The Company denies the allegations and
will vigorously defend against all of the claims.
3) Thorntons Plc. v. Carlton Cards Limited, in the High Court of Justice,
Queen's Bench Division, Birmingham District Registry, 1997 No. ML40017A
In December 1995, Thorntons Plc. filed suit in the United Kingdom claiming
breach of contract arising out of the discontinuance of 29 franchise
agreements after the sale of Carlton Cards Limited's retail stores to
Clinton Cards in September 1995. Trial on the issue of liability began
September 30, 1997, resulting in a judgment in Carlton's favor.
Thorntons has appealed. An appeal is not likely to be heard until 1999.
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, 1998, their positions and offices, and number of years
in executive office:
Years as
Name Age Executive Officer Current Position and Office
- ---- --- ----------------- ---------------------------
Irving I. Stone 89 48 Founder-Chairman and
Chairman of the Executive
Committee
Morry Weiss 58 26 Chairman and
Chief Executive Officer
Edward Fruchtenbaum 50 12 President and
Chief Operating Officer
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Years as
Name Age Executive Officer Current Position and Office
- ---- --- ----------------- ---------------------------
Michael B. Birkholm 46 --- Senior Vice President
Mary Ann Corrigan-Davis 44 1 Senior Vice President
Jon Groetzinger, Jr. 49 10 Senior Vice President,
General Counsel and
Secretary
John M. Klipfell 48 15 Senior Vice President
Harvey Levin 65 17 Senior Vice President
William R. Mason 53 16 Senior Vice President
William S. Meyer 51 10 Senior Vice President,
Chief Financial Officer
Patricia A. Papesh 50 3 Senior Vice President
Erwin Weiss 49 8 Senior Vice President
Jeffrey M. Weiss 34 --- Senior Vice President
George A. Wenz 53 --- Senior Vice President
Thomas T. Zinn, Sr. 49 --- Senior Vice President
Dale A. Cable 50 6 Vice President, Treasurer
Patricia L. Ripple 42 2 Vice President,
Corporate Controller
Mr. Irving I. Stone is the father-in-law of Morry Weiss. Morry
Weiss and Erwin Weiss are brothers. Jeffrey M. Weiss is the son of Morry Weiss.
The Board of Directors annually elects all executive officers; however,
executive officers are subject to removal, with or without cause, at any time.
All of the executive officers listed above have served in the
capacity shown or similar capacities with the Corporation (or major subsidiary)
over the past five years, with the following exceptions.
Michael B. Birkholm was Plant Manager at Osceola, Arkansas from
September 1992 until June 1994; and Vice President, Manufacturing from June 1994
until becoming Senior Vice President in March 1998.
Mary Ann Corrigan-Davis was President of Carlton Cards Retail,
Inc. from December 1992 until January 1996, and Group Managing Director of the
John Sands Group from January 1996 until becoming Senior Vice President in May
1997.
Patricia A. Papesh was Vice President, Creative of the U.S.
Greeting Card Division from December 1992 until becoming Senior Vice President
in April 1995.
Patricia L. Ripple was Director, Tax and Financial Reporting of
the Corporation from November 1991 until April 1993; and Executive Director, Tax
and Financial Reporting of the Corporation from April 1993 until becoming Vice
President and Corporate Controller in September 1996.
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Jeffrey M. Weiss was Vice President, Materials Management of the
Corporation's U.S. Greeting Card Division from October 1996 until May 1997; and
Vice President, Product Management of the Corporation's U.S. Greeting Card
Division from May 1997 until becoming Senior Vice President in January 1998.
George A. Wenz was Vice President, National Accounts from
October 1984 until becoming Senior Vice President in June 1997.
Thomas T. Zinn, Sr. was a Principal with Ernst & Young LLP
before joining the Corporation January 1995 as Vice President, Information
Services. He became Senior Vice President in March 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
- ----------------------
The Corporation's Class A Common stock was listed on the NASDAQ National Market
System through February 10, 1998. Effective February 11, 1998, the Corporation's
Class A Common stock, $1.00 par value per share, is listed on the New York Stock
Exchange under the trading symbol: AM. The high and low stock prices, as
reported in the respective exchange's listing, for the years ended February 28,
1998 and 1997 follow:
1998 1997
------------------------------- -------------------------------
High Low High Low
----------- ------------ ----------- -----------
1st Quarter.................... $ 34-1/2 $ 29-1/4 $ 30-1/2 $ 25-7/8
2nd Quarter.................... 37-1/4 33-1/8 27-3/8 23-1/2
3rd Quarter.................... 38-3/4 34 30-1/4 25-1/8
4th Quarter.................... 45-7/8 35-3/8 31-3/8 25
The ratio of the Corporation's share price to earnings per share was 17.7 at
February 28, 1998 and 13.9 at February 28, 1997.
National City 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.
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(b) Shareholders
- ----------------
At May 1, 1998, there were approximately 31,750 holders of Class A Common Shares
and 250 holders of Class B Common Shares of record and individual participants
in security position listings.
(c) Cash Dividends
- -------------------
Dividends Per Share 1998 1997
- ------------------- --------- ---------
1st Quarter (paid June 10, 1997 and 1996) $ .17 $ .16
2nd Quarter (paid September 10, 1997 and 1996) .18 .17
3rd Quarter (paid December 10, 1997 and 1996) .18 .17
4th Quarter (paid March 10, 1998 and 1997) .18 .17
--------- ---------
$ .71 $ .67
========= =========
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Item 6. Selected Financial Data
Years ended February 28 or 29
Thousands of dollars except per share amounts*
Summary of Operations
- ---------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- -----------
Net sales ............................................. $ 2,198,765 $ 2,161,089 $ 2,003,038 $ 1,868,927 $ 1,769,964
Gross profit .......................................... 1,408,077 1,355,965 1,241,032 1,192,842 1,097,944
Non-recurring (gain) loss ............................. (22,125) - 52,061 - -
Interest expense ...................................... 22,992 30,749 24,290 16,871 16,897
Income before cumulative effect of accounting changes . 190,084 167,095 115,135 148,792 130,884
Cumulative effect of accounting changes, net of tax ... - - - - 17,182
Net income ............................................ 190,084 167,095 115,135 148,792 113,702
Earnings per share:
Before cumulative effect of accounting changes .... 2.58 2.23 1.54 2.00 1.77
Cumulative effect of accounting changes, net of tax - - - - .23
Earnings per share ................................ 2.58 2.23 1.54 2.00 1.54
Earnings per share - assuming dilution ............ 2.55 2.22 1.53 1.98 1.52
Cash dividends per share .............................. .71 .67 .62 .55 .48
Fiscal year end market price per share ................ 45.63 31.00 27.38 29.38 27.88
Average number of shares outstanding .................. 73,708,100 74,818,960 74,528,809 74,305,346 73,809,132
Financial Position
- ------------------
Accounts receivable ................................... $ 373,594 $ 375,324 $ 353,671 $ 324,329 $ 322,675
Inventories ........................................... 271,205 303,611 335,074 279,270 243,357
Working capital ....................................... 506,029 562,148 516,346 531,199 474,280
Total assets .......................................... 2,145,892 2,135,120 2,005,832 1,761,751 1,565,234
Property, plant and equipment additions ............... 67,898 92,895 91,590 97,290 102,859
Long-term debt ........................................ 148,800 219,639 231,073 74,480 54,207
Shareholders' equity .................................. 1,345,217 1,361,655 1,235,022 1,159,541 1,053,442
Shareholders' equity per share ........................ 18.90 18.16 16.53 15.61 14.21
Net return on average shareholders' equity
before cumulative effect of accounting changes .... 14.0% 12.9% 9.6% 13.4% 13.0%
Return on net sales before income taxes and
cumulative effect of accounting changes ........... 13.3% 11.8% 8.7% 12.2% 11.8%
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
The Corporation achieved significant financial success as it reported all-time
record sales and earnings, as well as much improved cash flow. The focus on
enhancing shareholder value resulted in improved performance in virtually all of
the Corporation's businesses. During the year, the Corporation completed a
number of strategic repositioning moves. On August 12, 1997, the Corporation
divested the net assets of Acme Frame Products, Inc. and Wilhold, Inc., which
allowed a re-allocation of resources to initiatives with more potential for
long-term, profitable growth. Successful initiatives to manage working capital
and improve cash flow continued from 1997 and a share repurchase of 4.5 million
shares of Class A common stock was announced and completed. The share repurchase
was funded by the divestiture proceeds and internal cash flow.
The Corporation continuously reviews its portfolio of businesses on an ongoing
basis to ensure that growth opportunities are pursued and return on investments
are aligned with its long-term goals. The acquisition of John Sands in 1996 and
the 1998 divestiture are examples of this process. In March of 1998 the
Corporation acquired London-based Camden Graphics Group which increased our
market share and growth potential in the United Kingdom. The Corporation is
currently pursuing other growth opportunities in the UK. However, the possible
consummation of any such transaction is unlikely to have a material effect on
the Corporation's results as a whole.
RESULTS OF OPERATIONS
REVENUES
The net sales increase of 1.7% in 1998 over 1997, while adversely impacted by a
number of factors, represented the Corporation's 92nd consecutive year of
growth. The divestiture of Acme Frame Products, Inc. and Wilhold, Inc. in the
second quarter of 1998, a de-emphasis on sales of lower margin seasonal gift
accessories and weakening of certain foreign currencies against the United
States dollar, all negatively impacted sales growth. Removing the impact of
these factors would result in a normalized net sales increase of approximately
5.5%. Net sales increased 7.9% in 1997 and 7.2% in 1996.
Net sales of everyday cards continued to be strong and increased 5.8% in 1998
after increasing 10.3% in 1997. The increase in everyday card sales in 1998
reflected the strength of the everyday card market in the United States and in
almost all of the Corporation's foreign markets, particularly the United
Kingdom. The 1997 increase also reflected the acquisition of substantially all
of the assets of the John Sands Group, the largest greeting card business in
Australia and New Zealand. During 1998, the Corporation initiated efforts to
improve sell- through of seasonal card sales which included both targeted
promotions and reduced shipments. These efforts, which should benefit 1999,
resulted in a decrease in seasonal card net sales of 1%. The seasonal card
increase of 12.5% in 1997 reflected the improvement in the retail environment
compared to 1996. Total unit sales of all greeting cards increased 1% in 1998
after increasing 2% in 1997. Demand for certain consumer products, particularly
non-prescription reading glasses and custom display fixtures, rebounded in 1998
after slowing somewhat in 1997, as net sales of non-card products (excluding the
divestiture) increased 4.6%, after an increase of only 1.5% in 1997.
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The contribution of each major product category as a percent of net sales for
the past three years (due to the divestiture, excludes picture frames and hair
accessories from all years) is:
1998 1997 1996
---- ---- ----
Everyday Greeting Cards................................47% 46% 45%
Seasonal Greeting Cards................................22% 23% 22%
Gift Wrapping and Party Goods..........................17% 18% 19%
All Other Products.....................................14% 13% 14%
The All Other Products classification includes giftware, ornaments,
non-prescription reading glasses, educational products, candles, stationery,
calendars, balloons, stickers and custom display fixtures.
EXPENSES AND PROFIT MARGINS
The Corporation's continued focus on profitability resulted in a pre-tax margin
of 12.3% in 1998, compared to 11.8% in 1997 and 11.3% in 1996, excluding
non-recurring items. Continued manufacturing efficiencies and an improved
product mix resulted in material, labor and other production costs which were
36.0% of net sales, down from 37.3% in 1997 and 38.0% in 1996. The improved
product mix included both the strength of high margin everyday card sales as
well as the divestiture of the low margin picture frame and hair accessory
businesses which provided 70 basis points of this improvement. In 1997, strong
high margin card sales, along with a $11.7 million decrease in product cost
variances related to the conversion of the Canadian manufacturing operations to
United States manufacturing processes contributed to the margin improvement. The
cost of providing greeting card cabinets and point of purchase displays in the
United States has been well managed, remaining flat in 1998 after decreasing
$11.1 million in 1997 from 1996.
Selling, distribution and marketing expenses were 39.9% of net sales, up from
38.9% in 1997 and 38.4% in 1996. However, these expenses increased only 4.4%
after increasing 9.1% in 1997, as competitive costs moderated somewhat. As in
prior years, competitive costs increased due to higher amortization of deferred
costs and other expenses related to the Corporation's agreements with certain
retail customers. Deferred costs and the Corporation's method of accounting for
them are described in Note F to the Consolidated Financial Statements. The
growth of selling, distribution, and marketing expenses other than competitive
costs continued to slow, and increased just 1.7% in 1998 after increasing 3.1%
in 1997 and 2.1% in 1996.
Administrative and general expenses were $251.3 million, or 11.4% of net sales
compared to $242.2 million or 11.2% of net sales in 1997. The increase from
prior year is due primarily to costs related to the conversion of information
systems to be year 2000 compliant (which is discussed further under "Year
2000").
Excluding the Year 2000 costs, administrative and general expenses increased
only 1% in 1998 after increasing 6% in 1997. The increase in 1997 was due to the
$6.1 million higher expense of the United States profit sharing plan and
additional administrative and general expense from the operations of the John
Sands Group.
Interest expense decreased $7.8 million in 1998 after increasing $6.5 million in
1997. In 1998 strong cash flow provided by operating and investing activities
resulted in lower borrowing requirements. The increase in 1997 was due primarily
to the long-term debt incurred to purchase the assets of the John Sands Group.
15
16
The 1998 effective tax rate was 35.0% compared to 34.3% in 1997 and 34.2% in
1996. While the rate for all three years reflected tax benefits of the
corporate-owned life insurance, the benefits in 1998 and 1997 were reduced due
to the phase out of the Federal income tax deduction for interest on loans
associated with these policies. See Note J to the Consolidated Financial
Statements for details of the differences between the Federal statutory rate and
the effective tax rate.
NON-RECURRING ITEMS
On August 12, 1997, the Corporation divested the net assets of 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 non-recurring gain of $22.1 million
($13.2 million net of tax, or earnings per share of $.18).
In the third quarter of 1996, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". This Statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
In November 1995, the Corporation determined that the trends in the CreataCard
business indicated that the undiscounted future cash flows from that business
would be less than the carrying value of the long-lived assets related to that
business. As a result, the Corporation recognized a pre-tax, non-cash loss of
$52.1 million for the asset impairment. After the effect of income taxes, the
loss was $35.1 million or earnings per share of $.47. See Note B to the
Consolidated Financial Statements for further discussion of the impairment loss.
NET INCOME AND EARNINGS PER SHARE
Net income in 1998 increased to $190.1 million or earnings per share of $2.58
compared to net income of $167.1 million or earnings per share of $2.23 in 1997
and net income of $115.1 million or earnings per share of $1.54 in 1996.
However, net income in 1998 and 1996 included the impact of non-recurring gains
and losses. In 1998, a gain was recognized upon the divestiture of the net
assets of Acme Frame Products, Inc. and Wilhold, Inc. and without this
non-recurring gain, net income would have been $176.9 million or earnings per
share of $2.40. In 1996, an asset impairment loss was recognized upon the
adoption of SFAS No. 121 and without this non-recurring charge, net income would
have been $150.2 million or earnings per share of $2.01.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the application year. Any of the
Corporation's computer programs 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 software 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 addressing the Year 2000
issue with an enterprise-wide initiative, led by the Corporation's Senior Vice
President of Information Services.
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17
The Corporation believes that with timely modifications to its existing software
and conversion to new software, by both the Corporation and its significant
customers, the Year 2000 issue will 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 computer codes
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 costs, which are estimated to be $30 million
for both modification to existing software and software upgrades, are being
funded through operations.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's continuing initiatives to manage working capital resulted in
significant improvements in cash flow during the past two years. Cash flow from
operations increased $41.3 million in 1998 after increasing $121.1 million in
1997.
Ongoing controls over inventory in 1998, following a sizable reduction of
inventories in 1997, as well as slower growth in accounts receivable in both
years contributed to the increase in cash flow. The improvement in 1998 also
included lower cash payments related to net deferred costs. The significant
improvement achieved in 1997 was also due to higher earnings.
Trade accounts receivable used $20.6 million of cash in 1998 compared to $25.4
million in 1997. The receivable performance in both years reflect strong fourth
quarter sales of everyday cards and accessories. As a percent of net sales,
accounts receivable were 17.0% in 1998, 17.4% in 1997 and 17.7% in 1996.
Inventories as a percent of material, labor and other production costs,
continued to decrease and were 34.3% in 1998, compared to 37.7% in 1997 and 44%
in 1996. The improvements in 1998 and 1997 reflect the Corporation's focused
efforts to reduce inventory levels and were driven by the greeting card
divisions, where inventories declined $16.3 million in 1998 after decreasing
$16.0 million in 1997 from 1996 levels.
Payments under agreements with certain retailers (net of related amortization)
decreased $79.0 million in 1998, after increasing $10.0 million in 1997. The
payments which were made in connection with both new and existing agreements
reflect the fluctuations resulting from various contract payment and renewal
dates. However, the deferred costs which result from the payments are less
volatile as they are amortized over the effective period of the agreement. Total
commitments under the agreements are capitalized as deferred costs when the
agreements are consummated, and any future payment commitments are recorded as
liabilities at that time. Future payment commitments under existing agreements
at the end of 1998 were $132.8 million with $51.7 million due within the next
year. See Note F to the Consolidated Financial Statements for further discussion
of deferred costs related to certain customer agreements.
Investing activities include $82.0 million proceeds from the divestiture of the
net assets of Acme Frame Products, Inc. and Wilhold, Inc. on August 12, 1997. In
1996, the Corporation acquired substantially all of the assets from the John
Sands Group for $85.1 million in cash.
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Capital expenditures decreased $25 million in 1998 from $92.9 million in 1997
which reflected expenditures for the automation of distribution systems, which
began in 1996 and continued during 1997. Capital expenditures for 1999 are
expected to be approximately $70 million.
Investing activities other than capital expenditures and divestitures and
acquisitions used $10.0 million less cash in 1998 after decreasing $9.0 million
in 1997 from 1996. The Corporation's investment in corporate-owned life
insurance required less cash in 1998 due to reduced premium payments while the
increase in 1997 resulted from a decrease in policy loans.
In June 1997, the Corporation's Board of Directors authorized the repurchase of
up to 4.5 million shares of Class A common stock. The entire 4.5 million shares
were repurchased during 1998 at an average price of $37.49 per share or $168.7
million. On March 26, 1998, the Corporation announced that its Board of
Directors authorized an additional repurchase of up to 4 million shares of Class
A common stock.
Financing activities, excluding this share repurchase program, used $25.9
million of cash, including $52.0 million in dividend payments, while in 1997,
financing activities used $44.0 million of cash, including $50.2 million in
dividend payments to shareholders. Dividend payments increased $1.8 million in
1998 and $4.0 million in 1997. In 1996, financing activities included a $154.4
million increase in long-term debt used in part to fund the purchase of assets
from the John Sands Group. The increase in 1996 long-term debt also reflected a
shift in Canadian borrowings from short-term to long-term. Debt as a percent of
total capitalization in 1998 remained at the 1997 level of 20.6% after
decreasing from 22.1% in 1996.
The Corporation's operating cash flow and existing credit facilities are
expected to meet currently anticipated funding requirements. The seasonal nature
of the business results in peak working capital requirements which are financed
primarily through short term borrowings. See Note G to the Consolidated
Financial Statements for further discussion of the Corporation's credit
facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards (SFAS) No. 129,
"Disclosure of Information about Capital Structure," was issued. The Corporation
was previously subject to the requirements of already-existing pronouncements in
this area, and SFAS No. 129 contains no additional disclosure requirements
applicable to the Corporation.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. SFAS
No. 130 establishes a definition and standards for reporting comprehensive
income; however, SFAS No. 130 will have no effect on net income or shareholders'
equity. The Corporation will adopt SFAS No. 130 in the first quarter of 1999, as
required. The Corporation anticipates that comprehensive income will not differ
materially from net income. The Corporation anticipates disclosing comprehensive
income within its Statement of Shareholders' Equity.
Also in June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued. SFAS No. 131 changes the standards for
reporting financial results of segments and defines a segment as a component of
an enterprise about which separate financial information is available and which
is regularly evaluated
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by the "chief operating decision maker." SFAS No. 131 requires financial
information about segments to be reported on the basis of measurement that is
used internally for evaluating segment performance and allocating resources
among the segments. The Corporation will adopt SFAS No. 131 for its 1999
year-end reporting and for quarterly reporting in subsequent years, as required.
The Corporation has not yet determined the effect of this standard on its
segment reporting.
In February 1998, SFAS No. 132, "Employers Disclosures about Pensions and Other
Post Retirement Benefits," was issued. SFAS No. 132 supersedes the disclosure
requirements in SFAS No. 87, SFAS No. 88 and SFAS No. 106. SFAS No. 132
addresses disclosure issues only and does not change measurement or recognition
provisions specified in those statements. SFAS No. 132 eliminates certain
existing disclosure requirements but at the same time adds new disclosures, with
the overall objective to improve and standardize the disclosures about pensions
and other post retirement benefits and to make the required information easier
to prepare and more understandable. The Corporation will adopt SFAS No. 132 in
1999, as required.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP restricts the capitalization of the costs of computer
software developed or obtained for internal use to only external direct costs of
materials and services, payroll costs for employees who are directly associated
with the software development, and interest costs incurred during the
development. All other costs of computer software development are to be expensed
as incurred. Although the SOP is effective for fiscal years beginning after
December 15, 1998, earlier application is encouraged. The Corporation has
elected to apply this SOP effective in 1999. The Corporation is currently
assessing the effect but does not anticipate a material impact on the results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
During 1998, the Corporation, while continuing its long-term record of sales
growth and profitability, also focused on efforts to enhance shareholder value.
These efforts included improved cash flow management, the share repurchase
program and the divestiture of non-core businesses. While all of these efforts
were successful, future revenue trends, profit margins and customer strength are
difficult to predict.
The Corporation has maintained a strong customer base in a wide variety of
channels of distribution through its investment in deferred costs related to
agreements with certain retailers and other competitive arrangements. The
agreements have lessened the impact to the Corporation from loss of business due
to the retailer consolidations which continued in 1998, particularly in the drug
store channel. These agreements have been a strategic element of the
Corporation's growth and the financial condition of the retail customers is
continually evaluated and monitored to reduce risk.
The Corporation has included in the Annual Report certain information other than
historical facts that may constitute "forward-looking" information. Actual
results may differ materially from these projected in the "forward-looking"
statements, including but not limited to the risks discussed above, as well as
retail bankruptcies, a weak retail environment 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, as
well as economic conditions in the various markets served by the Corporation's
operations.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENT OF INCOME
Years ended February 28 or 29, 1998, 1997 and 1996 Thousands of dollars except
per share amounts
1998 1997 1996
------------ ------------ ------------
Net sales $ 2,198,765 $ 2,161,089 $ 2,003,038
Other income 13,349 11,209 8,916
------------ ------------ ------------
Total revenue 2,212,114 2,172,298 2,011,954
Costs and expenses:
Material, labor and other production costs 790,688 805,124 762,006
Selling, distribution and marketing 876,822 839,916 770,044
Administrative and general 251,300 242,179 228,544
Non-recurring (gain) charge (22,125) - 52,061
Interest 22,992 30,749 24,290
------------ ------------ ------------
1,919,677 1,917,968 1,836,945
------------ ------------ ------------
Income before income taxes 292,437 254,330 175,009
Income taxes 102,353 87,235 59,874
------------ ------------ ------------
Net income $ 190,084 $ 167,095 $ 115,135
============ ============ ============
Earnings per share $ 2.58 $ 2.23 $ 1.54
============ ============ ============
Earnings per share - assuming dilution $ 2.55 $ 2.22 $ 1.53
============ ============ ============
Average number of shares outstanding 73,708,100 74,818,960 74,528,809
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF FINANCIAL POSITION
February 28, 1998 and 1997
Thousands of dollars
ASSETS 1998 1997
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 47,623 $ 35,050
Trade accounts receivable, less allowances for
sales returns of $135,584 ($121,856 in 1997) and
for doubtful accounts of $15,661 ($15,264 in 1997) 373,594 375,324
Inventories 271,205 303,611
Deferred and refundable income taxes 120,507 100,732
Prepaid expenses and other 210,316 190,174
---------- ----------
Total current assets 1,023,245 1,004,891
OTHER ASSETS 675,015 667,442
PROPERTY, PLANT AND EQUIPMENT - NET 447,632 462,787
---------- ----------
$2,145,892 $2,135,120
========== ==========
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CONSOLIDATED STATEMENT OF FINANCIAL POSITION - CONTINUED
February 28, 1998 and 1997
Thousands of dollars
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
----------- -----------
CURRENT LIABILITIES
Debt due within one year $ 199,640 $ 133,171
Accounts payable and accrued liabilities 145,554 157,628
Accrued compensation and benefits 84,997 82,569
Income taxes 22,536 5,475
Other current liabilities 64,489 63,900
----------- -----------
Total current liabilities 517,216 442,743
LONG-TERM DEBT 148,800 219,639
OTHER LIABILITIES 91,937 67,839
DEFERRED INCOME TAXES 42,722 43,244
SHAREHOLDERS' EQUITY
Common shares - par value $1:
Class A - 71,321,420 shares issued
less 4,417,399 Treasury shares in 1998
and 70,608,745 shares issued less
14,193 Treasury shares in 1997 66,904 70,594
Class B - 6,066,096 shares issued
less 1,787,665 Treasury shares in 1998
and 6,066,096 shares issued less
1,678,197 Treasury shares in 1997 4,278 4,388
Capital in excess of par value 290,820 272,262
Treasury stock (200,380) (34,850)
Cumulative translation adjustment (23,437) (19,646)
Retained earnings 1,207,032 1,068,907
----------- -----------
Total shareholders' equity 1,345,217 1,361,655
----------- -----------
$ 2,145,892 $ 2,135,120
=========== ===========
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended February 28 or 29, 1998, 1997 and 1996
Thousands of dollars
1998 1997 1996
----------- ----------- ----------
OPERATING ACTIVITIES:
Net income $ 190,084 $ 167,095 $ 115,135
Adjustments to reconcile to net cash
provided (used) by operating activities:
Non-recurring (gain) charge (22,125) - 52,061
Depreciation 65,926 64,566 75,319
Deferred income taxes (20,186) 294 (48,184)
Changes in operating assets and liabilities,
net of effects from divestiture and acquisition:
Increase in trade accounts receivable (20,567) (25,389) (33,967)
Decrease (increase) in inventories 5,915 32,371 (43,804)
Increase in other current assets (4,232) (2,050) (3,434)
Increase in deferred costs - net (15,043) (93,961) (83,939)
Increase (decrease) in accounts payable
and other liabilities 10,402 5,877 (6,907)
Other - net 5,018 5,100 10,542
--------- --------- ---------
Cash Provided by Operating Activities 195,192 153,903 32,822
INVESTING ACTIVITIES:
Business divestiture (acquisition) 82,000 - (85,056)
Property, plant and equipment additions (67,898) (92,895) (91,590)
Proceeds from sale of fixed assets 2,148 2,579 2,065
Investment in corporate-owned life insurance (6,358) (8,454) (1,117)
Other 2,057 (6,283) (22,103)
--------- --------- ---------
Cash Provided (Used) by Investing Activities 11,949 (105,053) (197,801)
FINANCING ACTIVITIES:
Increase in long-term debt 9,430 8,451 154,406
Reduction of long-term debt (6,988) (12,232) (1,012)
Increase (decrease) in short-term debt 8,049 4,869 (6,558)
Sale of stock under benefit plans 16,915 6,997 9,572
Purchase of treasury shares (170,015) (1,863) (2,251)
Dividends to shareholders (51,959) (50,152) (46,199)
--------- --------- ---------
Cash (Used) Provided by Financing Activities (194,568) (43,930) 107,958
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 12,573 4,920 (57,021)
Cash and Equivalents at Beginning of Year 35,050 30,130 87,151
--------- --------- ---------
Cash and Equivalents at End of Year $ 47,623 $ 35,050 $ 30,130
========= ========= =========
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended February 28 or 29, 1998, 1997 and 1996
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 MARCH 1, 1995 $ 69,674 $ 4,628 $ 255,022 $ (30,585) $ (22,226) $ 883,028 $1,159,541
Net income 115,135 115,135
Cash dividends - $0.62 per share (46,199) (46,199)
Exchange of shares 15 (15)
Sale of shares under benefit
plans, including tax benefits 424 36 9,116 486 10,062
Purchase of treasury shares (1) (97) (2,849) (2,947)
Sale of treasury shares 8 128 113 249
Translation adjustment (1,976) (1,976)
Issuance of shares 36 1,121 1,157
---------- --------- ----------- -------- --------- ---------- ---------
BALANCE FEBRUARY 29, 1996 70,148 4,560 265,387 (32,835) (24,202) 951,964 1,235,022
Net income 167,095 167,095
Cash dividends - $0.67 per share (50,152) (50,152)
Exchange of shares 131 (131)
Sale of shares under benefit
plans, including tax benefits 323 44 6,872 587 7,826
Purchase of treasury shares (8) (85) (2,609) (2,702)
Sale of treasury shares 3 7 10
Translation adjustment 4,556 4,556
---------- -------- ----------- ---------- --------- ---------- ----------
BALANCE FEBRUARY 28, 1997 70,594 4,388 272,262 (34,850) (19,646) 1,068,907 1,361,655
Net income 190,084 190,084
Cash dividends - $0.71 per share (51,959) (51,959)
Exchange of shares 107 (107)
Sale of shares under benefit
plans, including tax benefits 713 33 18,386 438 19,570
Purchase of treasury shares (4,510) (45) (166,105) (170,660)
Sale of treasury shares 9 172 137 318
Translation adjustment (3,791) (3,791)
---------- --------- ----------- ---------- ---------- ---------- -----------
BALANCE FEBRUARY 28, 1998 $ 66,904 $ 4,278 $ 290,820 $(200,380) $ (23,437) $1,207,032 $1,345,217
========== ========= =========== ========== ========== ========== ==========
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 28 or 29, 1998, 1997 and 1996
Thousands of dollars except per share amounts
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts of the
Corporation and its subsidiaries. All significant intercompany accounts and
transactions are eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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, Australia, New
Zealand, France, Mexico and South Africa. 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.
Investment in Life Insurance: The Corporation's investment in corporate-owned
life insurance policies is recorded in other assets net of policy loans. 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, was $59,642, $67,788
and $70,485 in 1998, 1997 and 1996, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ACCOUNTING POLICIES (CONTINUED)
Property and Depreciation: Property, plant and equipment are carried at cost,
except for certain assets as described in Note B. Depreciation and amortization
of buildings, equipment and fixtures is computed principally by the
straight-line method over the useful lives of the various assets. The cost of
buildings is depreciated over 25 to 40 years and equipment and fixtures over 3
to 20 years.
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 $61,062, $58,794 and $61,124 in 1998, 1997 and 1996, 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-Based Compensation: The Corporation has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its employee stock options. Because
the exercise price of the Corporation's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. The Corporation has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation".
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - NON-RECURRING GAIN AND CHARGE
During 1998, 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).
During 1996, in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Corporation recorded an impairment loss on the
long-lived assets of its CreataCard business. The trends in the CreataCard
business indicated that the undiscounted future cash flows from this business
would be less than the carrying value of the long-lived assets related to that
business. Accordingly, on November 1, 1995, the Corporation recognized an asset
impairment loss of $52,061 ($35,094 net of tax, or earnings per share of $0.47).
This loss is the difference between the carrying value of the CreataCard
machines and related goodwill and other intangibles, and the fair value of these
assets based on discounted estimated future cash flows.
NOTE C - EARNINGS PER SHARE
The Corporation adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128), at the end of 1998, which replaced the
calculation of primary and fully diluted earnings per share with earnings per
share and earnings per share - assuming dilution. Because common stock
equivalents were immaterial in prior years, no difference exists between the
application of SFAS No. 128 and previous methods. Accordingly, no restatement of
prior years was necessary.
The following table sets forth the computation of earnings per share and
earnings per share - assuming dilution:
1998 1997 1996
------------- ------------- -------------
Numerator:
Net income, earnings per share and earnings
per share - assuming dilution $ 190,084 $ 167,095 $ 115,135
============= ============= =============
Denominator (thousands):
Denominator for earnings per share
- weighted average shares outstanding 73,708 74,819 74,529
Effect of dilutive securities - stock options 838 507 583
------------- ------------- -------------
Denominator for earnings per share - assuming dilution
- adjusted weighted average shares outstanding 74,546 75,326 75,112
============= ============= =============
Earnings per share $ 2.58 $ 2.23 $ 1.54
============= ============= =============
Earnings per share - assuming dilution $ 2.55 $ 2.22 $ 1.53
============= ============= =============
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - INVENTORIES
1998 1997
-------------- -------------
Raw material $ 42,641 $ 48,299
Work in process 37,204 47,113
Finished products 240,845 253,096
-------------- -------------
320,690 348,508
Less LIFO reserve 90,130 89,061
-------------- -------------
230,560 259,447
Display material and factory supplies 40,645 44,164
-------------- -------------
$ 271,205 $ 303,611
============== =============
NOTE E - PROPERTY, PLANT AND EQUIPMENT
1998 1997
-------------- -------------
Land $ 11,910 $ 10,028
Buildings 279,395 282,726
Equipment and fixtures 647,438 627,440
-------------- -------------
938,743 920,194
Less accumulated depreciation 491,111 457,407
-------------- -------------
$ 447,632 $ 462,787
============== =============
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - 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.
At February 28, 1998 and 1997 deferred costs and future payment commitments are
included in the following financial statement captions:
1998 1997
-------------- --------------
Prepaid expenses and other $ 179,818 $ 161,601
Other assets 481,236 464,599
Other current liabilities (51,676) (51,153)
Other liabilities (81,080) (54,199)
--------------- --------------
$ 528,298 $ 520,848
=============== =============
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30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - LONG AND SHORT-TERM DEBT
The borrowings of the Corporation in the United States consist primarily of
commercial paper. At February 28, 1998, commercial paper borrowings were
$148,855. The commercial paper borrowing arrangements are supported by a
$650,000 revolving credit agreement. The agreement provides an option to convert
up to $200,000 to a term loan. The agreement extends through June 2002, except
for $250,000 which extends through June 1998. The expiration date of $400,000 of
the agreement 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 0.08% to 0.25%. As of February 28, 1998,
the commitment fee was 0.125% on $400,000 of the facility, and 0.08% on $250,000
of the facility. No borrowings are outstanding under this facility as of
February 28,1998. However, the amount available under this facility is reduced
by $153,872 of commercial paper issued at February 28, 1998.
The borrowings of the Corporation in Canada consist solely of commercial paper.
At February 28, 1998, commercial paper borrowings, classified as long-term, were
$75,247. The commercial paper borrowing arrangements up to $70,230 are supported
by a revolving credit agreement for that amount that extends through January
2000. The expiration date of the agreement can be extended for one year during
each of the next two years to the January 15 next following the expiration date.
A facility fee is due on the aggregate amount of the facility, and can range
from 0.07% to 0.25%. At February 28, 1998, the facility fee was 0.08%. No
borrowings are outstanding under this facility as of February 28,1998. However,
the amount available under this facility is reduced by $70,230 of commercial
paper issued at February 28,1998. Commercial paper borrowings in Canada up to an
additional $35,115 are supported by the revolving credit agreement in the United
States.
The Corporation's subsidiaries in the United Kingdom, Australia, France, Mexico
and South Africa have credit agreements permitting borrowings of up to $186,372.
At February 28, 1998, $121,562 is outstanding under these foreign revolving
credit facilities, of which $71,472 is classified as long-term.
All of the Corporation's revolving credit and term loan agreements provide for
various borrowing alternatives in their respective currencies with interest
rates generally ranging from 3.9% to 8.2% for amounts borrowed as of February
28, 1998.
At February 28, 1998 and 1997, debt due within one year consists of the
following:
1998 1997
--------------- ---------------
Current maturities of long-term debt $ 695 $ 436
Foreign revolving credit facilities 46,505 -
--------------- ---------------
Aggregate current maturities 47,200 436
Notes payable 3,585 2,991
Commercial paper 148,855 129,744
--------------- ---------------
$ 199,640 $ 133,171
=============== ===============
30
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - LONG AND SHORT-TERM DEBT (CONTINUED)
At February 28, 1998 and 1997, long-term debt consists of the following:
1998 1997
--------------- ---------------
Revolving credit, commercial paper,
and term loan agreements $ 193,224 $ 217,240
Other 2,776 2,835
--------------- ---------------
196,000 220,075
Less current maturities 47,200 436
--------------- ---------------
$ 148,800 $ 219,639
=============== ===============
Aggregate maturities of long-term debt are as follows:
1999 $ 47,200
2000 75,940
2001 530
2002 71,032
2003 12
Thereafter 1,286
---------------
$ 196,000
===============
At February 28, 1998 the Corporation had credit arrangements to support the
issuance of letters of credit in the amount of $97,023 with $25,260 of open
credits outstanding.
Interest paid on short-term and long-term debt was $22,735 in 1998, $29,914 in
1997 and $23,395 in 1996.
The weighted average interest rate on short-term borrowings outstanding was 5.8%
and 5.5% as of February 28, 1998 and 1997, respectively.
31
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - LONG AND SHORT-TERM DEBT (CONTINUED)
As of February 28, 1998, the Corporation's subsidiary in Australia has an
interest rate swap agreement for notional borrowings of $33,940 under which the
Corporation pays a fixed rate and receives a floating rate. The pay rate and
receive rate under this agreement are 5.1% and 5.0%, respectively. This
agreement matures October 3, 1999. The floating rate under the agreement is
based on the three-month Australian Bank Bill Rate. Net payments or receipts
under the agreement are recognized as an adjustment to interest expense. The
agreement was entered into with a major financial institution, and the
Corporation anticipates that the financial institution will satisfy its
obligations under the agreement. The Corporation guarantees payment of the
subsidiary's obligations under the swap agreement. No collateral is held in
relation to the agreement.
NOTE H - 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 $23,850, $22,990 and $16,846 for 1998, 1997 and
1996, 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 $2,802, $2,698 and $2,760 for
1998, 1997 and 1996, 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 I - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation sponsors a defined benefit health care plan that provides
postretirement medical benefits to full-time United States 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.
The following table presents the plan's funded status at February 28, 1998 and
1997:
1998 1997
----------- -----------
Accumulated postretirement benefit obligation:
Retirees $ 30,271 $ 22,821
Fully eligible active plan participants 4,917 5,778
Other active plan participants 28,489 22,728
----------- -----------
Accumulated postretirement benefit obligation 63,677 51,327
Plan assets, primarily listed stocks and bonds (39,760) (32,358)
----------- ------------
Accumulated postretirement benefit obligation
in excess of plan assets 23,917 18,969
Unrecognized net loss (13,314) (5,546)
----------- -----------
Accrued postretirement benefit obligation $ 10,603 $ 13,423
============ ===========
The accrued postretirement benefit obligation is included in the other
liabilities financial statement caption.
Net periodic postretirement benefit cost includes the following components:
1998 1997 1996
----------- ------------ ----------
Service cost $ 1,711 $ 1,594 $ 1,280
Interest cost 4,282 3,441 3,239
Actual return on plan assets (4,717) (2,379) (2,864)
Asset gain deferred 2,209 274 1,193
Amortization of loss 598 53 -
----------- ------------ ----------
$ 4,083 $ 2,983 $ 2,848
=========== ============ ==========
33
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Assumptions used in the computations:
Assumed discount rate 7.25% 7.25% 7.25%
Expected long-term rate of return on plan assets 8.0% 8.0% 8.0%
A 5% annual rate of increase in per capita cost of covered benefits was assumed.
This health care trend rate has a significant impact on the amounts reported.
For example, a 1% increase in the trend rate in each year would increase the
accumulated postretirement benefit obligation at February 28, 1998 by $10,900
and increase aggregate service and interest cost for the year by $1,140.
34
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - INCOME TAXES
Income (loss) before income taxes:
1998 1997 1996
--------------- -------------- --------------
United States $ 298,817 $ 264,077 $ 191,649
Foreign (6,380) (9,747) (16,640)
--------------- -------------- --------------
$ 292,437 $ 254,330 $ 175,009
=============== ============== =============
Income taxes have been provided as follows:
1998 1997 1996
--------------- ------------- --------------
Current:
Federal $ 107,135 $ 71,582 $ 94,094
Foreign (6,873) 936 (1,045)
State and local 21,318 14,400 14,917
--------------- ------------- --------------
121,580 86,918 107,966
Deferred (principally federal) (19,227) 317 (48,092)
--------------- ------------- --------------
$ 102,353 $ 87,235 $ 59,874
=============== ============= =============
Significant components of the Corporation's deferred tax assets and liabilities
at February 28, 1998 and 1997 are as follows:
Deferred tax assets:
1998 1997
------------- -------------
Sales returns $ 39,152 $ 34,643
Other 121,464 109,345
------------- -------------
160,616 143,988
Valuation allowance (13,362) (11,515)
------------- -------------
Total deferred tax assets 147,254 132,473
Deferred tax liabilities:
Depreciation 44,694 46,005
Other 24,775 28,980
------------- -------------
Total deferred tax liabilities 69,469 74,985
------------- -------------
Net deferred tax assets $ 77,785 $ 57,488
============= =============
The increase in the valuation allowance was due to increases in net operating
loss carryforwards in the United Kingdom and Mexico.
35
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - INCOME TAXES (CONTINUED)
The statutory federal income tax rate and the effective income tax rate are
reconciled as follows:
1998 1997 1996
-------- --------- ------
Statutory rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal tax benefit 4.0 3.9 4.0
Asset impairment loss - - 1.8
Subsidiaries' losses without tax benefit 0.7 1.0 1.8
Corporate-owned life insurance investments (3.4) (4.3) (10.6)
Other (1.3) (1.3) 2.2
------- -------- -------
Effective tax rate 35.0% 34.3% 34.2%
======== ======= =======
Income taxes paid were $101,261 in 1998, $99,391 in 1997 and $94,267 in 1996.
Deferred taxes have not been provided on approximately $53,779 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, 1998, the Corporation had approximately $58,692 of
foreign operating loss carryforwards, of which $31,328 have no expiration dates
and $27,364 have expiration dates ranging from 1999 through 2008.
The Internal Revenue Service is currently examining the Corporation's federal
income tax returns for the fiscal years ended 1993 through 1995 and, as part of
its Coordinated Issues Program, has made inquiries related to the Corporation's
corporate-owned life insurance programs. Although no adjustments to taxable
income have been proposed, the Corporation plans to fully contest any
assessments relative to corporate-owned life insurance.
36
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - COMMON SHARES AND STOCK OPTIONS
At February 28, 1998 and 1997, common shares authorized consisted of 93,800,000
Class A and 7,916,484 Class B shares. 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.
Under the Corporation's Stock Option Plans, options to purchase Class A and
Class B shares are granted to directors, 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 annual
installments and expire over a period of not more than ten years from the date
of grant. The options granted to non-employee directors become exercisable in
six installments over five years. The options for certain Class B shares become
exercisable commencing one year after date of grant in ten equal annual
installments.
The Corporation has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Corporation's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Corporation had accounted for its
employee stock options issued subsequent to February 28, 1995 under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model.
37
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - COMMON SHARES AND STOCK OPTIONS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The pro forma
information for stock options indicate decreases in net income of $4,931 in
1998, $2,347 in 1997 and $180 in 1996. The Corporation's pro forma information
and related assumptions under the Black-Scholes method follow:
1998 1997 1996
-------------- ------------- -------------
Net income $ 185,153 $ 164,748 $ 114,955
Earnings per share $ 2.51 $ 2.20 $ 1.54
Earnings per share - diluted $ 2.48 $ 2.19 $ 1.53
Assumptions:
Risk-free interest rate 6.1% 6.4% 5.7%
Dividend yield 2.0% 2.4% 2.3%
Expected stock volatility 0.26 0.25 0.27
Expected life in years 5.6 4.6 4.6
38
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - COMMON SHARES AND STOCK OPTIONS (CONTINUED)
Stock option transactions and prices are summarized as follow:
Number of Options Options Price Range Per Share
----------------- -----------------------------
Class A Class B Class A Class B
------- ------- ------- -------
Options outstanding
March 1, 1995 1,826,965 770,090 $ 6.75 - $ 31.25 $ 7.16 - $ 26.75
Granted 105,291 6,000 25.75 - 31.63 28.13
Exercised (417,959) (36,000) 7.16 - 30.88 19.25
Cancelled (47,300) -
--------- ---------
1,466,997 740,090 $ 6.75 - $ 31.63 $ 7.16 - $ 28.13
Weighted-Average Exercise Price Per Share
-----------------------------------------
Options outstanding
February 29, 1996 1,466,997 740,090 $ 20.29 $ 11.01
Granted 891,595 215,922 27.29 27.32
Exercised (317,409) (43,500) 18.10 19.31
Cancelled (84,800) - 27.13 -
--------- ---------
Options outstanding
February 28, 1997 1,956,383 912,512 $ 23.57 $ 14.42
Granted 1,453,677 470,000 30.45 29.50
Exercised (616,675) (33,500) 21.14 19.85
Cancelled (182,250) - 28.96 -
--------- ---------
Options outstanding
February 28, 1998 2,611,135 1,349,012 $ 27.58 $ 19.54
========= =========
Options exercisable at February 28:
1998 1,077,035 902,262 $ 24.42 $ 14.84
1997 1,169,083 689,762 20.90 12.79
Exercise prices for options outstanding as of February 28, 1998 ranged from
$7.16 to $44.50. The weighted average remaining contractual life of those
options is 6.7 years.
39
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - LONG-TERM LEASES
The Corporation is committed under noncancelable operating leases for commercial
properties (certain 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 or 29, 1998, 1997 and 1996 follows:
1998 1997 1996
-------------- ------------- -------------
Gross rentals $ 57,320 $ 59,228 $ 61,198
Less sublease rentals 4,985 7,423 7,876
-------------- ------------- -------------
Net rental expense $ 52,335 $ 51,805 $ 53,322
============== ============= =============
At February 28, 1998, future minimum rental payments for noncancelable operating
leases, net of aggregate future minimum noncancelable sublease rentals, follow:
Gross Rentals:
1999 $ 44,609
2000 39,849
2001 35,491
2002 29,952
2003 24,389
Later years 61,554
-------------
235,844
Sublease rentals (17,826)
--------------
Net rentals $ 218,018
=============
40
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - 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. The Corporation's products are sold primarily to drug stores, mass
merchandisers, supermarkets and card and gift stores.
In addition to its North American operations, which include the United States
and Canada, the Corporation has subsidiaries in Europe, Australia, New Zealand,
Mexico and South Africa.
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 and income taxes.
Segment information by geographic area for the years ended February 28 or 29,
1998, 1997 and 1996 follows:
North Other
America Foreign Consolidated
--------------- ---------------- ---------------
1998
- ----
Total revenue $ 2,041,268 $ 170,846 $ 2,212,114
Operating profit before non-recurring gain 283,459 9,845 293,304
Non-recurring gain 22,125 - 22,125
--------------- ---------------- ---------------
Operating profit 305,584 9,845 315,429
Total assets excluding
cash and equivalents 1,883,244 215,025 2,098,269
1997
- ----
Total revenue $ 2,009,455 $ 162,843 $ 2,172,298
Operating profit 279,212 5,867 285,079
Total assets excluding
cash and equivalents 1,870,569 229,501 2,100,070
1996
- ----
Total revenue $ 1,907,942 $ 104,012 $ 2,011,954
Operating profit (loss) before
non-recurring charge 257,667 (6,307) 251,360
Non-recurring charge (49,432) (2,629) (52,061)
---------------- ----------------- ----------------
Operating profit (loss) 208,235 (8,936) 199,299
Total assets excluding
cash and equivalents 1,744,465 231,237 1,975,702
41
42
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, 1998 and 1997.
Quarter Ended
--------------------------------------------------------------------
May 31 August 31 November 30 February 28
------------- --------- ----------- -----------
Fiscal 1998
- -----------
Net sales $ 475,059 $ 484,742 $ 639,655 $ 599,309
Total revenue 477,336 486,966 642,777 605,035
Gross profit 313,585 296,806 397,324 400,362
Non-recurring gain - 22,125 - -
Net income 30,259 26,097 79,038 54,690
Earnings per share .40 .35 1.07 .76
Earnings per share - assuming dilution .40 .35 1.05 .75
Fiscal 1997
- -----------
Net sales $ 438,212 $ 466,536 $ 647,723 $ 608,618
Total revenue 440,127 469,024 651,074 612,073
Gross profit 283,545 278,277 397,568 396,575
Net income 27,772 11,429 74,597 53,297
Earnings per share .37 .15 1.00 .71
Earnings per share - assuming dilution .37 .15 .99 .71
42
43
Report of Independent Auditors
Board of Directors and Shareholders
American Greetings Corporation
We have audited the accompanying consolidated statements of financial position
of American Greetings Corporation as of February 28, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended February 28, 1998. Our audits
also included the financial statement schedule listed in the Index at Item
14(a)3. 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Greetings
Corporation as of February 28, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended February 28, 1998, 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 Note B to the consolidated financial statements, in 1996 the
Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 26, 1998
43
44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the Corporation's independent
auditors on accounting or financial disclosure matters within the three year
period ended February 28, 1998, 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 26, 1998, and related Proxy Statement
filed with the Securities and Exchange Commission on May 13, 1998.
(Next item is Part IV)
44
45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements
--------------------
Included in Part II of this report:
Consolidated Statement of Income -
Years ended February 28 or 29, 1998, 1997 and 1996
Consolidated Statement of Financial Position -
February 28, 1998 and 1997
Consolidated Statement of Cash Flows -
Years ended February 28 or 29, 1998, 1997 and 1996
Consolidated Statement of Shareholders' Equity -
Years ended February 28 or 29, 1998, 1997 and 1996
Notes to Consolidated Financial Statements -
Years ended February 28 or 29, 1998, 1997 and 1996
Quarterly Results of Operations (Unaudited)
Report of Ernst & Young LLP, Independent Auditors
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 the 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.
45
46
PART IV - Continued
(10) Material Contracts
(i) (A) (i) 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, 1997, and is incorporated
herein by reference.
(ii) Employment Agreement with Edward
Fruchtenbaum, dated January 1, 1998 *
(ii) (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, 1997, and is incorporated
herein by reference.
(ii) 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, 1997, and is incorporated
herein by reference.
(iii) 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, 1997, and is incorporated
herein by reference.
(iv) 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.
46
47
PART IV - Continued
(v) 1982 Incentive Stock Option Plan *
This Exhibit has been previously filed as
an Exhibit to the Registrant's Form S-8
Registration Statement (Registration No.
2-84911) dated July 1, 1983, and is
incorporated herein by reference.
(vi) 1985 Incentive Stock Option Plan *
This Exhibit has been previously filed as
an Exhibit to the Registrant's Form S-8
Registration Statement (Registration No.
33-975) dated November 7, 1985, and is
incorporated herein by reference.
(vii) 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.
(viii) 1987 Class B Stock Option Plan
This Exhibit has been previously filed as
an Exhibit to the Registrant's Form S-8
Registration Statement (Registration No.
33-16180) dated July 31, 1987, and is
incorporated herein by reference.
(ix) 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 28, 1997, and is incorporated
herein by reference.
(x) 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, 1997, and is incorporated
herein by reference.
(xi) 1992 Stock Option Plan *
This Exhibit has been previously filed as
an Exhibit to the Registrant's Form S-8
Registration Statement (Registration No.
33-58582) dated February 22,1993, and is
incorporated herein by reference.
47
48
PART IV - Continued
(xii) CEO/COO Compensation Plans *
This Exhibit has been previously filed as
an Exhibit to the Registrant's Form 10-K
Annual Report for the Fiscal Year ended
February 28,1995, and is incorporated
herein by reference.
(xiii) 1995 Director Stock Plan *
This Exhibit has been previously filed as
an Exhibit to the Registrant's Form S-8
Registration Statement (Registration No.
33-61037) dated July 14, 1995, and is
incorporated herein by reference.
(xiv) 1996 Employee Stock Option Plan *
This Exhibit has been previously filed as
an Exhibit to the Registrant's Form S-8
Registration Statement (Registration No.
33-08123) dated July 15, 1996, and is
incorporated herein by reference.
(xv) 1997 Equity and Performance Incentive
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, 1997, and is incorporated
herein by reference.
(iii)(A) (i) Agreement to defer stock option gains with
Morry Weiss dated December 15, 1997 *
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(27) Financial Data Schedule
Executive Compensation Plans and Arrangements
The Corporation's executive compensation plans and
arrangements are listed under Exhibit 10 hereof and
marked by an asterisk (*).
(b) Reports on Form 8-K
None
(c) Exhibits listed in Item 14(a) 3. are included
herein or incorporated herein by reference.
48
49
PART IV - Continued
(d) Financial Statement Schedules
The response to this portion of Item 14 is
submitted below.
3. Financial Statement Schedules
-----------------------------
Included in Part IV of the report:
Schedule II - Valuation and Qualifying Accounts
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.
49
50
PART IV - Continued
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 14, 1998 By: /s/ Jon Groetzinger, Jr.
-------------- ------------------------------
Jon Groetzinger, Jr.
Secretary
50
51
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 14, 1998
- -------------------------------------------- )
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/ William S. Meyer Senior Vice President; )
- -------------------------------------------- Chief Financial Officer )
William S. Meyer (principal financial officer) )
)
)
/s/ Patricia L. Ripple Vice President; )
- -------------------------------------------- Corporate Controller )
Patricia L. Ripple (principal accounting officer) )
)
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52
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AMERICAN GREETINGS CORPORATION AND SUBSIDIARIES
(000)
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
-----------------------------------
Balance (1) (2) Balance
Description at Beginning Charged to Costs Charged to Other Deductions-Describe at End
of Period and Expense Accounts-Describe of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended February 28, 1998:
Deduction from asset account:
Allowance for doubtful accounts $ 15,264 $ 11,585 $ (1,119) (A) $ 10,069 (B) $ 15,661
========== ========== ========= ========== ==========
Allowance for sales returns $ 121,856 $ 337,320 $ (1,040) (A) $ 322,552 (C) $ 135,584
========== ========== ========= ========== ==========
Allowance for other assets $ 16,400 $ 0 $ 0 $ 0 $ 16,400
========== ========== ========= ========== ==========
Year ended February 28, 1997:
Deduction from asset account:
Allowance for doubtful accounts $ 16,214 $ 8,210 $ 113 (A) $ 9,273 (B) $ 15,264
========== ========== ========= ========== ==========
Allowance for sales returns $ 141,412 $ 306,755 $ 164 (A) $ 326,475 (C) $ 121,856
========== ========== ========= ========== ==========
Allowance for other assets $ 16,400 $ 0 $ 0 $ 0 $ 16,400
========== ========== ========= ========== ==========
Year ended February 29, 1996:
Deduction from asset account:
Allowance for doubtful accounts $ 14,968 $ 13,905 $ 367 (A) $ 13,026 (B) $ 16,214
========== ========== ========= ========== ==========
Allowance for sales returns $ 102,004 $ 321,693 $ 238 (A) $ 282,523 (C) $ 141,412
========== ========== ========= ========== ==========
Allowance for other assets $ 5,000 $ 11,400 $ 0 $ 0 $ 16,400
========== ========== ========= ========== ==========
Note A: Includes translation adjustment on foreign subsidiary balances; business
unit disposals for the year ended February 28, 1998 of $1,064 allowance
for doubtful accounts and $392 allowance for sales returns; 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.