<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 1-13859
AMERICAN GREETINGS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0065325
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One American Road, Cleveland, Ohio 44144
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(216) 252-7300
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 31, 1999, the date of this report, the number of shares
outstanding of each of the issuer's classes of common stock was:
Class A Common 59,854,969
Class B Common 4,662,502
<PAGE> 2
AMERICAN GREETINGS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 1
Item 2. Management's Discussion and Analysis............................. 10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............. 17
Item 6. Exhibits and Reports on Form 8-K................................. 18
SIGNATURES......................................................................... 18
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
August 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 936,540 $ 967,641
Costs and expenses:
Material, labor and other production costs 348,586 330,206
Selling, distribution and marketing 454,031 440,916
Administrative and general 108,838 109,506
Restructuring charge 32,747 --
Interest 15,110 13,918
Other expense (income) 1,371 (1,524)
------------ ------------
Total costs and expenses 960,683 893,022
------------ ------------
Income (loss) before income taxes (24,143) 74,619
Income taxes (8,692) 26,863
------------ ------------
Net income (loss) $ (15,451) $ 47,756
============ ============
Earnings (loss) per share $ (0.23) $ 0.67
============ ============
Earnings (loss) per share - assuming dilution $ (0.23) $ 0.67
============ ============
Dividends per share $ 0.20* $ 0.37
============ ============
Average number of common shares outstanding 66,663,719 70,862,530
</TABLE>
* Dividend of $0.19 per share paid June 10, 1999 was declared in February 1999.
See notes to consolidated financial statements.
Page 1
<PAGE> 4
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
August 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 477,783 $ 479,733
Costs and expenses:
Material, labor and other production costs 188,821 170,487
Selling, distribution and marketing 234,709 226,032
Administrative and general 54,235 51,342
Restructuring charge 32,747 --
Interest 7,970 7,345
Other expense 392 3,185
------------ ------------
Total costs and expenses 518,874 458,391
------------ ------------
Income (loss) before income taxes (41,091) 21,342
Income taxes (14,793) 7,417
------------ ------------
Net income (loss) $ (26,298) $ 13,925
============ ============
Earnings (loss) per share $ (0.39) $ 0.20
============ ============
Earnings (loss) per share - assuming dilution $ (0.39) $ 0.20
============ ============
Dividends per share $ 0.20 $ 0.19
============ ============
Average number of common shares outstanding 65,648,721 70,524,337
</TABLE>
See notes to consolidated financial statements.
Page 2
<PAGE> 5
AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
August 31, 1999 Feb. 28, 1999 August 31, 1998
--------------- ------------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 28,525 $ 144,555 $ 76,483
Trade accounts receivable, less allowances
of $87,377, $147,686 and $87,303, respectively
(principally for sales returns) 394,126 390,740 392,884
Total inventories 289,519 251,289 336,664
Deferred income taxes 143,550 133,092 98,844
Prepaid expenses and other 247,849 226,142 221,524
---------- ---------- ----------
Total current assets 1,103,569 1,145,818 1,126,399
Goodwill 134,509 135,516 132,176
Other assets 691,817 703,188 568,171
Property, plant and equipment - at cost 973,577 958,623 943,453
Less accumulated depreciation 549,289 523,817 512,755
---------- ---------- ----------
Property, plant and equipment - net 424,288 434,806 430,698
---------- ---------- ----------
$2,354,183 $2,419,328 $2,257,444
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 144,904 $ 17,777 $ 27,312
Accounts payable and accrued liabilities 214,741 175,366 165,186
Accrued compensation and benefits 62,020 89,284 64,582
Dividends payable 12,904 26,337 13,468
Income taxes 4,573 27,165 12,820
Other current liabilities 111,280 81,745 59,444
---------- ---------- ----------
Total current liabilities 550,422 417,674 342,812
Long-term debt 439,490 463,246 457,506
Other liabilities 112,665 142,045 93,817
Deferred income taxes 52,214 49,752 37,498
Shareholders' equity 1,199,392 1,346,611 1,325,811
---------- ---------- ----------
$2,354,183 $2,419,328 $2,257,444
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE> 6
AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
August 31,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (15,451) $ 47,756
Adjustments to reconcile to net cash
provided (used) by operating activities:
Restructuring charge 32,747 --
Depreciation 32,129 33,741
Deferred income taxes (11,182) 13,777
Change in operating assets and liabilities,
net of effects from acquisitions:
Increase in trade accounts receivable (3,069) (11,973)
Increase in inventories (37,208) (70,825)
Increase in other current assets (18,556) (4,515)
Decrease in deferred cost - net 22,543 16,398
Decrease in accounts payable and
other liabilities (36,397) (19,386)
Other - net 7,008 3,027
--------- ---------
Cash (Used) Provided by Operating Activities (27,436) 8,000
INVESTING ACTIVITIES:
Business acquisitions -- (52,957)
Property, plant & equipment additions (22,597) (21,381)
Investment in corporate-owned life insurance 3,144 6,007
Other - net (17,652) 12,021
--------- ---------
Cash Used by Investing Activities (37,105) (56,310)
FINANCING ACTIVITIES:
Increase in long-term debt 14,979 319,233
Reduction of long-term debt (1,411) (25,785)
Increase (decrease) in short-term debt 89,641 (149,016)
Sale of stock under benefit plans 989 9,676
Purchase of treasury shares (130,054) (50,616)
Dividends to shareholders (25,633) (26,322)
--------- ---------
Cash (Used) Provided by Financing Activities (51,489) 77,170
--------- ---------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (116,030) 28,860
Cash and Equivalents at Beginning of Year 144,555 47,623
--------- ---------
Cash and Equivalents at End of Period $ 28,525 $ 76,483
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE> 7
AMERICAN GREETINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Thousands of dollars)
Six Months Ended August 31, 1999 and 1998
Note A - Basis of Presentation
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q. Although they are unaudited, the Corporation
believes that all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the results of operations have been made.
Note B - Special Charges
During the six months ended August 31, 1999, the Corporation recorded a
restructuring charge of $32,747. The primary components of this charge were
costs associated with the shutdown of the Corporation's Canadian manufacturing
and distribution operations, including employee severance and benefit
termination costs and the costs of closing down the facilities used for those
operations.
In addition, the Corporation recorded a charge of $7,682 during the period to
write down inventory in the Canadian operations. This amount is classified as
material, labor and other production costs.
The total impact of the restructuring and inventory charges net of tax was
$24,224, or $0.36 per share.
Note C - Seasonal Nature of Business
The Corporation's business is seasonal in nature. Therefore, the results of
operations for interim periods are not necessarily indicative of the results
for the fiscal year taken as a whole.
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<PAGE> 8
Note D - Earnings (Loss) Per Share
The following table sets forth the computation of earnings (loss) per share and
earnings (loss) per share - assuming dilution:
<TABLE>
<CAPTION>
Six Months Ended
August 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Numerator:
Net income (loss), earnings per share
and earnings per share -
assuming dilution $(15,451) $ 47,756
======== ========
Denominator (thousands):
Weighted average shares outstanding 66,664 70,863
Effect of dilutive securities - stock options 112 943
-------- --------
Adjusted weighted average shares
outstanding 66,776 71,806
======== ========
Earnings (loss) per share $ (0.23) $ 0.67
======== ========
Earnings (loss) per share - assuming dilution $ (0.23) $ 0.67
======== ========
</TABLE>
Page 6
<PAGE> 9
Note E - Comprehensive Income (Loss)
The Corporation's total comprehensive income (loss) was as follows:
Six Months Ended
August 31,
-----------------------
1999 1998
-------- --------
Net income (loss) $(15,451) $ 47,756
Other comprehensive income (loss)
Foreign currency translation adjustments 2,634 (5,331)
Unrealized gain on available-for-sale securities 7,163 5,431
-------- --------
Other comprehensive income 9,797 100
-------- --------
Total comprehensive income (loss) $ (5,654) $ 47,856
======== ========
Page 7
<PAGE> 10
Note F - Business Segment Information
Three Months Ended
August 31,
-------------------------
1999 1998
--------- ---------
Net Sales
Social Expressions Products $ 403,916 $ 414,703
Intersegment items (21,812) (21,391)
--------- ---------
Total 382,104 393,312
Non-reportable segments 94,234 85,116
Exchange rate adjustment - net 1,445 1,305
--------- ---------
Consolidated total $ 477,783 $ 479,733
========= =========
Earnings
Social Expressions Products $ 49,676 $ 69,843
Intersegment items (15,115) (14,402)
--------- ---------
Total 34,561 55,441
Non-reportable segments (5,814) (2,196)
Restructuring charge (32,747) --
Exchange rate adjustment - net (860) (121)
Unallocated items - net (36,231) (31,782)
--------- ---------
Consolidated total $ (41,091) $ 21,342
========= =========
Six Months Ended
August 31,
-------------------------
1999 1998
--------- ---------
Net Sales
Social Expressions Products $ 791,008 $ 827,974
Intersegment items (39,761) (37,241)
--------- ---------
Total 751,247 790,733
Non-reportable segments 182,477 171,653
Exchange rate adjustment - net 2,816 5,255
--------- ---------
Consolidated total $ 936,540 $ 967,641
========= =========
Earnings
Social Expressions Products $ 108,224 $ 161,701
Intersegment items (28,165) (25,973)
--------- ---------
Total 80,059 135,728
Non-reportable segments (3,354) (265)
Restructuring charge (32,747) --
Exchange rate adjustment - net (878) 107
Unallocated items - net (67,223) (60,951)
--------- ---------
Consolidated total $ (24,143) $ 74,619
========= =========
Page 8
<PAGE> 11
Note G - New Accounting Standards
The Corporation will adopt SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, for the fiscal quarter beginning March 1, 2001, as
required. Because of the Corporation's current minimal use of derivatives, the
Corporation does not anticipate that the adoption of SFAS No. 133 will have a
significant effect on its earnings or financial position.
Note H - Inventories
<TABLE>
<CAPTION>
August 31, 1999 February 28, 1999 August 31, 1998
--------------- ----------------- ---------------
<S> <C> <C> <C>
Raw materials $ 38,259 $ 37,745 $ 39,040
Work in process 29,833 25,523 38,321
Finished products 271,363 229,220 308,736
-------- -------- --------
339,455 292,488 386,097
Less LIFO reserve 92,400 89,207 91,370
-------- -------- --------
247,055 203,281 294,727
Display materials and factory supplies 42,464 48,008 41,937
-------- -------- --------
Inventories $289,519 $251,289 $336,664
======== ======== ========
</TABLE>
Note I - Deferred Costs
Deferred costs relating to agreements with certain customers are charged to
operations on a straight-line basis over the effective period of each
agreement, generally three to six years. Deferred costs estimated to be charged
to operations during the next year are classified with prepaid expenses and
other. Total commitments under the agreements are capitalized as deferred costs
and future payment commitments, if any, are recorded as liabilities when the
agreements are consummated.
As of August 31, 1999, February 28, 1999 and August 31, 1998 deferred costs and
future payment commitments are included in the following financial statement
captions:
<TABLE>
<CAPTION>
August 31, 1999 February 28, 1999 August 31, 1998
--------------- ----------------- ---------------
<S> <C> <C> <C>
Prepaid expenses and other $ 195,734 $ 192,619 $ 186,850
Other assets 560,031 595,136 451,240
Other current liabilities (104,993) (81,745) (59,444)
Other liabilities (81,369) (113,799) (67,093)
--------- --------- ---------
$ 569,403 $ 592,211 $ 511,553
========= ========= =========
</TABLE>
Page 9
<PAGE> 12
Part 1., Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net sales of $477.8 million for the second quarter and $936.5 million for the
six months ended August 31,1999 were down 0.4% and 3.2%, respectively, compared
to the same periods in the prior year. The decreases were primarily due to
reduced shipments of everyday cards reflecting the Corporation's continuing
initiatives to improve productivity of retailers' inventories. The reduced
everyday shipments were partially offset by increased sales of seasonal
promotional boxed cards and gift wrap, and strong sales in the UK market.
Material, labor and other production costs were 39.5% and 37.2% of net sales
for the quarter and six months, respectively. In the second quarter, the
Corporation recorded a $7.7 million inventory write-down relating to the
integration of the Canadian and domestic operations. See Restructuring
Activities and Special Charges below for further discussion. Excluding this
charge, material, labor and other production costs were 37.9% and 36.4% of net
sales for the quarter and six months, respectively, a significant increase from
35.5% and 34.1% from the same periods in the prior year. Gross profit margins
were unfavorably impacted due to lower sales of high margin everyday cards and
to reduced production levels which resulted in unfavorable manufacturing
variances.
Selling, distribution and marketing expenses were 49.1% of net sales for the
quarter, up from 47.1% in the prior year. For the six months ended August 31,
1999, selling, distribution and marketing expenses were 48.5% of net sales, up
from 45.6%. The increase in both periods was primarily due to selling expenses
associated with store remodelings due to retailer consolidations and to
additional costs relating to the electronic marketing unit.
Administrative and general expenses were $54.2 million for the quarter, up from
$51.3 million for the same period in the prior year. For the six months,
administrative and general expenses were $108.8 million, down slightly from the
$109.5 million in the prior year. Both periods were unfavorably impacted by
additional costs associated with the electronic marketing unit; however, the
six month period reflected lower employee profit sharing expense.
Interest expense increased slightly from the prior year by $0.6 million for the
quarter and by $1.2 million for the six months. These increases were primarily
due to the issuance of $300 million of 30 year notes with a 6.1% coupon rate in
July 1998, the proceeds of which reduced commercial paper and other short-term
debt.
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Other expense (income) was $0.4 million of expense for the quarter compared to
$3.2 million of expense in the prior year due primarily to increased royalty
income and to lower foreign exchange losses. For the six month period, other
expense (income) was $1.4 million of expense compared to $1.5 million of income
in the prior year due primarily to the gain on the sale of an equity investment
last year.
The effective tax rate for the six months was 36.0%, flat with the effective
tax rate in the prior year.
The net loss of $26.3 million for the quarter reflected both the special
charges for Canadian consolidation and increased expenses in the Corporation's
electronic marketing unit. Excluding these two items, net income for the
quarter decreased to $0.7 million from $13.9 million last year while earnings
per share decreased to $0.01 from $0.20 last year. For the first six months,
excluding special charges and the net loss incurred by the company's electronic
marketing unit, net income decreased to $11.4 million compared to $47.8 million
last year for the same period while earnings per share decreased to $0.17 from
$0.67 last year.
RESTRUCTURING ACTIVITIES AND SPECIAL CHARGES
Fiscal 2000
In connection with the Corporation's initiative to streamline its international
operations, the Corporation recorded a $40.4 million ($24.2 million net of tax,
or earnings per share of $0.36) special charge during the second quarter of
Fiscal 2000 relating primarily to the consolidation of the Canadian
manufacturing and distribution in the United States. Included in this special
charge is a $32.7 million restructure charge primarily for exit costs
associated with the closure of certain Canadian facilities and to a lesser
extent, costs to exit certain minor United Kingdom businesses. The remaining
$7.7 million of the special charge was recorded in material, labor, and other
production costs for the write-down of Canadian inventory to net realizable
value.
The restructure charge of $32.7 million includes $25.8 million of severance,
pension and personnel related items, $4.6 million of facility shut-down costs,
$1.5 million of lease exit costs and $0.8 million related to other restructure
costs. Approximately 520 hourly and 189 salaried Canadian employees will be
terminated as a result of the Corporation's realignment of its manufacturing
and distribution operations. All activities associated with the Canadian
restructuring are expected to be completed by the end of August 2000 and the
Corporation anticipates annual aggregate cost savings to be approximately $12
million.
Page 11
<PAGE> 14
Fiscal 1999
During the third quarter of fiscal 1999, the Corporation recorded a restructure
charge of $13.9 million ($8.3 million net of tax, or earnings per share of
$0.12) which reflected management's efforts to optimize the Corporation's cost
structure and to provide for operational streamlining initiatives. This
restructure charge consisted of approximately $8.6 million of personnel-related
charges associated with the termination of 228 employees; $4.6 million of exit
costs associated with discontinuing the kiosk business; $0.4 million of costs
associated with carrying vacated office space until lease expiration or
sublease; and approximately $0.3 million of other restructure costs.
FY99 RESTRUCTURING SUMMARY
(Thousands of dollars)
<TABLE>
<CAPTION>
Termination Kiosk Other
Benefits Exit Costs Costs Total
----------- ---------- ------- -------
<S> <C> <C> <C> <C>
Expense accrued $ 8,644 $ 4,618 $ 663 $13,925
Cash expenditures (5,019) (5,019)
Non-cash charges (3,362) (3,362)
------- ------- ------- -------
Balance 2/28/99 3,625 1,256 $ 663 5,544
Cash expenditures (3,452) (150) (3,602)
Non-cash charges (612) (612)
------- ------- ------- -------
Balance 8/31/99 $ 173 $ 644 $ 513 $ 1,330
======= ======= ======= =======
</TABLE>
Approximately $1.0 million of cash expenditures for payment of termination
benefits was charged against the restructuring reserve during the three months
ended August 31, 1999. Included in accounts payable and accrued liabilities at
August 31, 1999 is $1.3 million related to severance and other exit costs for
those actions that are not yet completed. The Corporation believes the
remaining accrued restructure liability is adequate for its remaining cash and
non-cash obligations.
Page 12
<PAGE> 15
Year 2000
The Year 2000 issue is the result of information technology ("IT") system
programs being written using two digits rather than four digits to define the
application year. Any of the Corporation's IT systems that have date-sensitive
software may be unable to interpret appropriately the calendar Year 2000 and
thus could cause the disruption of normal business activities. The Corporation
uses IT systems in various aspects of its business, including manufacturing,
distribution, product development, and many administrative functions, and much
of this software will need to be modified or replaced. The Corporation is
currently in the process of working toward Year 2000 compliance so that all of
its material business processes and components will properly handle dates prior
to, during and after the Year 2000.
The Corporation has prioritized its IT systems into three categories: critical,
necessary or other. Failure of a "critical" system would result in a serious
disruption of revenue and would critically impact competitive advantages.
Failure of a "necessary" system would result in serious processing delays and a
significant reduction in productivity. The Corporation believes all of its IT
systems are Year 2000 compliant with the exception of a very minor corporate
supported application. This remaining system is classified as "other" and is
currently being repaired. The failure of this system would pose no material
impact to the Corporation.
The Corporation's non-IT systems include embedded technology such as
microcontrollers included in production equipment, environmental control
equipment and timeclocks. These non-IT systems have been assessed. Remediation
actions are underway and risk mitigation strategies are being developed.
The Corporation is also in the process of ensuring the continuity and stability
of its normal business functions by identifying and assessing potential Year
2000 compliance risks associated with its external business relationships,
including those with vendors, customers, financial institutions and employee
benefit providers. This process has completed its assessment phase with
potential risks identified and contingency plans are being developed.
Contingency plans will be needed in the event any of the Corporation's critical
business partners are not Year 2000 compliant when required. The Corporation
does not currently anticipate such a situation and now expects to complete the
contingency planning phase in October.
The Corporation's current estimate of total cost to achieve Year 2000
compliance in both its IT and non-IT systems is approximately $35 million for
modifications to existing software, software replacement, computing hardware
and embedded systems. Through August 31, 1999, $31 million has been
cumulatively expended on Year 2000 compliance.
Page 13
<PAGE> 16
In addition, the Corporation has developed a program to provide independent
validation of its Year 2000 compliance efforts. This program includes engaging
independent consultants for audits of its completed coding corrections and for
providing guidance and suggestions for the remediation efforts.
The Corporation believes, but cannot warrant, that with timely modifications to
its existing software and conversion to new software, by both the Corporation
and its significant business partners, the Year 2000 compliance issue should
not have a material impact on the Corporation's operations. Specific factors
which might cause a material adverse effect include the availability and cost
of trained personnel and the ability to recruit and retain them, as well as the
ability to locate all system coding requiring correction. Based upon
information available at this time, the Corporation believes that the cost of
modifications, replacements and related testing will not have a material impact
on the Corporation's liquidity or results of operations. Year 2000 expenditures
are being funded through operations.
LIQUIDITY AND CAPITAL RESOURCES
The seasonality of the Corporation's business precludes a useful comparison of
the current period and the year-end financial statements; therefore, a
Statement of Financial Position for August 31, 1998 has been included.
Operations used $27.4 million of cash for the first six months, an increase of
$35.4 million from the same period last year due primarily to lower earnings
from operations excluding the restructure charge which was a non-cash expense.
Partially offsetting the reduction in net income were lower increases of
accounts receivable and reduced growth of inventories.
Accounts receivable increased $3.1 million from February 28, 1999, compared to
an increase of $12.0 million during the same period in the prior year, due
primarily to lower everyday card product shipments. Net accounts receivable
increased to 18.1% of the prior twelve months' sales at August 31, 1999
compared to 17.5% at August 31, 1998.
Inventories used $37.2 million of cash for the first six months compared to
$70.8 million during the same period in the prior year. This significant
improvement in inventory is the result of the Corporation's focus to reduce
production lead times and also reflects the $7.7 million Canadian inventory
write-down mentioned previously. Inventories as a percent of the prior twelve
months' material, labor, and other production costs decreased to 37.3% at
August 31, 1999 from 43.4% at August 31, 1998.
Amortization of deferred costs exceeded payments by $22.5 million for the first
six months compared to $16.4 million during the same period in the prior year.
This reflects lower payments under agreements with certain retailers.
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<PAGE> 17
Investing activities used $37.1 million in cash for the first six months this
year. While $56.3 million was used in the same period last year, this included
$53.0 million for the acquisition of two greeting card companies in the United
Kingdom. Excluding the acquisitions, investing activities used $3.4 million in
the prior year for the same period. This adjusted increase of $33.7 million from
the prior year, excluding acquisitions, reflected a supply agreement loan to a
customer, lower cash distributions received from the Corporation's investment in
corporate owned life insurance and proceeds from the sale of an equity
investment last year.
Financing activities used $51.5 million for the six months compared to
providing $77.2 million during the same period in the prior year. The current
period use includes the purchase of 4.6 million shares of the Corporation's
Class A common stock for $130.1 million at an average price of $28.25 per
share. During the same period last year, 1.0 million shares of stock had been
purchased for $47.7 million.
As a result of lower cash flow, total debt less cash increased from $408.3
million at August 31, 1998 to $555.9 million at August 31, 1999. Debt as a
percentage of debt plus equity increased to 32.8% at August 31, 1999 from 26.8%
at August 31, 1998. On a per-share basis, shareholders' equity decreased from
$18.71 per share at August 31, 1998 to $18.59 at August 31, 1999.
There were no material changes in the financial condition, liquidity or capital
resources of the Corporation from February 28, 1999, the end of its preceding
fiscal year, to August 31,1999, the end of its last fiscal quarter and the date
of the most recent balance sheet included in this report, nor from August
31,1998, the end of the corresponding fiscal quarter last year, to August 31,
1999, except the changes discussed above and aside from normal seasonal
fluctuations.
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<PAGE> 18
PROSPECTIVE INFORMATION
On February 24, 1999, the Corporation announced an initiative to further
strengthen its position as the productivity leader in the greeting card
industry. This initiative should result in more productive greeting card
departments in retail outlets by lowering retailer inventories to support
increased greeting card sales. The Corporation's investment in technology
improvements allows for shorter production lead times and a more efficient
retail distribution system. The Corporation's ability to more quickly offer
fresher, more innovative cards to the marketplace is key to this strategy.
Primarily as a result of this initiative, the Corporation believes Fiscal 2000
revenues will be reduced by approximately $100 million from the prior year
level with full fiscal year 2000 earnings per share declining to approximately
$2.00 to $2.10, excluding non-recurring items.
On June 1, 1999, the Corporation announced that its electronic marketing group,
americangreetings.com, will be established as a separate subsidiary in order to
aggressively grow and promote the electronic communication business. Also, on
June 17, 1999, the Corporation announced that it plans to sell a minority
interest in americangreetings.com in an initial public stock offering later
this year. The Corporation will continue to hold a majority interest in the new
company.
Management is not aware of any current trends, events, demands, commitments or
uncertainties which reasonably can be expected to have a material effect on the
liquidity, capital resources, financial position or results of operations of
the Corporation, except those mentioned above. However, the Corporation's
future results could be negatively impacted by such factors as retail
bankruptcies, a weak retail environment, loss of retail accounts to other
suppliers or as a result of retail consolidation and competitive terms of sale
offered to customers to expand or maintain business. Other risks, which are not
all-inclusive, include costs associated with correcting the Year 2000 issues,
unforeseen circumstances which may affect the Corporation's plans to reduce its
cost structure, as well as economic conditions in the various markets served by
the Corporation's operations. Please see the Corporation's Form 10-K for the
year ended February 28, 1999 for other risks and uncertainties that may affect
future results.
Page 16
<PAGE> 19
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Corporation was held
on June 25, 1999.
(b) The following individuals were elected to Class I of the
Corporation's Board of Directors with term expiring in 2002:
Stephen R. Hardis, James C. Spira, and Morry Weiss.
The following individuals are continuing directors with term
expiring in 2000 (Class II): Albert B. Ratner, Harry H. Stone
and Edward Fruchtenbaum.
The following individuals are continuing directors with term
expiring in 2001 (Class III): Scott S. Cowen, Irving I. Stone
and Harriet Mouchly-Weiss.
(c) The vote total was as follows for the election of directors
(Class I):
Nominee Votes For Votes Withheld
------- ---------- --------------
Stephen R. Hardis 95,711,133 1,796,863
James C. Spira 95,708,236 1,799,760
Morry Weiss 96,553,541 954,455
Page 17
<PAGE> 20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of
Regulation S-K)
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN GREETINGS CORPORATION
By: /s/ Patricia L. Ripple
------------------------------
Patricia L. Ripple
Controller
Chief Accounting Officer
October 15, 1999
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> AUG-31-1999
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<SECURITIES> 0
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<ALLOWANCES> 19,174
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<CURRENT-ASSETS> 1,103,569
<PP&E> 973,577
<DEPRECIATION> 549,289
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<CURRENT-LIABILITIES> 550,422
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0
0
<COMMON> 64,517
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<LOSS-PROVISION> 3,030
<INTEREST-EXPENSE> 15,110
<INCOME-PRETAX> (24,143)
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