<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
X SECURITIES EXCHANGE ACT OF 1934
-----------------
For the quarterly period ended August 31, 2000
--------------------------------------------------
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, 2000, the date of this report, the number of shares outstanding
of each of the issuer's classes of common stock was:
Class A Common 58,955,826
Class B Common 4,647,190
<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 of Financial Condition
and Results of Operations..................................................................14
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings..............................................................................21
Item 4. Submission of Matters to a Vote of Security Holders............................................21
Item 6. Exhibits and Reports on Form 8-K.............................................................. 22
SIGNATURES.......................................................................................................22
----------
</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,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 1,089,473 $ 936,540
Costs and expenses:
Material, labor and other production costs 398,435 348,586
Selling, distribution and marketing 532,756 454,031
Administrative and general 138,570 108,838
Non-recurring items -- 32,747
Interest 24,583 15,110
Other (income) expense - net (9,573) 1,371
------------ ------------
Total costs and expenses 1,084,771 960,683
------------ ------------
Income (loss) before income taxes and
cumulative effect of accounting change 4,702 (24,143)
Income taxes 1,701 (8,692)
------------ ------------
Income (loss) before cumulative effect of
accounting change 3,001 (15,451)
Cumulative effect of accounting change,
net of tax (21,141) --
------------ ------------
Net loss $ (18,140) $ (15,451)
============ ============
Earnings (loss) per share and earnings (loss) per share
assuming dilution:
Before cumulative effect of
accounting change $ 0.05 $ (0.23)
Cumulative effect of accounting
change, net of tax (0.33) --
------------ ------------
Loss per share and loss per share
assuming dilution $ (0.28) $ (0.23)
============ ============
Dividends per share* $ 0.21 $ 0.20
============ ============
Average number of common shares outstanding 63,796,233 66,663,719
</TABLE>
See notes to condensed consolidated financial statements.
* Dividend per share of $0.20 paid June 9, 2000 was declared in February 2000.
Dividend per share of $0.19 paid June 10, 1999 was declared in February 1999.
1
<PAGE> 4
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars except per share amounts)
(Unaudited)
Three Months Ended
August 31,
----------------------------
2000 1999
------------ ------------
Net sales $ 493,732 $ 477,783
Costs and expenses:
Material, labor and other production costs 195,111 188,821
Selling, distribution and marketing 269,199 234,709
Administrative and general 69,815 54,235
Non-recurring items -- 32,747
Interest 13,808 7,970
Other (income) expense - net 1,641 392
------------ ------------
Total costs and expenses 549,574 518,874
------------ ------------
Loss before income taxes (55,842) (41,091)
Income taxes (20,337) (14,793)
------------ ------------
Net loss $ (35,505) $ (26,298)
============ ============
Loss per share and loss per share
assuming dilution $ (0.55) $ (0.39)
============ ============
Dividends per share $ 0.21 $ 0.20
============ ============
Average number of common shares outstanding 63,088,531 65,648,721
See notes to condensed consolidated financial statements.
2
<PAGE> 5
AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited) (Note A) (Unaudited)
August 31, 2000 Feb. 29, 2000 August 31, 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 66,147 $ 61,010 $ 28,525
Trade accounts receivable, less allowances
of $91,392, $136,037 and $87,377, respectively
(principally for sales returns) 363,690 430,825 394,126
Inventories 434,213 249,433 289,519
Deferred and refundable income taxes 226,546 99,709 143,550
Prepaid expenses and other 232,649 259,707 247,849
---------------- ---------------- ----------------
Total current assets 1,323,245 1,100,684 1,103,569
Goodwill 211,593 149,437 134,509
Other assets 837,994 820,447 691,817
Property, plant and equipment - at cost 1,064,651 1,019,121 973,577
Less accumulated depreciation 592,628 571,706 549,289
---------------- ---------------- ----------------
Property, plant and equipment - net 472,023 447,415 424,288
---------------- ---------------- ----------------
$ 2,844,855 $ 2,517,983 $ 2,354,183
================ ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 509,758 $ 109,694 $ 144,904
Accounts payable and accrued liabilities 292,519 213,180 214,741
Accrued compensation and benefits 74,533 84,456 62,020
Dividends payable 13,105 25,808 12,904
Other current liabilities 132,709 149,350 115,853
---------------- ---------------- ----------------
Total current liabilities 1,022,624 582,488 550,422
Long-term debt 398,902 442,102 439,490
Other liabilities 210,324 195,985 112,665
Deferred income taxes 53,805 44,997 52,214
Shareholders' equity 1,159,200 1,252,411 1,199,392
---------------- ---------------- ----------------
$ 2,844,855 $ 2,517,983 $ 2,354,183
================ ================ ================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
August 31,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (18,140) $ (15,451)
Adjustments to reconcile to net cash
used by operating activities:
Cumulative effect of accounting change, net of tax 21,141 --
Non-recurring items -- 32,747
Depreciation and amortization 46,069 32,129
Deferred income taxes (3,770) (11,182)
Change in operating assets and liabilities,
net of effects from acquisition (98,933) (72,687)
Other - net (7,444) 7,008
--------- ---------
Cash Used by Operating Activities (61,077) (27,436)
INVESTING ACTIVITIES:
Business acquisitions (168,575) --
Property, plant & equipment additions (33,804) (22,597)
Proceeds from sale of fixed assets 22,888 643
Investment in corporate-owned life insurance 93 3,144
Other - net (8,700) (18,295)
--------- ---------
Cash Used by Investing Activities (188,098) (37,105)
FINANCING ACTIVITIES:
Increase in long-term debt -- 14,979
Reduction of long-term debt (49,785) (1,411)
Increase in short-term debt 373,781 89,641
Sale of stock under benefit plans -- 989
Purchase of treasury shares (43,596) (130,054)
Dividends to shareholders (26,088) (25,633)
--------- ---------
Cash Provided (Used) by Financing Activities 254,312 (51,489)
--------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5,137 (116,030)
Cash and Equivalents at Beginning of Year 61,010 144,555
--------- ---------
Cash and Equivalents at End of Period $ 66,147 $ 28,525
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 7
AMERICAN GREETINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Thousands of dollars except per share amounts)
Six Months Ended August 31, 2000 and 1999
Note A - Basis of Presentation
------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and notes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
The balance sheet at February 29, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by accounting principles generally accepted in the United
States for complete financial statements.
Certain amounts in the prior year financial statements have been reclassified to
conform with the 2000 presentation.
For further information, refer to the consolidated financial statements and
notes thereto included in the Corporation's annual report on Form 10-K for the
year ended February 29, 2000.
Note B - Change in Accounting Principle
---------------------------------------
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
among other guidance, clarifies the Staff's views on various revenue recognition
and reporting matters. As a result, effective March 1, 2000, the Corporation
adopted a change in its method of accounting for certain shipments of seasonal
product which carry implied acceptance provisions. Under the new accounting
method adopted retroactive to March 1, 2000, the Corporation now recognizes
revenue on these seasonal shipments at the approximate date the merchandise is
received by the customer and not upon shipment from the distribution facility.
The cumulative effect of the change on prior years resulted in a one-time
non-cash reduction to the Corporation's earnings of $21,141 (net of tax of
$12,564) or approximately $0.33 per share, which is included in income for the
three months ended May 31, 2000. The effect of the change on the three months
ended August 31,2000 was to reduce earnings by approximately $35,965 or $0.56
per share. The effect of the change on the six months ended August 31, 2000 was
to reduce earnings by approximately $14,824 or $0.23 per share. On a pro forma
basis, assuming the Corporation had adopted SAB 101 effective March 1, 1999, the
reduction in earnings for the three and six months ended August 31, 1999 would
have approximated the impact for the three and six months ended August 31, 2000.
5
<PAGE> 8
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.
Note D - Acquisition of Gibson Greetings, Inc.
----------------------------------------------
On March 9, 2000, the Corporation completed its acquisition of Gibson Greetings,
Inc. for a cash price of $10.25 per share. Gibson Greetings distributes more
than 24,000 individual relationship communication products, including greeting
cards, gift wrap, party goods and licensed products. E-mail greetings featuring
Gibson Greetings content are available through the Egreetings Network in which
Gibson holds a minority equity interest.
The acquisition has been accounted for by the purchase method of accounting, and
accordingly, the consolidated statements of income include the results of Gibson
Greetings beginning with the first quarter of fiscal 2001. The assets acquired
and liabilities assumed were recorded at estimated fair values as determined by
the Corporation's management based on information currently available and on
current assumptions as to future operations. The allocation of the purchase
price to the assets acquired and liabilities assumed is subject to revision as a
result of the final determination of appraised and other fair values. For
financial statement purposes, the excess of cost over net assets acquired is
amortized by the straight-line method over 40 years. A summary of the assets
acquired and liabilities assumed in the acquisition follows:
<TABLE>
<S> <C>
Estimated fair values:
Assets acquired $296,086
Liabilities assumed (142,919)
Excess of cost over net assets acquired 24,555
----------------
Purchase price 177,722
Less cash acquired 10,147
----------------
Net cash paid (including $30,000 paid in prior fiscal year) $167,575
================
</TABLE>
The acquisition of Gibson was primarily financed through short-term borrowings;
however, the Corporation will continue to evaluate long-term financing options.
6
<PAGE> 9
Unaudited pro forma results of operations for the six month period ended August
31, 1999, as if the Corporation and Gibson Greetings had been combined as of the
beginning of that period, follow. Consolidated results for the first six months
ended August 31, 2000, as reported, include the results of Gibson Greetings for
the entire period. The pro forma results include preliminary estimates and
assumptions which the Corporation's management believes are reasonable. However,
the pro forma results do not include any cost savings or other effects of the
planned integration of the Corporation and Gibson Greetings, and are not
necessarily indicative of the results which would have occurred if the business
combination had been in effect on the dates indicated, or which may result in
the future. The pro forma results for the six months ended August 31, 1999
include a charge recorded by Gibson Greetings of approximately $22,000 related
to its decision to seek a buyer for its Silly Slammers business.
<TABLE>
<CAPTION>
Pro forma
Six months ended
August 31, 1999
------------------------------
<S> <C>
Net sales $1,102,059
Net income (loss) (44,954)
Earnings (loss) per share and earnings (loss) per share assuming $(0.67)
dilution
</TABLE>
7
<PAGE> 10
Note E - Earnings 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,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Numerator:
Net income (loss) for earnings per share
and earnings (loss) per share -
assuming dilution $(18,140) $(15,451)
======== ========
Denominator (thousands):
Denominator for earnings per share
-weighted average shares outstanding 63,796 66,664
Effect of dilutive securities - stock options
-- 112
-------- --------
Denominator for earnings per share-assuming dilution
-adjusted weighted average shares outstanding 63,796 66,776
======== ========
Earnings (loss) per share $ (0.28) $ (0.23)
======== ========
Earnings (loss) per share - assuming dilution $ (0.28) $ (0.23)
======== ========
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended
August 31,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Numerator:
Net income (loss) for earnings per share
and earnings (loss) per share -
assuming dilution $ (35,505) $ (26,298)
=============== ===============
Denominator (thousands):
Denominator for earnings per share
-weighted average shares outstanding 63,089 65,649
Effect of dilutive securities - stock options -- 112
--------------- ---------------
Denominator for earnings per share-assuming dilution
-adjusted weighted average shares outstanding 63,089 65,761
=============== ===============
Earnings (loss) per share $ (0.55) $ (0.39)
=============== ===============
Earnings (loss) per share - assuming dilution $ (0.55) $ (0.39)
=============== ===============
</TABLE>
Certain stock options have been excluded for the three and six months ended
August 31, 2000 because they would have been antidilutive.
9
<PAGE> 12
Note F - Comprehensive Income (Loss)
------------------------------------
The Corporation's total comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Six Months Ended
August 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net income (loss) $(18,140) $(15,451)
Other comprehensive (loss) income
Foreign currency translation adjustments (10,452) 2,634
Unrealized (loss) gain on available-for-sale securities (19,039) 7,163
-------- --------
Other comprehensive (loss) income (29,491) 9,797
-------- --------
Total comprehensive (loss) income $(47,631) $ (5,654)
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
August 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net income (loss) $(35,505) $(26,298)
Other comprehensive (loss) income
Foreign currency translation adjustments 4,481 (2,074)
Unrealized (loss) gain on available-for-sale securities (5,888) 951
-------- --------
Other comprehensive (loss) income (1,407) (1,123)
-------- --------
Total comprehensive (loss) income $(36,912) $(27,421)
======== ========
</TABLE>
10
<PAGE> 13
Note G - Business Segment Information
-------------------------------------
Six Months Ended
August 31,
--------------------------
2000 1999
----------- -----------
Net Sales
Social Expressions Products $ 914,866 $ 792,266
Intersegment items 37,202 39,925
----------- -----------
Total 877,664 752,341
AmericanGreetings.com 11,560 6,577
Non-reportable segments 205,697 176,310
Exchange rate adjustment-net (5,448) 1,312
----------- -----------
Consolidated total $ 1,089,473 $ 936,540
=========== ===========
Earnings
Social Expressions Products $ 111,011 $ 107,754
Intersegment items 27,220 28,279
----------- -----------
Total
83,791 79,475
AmericanGreetings.com (20,080) (5,676)
Non-reportable segments 1,164 2,353
Exchange rate adjustment - net (87) (1,541)
Non-recurring item -- (32,747)
Unallocated items - net (60,086) (66,007)
----------- -----------
Consolidated total $ 4,702 $ (24,143)
=========== ===========
11
<PAGE> 14
Three Months Ended
August 31,
----------------------
2000 1999
--------- ---------
Net Sales
Social Expressions Products $ 392,263 $ 404,552
Intersegment items 20,075 21,890
--------- ---------
Total 372,188 382,662
AmericanGreetings.com 6,816 3,130
Non-reportable segments 118,403 91,318
Exchange rate adjustment-net (3,675) 673
--------- ---------
Consolidated total $ 493,732 $ 477,783
========= =========
Earnings
Social Expressions Products $ 5,200 $ 49,171
Intersegment items 14,580 15,166
--------- ---------
Total
(9,380) 34,005
AmericanGreetings.com (9,540) (5,772)
Non-reportable segments 1,413 (30)
Exchange rate adjustment - net (126) (612)
Non-recurring item -- (32,747)
Unallocated items - net (38,209) (35,935)
--------- ---------
Consolidated total $ (55,842) $ (41,091)
========= =========
12
<PAGE> 15
Note H - New Accounting Standards
---------------------------------
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was issued. This standard,
along with its subsequent amendments, which establishes new accounting and
reporting standards for derivative financial instruments, must be adopted no
later than the fiscal quarter beginning March 1, 2001. The Corporation is
currently analyzing the effect of this standard and does not expect it to have a
material effect on the Corporation's consolidated financial position, results of
operations or cash flows.
Note I - Inventories
--------------------
<TABLE>
<CAPTION>
August 31, 2000 February 29, 2000 August 31, 1999
------------------- -----------------------------------------
<S> <C> <C> <C>
Raw materials $ 54,265 $ 38,218 $ 38,259
Work in process 42,676 27,099 29,833
Finished products 381,019 229,887 271,363
------------------- -------------------- -------------------
477,960 295,204 339,455
Less LIFO reserve 83,580 90,343 92,400
------------------- -------------------- -------------------
394,380 204,861 247,055
Display materials and factory supplies 39,833 44,572 42,464
------------------- -------------------- -------------------
Inventories $ 434,213 $ 249,433 $ 289,519
=================== ==================== ===================
</TABLE>
Note J - 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, 2000, February 29, 2000 and August 31, 1999 deferred costs and
future payment commitments are included in the following financial statement
captions:
<TABLE>
<CAPTION>
August 31, 2000 February 29, 2000 August 31, 1999
------------------- -------------------- -------------------
<S> <C> <C> <C>
Prepaid expenses and other $ 158,431 $ 200,517 $ 195,734
Other assets 745,038 679,214 560,031
Other current liabilities (131,739) (118,250) (104,993)
Other liabilities (171,059) (163,865) (81,369)
------------------- -------------------- -------------------
$ 600,671 $ 597,616 $ 569,403
=================== ==================== ===================
</TABLE>
13
<PAGE> 16
Part 1., Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
BUSINESS DEVELOPMENTS
In July, 2000, the Corporation completed the acquisition of CPS Corporation, a
leading supplier of gift wrap and decorative packaging, and headquartered in
Franklin, Tennessee. This acquisition expands the Corporation's seasonal boxed
card, gift wrap, and decorative packaging product offering, adds new customers
and channels of distribution, and includes two state-of-the-art manufacturing
and distribution facilities in Tennessee and Kentucky. CPS will become part of
Plus Mark, the promotional giftwrap and Christmas boxed card unit of American
Greetings.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
among other guidance, clarifies the Staff's views on various revenue recognition
and reporting matters. As a result, effective March 1, 2000, the Corporation
adopted a change in its method of accounting for certain shipments of seasonal
product which carry implied acceptance provisions. Under the new accounting
method adopted retroactive to March 1, 2000, the Corporation now recognizes
revenue on these seasonal shipments at the approximate date the merchandise is
received by the customer and not upon shipment from the distribution facility.
The cumulative effect of the change on prior years resulted in a one-time
non-cash reduction to the Corporation's earnings of $21,141 (net of tax of
$12,564) or approximately $0.33 per share, which is included in income for the
three months ended May 31, 2000.
RESULTS OF OPERATIONS
Net sales were $493.7 million for the quarter ended August 31, 2000, an increase
of 3.3% over the prior year. Net sales for the second quarter were negatively
impacted by the change in accounting for recording certain seasonal product
shipments effective March 1, 2000 (see note B). As a result, a majority of
Christmas and Fall seasonal program sales, which in previous years were recorded
in the second quarter, will this year be recognized in the third quarter.
However, this year's second quarter results were bolstered by sales of the
newly-acquired Gibson Greetings and CPS units, which significantly offset the
seasonal program shift noted above. On a normalized basis, excluding the quarter
to date impact of the acquisitions and the seasonal sales shift to the third
quarter of $65.9 million and $81.5 million respectively, net sales improved 6.6%
compared to the prior year. The primary component of this performance was
increased sales of accessory product in the United States. Unit sales of
everyday greeting cards increased approximately 11% for the quarter from the
same period in the prior year. Excluding the Gibson acquisition, unit sales of
everyday greeting cards decreased approximately 3%.
14
<PAGE> 17
For the six months ended August 31, 2000, net sales were $1.089 billion, an
increase of 16.3% compared to the same period last year. Net sales on a year to
date basis were negatively impacted, to a much lesser extent than the quarter,
by the change in accounting for recording seasonal product shipments effective
March 1, 2000 (see note B). The shift in Christmas and Fall seasonal program
sales of $81.5 million from the second quarter to the third quarter was
partially offset by the recording of $44.4 million of Mother's Day, Father's Day
and Graduation sales in the first quarter of this fiscal year, which in previous
years would have been recorded in the fourth quarter immediately preceding.
Additionally, the Gibson and CPS acquisitions contributed $135.7 million of net
sales through the first six months. On a normalized basis, excluding the year to
date impact of the acquisitions and the seasonal sales shift, net sales improved
5.8% compared to the prior year. Key components of this performance were
increased sales of accessory product in the United States, primarily party
products which increased $13.7 million, and to strong sales in Canada and the
United Kingdom which increased $4.6 million and $4.1 million, respectively. Unit
sales of everyday greeting cards increased approximately 9% for the six months
from the same period in the prior year. Excluding the Gibson acquisition, unit
sales of everyday greeting cards decreased approximately 5%.
Material, labor and other production costs as a percentage of net sales for the
six months decreased to 36.6% from 37.2 % in the prior year. For the quarter,
the percentage remained relatively flat at 39.5% compared to prior year.
Excluding acquisitions and the impact of the seasonal sales shift, the
percentage would have been relatively flat in comparison to prior year for both
the quarter and the six months.
Selling, distribution and marketing expenses as a percentage of net sales were
54.5% for the three months ended August 31, 2000, up from 49.1% in the prior
year. For the six month period, selling, distribution, and marketing expenses
were 48.9% of net sales compared to 48.5% in the prior year. The increase in
both periods was primarily due to additional costs relating to the internet
division and to higher order fulfillment costs.
Administrative and general expenses increased $15.6 million to $69.8 million in
comparison to the same period in the prior year for the quarter. Acquisitions
accounted for $8.0 million of this increase while an increase in bad debt
expense added $3.2 million. For the six months, administrative and general
expenses were $138.6 million, up from $108.8 million in the prior year. Key
components of the increase were $17.8 million from the acquired companies, an
increase of $6.1 million of bad debt expense and $4.3 million of increased costs
related to the internet division.
Interest expense increased from the prior year by $5.8 million for the quarter
and $9.5 million for the six months. This increase was primarily due to higher
borrowing levels to fund the Corporation's acquisition of Gibson and CPS and to
fund the Corporation's common stock repurchase program.
Other (income) expense was $1.6 million of expense for the quarter compared to
$0.4 million of expense in the prior year due to lower royalty income. For the
six-month period, other (income) expense was $9.6 million of income compared to
$1.4 million of expense in the prior year. The improvement was due primarily to
an $8.4 million gain on the sale of a Canadian building.
15
<PAGE> 18
The effective tax rate for the six months was 36.4%, up slightly from 36.0% in
the prior year due to higher foreign income, particularly in the United Kingdom.
Earnings (loss) per share for the quarter were $(0.55) which reflects a
reduction of $0.56 associated with the shift in the recognition of Christmas and
Fall seasonal program shipments to the third quarter. Additionally, integration
costs associated with the Gibson acquisition reduced earnings per share by $0.03
while the Corporation's internet division had a loss of $0.10 per share. On an
adjusted basis, therefore, excluding the seasonal shift, acquisitions, special
charges (see below) and the internet division results, earnings per share would
have been $0.14 for the quarter compared to $0.01 last year.
For the first six months, earnings per share before cumulative effect of
accounting change were $0.05 which reflects a $0.23 net seasonal earnings shift
for the reduced recognition of Christmas and Fall shipments in the second
quarter partially offset by the recording of Mother's Day, Father's Day and
Graduation sales in the first quarter. Earnings per share were also impacted
$0.03 for the Gibson integration costs, $0.20 for the loss associated with the
Corporation's internet division and an $0.08 gain on the sale of a Canadian
building. Excluding these items, earnings per share for the six months would
have been $0.43 compared to $0.17 last year.
RESTRUCTURING ACTIVITIES AND SPECIAL CHARGES
Fiscal 2000 - Fourth Quarter
During the fourth quarter of fiscal 2000, the Corporation recorded a $6.1
million ($4.8 million net of tax, or earnings per share of $.08) restructure
charge related to various foreign operations. The primary component of this
charge was for the rationalization of various warehouse, distribution and
manufacturing facilities in the United Kingdom in order to increase operating
efficiency and lower fixed expenses. Additional initiatives include, to a lesser
extent, the integration of Mexican manufacturing in the United States and the
realignment of various business functions in Australia.
The restructure charge included $5.2 million for costs of severing employees,
$.6 million for lease exit costs, $.3 million for the write off of assets no
longer in use and other restructure costs. In total, approximately 336 positions
will be eliminated comprised of 304 hourly and 32 salaried employees. As of
August 31, 2000, 114 hourly and 12 salaried employees have been severed. All
activities are expected to be completed by the end of FY2001 and the Corporation
anticipates annual cost savings to be approximately $4.0 million.
Fiscal 2000 - Second Quarter
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.
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<PAGE> 19
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. As of August 31, 2000, 712 Canadian employees have been terminated as a
result of the Corporation's realignment of its manufacturing and distribution
operations. All initiatives associated with the Canadian restructuring have been
substantially completed and the Corporation anticipates annual aggregate cost
savings to be approximately $12 million. The largest remaining restructuring
activity relates to the Canadian Division pension plans. The Corporation has
taken the necessary actions to settle the pension liabilities, and pending the
appropriate Canadian regulatory approval, the remaining pension plan assets will
be distributed to satisfy those obligations. This is expected to be completed by
December 2001.
The following table summarizes the provisions, payments and remaining reserves
associated with the restructure charges recorded in 2000.
<TABLE>
<CAPTION>
Facility
Shut- Kiosk Lease
Termination Down Exit Exit Other
Benefits Costs Costs Costs Costs Total
--------------- ---------- --------- ----------- --------- -----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Balance February 29, 2000 $25,156 $4,081 $48 $1,016 $626 $30,927
Cash Expenditures (13,211) (798) (13) (12) (22) (14,056)
Non-Cash Charges (2,334) (2,334)
Change in Estimate 45 (35) (10)
--------------- ---------- --------- ----------- --------- -----------
Balance August 31, 2000 $11,990 $949 $0 $1,004 $594 $14,537
=============== ========== ========= =========== ========= ===========
</TABLE>
Included in accounts payable and accrued liabilities at August 31, 2000 is $14.5
million related to severance and other exit costs for those actions not
completed. The Corporation believes the remaining accrued restructure liability
is adequate for its remaining cash and non-cash obligations.
SEGMENT INFORMATION
The Corporation is organized and managed according to a number of factors,
including product categories, geographic locations and channels of distribution.
The Social Expression Products segment primarily designs, manufactures and sells
greeting cards and other products through various channels of distribution with
mass retailers as the primary channel. As permitted under Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," certain operating divisions have been aggregated into the
Social Expression Products segment. These operating divisions have similar
economic characteristics, products, production processes, types of customers and
distribution methods. AmericanGreetings.com is a web-based provider of greetings
and other social communication content to consumers and web-based businesses.
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<PAGE> 20
Social Expressions Products Segment
Net sales for the quarter decreased 2.7% from the prior year due to reduced
Christmas and Fall seasonal sales as a result of the change in accounting for
recording seasonal product shipments. As discussed previously, the second
quarter results were favorably impacted by the acquisition of Gibson, which
significantly offset the seasonal sales shift noted above. On a normalized
basis, excluding the quarter to date impact of the seasonal sales shift and the
Gibson acquisition, net sales improved 4.0%. The primary component of this
performance was increased sales of accessory product in the United States. For
the six months ended August 31, 2000, net sales increased 16.7% compared to the
same period last year. Excluding the year to date impact of the Gibson
acquisition and the seasonal sales shift, net sales increased 4.9% over the
prior year. This performance was driven by strong accessory product sales in the
United States, primarily party products, and to increased sales in Canada and
the United Kingdom.
Segment earnings for the quarter, net of intersegment items, decreased $43.4
million from the prior year reflecting reduced earnings from lower Christmas and
Fall seasonal sales that will ship in the third quarter. Partially offsetting
this decrease was improved performance from the Canadian Division due primarily
to benefits relating to the integration of manufacturing in the United States.
For the six months ended August 31, 2000, segment earnings, net of intersegment
items, increased 5.4% over the same period in the prior year. The seasonal sales
shift unfavorably impacted segment earnings by approximately $23 million as the
reduced Christmas and Fall seasonal shipments were partially offset by the
recording of Mother's Day, Father's Day and Graduation sales in the first
quarter. Lower advertising and competitive costs in the United States and cost
savings associated with the Canadian Division also contributed to the year to
date performance.
AmericanGreetings.com, Inc. Segment
Net sales more than doubled during the second quarter increasing to $6.8 million
in the current year compared to $3.1 million last year and for the six months
ended August 31, 2000 net sales improved 76% to $11.6 million compared to $6.6
million last year. This growth, in both periods, was driven by increased
advertising revenue resulting from new advertising sales initiatives, higher
traffic and online agreements with distribution partners. AmericanGreetings.com
more than doubled its market share percentage in the last nine months as a
result of moving to a new business model as a relationship service provider
which includes providing free electronic greetings. This growth in web site
traffic is evident as AmericanGreetings.com achieved market leadership status
in its category according to the August Nielsen Net Ratings traffic reports.
The segment loss was $9.5 million and $20.1 million for the second quarter and
six months ended August 31, 2000 respectively, compared to $5.8 million last
year for both the quarter and six months results. The segment losses for both
periods reflect increased partnershare costs associated with various internet
distribution agreements and the Corporation's continued commitment to provide
essential technological investment for expanded internet services and increased
volume growth.
In September, 2000, AmericanGreetings.com acquired eAgents, a Fairfax,
Virginia-based provider of a web-based personalized daily newspaper service
that allows subscribers to choose what news and entertainment items they would
like to receive in their daily email. This acquisition diversifies and enhances
AmericanGreetings.com revenue strategies by expanding the array of product
offerings to consumers.
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, 1999 has been included.
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<PAGE> 21
Operations used $61.1 million of cash for the first six months, an increase of
$33.6 million from the same period last year due primarily to an unfavorable
change in working capital. The unfavorable working capital movements were due
primarily to increased levels of inventories and to severance payments
associated with restructuring activities announced in the prior year partially
offset by lower accounts receivable levels.
Accounts receivable, net of the effect of acquisitions, decreased $55.4 million
from February 29, 2000, compared to an increase of $3.1 million during the same
period in the prior year, due primarily to the shift in the recognition of
Christmas and Fall seasonal program sales from the second quarter to the third
quarter. Net accounts receivable decreased to 15.6% (14.6% excluding
acquisitions) of the prior twelve months' sales at August 31, 2000 compared to
18.1% at August 31, 1999.
Inventories, net of the effect of acquisitions, used $107.6 million of cash for
the first six months compared to a use of $37.2 million during the same period
in the prior year. Key components of this increase are increased inventory
levels attributable to the consumer products group to meet anticipated higher
sales volumes and an increase in seasonal inventory which will ship in the third
quarter. Inventories as a percent of the prior twelve months' material, labor,
and other production costs increased to 50.5% (43.4% excluding acquisitions) at
August 31, 2000 from 37.3% at August 31, 1999.
Amortization of deferred costs exceeded payments by $28.9 million for the first
six months compared to $22.6 million during the same period in the prior year.
Both years reflect lower payments under agreements with certain retailers.
Accounts payable and other liabilities used $63.6 million of cash for the first
six months compared to $36.4 million in the same period last year due primarily
to cash payments associated with the Corporation's restructuring activities and
integration costs related to acquisitions.
Investing activities used $188.1 million in cash for the first six months this
year which includes $137.6 million for the Gibson acquisition and $31.0 million
for the CPS acquisition. Excluding acquisitions, investing activities used $19.5
million of cash for the quarter compared to $37.1 million in the prior year. The
current year net usage reflects the proceeds from the sale of a Canadian
building partially offset by an increase in capital additions.
Financing activities provided $254.3 million for the six months compared to
using $51.5 million during the same period in the prior year. The current period
activity reflects an increase in short-term borrowings to fund the Gibson and
CPS acquisitions; however, the Corporation will continue to evaluate long term
financing options. The Corporation continued the repurchase of its Class A
common stock as 2.1 million shares of common stock were purchased for $43.6
million at an average price of $20.56 per share. During the same period last
year, 4.6 million shares of stock had been purchased for $130.1 million.
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<PAGE> 22
As a result of the Gibson and CPS acquisition, total debt less cash increased
from $555.9 million at August 31, 1999 to $842.6 million at August 31, 2000.
Debt as a percentage of debt plus equity increased to 43.9% at August 31, 2000
from 32.8% at August 31, 1999. The Corporation's debt will peak in the third
quarter due to the normal build-up of seasonal inventory and increased accounts
receivable associated with seasonal shipments. Historically however, the fourth
quarter cash flow is very strong due to the collection of seasonal accounts
receivable. The Corporation's debt level is anticipated to be significantly
reduced at year-end from third quarter levels. On a per-share basis,
shareholders' equity decreased from $18.59 per share at August 31, 1999 to
$18.23 at August 31, 2000.
There were no material changes in the financial condition, liquidity or capital
resources of the Corporation from February 29, 2000, the end of its preceding
fiscal year, to August 31, 2000, the end of its last fiscal quarter and the date
of the most recent balance sheet included in this report, nor from August
31,1999, the end of the corresponding fiscal quarter last year, to August 31,
2000, except the changes discussed above and aside from normal seasonal
fluctuations.
PROSPECTIVE INFORMATION
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 the demand for the Corporation's goods and services;
competitive factors in the industries in which the Corporation competes; the
ability to achieve anticipated synergies and other cost savings in connection
with acquisitions; the timing, impact and other uncertainties of future
acquisitions, 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 29, 2000 for other risks and uncertainties that may affect
future results.
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<PAGE> 23
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
Hallmark Cards, Inc. v. American Greetings Corporation and
Americangreetings.com, Inc., Case No. 00-0538-CV-W-1, US District Court, Western
District of Missouri
On June 7, 2000, the Corporation was served with a complaint filed by
Hallmark alleging infringement of two patents acquired by Hallmark relating to
an electronic system for the management, selection and delivery of cards. In
July, Hallmark filed an Amended Complaint adding an infringement claim for a
third patent. The Corporation filed a motion for more definite statement and is
waiting for the court's ruling. The Corporation intends to aggressively defend
against the suit.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
----------------------------------------------------
(a) The Annual Meeting of Shareholders of the Corporation was held on
June 23, 2000.
(b) The following individuals are continuing directors with term
expiring in 2002 (Class I): Stephen R. Hardis, James C. Spira, and
Morry Weiss.
The following individuals were elected to Class II of the
Corporation's Board of Directors with term expiring in 2003:
Edward Fruchtenbaum, Harry H. Stone and Jerry Sue Thornton.
The following individuals are continuing directors with term
expiring in 2001 (Class III): Scott S. Cowen, Harriet
Mouchly-Weiss, and Charles A. Ratner.
(c)-1 The vote total was as follows for the election of directors (Class
II):
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
Edward Fruchtenbaum 97,128,808 579,973
Harry H. Stone 97,092,967 615,814
Jerry Sue Thornton 97,128,849 579,932
</TABLE>
On June 26, 2000, Edward Fruchtenbaum left the Corporation,
including all Board and executive positions.
(c)-2 A proposal to authorize the availability of an additional 500,000
Class A Common Shares under the 1997 Equity and Performance
Incentive Plan, for newly promoted and incoming employees and as
incentives to key personnel was approved by the shareholders. The
vote was as follows:
Affirmative 92,072,717
Negative 5,310,757
Abstain 325,307
(c)-3 A proposal to reapprove the Company's existing Compensation Plans
for the Chairman and Chief Executive Officer and President and
Chief Operating Officer and amending the Compensation Plans to
add a revenue target as an additional performance-based criterion
that must be attained to earn a bonus was approved by the
shareholders. The vote was as follows:
Affirmative 96,668,030
Negative 780,165
Abstain 260,586
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<PAGE> 24
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
On March 24, 2000, the Corporation filed Form 8-K with the Securities and
Exchange Commission. This filing reported that the Corporation had completed its
acquisition of Gibson Greetings, Inc. On May 23, 2000, the Corporation filed
Form 8-K/A with the Securities and Exchange Commission. This filing amended the
Form 8-K filed March 24, 2000 to include the historical and pro forma
information required for the combined entity.
On May 11, 2000, the Corporation filed Form 8-K with the Securities and Exchange
Commission. This filing reported that the Corporation had adopted a change in
its method of accounting for certain shipments of seasonal product which carry
implied acceptance provisions.
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 13, 2000
22
