-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KI+08sHR3iebFii7LTcqnILZMjwuIm4jq84zswCmqNzUyZjeqvH2rm8QxIPJuC2e SPiu88YRFp1R/9FC6x611A== 0000950152-00-000205.txt : 20000202 0000950152-00-000205.hdr.sgml : 20000202 ACCESSION NUMBER: 0000950152-00-000205 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GREETINGS CORP CENTRAL INDEX KEY: 0000005133 STANDARD INDUSTRIAL CLASSIFICATION: GREETING CARDS [2771] IRS NUMBER: 340065325 STATE OF INCORPORATION: OH FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13859 FILM NUMBER: 507628 BUSINESS ADDRESS: STREET 1: ONE AMERICAN ROAD CITY: CLEVELAND STATE: OH ZIP: 44144 BUSINESS PHONE: 2162527300 MAIL ADDRESS: STREET 1: ONE AMERICAN ROAD CITY: CLEVELAND STATE: OH ZIP: 44144 10-Q 1 AMERICAN GREETINGS CORPORATION 10-Q 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 SECURITIES X EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 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 November 30, 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 59,858,448 Class B Common 4,662,453 2 AMERICAN GREETINGS CORPORATION INDEX Page Number ------ PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements.........................................1 Item 2. Management's Discussion and Analysis........................10 PART II - OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K............................17 SIGNATURES................................................................17 - ---------- 3 PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements -------------------- AMERICAN GREETINGS CORPORATION CONSOLIDATED STATEMENT OF INCOME (Thousands of dollars except per share amounts) (Unaudited) Nine Months Ended November 30, ----------------------------- 1999 1998 ------------ ------------ Net sales $ 1,559,896 $ 1,606,004 Costs and expenses: Material, labor and other production costs 599,359 556,537 Selling, distribution and marketing 676,185 660,855 Administrative and general 164,943 165,662 Restructuring charge 32,747 13,925 Interest 26,544 20,651 Other expense (income) 70 (2,747) ------------ ------------ Total costs and expenses 1,499,848 1,414,883 ------------ ------------ Income before income taxes 60,048 191,121 Income taxes 21,617 68,804 ------------ ------------ Net income $ 38,431 $ 122,317 ============ ============ Earnings per share $ 0.58 $ 1.73 ============ ============ Earnings per share - assuming dilution $ 0.58 $ 1.71 ============ ============ Dividends per share $ 0.40* $ 0.56 ============ ============ Average number of common shares outstanding 65,948,991 70,625,300 * Dividend of $0.19 per share paid June 10, 1999 was declared in February 1999. See notes to consolidated financial statements. Page 1 4 AMERICAN GREETINGS CORPORATION CONSOLIDATED STATEMENT OF INCOME (Thousands of dollars except per share amounts) (Unaudited) Three Months Ended November 30, ------------------------------ 1999 1998 ------------ ------------ Net sales $ 623,356 $ 638,363 Costs and expenses: Material, labor and other production costs 250,773 226,331 Selling, distribution and marketing 222,154 219,939 Administrative and general 56,105 56,156 Restructuring charge -- 13,925 Interest 11,434 6,733 Other expense (income) (1,301) (1,223) ------------ ------------ Total costs and expenses 539,165 521,861 ------------ ------------ Income before income taxes 84,191 116,502 Income taxes 30,309 41,941 ------------ ------------ Net income $ 53,882 $ 74,561 ============ ============ Earnings per share $ 0.81 $ 1.06 ============ ============ Earnings per share - assuming dilution $ 0.81 $ 1.04 ============ ============ Dividends per share $ 0.20 $ 0.19 ============ ============ Average number of common shares outstanding 64,519,534 70,150,852 See notes to consolidated financial statements. Page 2 5 AMERICAN GREETINGS CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Thousands of dollars)
(Unaudited) (Unaudited) Nov 30, 1999 Feb. 28, 1999 Nov. 30, 1998 ------------ ------------- ------------- ASSETS Current assets Cash and equivalents $ 31,103 $ 144,555 $ 38,318 Trade accounts receivable, less allowances of $138,974, $147,686 and $150,106, respectively (principally for sales returns) 594,639 390,740 555,343 Total inventories 255,107 251,289 301,085 Deferred income taxes 153,446 133,092 120,254 Prepaid expenses and other 244,317 226,142 214,222 ---------- ---------- ---------- Total current assets 1,278,612 1,145,818 1,229,222 Goodwill 146,775 135,516 136,064 Other assets 694,349 703,188 675,847 Property, plant and equipment - at cost 1,013,189 958,623 954,771 Less accumulated depreciation 565,881 523,817 527,619 ---------- ---------- ---------- Property, plant and equipment - net 447,308 434,806 427,152 ---------- ---------- ---------- $2,567,044 $2,419,328 $2,468,285 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Debt due within one year $ 289,252 $ 17,777 $ 67,838 Accounts payable and accrued liabilities 211,912 175,366 176,913 Accrued compensation and benefits 72,976 89,284 75,043 Dividends payable 12,904 26,337 13,285 Income taxes 38,646 27,165 55,207 Other current liabilities 103,833 81,745 83,055 ---------- ---------- ---------- Total current liabilities 729,523 417,674 471,341 Long-term debt 446,135 463,246 482,578 Other liabilities 97,561 142,045 122,362 Deferred income taxes 51,976 49,752 37,656 Shareholders' equity 1,241,849 1,346,611 1,354,348 ---------- ---------- ---------- $2,567,044 $2,419,328 $2,468,285 ========== ========== ==========
See notes to consolidated financial statements. Page 3 6 AMERICAN GREETINGS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of dollars)
(Unaudited) Nine Months Ended November 30, ------------------------ 1999 1998 --------- --------- OPERATING ACTIVITIES: Net income $ 38,431 $ 122,317 Adjustments to reconcile to net cash used by operating activities: Restructuring charge 30,584 12,479 Depreciation 48,298 50,247 Deferred income taxes (21,183) (7,924) Change in operating assets and liabilities, net of effects from acquisitions: Increase in trade accounts receivable (198,875) (174,045) Decrease (increase) in inventories 6,361 (32,294) (Increase) decrease in other current assets (17,403) 948 Decrease (increase) in deferred cost - net 25,824 (50,511) (Decrease) increase in accounts payable and other liabilities (3,888) 31,752 Other - net 9,711 3,873 --------- --------- Cash Used by Operating Activities (82,140) (43,158) INVESTING ACTIVITIES: Business acquisitions (65,947) (52,957) Property, plant & equipment additions (29,454) (33,652) Investment in corporate-owned life insurance 4,773 22,067 Other - net (21,136) 14,066 --------- --------- Cash Used by Investing Activities (111,764) (50,476) FINANCING ACTIVITIES: Increase in long-term debt 14,658 342,703 Reduction of long-term debt (431) (19,940) Increase (decrease) in short-term debt 233,745 (120,456) Sale of stock under benefit plans 1,108 15,681 Purchase of treasury shares (130,091) (94,059) Dividends to shareholders (38,537) (39,600) --------- --------- Cash Provided by Financing Activities 80,452 84,329 --------- --------- DECREASE IN CASH AND EQUIVALENTS (113,452) (9,305) Cash and Equivalents at Beginning of Year 144,555 47,623 --------- --------- Cash and Equivalents at End of Period $ 31,103 $ 38,318 ========= =========
See notes to consolidated financial statements Page 4 7 AMERICAN GREETINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Thousands of dollars) Nine Months Ended November 30, 1999 and 1998 Note A - Basis of Presentation - ------------------------------ The accompanying unaudited 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 - Restructuring Activities and Special Charges - ----------------------------------------------------- During the second quarter 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. During the third quarter ended November 30, 1998, the Corporation recorded a restructuring charge of $13,925 ($8,342 net of tax, or earnings per share of $0.12). The primary components of this charge were employee severance and termination benefit costs associated with a headcount reduction of approximately 300 management, salaried and clerical positions. The balance of the charge was comprised of costs associated with exiting the Corporation's kiosk business and lease exit costs due to the closure of certain sales offices. 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. Page 5 8 Note D - Earnings Per Share - --------------------------- The following table sets forth the computation of earnings per share and earnings per share - assuming dilution:
Nine Months Ended November 30, --------------------- 1999 1998 -------- -------- Numerator: Net income, earnings per share and earnings per share - assuming dilution $ 38,431 $122,317 ======== ======== Denominator (thousands): Weighted average shares outstanding 65,949 70,625 Effect of dilutive securities - stock options 67 831 -------- -------- Adjusted weighted average shares outstanding 66,016 71,456 ======== ======== Earnings per share $ 0.58 $ 1.73 ======== ======== Earnings per share - assuming dilution $ 0.58 $ 1.71 ======== ========
Page 6 9 Note E - Comprehensive Income - ----------------------------- The Corporation's total comprehensive income was as follows: Three Months Ended November 30, ----------------------- 1999 1998 --------- --------- Net income $ 53,882 $ 74,561 Other comprehensive income Foreign currency translation adjustments 1,111 4,014 Unrealized gain on available-for-sale securities 287 678 --------- --------- Other comprehensive income 1,398 4,692 --------- --------- Total comprehensive income $ 55,280 $ 79,253 ========= ========= Nine Months Ended November 30, ----------------------- 1999 1998 --------- --------- Net income $ 38,431 $ 122,317 Other comprehensive (loss) income Foreign currency translation adjustments 3,745 (1,317) Unrealized gain on available-for-sale securities 7,450 6,109 --------- --------- Other comprehensive income 11,195 4,792 --------- --------- Total comprehensive income $ 49,626 $ 127,109 ========= ========= Page 7 10 Note F - Business Segment Information - ------------------------------------- Three Months Ended November 30, ---------------------------- 1999 1998 ----------- ----------- Net Sales Social Expressions Products $ 467,002 $ 512,366 Intersegment items (25,869) (23,032) ----------- ----------- Total 441,133 489,334 Non-reportable segments 179,769 147,201 Exchange rate adjustment-net 2,454 1,828 ----------- ----------- Consolidated total $ 623,356 $ 638,363 =========== =========== Earnings Social Expressions Products $ 117,937 $ 161,979 Intersegment items (17,136) (15,921) ----------- ----------- Total 100,801 146,058 Non-reportable segments 14,233 18,447 Restructuring charge -- (13,925) Exchange rate adjustment - net 128 494 Unallocated items - net (30,971) (34,572) ----------- ----------- Consolidated total $ 84,191 $ 116,502 =========== =========== Nine Months Ended November 30, ---------------------------- 1999 1998 ----------- ----------- Net Sales Social Expressions Products $ 1,258,010 $ 1,340,340 Intersegment items (65,630) (60,273) ----------- ----------- Total 1,192,380 1,280,067 Non-reportable segments 362,246 318,854 Exchange rate adjustment-net 5,270 7,083 ----------- ----------- Consolidated total $ 1,559,896 $ 1,606,004 =========== =========== Earnings Social Expressions Products $ 226,151 $ 323,680 Intersegment items (45,301) (41,894) ----------- ----------- Total 180,850 281,786 Non-reportable segments 10,879 18,182 Restructuring charge (32,747) (13,925) Exchange rate adjustment - net (740) 601 Unallocated items - net (98,194) (95,523) ----------- ----------- Consolidated total $ 60,048 $ 191,121 =========== =========== Page 8 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 - -------------------- November 30, February 28, November 1999 1999 30, 1999 -------- -------- -------- Raw materials $ 37,621 $ 37,745 $ 37,773 Work in process 23,591 25,523 27,203 Finished products 244,787 229,220 280,449 -------- -------- -------- 305,999 292,488 345,425 Less LIFO reserve 93,064 89,207 91,260 -------- -------- -------- 212,935 203,281 254,165 Display materials and factory supplies 42,172 48,008 46,920 -------- -------- -------- Inventories $255,107 $251,289 $301,085 ======== ======== ======== 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 November 30, 1999, February 28, 1999 and November 30, 1998 deferred costs and future payment commitments are included in the following financial statement captions: November 30, February 28, November 1999 1999 30, 1999 --------- --------- --------- Prepaid expenses and other $ 193,997 $ 192,619 $ 184,814 Other assets 536,052 595,136 568,532 Other current liabilities (97,159) (81,745) (83,055) Other liabilities (66,128) (113,799) (92,083) --------- --------- --------- $ 566,762 $ 592,211 $ 578,208 ========= ========= ========= Page 9 12 Part 1., Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS - ----------------------------------------------------- BUSINESS DEVELOPMENTS 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. The Corporation plans to sell a minority interest in AmericanGreetings.com in an initial public stock offering later this calendar year. The Corporation will continue to hold a majority interest in the new company. During September, 1999, the Corporation acquired Contempo Colours Inc., a Michigan-based party goods company. This acquisition expands the Corporation's party product offering, provides greater distribution to key retailers and includes a major manufacturing and distribution facility. Contempo will become part of DesignWare, the party goods unit of American Greetings. It is not expected to have a material impact on either the Corporation's results of operations or liquidity and capital resources. On November 3, 1999, the Corporation announced a $10.25 tender offer for all outstanding shares of Gibson Greetings Inc. common stock in a cash transaction estimated at $162 million. Gibson Greetings Inc. is the No. 3 greeting card company in the industry and will provide growth opportunities to the Corporation's U.S. and international greeting card businesses and its electronic marketing unit. While the respective boards of directors have approved the transaction, it is being reviewed by the Department of Justice, which must grant its approval before the transaction can be completed. RESULTS OF OPERATIONS Net sales for the third quarter of fiscal 2000 decreased 2.4% to $623.4 million from the same period in fiscal 1999. Net sales for the first nine months of fiscal 2000 decreased 2.9% to $1,560 million from the same period last year. The decreases in net sales were primarily due to reduced shipments of everyday cards reflecting the Corporation's initiative to improve productivity of retailers' inventories. That initiative will be completed during the fourth quarter of fiscal 2000. As a result unit sales of total greeting cards decreased approximately 5% for the quarter and 3% year-to-date from the same periods in the prior year. The reduction in domestic everyday shipments was partially offset by increased sales of seasonal promotional boxed cards and gift wrap, party products, candles and strong sales in the UK market. Material, labor and other production costs were 40.2% of net sales for the quarter a significant increase from 35.5% in the prior year. For the nine months ended November 30, 1999, material, labor and other production costs were 38.4% however, 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% of net sales for the nine months, a significant increase from 34.7% from the same period in the prior year. For both the quarter and year-to-date, gross profit margins were unfavorably Page 10 13 impacted due to increased sales of lower profit margin products and to reduced production levels which resulted in unfavorable manufacturing variances. Selling, distribution and marketing expenses were 35.6% and 43.3% of net sales for the quarter and nine months, respectively, an increase from 34.5% and 41.1% from the same periods in the prior year. The increase in both periods was primarily due to additional costs relating to the electronic marketing unit which increased selling costs by $9.6 million and $16.8 million for the quarter and year-to-date, respectively. Administrative and general expenses were $56.1 million for the quarter, flat to the same period in the prior year. For the nine months, administrative and general expenses were $164.9 million, down slightly from the $165.7 million in the prior year. Both periods reflected lower employee profit sharing expense offset by additional costs associated with the electronic marketing unit. Interest expense increased from the prior year by $4.7 million for the quarter and by $5.9 million for the nine months. These increases were primarily due to higher borrowing to fund the Corporation's common stock repurchase program and to payments associated with the Contempo Colours Inc. and Gibson acquisitions. Other expense (income) was $1.3 million of income for the quarter, comparable to the $1.2 million of income in the prior year. For the nine month period, other expense (income) was $0.1 million of expense compared to $2.7 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 nine months was 36.0%, flat with the effective tax rate in the prior year. The net income of $53.9 million for the quarter reflects a net loss associated with the Corporation's electronic marketing unit. Excluding this loss, adjusted net income for the quarter was $60.2 million or $.90 per share compared to $1.18 last year. For the first nine months, excluding special charges and the net loss incurred by the Corporation's electronic marketing unit, net income decreased to $72.3 million or $1.09 per share. In the first nine months of last year, net income excluding the impact of the restructure charge, was $130.7 million or $1.85 per share. 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 Page 11 14 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. As of November 30, 1999, 33 hourly and 99 salaried employees have left the company. 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. FY 00 RESTRUCTURING SUMMARY (Thousands of dollars)
Facility Termination shut-down Lease Exit Other Benefits Costs Costs Costs Total ----------- -------- -------- -------- -------- Expense accrued $ 25,820 $ 4,634 $ 1,454 $ 839 $ 32,747 Cash expenditures (1,063) (20) (860) (1,943) Non-cash charges (220) (220) ----------- -------- -------- -------- -------- Balance 11/30/99 $ 24,757 $ 4,614 $ 374 $ 839 $ 30,584 =========== ========= ======== ======== ========
Approximately $2.2 million was charged against the restructuring reserve during the three months ended November 30, 1999. Included in accounts payable and accrued liabilities at November 30, 1999 is $30.6 million related to employee severance costs 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. 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. Page 12 15 FY99 RESTRUCTURING SUMMARY (Thousands of dollars) Termination Kiosk Other Benefits Exit Costs Costs Total ----------- ---------- ------- ------- 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 (3,537) (261) (3,798) Non-cash charges (658) (177) (835) Change in estimate 162 (162) ----------- ---------- ------- ------- Balance 11/30/99 $ 250 $ 598 $ 63 $ 911 =========== ========== ======= ======= Approximately $.2 million of cash expenditures and $.2 million of non-cash charges were recorded against the restructuring reserve during the three months ended November 30, 1999. Approximately $.2 million of the restructure reserve was reclassed from Other Costs to Termination Benefits due to changes in estimates. Included in accounts payable and accrued liabilities at November 30, 1999 is $.9 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. 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 has completed its Year 2000 compliance efforts 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. Page 13 16 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 and remediated. The Corporation has completed 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. Contingency plans are now available in the unlikely event any of the Corporation's critical business partners are not Year 2000 compliant. 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 November 30, 1999, $34 million has been cumulatively expended on Year 2000 compliance. 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 its Year 2000 modifications to its existing software and conversion to new software, by both the Corporation and its significant business partners, should not have a material impact on the Corporation's operations. 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. As of January 14, 2000, the Corporation has not experienced any significant Year 2000 issues with any of its internal systems. 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 November 30, 1998 has been included. Operations used $82.1 million of cash for the first nine months, an increase of $39 million from the same period last year due primarily to lower earnings partially offset by a favorable change in net working capital. The favorable working capital movements were due primarily to reduced inventory levels and lower competitive payments. Page 14 17 Accounts receivable, net of the effect of acquisitions, increased $198.9 million from February 28, 1999, compared to an increase of $174.0 million during the same period in the prior year, due primarily to higher seasonal product shipments and slight delays in the receipt of several customers remittances that occurred early in the fourth quarter. Net accounts receivable increased to 27.4% of the prior twelve months' sales at November 30, 1999 compared to 24.8% at November 30, 1998. Inventories, net of the effect of acquisitions, generated $6.4 million of cash for the first nine months compared to a use of $32.3 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 recorded in the second quarter. Inventories as a percent of the prior twelve months' material, labor, and other production costs decreased to 32.5% at November 30, 1999 from 40.4% at November 30, 1998. Other current assets increased $17.4 million from February 28, 1999 compared to a decrease of $.9 million during the same period in the prior year primarily due to payments under agreements with key internet service providers by the Corporation's electronic marketing unit. Amortization of deferred costs exceeded payments by $25.8 million for the first nine months compared to a net use of $50.5 million during the same period in the prior year. This reflects lower payments under agreements with certain retailers. Accounts payable and other liabilities decreased $3.9 million for the first nine months compared to an increase of $31.8 million over the same period last year due to lower income tax accruals and employee profit sharing liability. Investing activities used $111.8 million in cash for the first nine months this year, including $35.5 million for the acquisition of Contempo Colours Inc. and an escrow payment of $30 million relating to the Gibson acquisition. While $50.5 million was used in the same period last year for investing activities, this included $53.0 million for the acquisition of two greeting card companies in the United Kingdom. Excluding the acquisitions and escrow payment, investing activities used $45.8 million for the first nine months of this year compared to generating $2.5 million in the prior year for the same period. This adjusted increase of $48.3 million from the prior year 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 provided $80.5 million for the nine months compared to providing $84.3 million during the same period in the prior year. The current period activity 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, 2.0 million shares of stock had been purchased for $87.5 million. Page 15 18 As a result of lower cash flow, total debt less cash increased from $512.1 million at November 30, 1998 to $704.3 million at November 30, 1999. Debt as a percentage of debt plus equity increased to 37.2% at November 30, 1999 from 28.9% at November 30, 1998. On a per-share basis, shareholders' equity decreased from $19.37 per share at November 30, 1998 to $19.25 at November 30, 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 November 30,1999, the end of its last fiscal quarter and the date of the most recent balance sheet included in this report, nor from November 30,1998, the end of the corresponding fiscal quarter last year, to November 30, 1999, 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 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 19 PART II - OTHER INFORMATION 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 October 27, 1999, the Corporation filed Form 8-K with the Securities and Exchange Commission. This filing reported that the Corporation expects to sell a minority interest in its electronic marketing division later this calendar year. 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 January 14, 2000 Page 17 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PART I, ITEM 1 OF THE THIRD-QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 9-MOS FEB-29-2000 MAR-01-1999 NOV-30-1999 31,103 0 594,639 22,627 255,107 1,278,612 1,013,189 565,881 2,567,044 729,523 0 0 0 64,521 1,177,328 2,567,044 1,559,896 1,559,896 599,359 599,359 0 5,213 26,544 60,048 21,617 38,431 0 0 0 38,431 0.58 0.58
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