-----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, OdEE5dztFXa+mn+YRzz+XIdZdDg/DT6HzSPxy690WdBcwGsF0rB4eMt/ZRYae+MN ci8eLWDy3J8qI5IgdOEw1g== 0000950152-01-000227.txt : 20010123 0000950152-01-000227.hdr.sgml : 20010123 ACCESSION NUMBER: 0000950152-01-000227 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001130 FILED AS OF DATE: 20010112 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: 1508111 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 l85893ae10-q.txt 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 X SECURITIES EXCHANGE ACT OF 1934 - ----------------- For the quarterly period ended November 30, 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 November 30, 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 58,857,041 Class B Common 4,629,220 2 AMERICAN GREETINGS CORPORATION INDEX
Page Number ------ 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..............................................................................22 Item 6. Exhibits and Reports on Form 8-K...............................................................23 SIGNATURES.......................................................................................................23 - ----------
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, ---------------------------- 2000 1999 ------------ ------------ Net sales $ 1,855,568 $ 1,559,896 Costs and expenses: Material, labor and other production costs 754,293 599,359 Selling, distribution and marketing 810,083 676,185 Administrative and general 208,896 164,943 Non-recurring items -- 32,747 Interest 39,649 26,544 Other (income) expense - net (12,376) 70 ------------ ------------ Total costs and expenses 1,800,545 1,499,848 ------------ ------------ Income before income taxes and cumulative effect of accounting change 55,023 60,048 Income taxes 20,007 21,617 ------------ ------------ Income before cumulative effect of accounting change 35,016 38,431 Cumulative effect of accounting change, net of tax (21,141) -- ------------ ------------ Net income $ 13,875 $ 38,431 ============ ============ Earnings per share and earnings per share assuming dilution: Before cumulative effect of accounting change $ 0.55 $ 0.58 Cumulative effect of accounting change, net of tax (0.33) -- ------------ ------------ Earnings per share and earnings per share assuming dilution $ 0.22 $ 0.58 ============ ============ Dividends per share $ 0.52 $ 0.40 ============ ============ Average number of common shares outstanding 63,699,617 65,948,991
See notes to condensed consolidated financial statements. 1 4 AMERICAN GREETINGS CORPORATION CONSOLIDATED STATEMENT OF INCOME (Thousands of dollars except per share amounts) (Unaudited) Three Months Ended November 30, ---------------------------- 2000 1999 ------------ ------------ Net sales $ 766,095 $ 623,356 Costs and expenses: Material, labor and other production costs 355,858 250,773 Selling, distribution and marketing 277,327 222,154 Administrative and general 70,326 56,105 Interest 15,066 11,434 Other (income) expense - net (2,803) (1,301) ------------ ------------ Total costs and expenses 715,774 539,165 ------------ ------------ Income before income taxes 50,321 84,191 Income taxes 18,306 30,309 ------------ ------------ Net income $ 32,015 $ 53,882 ============ ============ Earnings per share and earnings per share assuming dilution $ 0.50 $ 0.81 ============ ============ Dividends per share $ 0.31 $ 0.20 ============ ============ Average number of common shares outstanding 63,506,387 64,519,534 See notes to condensed consolidated financial statements. 2 5 AMERICAN GREETINGS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Thousands of dollars)
(Unaudited) (Note A) (Unaudited) November 30, 2000 Feb. 29, 2000 November 30,1999 ----------------- ---------------- ---------------- ASSETS Current assets Cash and equivalents $ 78,846 $ 61,010 $ 31,103 Trade accounts receivable, less allowances of $179,618, $136,037 and $138,974,respectively (principally for sales returns) 612,990 430,825 594,639 Inventories 344,981 249,433 255,107 Deferred and refundable income taxes 219,460 99,709 153,446 Prepaid expenses and other 232,328 259,707 244,317 ---------------- ---------------- ---------------- Total current assets 1,488,605 1,100,684 1,278,612 Goodwill 211,949 149,437 146,775 Other assets 788,164 820,447 694,349 Property, plant and equipment - at cost 1,078,216 1,019,121 1,013,189 Less accumulated depreciation 606,109 571,706 565,881 ---------------- ---------------- ---------------- Property, plant and equipment - net 472,107 447,415 447,308 ---------------- ---------------- ---------------- $ 2,960,825 $ 2,517,983 $ 2,567,044 ================ ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Debt due within one year $ 647,717 $ 109,694 $ 289,252 Accounts payable and accrued liabilities 247,322 213,180 211,912 Accrued compensation and benefits 89,179 84,456 72,976 Dividends payable 19,677 25,808 12,904 Other current liabilities 156,552 149,350 142,479 ---------------- ---------------- ---------------- Total current liabilities 1,160,447 582,488 729,523 Long-term debt 423,263 442,102 446,135 Other liabilities 146,066 195,985 97,561 Deferred income taxes 56,326 44,997 51,976 Shareholders' equity 1,174,723 1,252,411 1,241,849 ---------------- ---------------- ---------------- $ 2,960,825 $ 2,517,983 $ 2,567,044 ================ ================ ================
See notes to condensed consolidated financial statements. 3 6 AMERICAN GREETINGS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of dollars)
(Unaudited) Nine Months Ended November 30, ---------------------- 2000 1999 --------- --------- OPERATING ACTIVITIES: Net income $ 13,875 $ 38,431 Adjustments to reconcile to net cash used by operating activities: Cumulative effect of accounting change, net of tax 21,141 -- Non-recurring items -- 30,584 Depreciation and amortization 71,948 62,582 Deferred income taxes 262 (21,183) Change in operating assets and liabilities, net of effects from acquisitions (311,964) (197,072) Other - net (9,486) 4,518 --------- --------- Cash Used by Operating Activities (214,224) (82,140) INVESTING ACTIVITIES: Business acquisitions (179,993) (65,947) Property, plant & equipment additions (56,730) (29,454) Proceeds from sale of fixed assets 24,484 1,645 Investment in corporate-owned life insurance 2,526 4,773 Other - net 24,200 (22,781) --------- --------- Cash Used by Investing Activities (185,513) (111,764) FINANCING ACTIVITIES: Increase in long-term debt -- 14,658 Reduction of long-term debt (35,003) (431) Increase in short-term debt 537,420 233,745 Sale of stock under benefit plans -- 1,108 Purchase of treasury shares (45,448) (130,091) Dividends to shareholders (39,396) (38,537) --------- --------- Cash Provided by Financing Activities 417,573 80,452 --------- --------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 17,836 (113,452) Cash and Equivalents at Beginning of Year 61,010 144,555 --------- --------- Cash and Equivalents at End of Period $ 78,846 $ 31,103 ========= =========
See notes to condensed consolidated financial statements. 4 7 AMERICAN GREETINGS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Thousands of dollars except per share amounts) Nine Months Ended November 30, 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. Under the new accounting method, the Corporation 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. Customer receipt is a more preferable method of recording revenue due to the large volumes of seasonal product shipment activity and the time required to achieve customer-requested delivery dates. The implementation of the change has been accounted for as a change in accounting principle and applied cumulatively as if the change occurred at March 1, 2000. The effect of the change was 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 net effect of the change on the three months ended November 30, 2000 was to increase earnings by approximately $40,900 or $0.23 per share. The net effect of the change on the nine months ended November 30, 2000 was not material. On a pro forma basis, assuming the Corporation had adopted SAB 101 effective March 1, 1999, the increase in earnings for the three months ended November 30, 1999 would have approximated the impact for the three months ended November 30, 2000. On a pro forma basis, assuming the Corporation had adopted SAB 101 effective March 1, 1999, the impact in earnings for the nine months ended November 30, 1999 would have been virtually nil and would have approximated the impact for the nine months ended November 30, 2000. 5 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 held 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: 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 ========= The acquisition of Gibson was primarily financed through short-term borrowings; however, the Corporation will continue to evaluate long-term financing options. 6 9 Unaudited pro forma results of operations for the nine month period ended November 30, 1999, as if the Corporation and Gibson Greetings had been combined as of the beginning of that period, follow. Consolidated results for the first nine months ended November 30, 2000, as reported, include the results of Gibson Greetings for the entire period. The pro forma results include 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 proforma results for the nine months ended November 30, 1999 include a charge recorded by Gibson Greetings of approximately $23,000 related to its decision to seek a buyer for one of its operations.
Pro forma Nine months ended November 30, 1999 ------------------------ Net sales $1,822,008 Net income (loss) (3,823) Earnings (loss) per share and earnings (loss) per share assuming $ (0.06) dilution
7 10 Note E - 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, ----------------------- 2000 1999 ---------- ---------- Numerator: Net income for earnings per share and earnings per share - assuming dilution $ 13,875 $ 38,431 ========== ========== Denominator (thousands): Denominator for earnings per share -weighted average shares outstanding 63,700 65,949 Effect of dilutive securities - stock options -- 67 ---------- ---------- Denominator for earnings per share-assuming dilution -adjusted weighted average shares outstanding 63,700 66,016 ========== ========== Earnings per share $ 0.22 $ 0.58 ========== ========== Earnings per share - assuming dilution $ 0.22 $ 0.58 ========== ==========
8 11
Three Months Ended November 30, ----------------------- 2000 1999 ---------- ---------- Numerator: Net income for earnings per share and earnings per share - assuming dilution $ 32,015 $ 53,882 ========== ========== Denominator (thousands): Denominator for earnings per share -weighted average shares outstanding 63,506 64,520 Effect of dilutive securities - stock options -- 67 ---------- ---------- Denominator for earnings per share-assuming dilution -adjusted weighted average shares outstanding 63,506 64,587 ========== ========== Earnings per share $ 0.50 $ 0.81 ========== ========== Earnings per share - assuming dilution $ 0.50 $ 0.81 ========== ==========
Certain stock options have been excluded for the three and nine months ended November 30, 2000 because they would have been antidilutive. 9 12 Note F - Comprehensive Income (Loss) - ------------------------------------ The Corporation's total comprehensive income (loss) was as follows:
Nine Months Ended November 30, ------------------------ 2000 1999 ---------- ---------- Net income $ 13,875 $ 38,431 Other comprehensive (loss) income Foreign currency translation adjustments (13,418) 3,745 Unrealized (loss) gain on available-for-sale securities (23,464) 7,450 ---------- ---------- Other comprehensive (loss) income (36,882) 11,195 ---------- ---------- Total comprehensive (loss) income $ (23,007) $ 49,626 ========== ========== Three Months Ended November 30, ------------------------ 2000 1999 ---------- ---------- Net income $ 32,015 $ 53,882 Other comprehensive (loss) income Foreign currency translation adjustments (2,966) 1,111 Unrealized (loss) gain on available-for-sale securities (4,425) 287 ---------- ---------- Other comprehensive (loss) income (7,391) 1,398 ---------- ---------- Total comprehensive (loss) income $ 24,624 $ 55,280 ========== ==========
10 13 Note G - Business Segment Information - ------------------------------------- Nine Months Ended November 30, -------------------------- 2000 1999 ----------- ----------- Net Sales Social Expressions Products $ 1,467,458 $ 1,263,281 Intersegment items (66,408) (65,943) ----------- ----------- Total 1,401,050 1,197,338 AmericanGreetings.com 14,770 10,715 Non-reportable segments 454,121 352,207 Exchange rate adjustment-net (14,373) (364) ----------- ----------- Consolidated total $ 1,855,568 $ 1,559,896 =========== =========== Earnings Social Expressions Products $ 205,052 $ 226,058 Intersegment items (47,296) (45,510) ----------- ----------- Total 157,756 180,548 AmericanGreetings.com (32,832) (16,145) Non-reportable segments 34,421 27,070 Exchange rate adjustment - net (972) (3,085) Non-recurring item -- (32,747) Unallocated items - net (103,350) (95,593) ----------- ----------- Consolidated total $ 55,023 $ 60,048 =========== =========== 11 14 Three Months Ended November 30, ------------------------ 2000 1999 ---------- ---------- Net Sales Social Expressions Products $ 552,592 $ 471,015 Intersegment items (29,206) (26,018) ---------- ---------- Total 523,386 444,997 AmericanGreetings.com 3,210 4,138 Non-reportable segments 248,424 175,897 Exchange rate adjustment-net (8,925) (1,676) ---------- ---------- Consolidated total $ 766,095 $ 623,356 ========== ========== Earnings Social Expressions Products $ 94,041 $ 118,304 Intersegment items (20,076) (17,231) ---------- ---------- Total 73,965 101,073 AmericanGreetings.com (12,752) (10,469) Non-reportable segments 33,257 24,717 Exchange rate adjustment - net (885) (1,544) Unallocated items - net (43,264) (29,586) ---------- ---------- Consolidated total $ 50,321 $ 84,191 ========== ========== 12 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 - --------------------
November 30, 2000 February 29, 2000 November 30, 1999 -------------------- ------------------------------------------ Raw materials $ 47,273 $ 38,218 $ 37,621 Work in process 20,166 27,099 23,591 Finished products 328,883 229,887 244,787 -------------------- -------------------- -------------------- 396,322 295,204 305,999 Less LIFO reserve 93,530 90,343 93,064 -------------------- -------------------- -------------------- 302,792 204,861 212,935 Display materials and factory supplies 42,189 44,572 42,172 -------------------- -------------------- -------------------- Inventories $ 344,981 $ 249,433 $ 255,107 ==================== ==================== ====================
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 November 30, 2000, February 29, 2000 and November 30, 1999 deferred costs and future payment commitments are included in the following financial statement captions:
November 30, 2000 February 29, 2000 November 30, 1999 -------------------- ------------------------------------------ Prepaid expenses and other $ 165,222 $ 200,517 $ 193,997 Other assets 714,267 679,214 536,052 Other current liabilities (132,512) (118,250) (97,159) Other liabilities (114,915) (163,865) (66,128) -------------------- -------------------- -------------------- $ 632,062 $ 597,616 $ 566,762 ==================== ==================== ====================
13 16 Part 1., Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - --------------------- BUSINESS DEVELOPMENTS In November 2000, the Corporation reduced its earnings expectation for Fiscal 2001 to a full year range of $1.30 to $1.35 per share before cumulative effect of accounting change due primarily to lower than expected sales of greeting cards. The softness in greeting card sales is the result of continued pressure to reduce retailer inventories, increased competition from lower-priced cards and general retail sales weakness. The Corporation has also undertaken a review of its operations focusing on process improvements that is expected to improve efficiency and reduce costs by rationalizing brands, products and facilities. Details of the restructuring effort will be announced in March 2001, and the Corporation expects to record a restructure charge during Fiscal 2002 as part of this initiative. Additionally, the Corporation reduced its quarterly dividend from 21 cents per share to 10 cents per share, beginning with the dividend payable in March 2001. 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. Under the new accounting method, the Corporation 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. Customer receipt is a more preferable method of recording revenue due to the large volumes of seasonal product shipment activity and the time required to achieve customer requested delivery dates. The cumulative effect of the change on prior years resulted in a one-time non-cash reduction to the Corporation's earnings of $21.1 million (net of tax of $12.6 million) 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 $766.1 million for the quarter ended November 30, 2000, an increase of 22.9% over the prior year. This year's third quarter results were favorably impacted by the newly-acquired Gibson Greetings and CPS units which contributed in total approximately $149 million of net sales. Net sales for the third quarter were also favorably 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, were recognized in the third quarter, while Valentines Day seasonal program sales shifted from the third quarter to the fourth quarter. The net seasonal sales shift in the third quarter increased sales by approximately $41 million over the prior year. Excluding the quarter to date impact of the acquisitions and the seasonal sales shift to the third quarter, net sales decreased 7.6% compared to the prior year. The primary 14 17 component of this performance was lower sales of everyday card product in the United States partially offset by an $11 million sales increase at the Corporation's PlusMark unit, primarily attributable to calendars. Unit sales of everyday greeting cards increased in total approximately 11% for the quarter from the same period in the prior year however, excluding the Gibson acquisition, unit sales of everyday greeting cards decreased approximately 3%. For the nine months ended November 30, 2000, net sales were $1.856 billion, an increase of 19.0% compared to the same period last year. Through the nine months ended November 30, 2000, the recording of $44.4 million of Mother's Day, Father's Day and Graduation sales in the first quarter of this fiscal year has offset the shift of Valentines Day seasonal program sales from the third quarter into the fourth quarter (see note B). Additionally, the Gibson and CPS acquisitions in total have contributed approximately $285 million of net sales through the first nine months. Excluding the year to date impact of the acquisitions, net sales increased 0.7% 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 $12.1 million, strong sales in Canada and the United Kingdom, as each showed increases of $7 million, and an increase of approximately $15 million at the Corporation's PlusMark unit which sells promotional gift wrap, Christmas boxed cards and calendars. Offsetting these sales increases were lower sales of everyday greeting cards in the United States. Unit sales of everyday greeting cards increased in total approximately 11% for the nine months from the same period in the prior year however, excluding the Gibson acquisition, unit sales of everyday greeting cards decreased approximately 4%. Material, labor and other production costs as a percentage of net sales for the nine months increased to 40.7% from 38.4% in the prior year. For the quarter, the percentage increased to 46.5% from 40.2% compared to prior year. The year-to-date and quarter were impacted by 170 basis points and 290 basis points, respectively, due to the CPS acquisition and increased sales at PlusMark, which have lower profit margins than traditional greeting cards. The remainder of the increase was primarily due to lower sales of higher margin everyday greeting cards. Selling, distribution and marketing expenses as a percentage of net sales were 36.2% for the three months ended November 30, 2000, up from 35.6% in the prior year due primarily to higher order fulfillment costs. For the nine month period, selling, distribution, and marketing expenses increased to 43.7% of net sales from 43.3% in the prior year due primarily to additional costs relating to AmericanGreetings.com, a subsidiary of the Corporation. Administrative and general expenses increased $14.2 million to $70.3 million in comparison to the same period in the prior year for the quarter due primarily to acquisitions. For the nine months, administrative and general expenses were $208.9 million, up from $164.9 million in the prior year. Key components of the increase were $29 million from the acquired companies, an increase of $5 million of bad debt expense and $5 million of increased costs related to AmericanGreetings.com. Interest expense increased from the prior year by $3.6 million for the quarter and $13.1 million for the nine months. This increase was primarily due to higher borrowing levels to fund the Corporation's acquisition of Gibson and CPS, as well as the common stock repurchase program. 15 18 Other (income) expense was $2.8 million of income for the quarter compared to $1.3 million of income in the prior year due primarily to Year 2000 remediation costs incurred in the prior year. For the nine-month period, other (income) expense was $12.4 million of income compared to $0.1 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 and approximately $7 million of Year 2000 remediation costs incurred in the prior year. The effective tax rate for the nine months was 36.4%, up slightly from 36% in the prior year, which included the benefit of tax loss carryforwards in the United Kingdom. Earnings per share for the quarter were $0.50 compared to $0.81 for the same period last year. This year's third quarter reflects a net benefit of $0.23 associated with the shift in the recognition of Christmas and Fall seasonal program shipments to the third quarter and Valentine's Day seasonal program sales shifting to the fourth quarter. Additionally, acquisitions contributed $0.08 to earnings per share. In comparison to prior year, the decrease in earnings per share excluding the accounting change and acquisitions is primarily due to lower sales of high margin everyday greeting cards. For the first nine months, earnings per share before cumulative effect of accounting change were $0.55 compared to $0.58 last year; however, last year included a reduction of $0.36 for special charges. Through the nine months ended November 30, 2000, the recording of Mother's Day, Father's Day and Graduation sales in the first quarter of this fiscal year has offset the shift of Valentine's Day seasonal program sales from the third quarter into the fourth quarter. Therefore, the year-to-date impact of the seasonal sales shift is virtually nil. Earnings per share were favorably impacted by $0.07 relating to acquisitions and also an $0.08 gain on the sale of a Canadian building. In comparison to prior year, reduced sales of high margin everyday greeting cards are the primary reason for the decline in earnings per share. 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 November 30, 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 million. Fiscal 2000 - Second Quarter 16 19 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. As of November 30, 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.
Pension Liabilities Facility Kiosk Lease and Shut-Down Exit Exit Other Termination Costs Costs Costs Costs Total Benefits -------- -------- -------- -------- -------- -------- (Thousands of dollars) Balance February 29, 2000 $ 25,156 $ 4,081 $ 48 $ 1,016 $ 626 $ 30,927 Cash Expenditures (17,534) (798) (13) (12) (22) (18,379) Non-Cash Charges (2,334) (2,334) Change in Estimate 45 (35) (10) Exchange Rate Impact (1,113) (138) (146) (86) (1,483) -------- -------- -------- -------- -------- -------- Balance November 30, 2000 $ 6,554 $ 811 $ 0 $ 858 $ 508 $ 8,731 ======== ======== ======== ======== ======== ========
Included in accounts payable and accrued liabilities at November 2000 is $8.7 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 17 20 segment primarily designs, manufactures and sells greeting cards and other products through various channels of distribution with mass retailers as the primary channel and is managed by geographic location. 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. Social Expressions Products Segment Net sales for the quarter, net of intersegment items, increased 17.6% from the prior year due primarily to a $40.9 million increase in seasonal sales. Higher Christmas and Fall seasonal sales in the third quarter were partially offset by the shift of Valentine's Day sales to the fourth quarter as a result of the change in accounting for recording seasonal product shipments. As discussed previously, the third quarter results were also favorably impacted by the acquisition of Gibson, which contributed $80.1 million of net sales. Excluding the impact on the quarter of the seasonal sales shift and the Gibson acquisition, net sales decreased 9.6%. The primary driver of this sales decline was lower sales of everyday greeting card product in the United States. For the nine months ended November 30, 2000, net sales increased 17% compared to the same period last year. Through the nine months ended November 30, 2000, the recording of $44.4 million of Mother's Day, Father's Day and Graduation sales in the first quarter of this fiscal year has offset the shift of Valentines Day seasonal program sales from the third quarter into the fourth quarter. Excluding the year to date impact of the Gibson acquisition net sales would be flat compared to 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 offset by lower sales of everyday greeting card product. Segment earnings for the quarter, net of intersegment items, decreased $27.1 million from the prior year reflecting the earnings impact of lower sales in the United States of high margin everyday greeting card product. 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 nine months ended November 30, 2000, segment earnings, net of intersegment items, decreased $22.8 million from the same period in the prior year. Lower sales of everyday greeting card product in the United States were partially offset by cost savings associated with the Canadian Division restructure. AmericanGreetings.com, Inc. Segment Net sales declined $0.9 million during the third quarter, decreasing to $3.2 million compared to $4.1 million last year, due primarily to reduced subscription revenue as a result of providing free electronic greetings. For the nine months ended November 30, 2000, net sales improved 38% to $14.8 million compared to $10.7 million last year. This growth was driven by increased advertising revenue resulting from new advertising sales initiatives and higher traffic. AmericanGreetings.com more than doubled its market share percentage in the last nine months 18 21 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 September Nielsen Net Ratings traffic reports. The segment loss was $12.8 million for the third quarter compared to $10.5 million last year and for the nine months ended November 30, 2000 the segment loss was $32.8 million compared to $16.1 million last year. The segment losses for both periods reflect increased partner share costs associated with various internet distribution agreements and the Corporation's continued investment in technology and content 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 November 30, 1999 has been included. Operations used $214.2 million of cash for the first nine months, an increase of $132.1 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. Accounts receivable, net of the effect of acquisitions, used $208.7 million of cash from February 29, 2000, compared to a use of $198.9 million during the same period in the prior year. This increase reflects an $82 million increase in accounts receivable due to the activity of the acquired units of Gibson and CPS, while increased sales at PlusMark increased accounts receivable by $12.5 million. Partially offsetting this increase is the impact of the shift in the recognition of Valentine's Day seasonal program shipments from the third quarter to the fourth quarter of approximately $44 million and to lower everyday greeting card sales. Net accounts receivable decreased to 24.8% (23.1% excluding acquisitions) of the prior twelve months' sales at November 30, 2000 compared to 27.4% at November 30, 1999. Inventories, net of the effect of acquisitions, used $25.4 million of cash for the first nine months compared to a source of $6.4 million during the same period in the prior year. Key components of this increase are increased inventory levels attributable to everyday accessory products of $21.2 million to meet anticipated higher sales volumes and an increase of $5.9 million in seasonal inventory, primarily related to Valentine's Day, which will ship in the fourth quarter. Inventories as a percent of the prior twelve months' material, labor, and other production costs increased to 35.8% (38.4% excluding acquisitions) at November 30, 2000 from 32.5% at November 30, 1999. 19 22 Deferred costs - net used $1.3 million of cash for the first nine months as scheduled payments exceeded amortization while in the prior year amortization of deferred costs exceeded payments by $25.8 million. Accounts payable and other liabilities used $61.9 million of cash for the first nine months compared to $3.9 million in the same period last year. This increase use of cash is due primarily to $18.4 million of cash payments associated with the Corporation's restructuring activities and approximately $28 million of cash payments for integration costs associated with acquisitions. Investing activities used $185.5 million in cash for the first nine months this year which includes $137.6 million for the Gibson acquisition, $31.0 million for the CPS acquisition and $11.4 million for the acquisition of M&D Balloons. Excluding acquisitions, investing activities used $5.5 million of cash for the quarter compared to $45.8 million in the prior year. The current year lower cash usage reflects $20.3 million of cash proceeds from the sale of a Canadian building and the settlement of a $15 million supply agreement loan partially offset by an increase in capital additions. Financing activities provided $417.6 million for the nine months compared to $80.5 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, but to a much lesser extent, the repurchase of its Class A common stock as 2.2 million shares of common stock were purchased for $45.4 million at an average price of $20.47 per share. During the same period last year, 4.6 million shares of stock had been purchased for $130.1 million at an average price of $28.25 per share. As a result of the Gibson and CPS acquisition, total debt less cash increased from $704.3 million at November 30, 1999 to $992.2 million at November 30, 2000. Debt as a percentage of debt plus equity increased to 47.7% at November 30, 2000 from 37.2% at November 30, 1999. The Corporation's debt level is anticipated to be significantly reduced at year-end from third quarter levels, as the fourth quarter cash flow is typically very strong due to the collection of seasonal accounts receivable. On a per-share basis, shareholders' equity decreased from $19.25 per share at November 30, 1999 to $18.50 at November 30, 2000. The Internal Revenue Service has examined the Corporation's federal income tax returns for the fiscal years ended 1992 through 1995 and is currently examining returns for fiscal years 1996 through 1998. As part of its Coordinated Issues Program, the IRS has issued proposed adjustments disallowing interest deductions related to the Corporation's corporate-owned life insurance programs. The Corporation plans to vigorously contest the proposed adjustments or any subsequent assessments. If assessed, the disallowance represents an exposure for tax and interest of approximately $135 million. An additional $10 million exposure exists for interest deductions claimed in the tax return for fiscal 1999 which has not been examined. 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 November 30, 2000, the end of its last fiscal quarter and the date of the most recent balance sheet included in this 20 23 report, nor from November 30,1999, the end of the corresponding fiscal quarter last year, to November 30, 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. 21 24 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 The Corporation's motion for more definite statement was denied by the Court. The Corporation's answer is due in mid-January, 2001, and discovery is scheduled to begin shortly thereafter. The Corporation intends to aggressively defend against the suit. 22 25 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (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 January 12, 2001 -----END PRIVACY-ENHANCED MESSAGE-----