10-Q 1 l92282ae10-q.txt AMERICAN GREETINGS CORPORATION FORM 10-Q 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, 2001 ------------------------------------------------- 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 incorporation or organization) Identification No.) 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, 2001, the date of this report, the number of shares outstanding of each of the issuer's classes of common stock was: Class A Common 59,124,949 Class B Common 4,620,456 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..........................17 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................24 Item 6. Exhibits and Reports on Form 8-K.............................25 SIGNATURES.................................................................25
PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements -------------------- AMERICAN GREETINGS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Thousands of dollars except share and per share amounts) (Unaudited) Nine Months Ended November 30, --------------------------------- 2001 2000 ------------ ------------ Net sales $ 1,699,398 $ 1,855,568 Costs and expenses: Material, labor and other production costs 751,529 754,293 Selling, distribution and marketing 799,049 810,083 Administrative and general 214,488 208,896 Restructure charges 52,925 -- Interest 59,144 39,649 Other (income) - net (2,478) (12,376) ------------ ------------ Total costs and expenses 1,874,657 1,800,545 ------------ ------------ (Loss) income before income tax (benefit) expense and cumulative effect of accounting change (175,259) 55,023 Income tax (benefit) expense (66,072) 20,007 ------------ ------------ (Loss) income before cumulative effect of accounting change (109,187) 35,016 Cumulative effect of accounting change, net of tax -- (21,141) ------------ ------------ Net (loss) income $ (109,187) $ 13,875 ============ ============ (Loss) earnings per share and (loss) earnings per share assuming dilution: Before cumulative effect of accounting change $ (1.72) $ 0.55 Cumulative effect of accounting change, net of tax -- (0.33) ------------ ------------ (Loss) earnings per share and (loss) earnings per share assuming dilution $ (1.72) $ 0.22 ============ ============ Dividends per share $ 0.20 $ 0.52 ============ ============ Average number of common shares outstanding 63,569,030 63,699,617
See notes to condensed consolidated financial statements. 1
AMERICAN GREETINGS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Thousands of dollars except per share amounts) (Unaudited) Three Months Ended November 30, -------------------------------------- 2001 2000 ----------- ------------ Net sales $ 705,433 $ 766,095 Costs and expenses: Material, labor and other production costs 313,512 355,858 Selling, distribution and marketing 284,785 277,327 Administrative and general 71,290 70,326 Interest 23,619 15,066 Other expense (income) - net 1,592 (2,803) ----------- ------------ Total costs and expenses 694,798 715,774 ----------- ------------ Income before income tax expense 10,635 50,321 Income tax expense 4,010 18,306 ----------- ------------ Net income $ 6,625 $ 32,015 =========== ============ Earnings per share and earnings per share - assuming dilution $ 0.10 $ 0.50 =========== ============ Dividends per share $ 0.10 $ 0.31 =========== ============ Average number of common shares outstanding 63,705,743 63,506,387
See notes to condensed consolidated financial statements. 2
AMERICAN GREETINGS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Thousands of dollars) (Unaudited) (Note A) (Unaudited) November 30, 2001 Feb. 28, 2001 November 30, 2000 ----------------- ----------------- ----------------- ASSETS Current assets Cash and equivalents $ 45,353 $ 51,691 $ 78,846 Trade accounts receivable, less allowances of $185,499, $184,799 and $179,618,respectively (principally for sales returns) 538,546 387,534 612,990 Inventories 341,962 365,221 344,981 Deferred and refundable income taxes 151,048 190,241 219,460 Prepaid expenses and other 207,742 211,049 232,328 ------------- ------------- ------------- Total current assets 1,284,651 1,205,736 1,488,605 Goodwill 256,259 229,802 211,949 Other assets 901,061 799,348 788,164 Property, plant and equipment - at cost 1,069,519 1,086,094 1,078,216 Less accumulated depreciation 631,186 608,906 606,109 ------------- ------------- ------------- Property, plant and equipment - net 438,333 477,188 472,107 ------------- ------------- ------------- $ 2,880,304 $ 2,712,074 $ 2,960,825 ============= ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Debt due within one year $ 35,056 $ 378,904 $ 647,717 Accounts payable 119,170 139,753 137,511 Accrued liabilities 227,209 164,310 109,811 Accrued compensation and benefits 97,762 89,936 89,179 Dividends payable 6,368 12,732 19,677 Income taxes 118,787 192,936 10,540 Other current liabilities 143,775 132,710 146,012 ------------- ------------- ------------- Total current liabilities 748,127 1,111,281 1,160,447 Long-term debt 995,239 380,124 423,263 Other liabilities 198,258 146,187 146,066 Deferred income taxes 23,351 27,292 56,326 Shareholders' equity 915,329 1,047,190 1,174,723 ------------- ------------- ------------- $ 2,880,304 $ 2,712,074 $ 2,960,825 ============= ============= =============
See notes to condensed consolidated financial statements. 3
AMERICAN GREETINGS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of dollars) (Unaudited) Nine Months Ended November 30, ------------------------------ 2001 2000 ------------ ------------ OPERATING ACTIVITIES: Net (loss) income $ (109,187) $ 13,875 Adjustments to reconcile to net cash used by operating activities: Cumulative effect of accounting change, net of tax -- 21,141 Restructure charges 46,439 -- Depreciation and amortization 62,284 71,948 Deferred income taxes 41,636 262 Changes in operating assets and liabilities, net of effects from acquisitions: Increase in trade accounts receivable (153,099) (208,740) Decrease (increase) in inventories 20,589 (25,418) Decrease (increase) in other current assets 6,394 (14,614) Increase in deferred cost - net (46,551) (1,296) Decrease in accounts payable and other liabilities (67,251) (61,896) Other - net 7,263 (9,486) ------------ ------------ Cash Used by Operating Activities (191,483) (214,224) INVESTING ACTIVITIES: Business acquisitions (35,000) (179,993) Property, plant & equipment additions (21,597) (56,730) Proceeds from sale of fixed assets 3,459 24,484 Investment in corporate-owned life insurance 5,745 2,526 Other - net (14,058) 24,200 ------------ ------------ Cash Used by Investing Activities (61,451) (185,513) FINANCING ACTIVITIES: Increase in long-term debt 688,485 -- Reduction of long-term debt (80,622) (35,003) (Decrease) increase in short-term debt (341,058) 537,420 Sale of stock under benefit plans 92 -- Purchase of treasury shares (99) (45,448) Dividends to shareholders (20,202) (39,396) ------------ ------------ Cash Provided by Financing Activities 246,596 417,573 ------------ ------------ (DECREASE) INCREASE IN CASH AND EQUIVALENTS (6,338) 17,836 Cash and Equivalents at Beginning of Year 51,691 61,010 ------------ ------------ Cash and Equivalents at End of Period $ 45,353 $ 78,846 ============ ============
See notes to condensed consolidated financial statements. 4 AMERICAN GREETINGS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Thousands of dollars except per share amounts) Nine Months Ended November 30, 2001 and 2000 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 Corporation's fiscal year ends on February 28 or 29. References to a particular fiscal year refer to the fiscal year ending in February of that year. The balance sheet at February 28, 2001 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 fiscal 2002 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 28, 2001. 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, clarified 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 operations for the nine months ended November 30, 2000. 5 Note C - Seasonal Nature of Business ------------------------------------ A significant portion of 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 - Special Charges and Restructure Reserves ------------------------------------------------- Fiscal 2002 The Corporation has undertaken a previously-announced review of its operations, which has resulted in three initiatives: the reorganization of the core greeting card business, the implementation of scan-based trading, and a change in the contractual relationship with a strategic partner of the Corporation's Internet business. In total, the Corporation expects these pre-tax special charges to be approximately $300,000 to $330,000 during fiscal 2002. The Corporation incurred $225,472 of these pre-tax special charges during the nine months ended November 30, 2001, of which $54,978 was incurred in the three months ended November 30, 2001. Included in the special charges noted above is a restructure charge of $52,925 ($32,970 net of tax, or earnings per share of $0.52). This charge was for costs associated with the consolidation and rationalization of certain of the Corporation's domestic and foreign manufacturing and distribution operations, including employee severance and benefit termination costs. The restructure charge also included a charge for a change in the contractual relationship with a partner of the Corporation's Internet unit. More specifically, the restructure charge included $26,470 for employee termination benefits, $3,727 for facility rationalization costs, $2,296 for lease exit costs, $17,727 for a change in the contractual relationship with a partner of the Corporation's Internet unit and $2,705 of other costs. In total, approximately 1,500 positions will be eliminated, comprised of 1,106 hourly and 394 salaried positions. All activities are expected to be completed by the end of fiscal 2002. As of November 30, 2001, 386 hourly and 264 salaried positions have been eliminated. 6 The following table summarizes the provisions and remaining reserve associated with the restructure charge at November 30, 2001:
Facility Change in Termination Rationalization Lease Exit Contractual Other Benefits Costs Costs Relationship Costs Total ---------- --------------- --------- ------------ -------- -------- Provision $ 26,470 $ 3,727 $ 2,296 $ 17,727 $ 2,705 $ 52,925 Non-cash charge (17,727) (17,727) Cash expenditures (4,500) (429) (121) (1,436) (6,486) -------- -------- -------- -------- -------- -------- Balance November 30, 2001 $ 21,970 $ 3,298 $ 2,175 $ -- $ 1,269 $ 28,712 ======== ======== ======== ======== ======== ========
Included in accrued liabilities at November 30, 2001 is $28,712 related to severance and other exit costs for those actions not yet completed. Also, $34,140 of other special pre-tax costs associated with the restructure efforts were incurred during the nine months. In addition, the Corporation recorded a charge of $54,014 during the period to write down inventory in its domestic operations to net realizable value associated with its previously-announced one-time efforts. These efforts include a brand rationalization and product line size reduction, which entail the elimination of the Corporation's Forget Me Not greeting card brand. This amount is included in material, labor and other production costs. The total pre-tax impact of these special charges was $141,079 ($87,892 net of tax) or $1.38 per share. Also during the period, the Corporation began implementing its scan-based trading business model with certain of its retailers. The impact of its implementation was a $65,485 reduction in its net sales and a $10,149 reduction in its material, labor, and other production costs. In addition, the Corporation incurred implementation and other costs of $29,057, for a total pre-tax impact of approximately $84,393 ($52,577 net of tax) or $0.83 per share. 7 In summary, the pre-tax special charges consist of the following: Severance $ 26,470 Lease exit costs 2,296 Facility rationalization costs 3,727 Change in contractual relationship 17,727 Other costs 2,705 -------- Total restructure charge $ 52,925 Inventory write-down 54,014 Scan-based trading initiative 84,393 Other costs 34,140 -------- Total special charges $225,472 Fiscal 2000 - Fourth Quarter During the three months ended February 29, 2000, the Corporation recorded a $6,126 ($4,849 net of tax, or earnings per share of $0.08) restructure charge related to various international 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 included, to a lesser extent, the integration of Mexican manufacturing in the United States and the realignment of various business functions in Australia. This restructure charge included $5,198 for employee termination benefits, $654 for lease exit costs, $274 for the write off of assets no longer in use and other restructure costs. In total, approximately 336 positions were anticipated to be eliminated, comprised of 304 hourly and 32 salaried employees. As of November 30, 2001, 161 hourly and 36 salaried employees have been terminated. All activities are expected to be completed by the end of fiscal 2002. Fiscal 2000 - Second Quarter In connection with the Corporation's initiative to continue to streamline its North American operations, and to a lesser extent, its United Kingdom operations, the Corporation recorded a $40,429 ($24,224 net of tax, or earnings per share of $0.36) special charge during the three months ended November 30, 1999 relating primarily to the consolidation of Canadian manufacturing and distribution in the United States. Included in this special charge is a $32,747 restructure charge primarily for exit costs associated with the closure of certain facilities in Canada and to a lesser extent, costs to exit certain minor United Kingdom businesses. The remaining $7,682 of the special charge was recorded in material, labor and other production costs for the write-down of inventory in Canada to net realizable value. The restructure charge of $32,747 included $25,820 of severance, pension and personnel-related benefits, $4,634 of facility shut-down costs, $1,454 of lease exit costs and $839 related to other restructure costs. All initiatives associated with the Canadian restructuring have been substantially completed. The largest remaining restructuring activity relates to the Canadian Division's pension plans. The Corporation has taken the necessary actions to settle the 8 pension liabilities, and Canadian regulatory approval has been obtained. The Corporation is in the process of distributing the remaining pension plan assets to satisfy those obligations. The following table summarizes the provisions, payments and remaining reserves associated with the restructure charges recorded in fiscal 2000:
Facility Lease Termination Rationalization Exit Other Benefits Costs Costs Costs Total ----------- --------------- -------- -------- -------- Balance, February 28, 2001 $ 5,408 $ 1,148 $ 934 $ 235 $ 7,725 Cash expenditures (3,363) (314) (235) (3,912) -------- -------- -------- -------- -------- Balance, November 30, 2001 $ 2,045 $ 1,148 $ 620 $ -- $ 3,813 ======== ======== ======== ======== ========
Included in accounts payable and accrued liabilities at November 30, 2001 is $3,813 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. 9 Note E - Debt ------------- On June 22, 2001, the Corporation entered into agreements to sell $175,000 of 7.00% convertible subordinated notes due in 2006 and $260,000 of 11.75% senior subordinated notes due in 2008 to qualified institutional investors. The convertible notes outstanding could potentially result in the issuance of 12.6 million shares of the Class A Common Stock of the Corporation. The transactions, which closed on June 29, 2001, resulted in net proceeds to the Corporation of approximately $390,300, after deducting underwriting discounts and estimated transactional expenses. The Corporation used the net proceeds from these offerings to repay indebtedness and to provide funds for other general corporate purposes. On August 28, 2001, the Corporation filed Form S-3 and Form S-4 with the Securities and Exchange Commission as required with respect to these debt offerings. On August 9, 2001, the Corporation entered into a new $350,000 senior secured credit facility. It consists of three tranches: a $105,000, 364-day revolving facility, a $120,000 revolving facility maturing January 15, 2006, and a $125,000 term loan maturing June 15, 2006. The Corporation has the option to request a one-year extension of the 364-day revolving facility. The credit facility contains various restrictive covenants which require, among other things, that the Corporation meet specified periodic financial ratios, minimum net worth and earnings requirements. The credit facility restricts the Corporation's ability to incur additional indebtedness and to engage in acquisitions of other businesses and entities. As part of the debt restructuring, the Corporation also announced it had entered into a three-year, $250,000 credit facility secured by certain trade accounts receivable. Note F - Acquisitions --------------------- On March 9, 2000, the Corporation completed its acquisition of Gibson Greetings, Inc. ("Gibson") for a cash price of $10.25 per share. Gibson distributed individual relationship communication products, including greeting cards, gift wrap, party goods and licensed products. Gibson held a minority interest in Egreetings Network, Inc.("Egreetings"); the Corporation subsequently acquired the remaining shares of Egreetings in March 2001. The acquisition of Gibson has been accounted for by the purchase method of accounting, and accordingly, the consolidated statements of operations include the results of Gibson 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 available and on assumptions as to future operations. For financial statement purposes, the excess of cost over net assets acquired is amortized by the straight-line method over 40 years. On July 13, 2000, the Corporation completed its acquisition of CPS Corporation ("CPS"), for a cash price of $31,000 plus 1,200,000 shares of the Corporation's common stock. CPS is a supplier of gift wrap and decorative packaging. On September 12, 2001, the Corporation completed its acquisition of the BlueMountain.com division of At Home Corporation for a cash price of $35 million. The BlueMountain.com division operates an online card and entertainment Internet site, www.bluemountain.com. 10 Note G - (Loss) Earnings per Share ---------------------------------- The following table sets forth the computation of (loss) earnings per share and loss (earnings) per share - assuming dilution:
Nine Months Ended November 30, ------------------------------ 2001 2000 ------------ ------------ Numerator: Net (loss) income for (loss) earnings per share and (loss) earnings per share - assuming dilution $ (109,187) $ 13,875 ============ ============ Denominator (thousands): Denominator for (loss) earnings per share -weighted average shares outstanding 63,569 63,700 Effect of dilutive securities - stock options and convertible debt -- -- ------------ ------------ Denominator for (loss) earnings per share-assuming dilution -adjusted weighted average shares outstanding 63,569 63,700 ============ ============ (Loss) earnings per share $ (1.72) $ 0.22 ============ ============ (Loss) earnings per share - assuming dilution $ (1.72) $ 0.22 ============ ============ Three Months Ended November 30, ------------------------------ 2001 2000 ------------ ------------ Numerator: Net income for earnings per share and earnings per share - assuming dilution $ 6,625 $ 32,015 ============ ============ Denominator (thousands): Denominator for earnings per share -weighted average shares outstanding 63,706 63,506 Effect of dilutive securities - stock options and convertible debt -- -- ------------ ------------ Denominator for earnings per share-assuming dilution -adjusted weighted average shares outstanding 63,706 63,506 ============ ============ Earnings per share $ 0.10 $ 0.50 ============ ============ Earnings per share - assuming dilution $ 0.10 $ 0.50 ============ ============
Certain stock options and convertible debt have been excluded for the three and nine months ended November 30, 2001 and 2000 because the effect would have been antidilutive. 11 Note H - Comprehensive Income (Loss) ------------------------------------ The Corporation's total comprehensive income (loss) was as follows:
Nine Months Ended November 30, ------------------------------ 2001 2000 ------------ ------------ Net (loss) income $ (109,187) $ 13,875 Other comprehensive (loss) income: Foreign currency translation adjustments (13,934) (13,418) Unrealized gain (loss) on available-for-sale securities 2,088 (23,464) ------------ ------------ Other comprehensive loss (11,846) (36,882) ------------ ------------ Total comprehensive loss $ (121,033) $ (23,007) ============ ============ Three Months Ended November 30, ------------------------------ 2001 2000 ------------ ------------ Net income $ 6,625 $ 32,015 Other comprehensive (loss) income: Foreign currency translation adjustments (11,590) (2,966) Unrealized gain (loss) on available-for-sale securities 410 (4,425) ------------ ------------ Other comprehensive loss (11,180) (7,391) ------------ ------------ Total comprehensive (loss) income $ (4,555) $ 24,624 ============ ============
12 Note I - Business Segment Information -------------------------------------
Nine Months Ended November 30, ------------------------------ 2001 2000 ------------ ------------ Net Sales Social Expressions Products $ 1,359,456 $ 1,441,460 Intersegment items (66,328) (66,408) ------------ ------------ Total 1,293,128 1,375,052 AmericanGreetings.com 24,747 14,770 Non-reportable segments 472,399 464,586 Exchange rate adjustment-net (14,141) 1,160 Special charges (76,735) -- ------------ ------------ Consolidated total $ 1,699,398 $ 1,855,568 ============ ============ Earnings Social Expressions Products $ 189,998 $ 212,634 Intersegment items (46,502) (47,296) ------------ ------------ Total 143,496 165,338 AmericanGreetings.com (4,736) (32,832) Non-reportable segments 43,534 34,614 Exchange rate adjustment - net (849) (719) Special charges (225,472) -- Unallocated items - net (131,232) (111,378) ------------ ------------ Consolidated total $ (175,259) $ 55,023 ============ ============
13
Three Months Ended November 30, ------------------------------ 2001 2000 ------------ ------------ Net Sales Social Expressions Products $ 505,499 $ 539,439 Intersegment items (25,837) (29,206) ------------ ------------ Total 479,662 510,233 AmericanGreetings.com 9,407 3,210 Non-reportable segments 240,075 256,330 Exchange rate adjustment-net (6,154) (3,678) Special charges (17,557) -- ------------ ------------ Consolidated total $ 705,433 $ 766,095 ============ ============ Earnings Social Expressions Products $ 88,812 $ 102,084 Intersegment items (17,341) (20,076) ------------ ------------ Total 71,471 82,008 AmericanGreetings.com (142) (12,752) Non-reportable segments 46,775 34,296 Exchange rate adjustment - net (731) (2,058) Special charges (54,978) -- Unallocated items - net (51,760) (51,173) ------------ ------------ Consolidated total $ 10,635 $ 50,321 ============ ============
Special charges for the period ended November 30, 2001 include the costs associated with the consolidation and rationalization of certain of the Corporation's operations, including employee severance and benefit termination costs, a change in the contractual relationship with a partner of the Corporation's Internet unit, an inventory write-down, the implementation of the scan-based trading business model, and other non-recurring costs in connection with these initiatives. 14 Note J - New Pronouncements --------------------------- In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued. This Statement, which establishes new accounting and reporting standards for derivative financial instruments, along with its amendments SFAS No. 137 and SFAS No. 138, became effective for the Corporation March 1, 2001. The adoption of the Statements did not have a material effect on the Corporation's consolidated financial statements. In July 2001, SFAS No. 141, "Business Combinations", was issued. This Statement, which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations", eliminated the pooling-of-interests method of accounting for business combinations and modifies the application of the purchase accounting method. The elimination of the pooling-of-interests method is effective for transactions initiated after June 30, 2001. The remaining provisions of SFAS No. 141 will be effective for transactions accounted for using the purchase method that are completed after June 30, 2001. Also in July 2001, SFAS No. 142, "Goodwill and Intangible Assets", was issued. This Statement, which supersedes APB Opinion No. 17, "Intangible Assets", eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and addresses the impairment testing and recognition for goodwill and intangible assets. SFAS No. 142 will apply to goodwill and intangible assets arising from transactions completed before and after the Statement's effective date. SFAS No. 142 will be effective for the Corporation beginning in the first quarter of fiscal 2003. The Corporation is currently assessing the Statement and has not yet determined the impact of its adoption on its financial statements. In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations", was issued. This Statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Corporation is required to adopt this Statement for fiscal 2004. The Corporation is analyzing the effect of this Statement and does not expect it to have a material effect on the Corporation's consolidated financial position, results of operations or cash flows. In October 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", was issued. This Statement, which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the Statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. This distinction is important because assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The Corporation is required to adopt this Statement for fiscal 2003. The Corporation is analyzing the effect of this 15 Statement and does not expect it to have a material effect on the Corporation's consolidated financial position, results of operations or cash flows. In November 2001, the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") issued EITF Issue No. 01-09 ("EITF 01-09"), "Accounting for Consideration Given by a Vendor to a Customer/Reseller", which addresses the accounting for consideration given by a vendor to a customer including both a reseller of the vendor's products and an entity that purchases the vendor's products from a reseller. EITF 01-09 also codifies and reconciles related guidance issued by the EITF including EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products", and EITF No. 00-14, "Accounting for Certain Sales Incentives". EITF 01-09 outlines the presumption that consideration given by a vendor to a customer, a reseller or a customer of a reseller is to be treated as a reduction of revenue. Treatment of such payments as an expense would only be appropriate if two conditions are met: a) the vendor receives an identifiable benefit in return for the consideration paid that is sufficiently separable from the sale such that the vendor could have entered into an exchange transaction with a party other than the purchaser or its products in order to receive that benefit; and b) the vendor can reasonably estimate the fair value of that benefit. The Corporation is required to adopt EITF 01-09 no later than the first quarter of fiscal 2003. Although the Corporation does not expect the adoption to have any effect on its operations, it will have a material effect on certain reported income statement classifications. Upon adoption, the Corporation will be required to reclassify certain prior period amounts to conform to these reporting requirements. The Corporation has not yet completed its analysis of the amounts which will be reclassified for prior periods. Note K - Inventories
November 30, 2001 February 28, 2001 November 30, 2000 ----------------- ----------------- ----------------- Raw materials $ 60,827 $ 49,408 $ 47,273 Work in process 38,532 33,370 20,166 Finished products 289,376 330,664 328,883 -------------- -------------- -------------- 388,735 413,442 396,322 Less LIFO reserve (95,888) (93,111) (93,530) -------------- -------------- -------------- 292,847 320,331 302,792 Display materials and factory supplies 49,115 44,890 42,189 -------------- -------------- -------------- Inventories $ 341,962 $ 365,221 $ 344,981 ============== ============== ==============
The valuation of inventory under the Last-In, First-Out (LIFO) method is made at the end of each fiscal year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations, by necessity, are based on estimates of expected fiscal year-end inventory levels and costs and are subject to final fiscal year-end LIFO inventory calculations. 16 Note L - 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, 2001, February 28, 2001 and November 30, 2000 deferred costs and future payment commitments are included in the following financial statement captions:
November 30, 2001 February 28, 2001 November 30, 2000 ----------------- ----------------- ----------------- Prepaid expenses and other $ 151,552 $ 142,436 $ 165,222 Other assets 820,572 717,400 714,267 Other current liabilities (133,505) (119,770) (132,512) Other liabilities (159,193) (111,030) (114,915) -------------- -------------- -------------- $ 679,426 $ 629,036 $ 632,062 ============== ============== ==============
Part 1, Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Business Developments --------------------- As previously reported, during fiscal 2002 the Corporation has undertaken a review of its operations focusing on process improvements that are expected to improve efficiency and reduce costs. Additionally, the Corporation has undertaken two other initiatives, all of which will take place during fiscal 2002 and result in the following special pre-tax charges: - The reorganization of the core business, which is expected to result in a pre-tax charge of $200 million to $220 million for the full year. The implementation of this new business structure will result in expected ongoing pre-tax cost savings of about $90 million beginning in fiscal 2003. Included in the restructuring are a brand rationalization process, product line size reduction program, the consolidation and rationalization of facilities, and a headcount reduction of approximately 1,500 associates, or about 13 percent of the Corporation's full-time workforce. The Corporation expects the reorganization to conclude by the end of fiscal year 2002. - Implementing scan-based trading at select retailers will result in an expected pre-tax charge of $80 million to $90 million for the full year. While the charge associated with the conversion will have a one-time negative impact on profitability, the Corporation is optimistic 17 that scan-based trading will ultimately reduce costs, result in a reduction in working capital, maximize retail productivity and throughput, and continue to enhance retailer relationships. - Changes in contractual relationships with a strategic partner related to the Corporation's Internet business resulted in a pre-tax, non-cash charge of $17.7 million. The Corporation expects that these three initiatives will result in total pre-tax special charges of $300 million to $330 million for the full year. Combined, these efforts are expected to use $110 million to $120 million in after-tax cash, with the majority of the cash usage coming in fiscal 2002. Several special charges related to the above items, totaling $225.5 million, occurred during the nine months ended November 30, 2001: - A pre-tax restructuring charge of $52.9 million. This pre-tax charge included $35.2 million for the consolidation and rationalization of certain of the Corporation's domestic and foreign manufacturing and distribution operations, including employee severance and benefit termination costs, and $17.7 million related to the completion of contractual changes with an online strategic partner of the Corporation's Internet unit. - A pre-tax charge of $34.1 million for non-recurring administrative costs related to the reorganization were incurred. - A pre-tax charge of $54.1 million to reduce the value of inventory in the Corporation's domestic operations to net realizable value associated with its previously-announced one-time efforts. These efforts include a brand rationalization and product line size reduction, which entail the elimination of the Corporation's Forget Me Not greeting card brand. - The conversion to scan-based trading for two retail customers, resulting in reductions in net sales of $65.5 million and in material, labor and other production costs of $10.1 million, as well as additional non-recurring costs of $29.0 million. The Corporation expects to complete the conversion by the end of fiscal 2002. On June 22, 2001, the Corporation entered into agreements to sell $175 million of 7.00% convertible subordinated notes due in 2006 and $260 million of 11.75% senior subordinated notes due in 2008 to qualified institutional investors. The convertible notes outstanding could potentially result in the issuance of 12.6 million shares of the Class A Common Stock of the Corporation. The transactions, which closed on June 29, 2001, resulted in net proceeds to the Corporation of approximately $390.3 million, after deducting underwriting discounts and estimated transactional expenses. The Corporation used the net proceeds from these offerings to repay indebtedness and to provide funds for other general corporate purposes. On August 28, 2001, the Corporation filed Form S-3 and Form S-4 with the Securities and Exchange Commission as required with respect to these debt offerings. On August 9, 2001, the Corporation entered into a new $350 million senior secured credit facility. It consists of three tranches: a $105 million, 364-day revolving facility, a $120 million revolving facility maturing January 15, 2006, and a $125 million term loan maturing June 15, 18 2006. The Corporation has the option to request a one-year extension of the 364-day revolving facility. The credit facility contains various restrictive covenants which require, among other things, that the Corporation meet specified periodic financial ratios, minimum net worth and earnings requirements. The credit facility restricts the Corporation's ability to incur additional indebtedness and to engage in acquisitions of other businesses and entities. As part of the debt restructuring, the Corporation also announced it had entered into a three-year, $250 million credit facility secured by certain trade accounts receivable. Results of Operations --------------------- For the three months ended November 30, 2001, net sales were $705.4 million, a 7.9% decrease from $766.1 million in the same period in the prior year. For the nine months ended November 30, 2001, net sales were $1,699.4 million, a decrease of 8.4% from $1,855.6 million in the same period last year. Included in the current-year nine-month amount is a reduction of $65.5 million for the conversion to scan-based trading for two of the Corporation's retail customers. The revenue impact of the conversion to scan-based trading was complete as of the end of the period ended November 30, 2001. All-inclusive unit sales of total greeting cards for the nine months decreased approximately 5% from the same period in the prior year. The decrease from last year also reflects the Corporation's retail inventory reduction initiative and the new pricing strategy. Material, labor and other production costs for the three months were $313.5 million, a decrease of 11.9% from $355.9 million in the same period in the prior year. As a percentage of net sales, these costs decreased to 44.4% from 46.5% in the prior year. For the nine months, material, labor and other production costs were $751.5 million, a decrease from $754.3 million for the same period in the prior year. Included in the current year nine-month amount is a pre-tax charge of $54.1 million to reduce the value of inventory in the Corporation's domestic operations to net realizable value associated with its brand rationalization and product line reduction. The current year amount also includes a pre-tax reduction of approximately $10.1 million related to the Corporation's conversion to scan-based trading. Excluding these items, material, labor and other production costs would have been 40.1% of net sales for the nine months. The decrease in that percentage from 40.7% in the same period in the prior year reflects some benefit of the integration of the Gibson brand and CPS into the Corporate cost structure. Selling, distribution and marketing costs for the three months were $284.8 million, an increase from $277.3 million for the same period in the prior year. As a percentage of net sales, these costs increased to 40.4% from 36.2% in the prior year. For the nine months ended November 30, 2001, selling, distribution, and marketing costs were $799.0 million, a decrease from $810.1 in the same period of the prior year. The Corporation's Internet unit reduced its costs by $18.0 million, primarily due to lower expense for online partner arrangements. However, as a percentage of net sales, these costs increased to 47.0% from 43.7% in the same period last year, as the selling, distribution and marketing cost decrease was less than the corresponding sales decrease. Administrative and general expenses increased $1.0 million from $70.3 million to $71.3 million in comparison to the same period in the prior year for the three months. For the nine months, administrative and general expenses were $214.5 million, up from $209.0 million in the prior year. The increases from prior year for both the three months and nine months were due to costs related to the Corporation's conversion to scan based trading ($ 1.8 million and $9.1 million for the three and nine months, respectively); special charges associated with the Corporation's restructuring efforts ($9.6 million and $21.2 million for the three and nine months, 19 respectively); and various other cost increases. The higher costs were offset somewhat by the elimination of costs related to Gibson Greetings, Inc. in the prior year. Interest expense increased $8.6 million for the three months ended November 30, 2001 from the prior year to $23.6 million and increased $19.5 million to $59.1 million for the nine months ended November 30, 2001. This increase was primarily due to higher borrowing levels to fund the Corporation's acquisitions of CPS in July 2000 and Blue Mountain.com in September 2001, and for special charges and general corporate purposes, as well as higher interest rates on its new debt arrangements. Other expense (income) - net was $1.6 million of expense for the three months compared to $2.8 million of income in the prior year. For the nine months, this caption has income of $2.5 million, down from $12.4 million of income in the prior year. The prior-year amount of $12.4 million included an $8.4 million pre-tax gain on the sale of a building. The effective tax rate for the nine months was 37.7%, an increase from 36.4% in the prior year, as previous years benefitted from loss carryforwards. The increase is due to foreign operations, particularly the United Kingdom. Earnings per share and earnings per share - assuming dilution for the quarter was $0.10 compared to the prior year of $0.50. Loss per share was $(1.72) for the nine months, compared to earnings per share before the cumulative effect of the accounting change of $0.55 for the nine months ended November 30, 2000. The nine months ended November 30, 2001 includes various special after-tax charges equating to $2.21 per share as follows: Per Share --------- Restructuring charge $0.52 Inventory write-down $0.52 Conversion to scan-based trading $0.83 Other activities $0.34 ----- $2.21 The prior year period included a gain of $0.08 per share on the sale of a building. Excluding the above items, basic earnings per share for the nine months ended November 30, 2001 was $0.49 compared to $0.47 in the same period in the prior year. 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 Expressions Products 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 Expressions Products segment. These operating divisions have similar economic characteristics, products, production processes, 20 types of customers and distribution methods. AmericanGreetings.com is the online greetings and personal expression subsidiary of the Corporation. Social Expressions Products Segment Net sales, net of intersegment items, for the three months ended November 30, 2001, decreased $30.6 million or 6.0% from the same period in the prior year. For the nine months, net sales decreased $81.9 million or 6.0% from the same period in the prior year. The Corporation's new pricing strategy, which includes a higher mix of lower-priced greeting cards in the mass retail channels, negatively affected net sales for both the three and nine months. The remainder of the decrease from the prior year relates primarily to the Corporation's continuing efforts to reduce inventory levels at its customers' retail stores. Segment earnings, net of intersegment items, for the three months ended November 30, 2001, decreased from $82.0 million in the prior year to $71.5 million in the current year. For the nine months, segment earnings decreased from $165.3 million in the prior year to $143.5 million in the current period. The decrease from prior year in the nine-month period reflects the lower net sales as noted above, with $26.5 million of the decrease in the United States. AmericanGreetings.com Segment Net sales increased $6.2 million for the three months and $10.0 million for the nine months ended November 30, 2001 compared to the prior year, as higher advertising and co-branded site revenues more than offset lower subscription revenue. The higher advertising revenues reflect the sites' increased traffic. The segment loss was lower than the prior year by $12.6 million and $28.1 million for the three and nine months, respectively. This reduction in the loss reflects the higher revenues as well as lower expenses due to a change in the contractual relationship with an Internet partner. In March 2001, AmericanGreetings.com acquired Egreetings Network, Inc., a company that operates an online card and entertainment Internet site, www.egreetings.com. This acquisition was previously disclosed in the Corporation's Form 8-K filed on April 3, 2001 and Form 8-K/A filed on June 1, 2001. In September 2001, AmericanGreetings.com acquired the BlueMountain.com division of At Home Corporation. The BlueMountain.com division operates an online card and entertainment Internet site, www.bluemountain.com. This acquisition was previously disclosed in the Corporation's Form 8-K filed on September 27, 2001 and Form 8-K/A filed on November 21, 2001. Liquidity and Capital Resources ------------------------------- The seasonality of the Corporation's business precludes a useful comparison of the current period and the fiscal year-end financial statements; therefore, a Statement of Financial Position for November 30, 2000 has been included. Operating activities used $191.5 million of cash in the nine months ended November 30, 2001, compared to using $214.2 million in the same period in the prior year. The decrease in earnings, excluding non-cash charges, for the period compared to the prior year adversely impacted cash flow significantly. 21 Accounts receivable, net of the effect of acquisitions, increased $153.1 million from February 28, 2001, compared to an increase of $208.7 million during the same period in the prior year. This lower increase reflects the impact of the lower sales level during the current period compared to the prior year, including the effect of the reduction in sales related to the conversion to scan-based trading for two of the Corporation's customers. As a percentage of the prior twelve months' net sales, net accounts receivable were 22.8% at November 30, 2001 compared to 24.8% at November 30, 2000. Inventories, net of the effect of acquisitions, decreased $20.6 million from February 28, 2001, compared to an increase of $25.4 million for the same period in the prior year. The decrease from February 28, 2001 includes the write-down of $54.1 million recorded during the nine months ended November 30, 2001. Partially offsetting that decrease from February 28, 2001 were increases in inventories due to the conversion to scan-based trading for two of the Corporation's major customers, as well as some build-up to complete the brand rationalization and product line size reduction. Cash payments exceeded amortization of deferred costs cash payments by $46.6 million for the nine months ended November 30, 2001, compared to $1.3 million for the same period in the prior year. The current year includes a significant expansion of an agreement with a major customer. Accounts payable and other liabilities decreased $67.3 million during the nine months ended November 30, 2001, compared to a decrease of $61.9 million during the same period in the prior year. The increase in the movement reflects an adjustment among the current and deferred income tax amounts. Included in income taxes payable at November 30, 2001 is $143.6 million for potential tax exposure for the fiscal years ended 1992 through 1999 relating to the Corporation's corporate-owned life insurance (COLI) program. This amount represents the effect of assessments by the Internal Revenue Service for the disallowance of certain deductions related to this insurance program. The Corporation believes that it has fully complied with the tax law as it related to its COLI program and plans to vigorously contest the assessments or any subsequent assessments. Investing activities resulted in a use of $61.5 million of cash during the nine months, compared to a use of $185.5 million in the same period in the prior year. The prior year amount included $137.6 million used in the acquisition of Gibson Greetings, Inc., $31.0 million for the acquisition of CPS, and $11.4 million for the acquisition of M&D Balloons, as well as the proceeds from the sale of a building. Financing activities provided $246.6 million for the nine months compared to providing $417.6 million during the same period in the prior year. The current period includes the proceeds from the long-term debt agreements entered into during the second quarter. The prior year included a larger increase in the level of short-term debt borrowings during the period. Total debt less cash at November 30, 2001 was $984.9 million, compared to $992.1 million at November 30, 2000. Debt as a percentage of debt plus equity increased to 53.0% at November 22 30, 2001 from 47.7% at November 30, 2000. Based on actual shares outstanding, shareholders' equity decreased from $18.50 per share at November 30, 2000 to $14.36 per share at November 30, 2001. There were no material changes in the financial condition, liquidity or capital resources of the Corporation from February 28, 2001, the end of its preceding fiscal year, to November 30, 2001, the end of its last fiscal quarter and the date of the most recent balance sheet included in this report, nor from November 30, 2000, the end of the corresponding fiscal quarter last year, to November 30, 2001, except the changes discussed above and aside from normal seasonal fluctuations. Prospective Information ----------------------- The statements contained in this document that are not historical facts are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements involve risks and uncertainties, including but not limited to retail bankruptcies and consolidations, successful integration of acquisitions, a weak retail environment, consumer acceptance of products as priced and marketed, the impact of technology on core product sales and competitive terms of sale offered to customers. Risks pertaining specifically to the Corporation's electronic marketing business include the viability of online advertising as a revenue generator and the public's acceptance of online greetings and other social expression products. 23 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ----------------- 1. In re: Underground Storage Tank Release Report United States Environmental Protection Agency (US EPA) Facility ID# TN 1-300153 Tennessee Department of Environment & Conservation (TDEC) v. Plus Mark This matter was previously disclosed in Form 10-K for the period ending February 29, 2000. In January 2000, Plus Mark Inc. ("Plus Mark"), a wholly-owned subsidiary of the Corporation, received a request from US EPA in connection with the excavation of eight underground storage tanks at Plus Mark's Afton, Tennessee facility to perform initial site characterization for both soil and groundwater. After Plus Mark submitted the initial test results, US EPA concluded that no further action was required regarding soil, but that further site characterization was required for groundwater. US EPA transferred the matter to TDEC for administration. No remedy has been determined, but costs are not expected to be material. In November 2001, Plus Mark voluntarily entered into a Remediation Order with TDEC. A Remediation Plan addressing groundwater contamination, including a plan for off-site work, is due in February 2002. 2. In re: Tennessee Dept. of Environment and Conservation (TDEC) v. Cleo Tennessee State Superfund Site - Carl Wright Site, Henry County, TN This matter was previously disclosed in Form 10-K for the period ending February 29, 2000. In May 1998, TDEC informed Gibson Greetings Inc. ("Gibson") now a wholly-owned subsidiary of the Corporation, that Cleo, a former subsidiary of Gibson may be a potentially responsible party for the costs incurred by the State of Tennessee in remediating the Carl Wright Site. TDEC notified Gibson that storage drums recovered from the Site during clean up bore "Cleo Wrap" labels. Gibson had agreed to indemnify Cleo and its shareholder, CSS, against various environmental liabilities, in connection with the sale of Cleo to CSS. Gibson's share of the estimated clean up cost is not expected to be material. In November 2001, the Division of Superfund issued a second notice of assessment to "Cleo Wrap/Gibson Greetings" for $94,261.55, representing 8.3% of the clean-up costs assessed. Payment of the assessment is due January 25, 2002. 24 Item 6. Exhibits and Reports on Form 8-K --------------------------------- (b) Reports on Form 8-K On April 3, 2001, the Corporation filed Form 8-K with the Securities and Exchange Commission. This filing reported that the Corporation had completed its acquisition of Egreetings Network, Inc. On June 1, 2001, the Corporation filed Form 8-K/A with the Securities and Exchange Commission. This filing amended the Form 8-K filed April 3, 2001 to include the historical and pro forma information required for the combined entity. On September 27, 2001, the Corporation filed Form 8-K with the Securities and Exchange Commission. This filing reported that the Corporation had acquired the BlueMountain.com division of At Home Corporation. On November 21, 2001, the Corporation filed Form 8-K/A with the Securities and Exchange Commission. This filing amended the Form 8-K filed September 27, 2001 to include the historical and pro forma information required for the combined entity. On December 21, 2001, the Corporation filed Form 8-K with the Securities and Exchange Commission. This filing reported that on December 18, 2001, the Corporation had issued a press release announcing financial results for the fiscal quarter ended November 20, 2001. This filing also reported that on December 18, 2001, the Corporation announced suspension of its dividend. 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/ Joseph B. Cipollone --------------------------------------- Joseph B. Cipollone Vice President, Corporate Controller Chief Accounting Officer January 14, 2002 25