-----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, MAzfKIXtRXTVLkH7R88h4IUll5poaFKWnL1DN34Bvg1gRXpcUeNJHejdewwD4mrk 91EqyVD+f/p2zLzxrTnXAw== 0000950152-99-008291.txt : 19991018 0000950152-99-008291.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950152-99-008291 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991015 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: 99728963 BUSINESS ADDRESS: STREET 1: 10500 AMERICAN RD CITY: CLEVELAND STATE: OH ZIP: 44144 BUSINESS PHONE: 2162527300 MAIL ADDRESS: STREET 1: 10500 AMERICAN ROAD CITY: CLEVELAND STATE: OH ZIP: 44144 10-Q 1 AMERICAN GREETINGS CORPORATION 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission file number 1-13859 AMERICAN GREETINGS CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 34-0065325 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One American Road, Cleveland, Ohio 44144 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (216) 252-7300 -------------------------------------------------- Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 31, 1999, the date of this report, the number of shares outstanding of each of the issuer's classes of common stock was: Class A Common 59,854,969 Class B Common 4,662,502 2 AMERICAN GREETINGS CORPORATION INDEX
Page Number ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements............................................. 1 Item 2. Management's Discussion and Analysis............................. 10 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.............. 17 Item 6. Exhibits and Reports on Form 8-K................................. 18 SIGNATURES......................................................................... 18
3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN GREETINGS CORPORATION CONSOLIDATED STATEMENT OF INCOME (Thousands of dollars except per share amounts)
(Unaudited) Six Months Ended August 31, --------------------------------- 1999 1998 ------------ ------------ Net sales $ 936,540 $ 967,641 Costs and expenses: Material, labor and other production costs 348,586 330,206 Selling, distribution and marketing 454,031 440,916 Administrative and general 108,838 109,506 Restructuring charge 32,747 -- Interest 15,110 13,918 Other expense (income) 1,371 (1,524) ------------ ------------ Total costs and expenses 960,683 893,022 ------------ ------------ Income (loss) before income taxes (24,143) 74,619 Income taxes (8,692) 26,863 ------------ ------------ Net income (loss) $ (15,451) $ 47,756 ============ ============ Earnings (loss) per share $ (0.23) $ 0.67 ============ ============ Earnings (loss) per share - assuming dilution $ (0.23) $ 0.67 ============ ============ Dividends per share $ 0.20* $ 0.37 ============ ============ Average number of common shares outstanding 66,663,719 70,862,530
* Dividend of $0.19 per share paid June 10, 1999 was declared in February 1999. See notes to consolidated financial statements. Page 1 4 AMERICAN GREETINGS CORPORATION CONSOLIDATED STATEMENT OF INCOME (Thousands of dollars except per share amounts)
(Unaudited) Three Months Ended August 31, --------------------------------- 1999 1998 ------------ ------------ Net sales $ 477,783 $ 479,733 Costs and expenses: Material, labor and other production costs 188,821 170,487 Selling, distribution and marketing 234,709 226,032 Administrative and general 54,235 51,342 Restructuring charge 32,747 -- Interest 7,970 7,345 Other expense 392 3,185 ------------ ------------ Total costs and expenses 518,874 458,391 ------------ ------------ Income (loss) before income taxes (41,091) 21,342 Income taxes (14,793) 7,417 ------------ ------------ Net income (loss) $ (26,298) $ 13,925 ============ ============ Earnings (loss) per share $ (0.39) $ 0.20 ============ ============ Earnings (loss) per share - assuming dilution $ (0.39) $ 0.20 ============ ============ Dividends per share $ 0.20 $ 0.19 ============ ============ Average number of common shares outstanding 65,648,721 70,524,337
See notes to consolidated financial statements. Page 2 5 AMERICAN GREETINGS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Thousands of dollars)
(Unaudited) (Unaudited) August 31, 1999 Feb. 28, 1999 August 31, 1998 --------------- ------------- --------------- ASSETS Current assets Cash and equivalents $ 28,525 $ 144,555 $ 76,483 Trade accounts receivable, less allowances of $87,377, $147,686 and $87,303, respectively (principally for sales returns) 394,126 390,740 392,884 Total inventories 289,519 251,289 336,664 Deferred income taxes 143,550 133,092 98,844 Prepaid expenses and other 247,849 226,142 221,524 ---------- ---------- ---------- Total current assets 1,103,569 1,145,818 1,126,399 Goodwill 134,509 135,516 132,176 Other assets 691,817 703,188 568,171 Property, plant and equipment - at cost 973,577 958,623 943,453 Less accumulated depreciation 549,289 523,817 512,755 ---------- ---------- ---------- Property, plant and equipment - net 424,288 434,806 430,698 ---------- ---------- ---------- $2,354,183 $2,419,328 $2,257,444 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Debt due within one year $ 144,904 $ 17,777 $ 27,312 Accounts payable and accrued liabilities 214,741 175,366 165,186 Accrued compensation and benefits 62,020 89,284 64,582 Dividends payable 12,904 26,337 13,468 Income taxes 4,573 27,165 12,820 Other current liabilities 111,280 81,745 59,444 ---------- ---------- ---------- Total current liabilities 550,422 417,674 342,812 Long-term debt 439,490 463,246 457,506 Other liabilities 112,665 142,045 93,817 Deferred income taxes 52,214 49,752 37,498 Shareholders' equity 1,199,392 1,346,611 1,325,811 ---------- ---------- ---------- $2,354,183 $2,419,328 $2,257,444 ========== ========== ==========
See notes to consolidated financial statements. Page 3 6 AMERICAN GREETINGS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of dollars)
(Unaudited) Six Months Ended August 31, --------------------------- 1999 1998 --------- --------- OPERATING ACTIVITIES: Net income (loss) $ (15,451) $ 47,756 Adjustments to reconcile to net cash provided (used) by operating activities: Restructuring charge 32,747 -- Depreciation 32,129 33,741 Deferred income taxes (11,182) 13,777 Change in operating assets and liabilities, net of effects from acquisitions: Increase in trade accounts receivable (3,069) (11,973) Increase in inventories (37,208) (70,825) Increase in other current assets (18,556) (4,515) Decrease in deferred cost - net 22,543 16,398 Decrease in accounts payable and other liabilities (36,397) (19,386) Other - net 7,008 3,027 --------- --------- Cash (Used) Provided by Operating Activities (27,436) 8,000 INVESTING ACTIVITIES: Business acquisitions -- (52,957) Property, plant & equipment additions (22,597) (21,381) Investment in corporate-owned life insurance 3,144 6,007 Other - net (17,652) 12,021 --------- --------- Cash Used by Investing Activities (37,105) (56,310) FINANCING ACTIVITIES: Increase in long-term debt 14,979 319,233 Reduction of long-term debt (1,411) (25,785) Increase (decrease) in short-term debt 89,641 (149,016) Sale of stock under benefit plans 989 9,676 Purchase of treasury shares (130,054) (50,616) Dividends to shareholders (25,633) (26,322) --------- --------- Cash (Used) Provided by Financing Activities (51,489) 77,170 --------- --------- (DECREASE) INCREASE IN CASH AND EQUIVALENTS (116,030) 28,860 Cash and Equivalents at Beginning of Year 144,555 47,623 --------- --------- Cash and Equivalents at End of Period $ 28,525 $ 76,483 ========= =========
See notes to consolidated financial statements. Page 4 7 AMERICAN GREETINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Thousands of dollars) Six Months Ended August 31, 1999 and 1998 Note A - Basis of Presentation The accompanying financial statements have been prepared in accordance with the instructions to Form 10-Q. Although they are unaudited, the Corporation believes that all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations have been made. Note B - Special Charges During the six months ended August 31, 1999, the Corporation recorded a restructuring charge of $32,747. The primary components of this charge were costs associated with the shutdown of the Corporation's Canadian manufacturing and distribution operations, including employee severance and benefit termination costs and the costs of closing down the facilities used for those operations. In addition, the Corporation recorded a charge of $7,682 during the period to write down inventory in the Canadian operations. This amount is classified as material, labor and other production costs. The total impact of the restructuring and inventory charges net of tax was $24,224, or $0.36 per share. Note C - Seasonal Nature of Business The Corporation's business is seasonal in nature. Therefore, the results of operations for interim periods are not necessarily indicative of the results for the fiscal year taken as a whole. Page 5 8 Note D - Earnings (Loss) Per Share The following table sets forth the computation of earnings (loss) per share and earnings (loss) per share - assuming dilution:
Six Months Ended August 31, ----------------------- 1999 1998 -------- -------- Numerator: Net income (loss), earnings per share and earnings per share - assuming dilution $(15,451) $ 47,756 ======== ======== Denominator (thousands): Weighted average shares outstanding 66,664 70,863 Effect of dilutive securities - stock options 112 943 -------- -------- Adjusted weighted average shares outstanding 66,776 71,806 ======== ======== Earnings (loss) per share $ (0.23) $ 0.67 ======== ======== Earnings (loss) per share - assuming dilution $ (0.23) $ 0.67 ======== ========
Page 6 9 Note E - Comprehensive Income (Loss) The Corporation's total comprehensive income (loss) was as follows: Six Months Ended August 31, ----------------------- 1999 1998 -------- -------- Net income (loss) $(15,451) $ 47,756 Other comprehensive income (loss) Foreign currency translation adjustments 2,634 (5,331) Unrealized gain on available-for-sale securities 7,163 5,431 -------- -------- Other comprehensive income 9,797 100 -------- -------- Total comprehensive income (loss) $ (5,654) $ 47,856 ======== ======== Page 7 10 Note F - Business Segment Information Three Months Ended August 31, ------------------------- 1999 1998 --------- --------- Net Sales Social Expressions Products $ 403,916 $ 414,703 Intersegment items (21,812) (21,391) --------- --------- Total 382,104 393,312 Non-reportable segments 94,234 85,116 Exchange rate adjustment - net 1,445 1,305 --------- --------- Consolidated total $ 477,783 $ 479,733 ========= ========= Earnings Social Expressions Products $ 49,676 $ 69,843 Intersegment items (15,115) (14,402) --------- --------- Total 34,561 55,441 Non-reportable segments (5,814) (2,196) Restructuring charge (32,747) -- Exchange rate adjustment - net (860) (121) Unallocated items - net (36,231) (31,782) --------- --------- Consolidated total $ (41,091) $ 21,342 ========= ========= Six Months Ended August 31, ------------------------- 1999 1998 --------- --------- Net Sales Social Expressions Products $ 791,008 $ 827,974 Intersegment items (39,761) (37,241) --------- --------- Total 751,247 790,733 Non-reportable segments 182,477 171,653 Exchange rate adjustment - net 2,816 5,255 --------- --------- Consolidated total $ 936,540 $ 967,641 ========= ========= Earnings Social Expressions Products $ 108,224 $ 161,701 Intersegment items (28,165) (25,973) --------- --------- Total 80,059 135,728 Non-reportable segments (3,354) (265) Restructuring charge (32,747) -- Exchange rate adjustment - net (878) 107 Unallocated items - net (67,223) (60,951) --------- --------- Consolidated total $ (24,143) $ 74,619 ========= ========= Page 8 11 Note G - New Accounting Standards The Corporation will adopt SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, for the fiscal quarter beginning March 1, 2001, as required. Because of the Corporation's current minimal use of derivatives, the Corporation does not anticipate that the adoption of SFAS No. 133 will have a significant effect on its earnings or financial position. Note H - Inventories
August 31, 1999 February 28, 1999 August 31, 1998 --------------- ----------------- --------------- Raw materials $ 38,259 $ 37,745 $ 39,040 Work in process 29,833 25,523 38,321 Finished products 271,363 229,220 308,736 -------- -------- -------- 339,455 292,488 386,097 Less LIFO reserve 92,400 89,207 91,370 -------- -------- -------- 247,055 203,281 294,727 Display materials and factory supplies 42,464 48,008 41,937 -------- -------- -------- Inventories $289,519 $251,289 $336,664 ======== ======== ========
Note I - Deferred Costs Deferred costs relating to agreements with certain customers are charged to operations on a straight-line basis over the effective period of each agreement, generally three to six years. Deferred costs estimated to be charged to operations during the next year are classified with prepaid expenses and other. Total commitments under the agreements are capitalized as deferred costs and future payment commitments, if any, are recorded as liabilities when the agreements are consummated. As of August 31, 1999, February 28, 1999 and August 31, 1998 deferred costs and future payment commitments are included in the following financial statement captions:
August 31, 1999 February 28, 1999 August 31, 1998 --------------- ----------------- --------------- Prepaid expenses and other $ 195,734 $ 192,619 $ 186,850 Other assets 560,031 595,136 451,240 Other current liabilities (104,993) (81,745) (59,444) Other liabilities (81,369) (113,799) (67,093) --------- --------- --------- $ 569,403 $ 592,211 $ 511,553 ========= ========= =========
Page 9 12 Part 1., Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Net sales of $477.8 million for the second quarter and $936.5 million for the six months ended August 31,1999 were down 0.4% and 3.2%, respectively, compared to the same periods in the prior year. The decreases were primarily due to reduced shipments of everyday cards reflecting the Corporation's continuing initiatives to improve productivity of retailers' inventories. The reduced everyday shipments were partially offset by increased sales of seasonal promotional boxed cards and gift wrap, and strong sales in the UK market. Material, labor and other production costs were 39.5% and 37.2% of net sales for the quarter and six months, respectively. In the second quarter, the Corporation recorded a $7.7 million inventory write-down relating to the integration of the Canadian and domestic operations. See Restructuring Activities and Special Charges below for further discussion. Excluding this charge, material, labor and other production costs were 37.9% and 36.4% of net sales for the quarter and six months, respectively, a significant increase from 35.5% and 34.1% from the same periods in the prior year. Gross profit margins were unfavorably impacted due to lower sales of high margin everyday cards and to reduced production levels which resulted in unfavorable manufacturing variances. Selling, distribution and marketing expenses were 49.1% of net sales for the quarter, up from 47.1% in the prior year. For the six months ended August 31, 1999, selling, distribution and marketing expenses were 48.5% of net sales, up from 45.6%. The increase in both periods was primarily due to selling expenses associated with store remodelings due to retailer consolidations and to additional costs relating to the electronic marketing unit. Administrative and general expenses were $54.2 million for the quarter, up from $51.3 million for the same period in the prior year. For the six months, administrative and general expenses were $108.8 million, down slightly from the $109.5 million in the prior year. Both periods were unfavorably impacted by additional costs associated with the electronic marketing unit; however, the six month period reflected lower employee profit sharing expense. Interest expense increased slightly from the prior year by $0.6 million for the quarter and by $1.2 million for the six months. These increases were primarily due to the issuance of $300 million of 30 year notes with a 6.1% coupon rate in July 1998, the proceeds of which reduced commercial paper and other short-term debt. Page 10 13 Other expense (income) was $0.4 million of expense for the quarter compared to $3.2 million of expense in the prior year due primarily to increased royalty income and to lower foreign exchange losses. For the six month period, other expense (income) was $1.4 million of expense compared to $1.5 million of income in the prior year due primarily to the gain on the sale of an equity investment last year. The effective tax rate for the six months was 36.0%, flat with the effective tax rate in the prior year. The net loss of $26.3 million for the quarter reflected both the special charges for Canadian consolidation and increased expenses in the Corporation's electronic marketing unit. Excluding these two items, net income for the quarter decreased to $0.7 million from $13.9 million last year while earnings per share decreased to $0.01 from $0.20 last year. For the first six months, excluding special charges and the net loss incurred by the company's electronic marketing unit, net income decreased to $11.4 million compared to $47.8 million last year for the same period while earnings per share decreased to $0.17 from $0.67 last year. RESTRUCTURING ACTIVITIES AND SPECIAL CHARGES Fiscal 2000 In connection with the Corporation's initiative to streamline its international operations, the Corporation recorded a $40.4 million ($24.2 million net of tax, or earnings per share of $0.36) special charge during the second quarter of Fiscal 2000 relating primarily to the consolidation of the Canadian manufacturing and distribution in the United States. Included in this special charge is a $32.7 million restructure charge primarily for exit costs associated with the closure of certain Canadian facilities and to a lesser extent, costs to exit certain minor United Kingdom businesses. The remaining $7.7 million of the special charge was recorded in material, labor, and other production costs for the write-down of Canadian inventory to net realizable value. The restructure charge of $32.7 million includes $25.8 million of severance, pension and personnel related items, $4.6 million of facility shut-down costs, $1.5 million of lease exit costs and $0.8 million related to other restructure costs. Approximately 520 hourly and 189 salaried Canadian employees will be terminated as a result of the Corporation's realignment of its manufacturing and distribution operations. All activities associated with the Canadian restructuring are expected to be completed by the end of August 2000 and the Corporation anticipates annual aggregate cost savings to be approximately $12 million. Page 11 14 Fiscal 1999 During the third quarter of fiscal 1999, the Corporation recorded a restructure charge of $13.9 million ($8.3 million net of tax, or earnings per share of $0.12) which reflected management's efforts to optimize the Corporation's cost structure and to provide for operational streamlining initiatives. This restructure charge consisted of approximately $8.6 million of personnel-related charges associated with the termination of 228 employees; $4.6 million of exit costs associated with discontinuing the kiosk business; $0.4 million of costs associated with carrying vacated office space until lease expiration or sublease; and approximately $0.3 million of other restructure costs. FY99 RESTRUCTURING SUMMARY (Thousands of dollars)
Termination Kiosk Other Benefits Exit Costs Costs Total ----------- ---------- ------- ------- Expense accrued $ 8,644 $ 4,618 $ 663 $13,925 Cash expenditures (5,019) (5,019) Non-cash charges (3,362) (3,362) ------- ------- ------- ------- Balance 2/28/99 3,625 1,256 $ 663 5,544 Cash expenditures (3,452) (150) (3,602) Non-cash charges (612) (612) ------- ------- ------- ------- Balance 8/31/99 $ 173 $ 644 $ 513 $ 1,330 ======= ======= ======= =======
Approximately $1.0 million of cash expenditures for payment of termination benefits was charged against the restructuring reserve during the three months ended August 31, 1999. Included in accounts payable and accrued liabilities at August 31, 1999 is $1.3 million related to severance and other exit costs for those actions that are not yet completed. The Corporation believes the remaining accrued restructure liability is adequate for its remaining cash and non-cash obligations. Page 12 15 Year 2000 The Year 2000 issue is the result of information technology ("IT") system programs being written using two digits rather than four digits to define the application year. Any of the Corporation's IT systems that have date-sensitive software may be unable to interpret appropriately the calendar Year 2000 and thus could cause the disruption of normal business activities. The Corporation uses IT systems in various aspects of its business, including manufacturing, distribution, product development, and many administrative functions, and much of this software will need to be modified or replaced. The Corporation is currently in the process of working toward Year 2000 compliance so that all of its material business processes and components will properly handle dates prior to, during and after the Year 2000. The Corporation has prioritized its IT systems into three categories: critical, necessary or other. Failure of a "critical" system would result in a serious disruption of revenue and would critically impact competitive advantages. Failure of a "necessary" system would result in serious processing delays and a significant reduction in productivity. The Corporation believes all of its IT systems are Year 2000 compliant with the exception of a very minor corporate supported application. This remaining system is classified as "other" and is currently being repaired. The failure of this system would pose no material impact to the Corporation. The Corporation's non-IT systems include embedded technology such as microcontrollers included in production equipment, environmental control equipment and timeclocks. These non-IT systems have been assessed. Remediation actions are underway and risk mitigation strategies are being developed. The Corporation is also in the process of ensuring the continuity and stability of its normal business functions by identifying and assessing potential Year 2000 compliance risks associated with its external business relationships, including those with vendors, customers, financial institutions and employee benefit providers. This process has completed its assessment phase with potential risks identified and contingency plans are being developed. Contingency plans will be needed in the event any of the Corporation's critical business partners are not Year 2000 compliant when required. The Corporation does not currently anticipate such a situation and now expects to complete the contingency planning phase in October. The Corporation's current estimate of total cost to achieve Year 2000 compliance in both its IT and non-IT systems is approximately $35 million for modifications to existing software, software replacement, computing hardware and embedded systems. Through August 31, 1999, $31 million has been cumulatively expended on Year 2000 compliance. Page 13 16 In addition, the Corporation has developed a program to provide independent validation of its Year 2000 compliance efforts. This program includes engaging independent consultants for audits of its completed coding corrections and for providing guidance and suggestions for the remediation efforts. The Corporation believes, but cannot warrant, that with timely modifications to its existing software and conversion to new software, by both the Corporation and its significant business partners, the Year 2000 compliance issue should not have a material impact on the Corporation's operations. Specific factors which might cause a material adverse effect include the availability and cost of trained personnel and the ability to recruit and retain them, as well as the ability to locate all system coding requiring correction. Based upon information available at this time, the Corporation believes that the cost of modifications, replacements and related testing will not have a material impact on the Corporation's liquidity or results of operations. Year 2000 expenditures are being funded through operations. LIQUIDITY AND CAPITAL RESOURCES The seasonality of the Corporation's business precludes a useful comparison of the current period and the year-end financial statements; therefore, a Statement of Financial Position for August 31, 1998 has been included. Operations used $27.4 million of cash for the first six months, an increase of $35.4 million from the same period last year due primarily to lower earnings from operations excluding the restructure charge which was a non-cash expense. Partially offsetting the reduction in net income were lower increases of accounts receivable and reduced growth of inventories. Accounts receivable increased $3.1 million from February 28, 1999, compared to an increase of $12.0 million during the same period in the prior year, due primarily to lower everyday card product shipments. Net accounts receivable increased to 18.1% of the prior twelve months' sales at August 31, 1999 compared to 17.5% at August 31, 1998. Inventories used $37.2 million of cash for the first six months compared to $70.8 million during the same period in the prior year. This significant improvement in inventory is the result of the Corporation's focus to reduce production lead times and also reflects the $7.7 million Canadian inventory write-down mentioned previously. Inventories as a percent of the prior twelve months' material, labor, and other production costs decreased to 37.3% at August 31, 1999 from 43.4% at August 31, 1998. Amortization of deferred costs exceeded payments by $22.5 million for the first six months compared to $16.4 million during the same period in the prior year. This reflects lower payments under agreements with certain retailers. Page 14 17 Investing activities used $37.1 million in cash for the first six months this year. While $56.3 million was used in the same period last year, this included $53.0 million for the acquisition of two greeting card companies in the United Kingdom. Excluding the acquisitions, investing activities used $3.4 million in the prior year for the same period. This adjusted increase of $33.7 million from the prior year, excluding acquisitions, reflected a supply agreement loan to a customer, lower cash distributions received from the Corporation's investment in corporate owned life insurance and proceeds from the sale of an equity investment last year. Financing activities used $51.5 million for the six months compared to providing $77.2 million during the same period in the prior year. The current period use includes the purchase of 4.6 million shares of the Corporation's Class A common stock for $130.1 million at an average price of $28.25 per share. During the same period last year, 1.0 million shares of stock had been purchased for $47.7 million. As a result of lower cash flow, total debt less cash increased from $408.3 million at August 31, 1998 to $555.9 million at August 31, 1999. Debt as a percentage of debt plus equity increased to 32.8% at August 31, 1999 from 26.8% at August 31, 1998. On a per-share basis, shareholders' equity decreased from $18.71 per share at August 31, 1998 to $18.59 at August 31, 1999. There were no material changes in the financial condition, liquidity or capital resources of the Corporation from February 28, 1999, the end of its preceding fiscal year, to August 31,1999, the end of its last fiscal quarter and the date of the most recent balance sheet included in this report, nor from August 31,1998, the end of the corresponding fiscal quarter last year, to August 31, 1999, except the changes discussed above and aside from normal seasonal fluctuations. Page 15 18 PROSPECTIVE INFORMATION On February 24, 1999, the Corporation announced an initiative to further strengthen its position as the productivity leader in the greeting card industry. This initiative should result in more productive greeting card departments in retail outlets by lowering retailer inventories to support increased greeting card sales. The Corporation's investment in technology improvements allows for shorter production lead times and a more efficient retail distribution system. The Corporation's ability to more quickly offer fresher, more innovative cards to the marketplace is key to this strategy. Primarily as a result of this initiative, the Corporation believes Fiscal 2000 revenues will be reduced by approximately $100 million from the prior year level with full fiscal year 2000 earnings per share declining to approximately $2.00 to $2.10, excluding non-recurring items. On June 1, 1999, the Corporation announced that its electronic marketing group, americangreetings.com, will be established as a separate subsidiary in order to aggressively grow and promote the electronic communication business. Also, on June 17, 1999, the Corporation announced that it plans to sell a minority interest in americangreetings.com in an initial public stock offering later this year. The Corporation will continue to hold a majority interest in the new company. Management is not aware of any current trends, events, demands, commitments or uncertainties which reasonably can be expected to have a material effect on the liquidity, capital resources, financial position or results of operations of the Corporation, except those mentioned above. However, the Corporation's future results could be negatively impacted by such factors as retail bankruptcies, a weak retail environment, loss of retail accounts to other suppliers or as a result of retail consolidation and competitive terms of sale offered to customers to expand or maintain business. Other risks, which are not all-inclusive, include costs associated with correcting the Year 2000 issues, unforeseen circumstances which may affect the Corporation's plans to reduce its cost structure, as well as economic conditions in the various markets served by the Corporation's operations. Please see the Corporation's Form 10-K for the year ended February 28, 1999 for other risks and uncertainties that may affect future results. Page 16 19 PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders of the Corporation was held on June 25, 1999. (b) The following individuals were elected to Class I of the Corporation's Board of Directors with term expiring in 2002: Stephen R. Hardis, James C. Spira, and Morry Weiss. The following individuals are continuing directors with term expiring in 2000 (Class II): Albert B. Ratner, Harry H. Stone and Edward Fruchtenbaum. The following individuals are continuing directors with term expiring in 2001 (Class III): Scott S. Cowen, Irving I. Stone and Harriet Mouchly-Weiss. (c) The vote total was as follows for the election of directors (Class I): Nominee Votes For Votes Withheld ------- ---------- -------------- Stephen R. Hardis 95,711,133 1,796,863 James C. Spira 95,708,236 1,799,760 Morry Weiss 96,553,541 954,455 Page 17 20 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K) 27 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN GREETINGS CORPORATION By: /s/ Patricia L. Ripple ------------------------------ Patricia L. Ripple Controller Chief Accounting Officer October 15, 1999 Page 18 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PART I, ITEM 1 OF THE SECOND QUARTER FORM 10-Q. 1,000 6-MOS FEB-29-2000 MAR-01-1999 AUG-31-1999 28,525 0 394,126 19,174 289,519 1,103,569 973,577 549,289 2,354,183 550,422 0 0 0 64,517 1,134,875 2,354,183 936,540 936,540 348,586 348,586 0 3,030 15,110 (24,143) (8,692) (15,451) 0 0 0 (15,451) (0.23) (0.23)
-----END PRIVACY-ENHANCED MESSAGE-----