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 August 31, 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 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, 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 58,876,974
Class B Common 4,626,457
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 4. Submission of Matters to a Vote of Security
Holders................................................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 per share amounts)
(Unaudited)
Six Months Ended
August 31,
-------------------------------------
2001 2000
--------------- --------------
Net sales $ 993,965 $ 1,089,473
Costs and expenses:
Material, labor and other production costs 438,017 398,435
Selling, distribution and marketing 514,264 532,756
Administrative and general 143,198 138,570
Restructure charges 52,925 --
Interest 35,525 24,583
Other (income) - net (4,070) (9,573)
------------ ------------
Total costs and expenses 1,179,859 1,084,771
------------ ------------
(Loss) income before income tax (benefit) expense and
cumulative effect of accounting change (185,894) 4,702
Income tax (benefit) expense (70,082) 1,701
------------ ------------
(Loss) income before cumulative effect of
accounting change (115,812) 3,001
Cumulative effect of accounting change,
net of tax -- (21,141)
------------ ------------
Net loss $ (115,812) $ (18,140)
============ ============
(Loss) earnings per share and (loss) earnings per share
assuming dilution:
Before cumulative effect of
accounting change $ (1.82) $ 0.05
Cumulative effect of accounting
change, net of tax -- (0.33)
------------ ------------
Loss per share and loss per share
assuming dilution $ (1.82) $ (0.28)
============ ============
Dividends per share $ .10 $ 0.21
============ ============
Average number of common shares outstanding 63,500,674 63,796,233
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
August 31,
--------------------------------------
2001 2000
---------------- ---------------
Net sales $ 488,225 $ 493,732
Costs and expenses:
Material, labor and other production costs 186,401 195,111
Selling, distribution and marketing 259,365 269,199
Administrative and general 77,429 69,815
Interest 22,089 13,808
Other expense - net 270 1,641
------------ ------------
Total costs and expenses 545,554 549,574
------------ ------------
Loss before income tax (benefit) (57,329) (55,842)
Income tax (benefit) (21,613) (20,337)
------------ ------------
Net loss $ (35,716) $ (35,505)
============ ============
Loss per share and loss per share
assuming dilution $ (0.56) $ (0.55)
============ ============
Dividends per share $ .10 $ 0.21
============ ============
Average number of common shares outstanding 63,502,624 63,088,531
See notes to condensed consolidated financial statements.
2
AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)
(Unaudited) (Note A) (Unaudited)
August 31, 2001 Feb. 28, 2001 August 31, 2000
-------------------- --------------------- ----------------------
ASSETS
Current assets
Cash and equivalents $ 74,883 $ 51,691 $ 66,147
Trade accounts receivable, less allowances
of $143,725, $184,799 and $91,392, respectively
(principally for sales returns) 369,544 387,534 363,690
Inventories 429,657 365,221 434,213
Deferred and refundable income taxes 164,924 190,241 226,546
Prepaid expenses and other 215,298 211,049 232,649
----------- ----------- -----------
Total current assets 1,254,306 1,205,736 1,323,245
Goodwill 227,202 229,802 211,593
Other assets 906,291 799,348 837,994
Property, plant and equipment - at cost 1,077,387 1,086,094 1,064,651
Less accumulated depreciation 622,800 608,906 592,628
----------- ----------- -----------
Property, plant and equipment - net 454,587 477,188 472,023
----------- ----------- -----------
$ 2,842,386 $ 2,712,074 $ 2,844,855
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 141,311 $ 378,904 $ 509,758
Accounts payable 152,574 139,753 131,210
Accrued liabilities 198,340 164,310 161,309
Accrued compensation and benefits 86,667 89,936 74,533
Dividends payable 6,367 12,732 13,105
Income taxes 128,303 192,936 (11,874)
Other current liabilities 132,014 132,710 144,583
----------- ----------- -----------
Total current liabilities 845,576 1,111,281 1,022,624
Long-term debt 850,250 380,124 398,902
Other liabilities 199,585 146,187 210,324
Deferred income taxes 23,005 27,292 53,805
Shareholders' equity 923,970 1,047,190 1,159,200
----------- ----------- -----------
$ 2,842,386 $ 2,712,074 $ 2,844,855
=========== =========== ===========
See notes to condensed consolidated financial statements.
3
AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Six Months Ended
August 31,
---------------------------------------
2001 2000
------------------ -----------------
OPERATING ACTIVITIES:
Net loss $(115,812) $ (18,140)
Adjustments to reconcile to net cash used by operating activities:
Cumulative effect of accounting change, net of tax -- 21,141
Restructure charges 50,264 --
Depreciation and amortization 42,401 46,069
Deferred income taxes 27,170 (3,770)
Changes in operating assets and liabilities,
net of effects from acquisitions:
Decrease in trade accounts receivable 18,717 55,368
Increase in inventories (64,399) (107,589)
Increase in other current assets (2,287) (12,005)
(Increase) decrease in deferred cost - net (60,555) 28,861
Decrease in accounts payable and other liabilities (71,266) (63,568)
Other - net 7,344 (7,444)
--------- ---------
Cash Used by Operating Activities (168,423) (61,077)
INVESTING ACTIVITIES:
Business acquisitions -- (168,575)
Property, plant & equipment additions (20,988) (33,804)
Proceeds from sale of fixed assets 164 22,888
Investment in corporate-owned life insurance 2,467 93
Other - net (4,449) (8,700)
--------- ---------
Cash Used by Investing Activities (22,806) (188,098)
FINANCING ACTIVITIES:
Increase in long-term debt 540,555 --
Reduction of long-term debt (78,402) (49,785)
(Decrease) increase in short-term debt (234,580) 373,781
Sale of stock under benefit plans 137 --
Purchase of treasury shares (214) (43,596)
Dividends to shareholders (13,075) (26,088)
--------- ---------
Cash Provided by Financing Activities 214,421 254,312
--------- ---------
INCREASE IN CASH AND EQUIVALENTS 23,192 5,137
Cash and Equivalents at Beginning of Year 51,691 61,010
--------- ---------
Cash and Equivalents at End of Period $ 74,883 $ 66,147
========= =========
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)
Six Months Ended August 31, 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.
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 six months ended August 31,
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
$170,494 of these pre-tax special charges during the six months ended August 31,
2001, of which $12,367 was incurred in the three months ended August 31, 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 August 31, 2001,
93 hourly and 220 salaried positions have been eliminated.
6
The following table summarizes the provisions and remaining reserve associated
with the restructure charge at August 31, 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 (540)
(2,062) (59) (2,661)
------- ------ ------ -------- ----- --------
Balance
August 31, 2001 $24,408 $3,727 $2,237 $ -- $2,165 $ 32,537
======= ====== ====== ======== ===== ========
Included in accrued liabilities at August 31, 2001 is $32,537 related to
severance and other exit costs for those actions not yet completed.
Also, $10,084 of non-recurring project-related pre-tax costs associated with the
restructure efforts were incurred during the six months. In addition, the
Corporation recorded a charge of $54,130 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 $117,139 ($72,978 net of
tax) or $1.15 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 were reductions in its net sales and material, labor, and other
production costs of approximately $56,207 and $10,068, respectively, as well as
implementation costs of $7,216, for a net pre-tax impact of approximately
$53,355 ($33,241 net of tax) or $0.52 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 54,130
Scan-based trading initiative 53,355
Other restructuring costs 10,084
--------
Total special charges $170,494
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
August 31, 2001, 142 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 August 31, 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
pension liabilities, and pending the appropriate Canadian regulatory approval,
the remaining
8
pension plan assets will be distributed to satisfy those obligations. This is
expected to be completed by December 2001.
The following table summarizes the provisions, payments and remaining reserves
associated with the restructure charges recorded in 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 (3,254) (3,254)
------- ------- ----- ----- -------
Balance, August 31, 2001 $ 2,154 $ 1,148 $ 934 $ 235 $ 4,471
======= ======= ===== ===== =======
Included in accounts payable and accrued liabilities at August 31, 2001 is
$4,471 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. 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.
10
NOTE G - LOSS PER SHARE
The following table sets forth the computation of loss per share and
loss per share - assuming dilution:
Six Months Ended
August 31,
----------------------------------
2001 2000
--------------- -------------
Numerator:
Net loss for loss per share
and loss per share -
assuming dilution $ (115,812) $ (18,140)
============== ==========
Denominator (thousands):
Denominator for loss per share
-weighted average shares outstanding 63,501 63,796
Effect of dilutive securities - stock options
and convertible debt -- --
-------------- ----------
Denominator for loss per share-assuming
dilution -adjusted weighted average shares
outstanding 63,501 63,796
============== ==========
Loss per share $ (1.82) $ (0.28)
============== ==========
Loss per share - assuming dilution $ (1.82) $ (0.28)
============== ==========
Three Months Ended
August 31,
--------------------------------
2001 2000
---------------- -----------
Numerator:
Net loss for loss per share
and loss per share -
assuming dilution $ (35,716) $ (35,505)
============== ==========
Denominator (thousands):
Denominator for loss per share
-weighted average shares outstanding 63,503 63,089
Effect of dilutive securities - stock options
and convertible debt -- --
-------------- ----------
Denominator for loss per share-assuming
dilution -adjusted weighted average shares outstanding 63,503 63,089
============== =========
Loss per share $ (0.56) $ (0.55)
============== =========
Loss per share - assuming dilution $ (0.56) $ (0.55)
============== =========
Certain stock options and convertible debt have been excluded for the three and
six months ended August 31, 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:
Six Months Ended
August 31,
-----------------------
2001 2000
---------- ----------
Net loss $(115,812) $ (18,140)
Other comprehensive (loss) income:
Foreign currency translation adjustments (2,344) (10,452)
Unrealized gain (loss) on available-for-sale securities 1,678 (19,039)
--------- ---------
Other comprehensive loss (666) (29,491)
--------- ---------
Total comprehensive loss $(116,478) $ (47,631)
========= =========
Three Months Ended
August 31,
-----------------------
2001 2000
---------- ----------
Net loss $ (35,716) $ (35,505)
Other comprehensive (loss) income:
Foreign currency translation adjustments (1,374) 4,481
Unrealized gain (loss) on available-for-sale securities 798 (5,888)
--------- ---------
Other comprehensive loss (576) (1,407)
--------- ---------
Total comprehensive loss $ (36,292) $ (36,912)
========= =========
12
NOTE I - BUSINESS SEGMENT INFORMATION
Six Months Ended
August 31,
----------------------------
2001 2000
------------- ------------
Net Sales
Social Expressions Products $ 851,821 $ 902,021
Intersegment items (40,491) (37,202)
----------- -----------
Total 811,330 864,819
AmericanGreetings.com 15,340 11,560
Non-reportable segments 229,751 208,256
Exchange rate adjustment-net (7,987) 4,838
Special charges (54,469) --
----------- -----------
Consolidated total $ 993,965 $ 1,089,473
=========== ===========
Earnings
Social Expressions Products $ 101,187 $ 111,695
Intersegment items (29,161) (27,220)
----------- -----------
Total 72,026 84,475
AmericanGreetings.com (4,592) (20,080)
Non-reportable segments (3,263) 318
Exchange rate adjustment - net (118) 194
Special charges (170,494) --
Unallocated items - net (79,453) (60,205)
----------- -----------
Consolidated total $ (185,894) $ 4,702
=========== ===========
13
Three Months Ended
August 31,
-------------------------
2001 2000
---------- ----------
Net Sales
Social Expressions Products $ 373,794 $ 386,060
Intersegment items (19,744) (20,075)
--------- ---------
Total 354,050 365,985
AmericanGreetings.com 8,089 6,816
Non-reportable segments 128,659 119,693
Exchange rate adjustment-net (4,605) 1,238
Special charges 2,032 --
--------- ---------
Consolidated total $ 488,225 $ 493,732
========= =========
Earnings
Social Expressions Products $ 11,878 $ 5,687
Intersegment items (13,739) (14,580)
--------- ---------
Total (1,861) (8,893)
AmericanGreetings.com (2,055) (9,540)
Non-reportable segments 69 1,063
Exchange rate adjustment - net 46 (161)
Special charges (12,367) --
Unallocated items - net (41,161) (38,311)
--------- ---------
Consolidated total $ (57,329) $ (55,842)
========= =========
Special charges for the period ended August 31, 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 non-recurring administrative 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
15
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.
During 2000, the Financial Accounting Standards Board's Emerging Issues Task
Force (EITF) added to its agenda various issues that could impact the income
statement classification of certain promotional payments. In May 2000, the EITF
reached a consensus on Issue 00-14, "Accounting for Certain Sales Incentives".
EITF 00-14 addresses the recognition and income statement classification of
various sales incentives. In April 2001, the EITF reached a consensus on Issue
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products". EITF 00-25 addresses the income statement
classification of consideration, other than that directly addressed in EITF
00-14, from a vendor to a reseller, or another party that purchases the vendor's
products. The Corporation is required to adopt EITF 00-14 and EITF 00-25 no
later than the first quarter of fiscal 2003. Although the Corporation does not
expect the adoption of EITF 00-14 and EITF 00-25 to have any effect on its
operations, it will have a material effect on certain reported classifications.
Upon adoption, the Corporation will be required to reclassify certain prior
period amounts to conform to these reporting requirements.
NOTE K - INVENTORIES
August 31, 2001 February 28, 2001 August 31, 2000
--------------- ----------------- ---------------
Raw materials $ 73,263 $ 49,408 $ 54,265
Work in process 45,171 33,370 42,676
Finished products 351,897 330,664 381,019
--------- --------- ---------
470,331 413,442 477,960
Less LIFO reserve (95,412) (93,111) (83,580)
--------- --------- ---------
374,919 320,331 394,380
Display materials and factory supplies 54,738 44,890 39,833
--------- --------- ---------
Inventories $ 429,657 $ 365,221 $ 434,213
========= ========= =========
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.
16
As of August 31, 2001, February 28, 2001 and August 31, 2000 deferred costs and
future payment commitments are included in the following financial statement
captions:
August 31, 2001 February 28, 2001 August 31, 2000
--------------- ----------------- ---------------
Prepaid expenses and other $ 152,593 $ 142,436 $ 158,431
Other assets 820,476 717,400 745,038
Other current liabilities (119,117) (119,770) (131,739)
Other liabilities (161,447) (111,030) (171,059)
--------- --------- ---------
$ 692,505 $ 629,036 $ 600,671
========= ========= =========
NOTE M - SUBSEQUENT EVENTS
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.
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 one-time 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 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.
17
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 one-time charges related to the above items, totaling $170.5 million,
occurred during the six months ended August 31, 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 $10.1 million for non-recurring administrative costs
related to the restructure.
- 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 $56.2 million and in material, labor and other
production costs of $10.1 million, as well as additional non-recurring
administrative costs of $7.2 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, 2006. The Corporation has the
option to request a one-year extension of the 364-day revolving facility. 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.
18
RESULTS OF OPERATIONS
For the three months ended August 31, 2001, net sales were $488.2 million, a
1.1% decrease from $493.7 million in the same period in the prior year. For the
six months ended August 31, 2001, net sales were $994.0 million, a decrease of
8.8% from $1,089.5 million in the same period last year. Included in the
current-year six-month amount is a reduction of $56.2 million for the conversion
to scan-based trading for two of the Corporation's retail customers.
All-inclusive unit sales of total greeting cards for the six months decreased
approximately 7% 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 $186.4
million, a decrease of 4.5% from $195.1 million in the same period in the prior
year. As a percentage of net sales, these costs decreased to 38.2% from 39.5% in
the prior year. For the six months, material, labor and other production costs
were $438.0 million, an increase from $398.4 million for the same period in the
prior year. Included in the current year six-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 those items, material, labor and other
production costs would have been 37.6% of net sales for the six months. The
increase in that percentage from 36.6% in the same period in the prior year was
due to a shift in mix toward lower-margin non-card product.
Selling, distribution and marketing costs for the three months were $259.4
million, a decrease from $269.2 million for the same period in the prior year.
As a percentage of net sales, these costs decreased to 53.1% from 54.5%. For the
six months ended August 31, 2001, selling, distribution, and marketing expenses
were $514.3 million, a decrease from $532.8 in the same period of the prior
year. Advertising costs were $8 million lower for the six months than the same
period last year. The Corporation's Internet unit reduced its costs by $12.8
million, primarily due to lower payments for online partner arrangements. Also,
lower order fulfillment costs in the Social Expressions Products Segment
contributed to that decrease. As a percentage of net sales, these costs
increased to 51.7% from 48.9% in the same period last year.
Administrative and general expenses increased $7.6 million to $77.4 million in
comparison to the same period in the prior year for the three months. For the
six months, administrative and general expenses were $143.2 million, up from
$138.6 million in the prior year. The increases from prior year for both the
three months and six months were due to costs related to the Corporation's
conversion to scan based trading ($3.3 million and $7.2 million for the three
and six months, respectively); special charges associated with the Corporation's
restructuring efforts ($2.8 million and $4.0 million for the three and six
months, 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 $8.3 million for the three months ended August 31,
2001 from the prior year to $22.1 million and increased $10.9 million to $35.5
million for the six months ended August 31, 2001. This increase was primarily
due
19
to higher borrowing levels to fund the Corporation's acquisition of CPS in July
2000 and for restructure and scan-based trading initiatives and general
corporate purposes, as well as higher interest rates on its new debt
arrangements.
Other expense (income) - net was $0.3 million of expense for the three months
compared to $1.6 million of expense in the prior year. For the six months, this
caption has income of $4.1 million, down from $9.6 million of income in the
prior year. The prior-year amount of $9.6 million included an $8.4 million
pre-tax gain on the sale of a building.
The effective tax rate for the six months was 37.7%, an increase from 36.4% in
the prior year. The increase is due to foreign operations, particularly the
United Kingdom.
Loss per share for the quarter was $(0.56) compared to the prior year of
$(0.55).
20
Loss per share was $(1.82) for the six months, compared to earnings per share
before the cumulative effect of the accounting change of $0.05 for the six
months ended August 31, 2000. The current year includes various special
after-tax charges equating to $1.67 per share as follows:
PER SHARE
Restructuring charge $0.52
Inventory write-down $0.52
Conversion to scan-based trading $0.52
Other restructure activities $0.11
-----
$1.67
The prior year period included a gain of $0.08 per share on the sale of a
building. Excluding the above items, loss per share for the six months ended
August 31, 2001 was $(0.15) compared to $(0.03) 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, 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 August 31,
2001, decreased $11.9 million or 3.3% from the same period in the prior year.
For the six months, net sales decreased $53.5 million 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 six 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 August
31, 2001, improved from an $8.9 million loss in the prior year to a $1.9 million
loss in the current year. For the six months, segment earnings decreased from
$84.5 million in the prior year to $72.0 million in the current period. The
decrease from prior year in the six-month period reflects the lower net sales as
noted above, with $11.7 million of the decrease in the United States.
AmericanGreetings.com Segment
Net sales increased $1.3 million for the three months and $3.8 million for the
six months ended August 31, 2001 compared to the prior year, as higher
advertising and co-branded site
21
revenues more than offset lower subscription revenue, reflecting the shift to
providing free electronic greetings rather than charging a subscription fee to
users. The higher advertising revenues reflect this shift in the business model
as well as the site's increased traffic.
The segment loss was lower than the prior year by $7.5 million and $15.5 million
for the three and six months, respectively. This reduction in the loss reflects
the higher revenues as well as lower expenses due to renegotiated Internet
partner distribution contracts.
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.
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 August 31, 2000 has been included.
Operating activities used $168.4 million of cash in the six months ended August
31, 2001, compared to using $61.1 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.
Accounts receivable, net of the effect of acquisitions, decreased $18.7 million
from February 28, 2001, compared to a decrease of $55.4 million during the same
period in the prior year. This decrease 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 15.2% at August 31, 2001 compared to
15.6% at August 31, 2000.
Inventories, net of the effect of acquisitions, increased $64.4 million from
February 28, 2001, compared to an increase of $107.6 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 six months ended August 31, 2001.
Offsetting that decrease from February 28, 2001 were increases in inventory
build levels at two of the Corporation's operating units in anticipation of
higher sales in the next several months.
Cash payments exceeded amortization of deferred costs cash payments by $60.6
million for the six months ended August 31, 2001, compared to amortization of
deferred costs exceeding cash payments by $28.9 million for the same period in
the prior year. The current year includes a significant expansion of an
agreement with a major customer.
22
Accounts payable and other liabilities decreased $71.3 million during the six
months ended August 31, 2001, compared to a decrease of $63.6 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 August 31, 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 $22.8 million of cash use during the
six months, compared to a use of $188.1 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. and $31.0 million for the acquisition of CPS, as well as
the proceeds from the sale of a building.
Financing activities provided $214.4 million for the six months compared to
providing $254.3 million during the same period in the prior year. The current
period includes the proceeds from the long-term debt agreement entered into
during the second quarter. The prior year included a larger increase in the
level of short-term debt during the period.
Total debt less cash at August 31, 2001 was $916.7 million, compared to $842.5
million at August 31, 2000. Debt as a percentage of debt plus equity increased
to 51.8% at August 31, 2001 from 43.9% at August 31, 2000. Based on actual
shares outstanding, shareholders' equity decreased from $18.23 per share at
August 31, 2000 to $14.55 per share at August 31, 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 August 31, 2001, the end of its last fiscal quarter and the date
of the most recent balance sheet included in this report, nor from August 31,
2000, the end of the corresponding fiscal quarter last year, to August 31, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Corporation was
held on June 22, 2001.
(b) The following individuals were elected to Class III
Directors of the Corporation: Scott S. Cowen, Harriet Mouchly
Weiss and Charles A. Ratner.
(c)-1 The vote total was as follows for the election of directors
(Class III):
NOMINEE VOTES FOR VOTES WITHHELD
Scott S. Cowen 94,649,906 5,050,643
Harriet Mouchly Weiss 94,699,807 5,000,742
Charles A. Ratner 92,505,662 7,194,887
(c)-2 A proposal to authorize the availability of an additional
6,500,000 Class A Common Shares and 500,000 Class B Common
Shares under the 1997 Equity and Performance Incentive Plan,
for newly promoted and incoming employees and as incentives to
key personnel, having received the number of votes set forth
below, passed:
Affirmative 79,640,010
Negative 19,279,660
Abstain 780,879
(c)-3 A proposal to approve performance-based compensation
arrangements for the Chairman and Chief Executive Officer and
other Named Executive Officers, having received the number of
votes set forth below, passed:
Affirmative 93,238,787
Negative 5,736,114
Abstain 725,648
24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
(10) Credit Agreement dated as of August 7, 2001 among (i) the
Registrant, (ii) KeyBank National Association, as lender and
documentation agent, (iii) National City Bank, as lender,
co-lead arranger, co-syndication agent and administrative
agent, (iv) Goldman Sachs Credit Partners L.P., as lender,
co-lead arranger and co-syndication agent, (v) Bank One NA,
as lender, (vi) LaSalle Bank National Association, as
lender, and (vii) PNC Bank, National Association, as lender
(Portions of this exhibit have been redacted and filed
separately, accompanied by a confidential treatment request,
with the Secretary of the Commission, Office of the
Secretary, Securities and Exchange Commission, pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of
1934.)
(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.
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
October 15, 2001
25