<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Commission File
Ended February 29, 2000 Number 1-13859
----------------- -------
AMERICAN GREETINGS CORPORATION
-----------------------------------------
(Exact name of registrant as specified in Charter)
OHIO 34-0065325
- ------------------------- ---------------
(State of incorporation) (I.R.S. Employer
Identification No.)
One American Road , Cleveland, Ohio 44144
- -------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (216) 252-7300
-----------------
Securities registered pursuant to Section 12 (b) of the Act:
Class A Common Shares, Par Value $1.00
Securities registered pursuant to Section 12 (g) of the Act:
Class B Common Shares, Par Value $1.00
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
<PAGE> 2
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of April 24, 2000 - $1,098,221,346
Number of shares outstanding as of April 24, 2000:
CLASS A COMMON - 59,872,489
CLASS B COMMON - 4,649,888
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement filed with the Securities and Exchange
Commission on May 16, 2000 with respect to the 2000 Annual Meeting of
Shareholders called for June 23, 2000, are incorporated by reference into Part
III.
PART I
Item 1. Business
American Greetings Corporation and its subsidiaries operate
predominantly in a single industry: the design, manufacture and sale of everyday
and seasonal greeting cards and other social expression products. Greeting
cards, gift wrap, paper party goods, candles, balloons, stationery and giftware
are manufactured and /or sold in the United States by American Greetings
Corporation, Plus Mark, Inc., Carlton Cards Retail, Inc., and Quality Greeting
Card Distributing Company; in Canada by Carlton Cards Limited; in the United
Kingdom by Carlton Cards Limited, Camden Graphics Group, Hanson White Ltd., and
Carlton Cards Ltd. (Ireland); in France by Carlton Cards (France) SNC; in Mexico
by Carlton Mexico, S.A. de C.V.; in Australia by John Sands (Australia) Ltd.;
in New Zealand by John Sands (N.Z.) Ltd.; in South Africa by S.A. Greetings
Corporation (PTY) Ltd.; and in Singapore, Hong Kong, China, and Malaysia by
Memory Lane SDN BHD (85% owned). AmericanGreetings.com (formerly Interactive
Marketing, Inc.), markets e-mail greetings, personalized greeting cards and
other social expression products through the Corporation's website
www.americangreetings.com, co-branded websites and on-line services.
AmericanGreetings.com also provides design and verse content which is included
in various CD-Rom software products for use on personal computers. Magnivision,
Inc. produces and sells non-prescription reading glasses and eyeware
accessories, and Learning Horizons distributes supplemental educational
products. Design licensing and character licensing are done by AGC, Inc. and
Those Characters From Cleveland, Inc., respectively. AG Industries, Inc.
manufactures custom display fixtures for the Corporation's products and products
of others. (Although other subsidiaries of American Greetings Corporation exist,
they are either inactive, of minor importance or of a holding company nature.)
2
<PAGE> 3
Many of the Corporation's products are manufactured at common
production facilities and marketed by a common sales force. Marketing and
manufacturing functions in the United States and Canada are combined; dual
priced cards are produced in the United States and distributed in both
countries. Information concerning sales by major product classifications is
included in Part II, Item 7. Additionally, information by geographic area is
included in Note M to the Consolidated Financial Statements included in Part II,
Item 8.
The Corporation's products are primarily sold in about 112,000
retail outlets worldwide. In addition, the Corporation licenses its designs to
various foreign licensees, so that in total, the Corporation's products and
designs are available in more than 70 nations around the world. The greeting
card and gift wrap industry is intensely competitive. Competitive factors
include quality, design, customer service and terms, which may include payments
and other concessions to retail customers under long-term agreements. These
agreements are discussed in greater detail below. There are an estimated 2,000
companies in this industry in the United States. The Corporation's principal
competitor is Hallmark Cards, Incorporated. On March 2, 2000, the Federal Trade
Commission approved the proposed acquisition of all outstanding shares of Gibson
Greetings, Inc. common stock in a cash transaction estimated at $163 million,
plus approximately $15 million of other transaction costs. Gibson Greetings,
Inc. had been the Corporation's other principal competitor. The cash tender
offer was completed and the acquisition was closed on March 9, 2000. Based upon
its general familiarity with the greeting card and gift wrap industry and
limited information as to its competitors, the Corporation believes that it is
the second largest company in the industry and the largest publicly owned
company in the industry.
The greeting card and gift wrap industry is generally mature.
The Corporation's unit sales of greeting cards decreased approximately 3% in
2000 after increasing 4% in 1999. Excluding acquisitions, 1999 total unit sales
would have decreased 1% from 1998.
Production of the Corporation's products is generally on a level
basis throughout the year. Everyday inventories remain relatively constant
throughout the year, while seasonal inventories peak in advance of each major
holiday season, including Christmas, Valentine's Day, Easter, Mother's Day,
Father's Day and Graduation. Also characteristic of the business, accounts
receivable for seasonal merchandise are carried for relatively long periods, as
product is normally shipped three to five months prior to a holiday. Payments
for seasonal shipments are generally received during the month in which the
major holiday occurs, or shortly thereafter. Extended payment terms may also be
offered in response to competitive situations with individual customers. The
Corporation and many of its competitors sell seasonal greeting cards with the
right of return.
During the fiscal year, the Corporation experienced no difficulty
in obtaining raw materials from suppliers.
At February 29, 2000, the Corporation employed approximately
15,200 full-time employees and approximately 19,000 part-time employees which,
when jointly considered, equate to approximately 24,700 full-time employees.
Approximately 3,100 of the Corporation's hourly plant employees are unionized,
of which approximately 2,100 are covered by the following collective bargaining
agreements:
3
<PAGE> 4
<TABLE>
<CAPTION>
Union Plant Location Contract Expiration Date
- ---------------------------- ----------------------- ------------------------
<S> <C> <C>
International Brotherhood Bardstown, Kentucky 4/15/03
of Teamsters Corbin, Kentucky 12/01/02
Shelbyville, Kentucky 10/01/01
Union of Needle Trades, Greeneville, Tennessee 10/20/02
Industrial, & Textile Employees (Plus Mark)
International Brotherhood Kalamazoo, Michigan 4/30/2005
of Teamsters
</TABLE>
Other locations with unions are Cleveland, Ohio, the United
Kingdom, Mexico, Australia, New Zealand, and South Africa. The Corporation's
headquarters and other manufacturing locations are not unionized. Labor
relations at each location have generally been satisfactory.
The Corporation has a number of patents and registered trademarks
which are used in connection with its products. The Corporation's designs and
verses are protected by copyright. Although the licensing of copyrighted designs
and trademarks produces additional revenue, in the opinion of the Corporation,
the Corporation's operations are not dependent upon any individual patent,
trademark, copyright or intellectual property license. The collective value of
the Corporation's copyrights and trademarks is substantial and the Corporation
follows an aggressive policy of protecting its patents, copyrights and
trademarks.
In fiscal 2000, the Corporation's major channel of distribution
continues to be mass retail (which is comprised of mass merchandisers, chain
drug stores and supermarkets), where it is the social expression industry
leader. Other major channels of distribution include card and gift shops,
department stores, military post exchanges, variety stores and combo stores
(stores combining food, general merchandise and drug items).
Sales to the Corporation's five largest customers, which include
mass merchandisers and major drug stores, accounted for approximately 33.0% of
net sales in fiscal 2000. Sales to retail customers are made through 27 sales
offices in the United States, Canada, the United Kingdom, Australia, New
Zealand, France, Mexico, South Africa and Malaysia. Sales to one customer
accounted for 10% of net sales in Fiscal 2000.
The Corporation has agreements with various customers for the
supply of greeting cards and related products. Contracts are separately
negotiated to meet competitive situations; therefore, while some aspects of the
agreements may be the same or similar, important contractual terms often vary
from contract to contract. Under the agreements, customers typically receive
allowances, discounts and/or advances in consideration for the Corporation being
allowed to supply customers' stores for a stated term and/or specify a minimum
sales volume commitment.
4
<PAGE> 5
Some of these competitive agreements have been negotiated with customers
covering a period following that covered by current agreements and requiring the
Corporation to make advances prior to the start of such future period. The
Corporation views the use of such agreements as advantageous in developing and
maintaining business with retail customers. Although risk is inherent in the
granting of advances, payments and credits, the Corporation subjects such
customers to its normal credit review. Losses attributable to these agreements
have historically not been material. Advances, payments and credits made under
these agreements are accounted for as deferred costs. The current and long-term
portions of such deferred costs, including future payment commitments, are
disclosed in Note G to the Consolidated Financial Statements included in Part
II, Item 8. Note G also discusses the amortization policy. The Corporation
believes that these agreements represent a common practice within the industry.
Since Hallmark Cards, the Corporation's principal competitor, is a non-public
company, public disclosure of its practices has been limited.
The operations of the Corporation, like those of other companies
in our industry, are subject to various federal, state and local environmental
laws and regulation. These laws and regulations may give rise to claims,
uncertainties or possible loss contingencies for future environmental
remediation liabilities and costs. The Corporation has implemented various
programs designed to protect the environment and comply with applicable
environmental laws and regulations. The costs associated with these compliance
and remediation efforts have not and are not expected to have a material adverse
effect on the financial condition, cash flows, or operating results of the
Corporation.
5
<PAGE> 6
Item 2. Properties
As of February 29, 2000, the Corporation owns or leases
approximately 16.8 million square feet of plant, warehouse, store and office
space, of which approximately 5.8 million square feet are leased. Space needs in
the United States have been met primarily through long-term leases of properties
constructed and financed by community development corporations and
municipalities.
The following table summarizes the principal plants and
materially important physical properties of the Corporation:
<TABLE>
<CAPTION>
Expiration
Approximate Square Date of
Feet Occupied Material Principal
Location Owned Leased Leases Activity
- -------------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Cleveland, 1,700,000 International headquarters;
Ohio general offices of U.S.
Greeting Card Division,
Plus Mark, Inc., AG
Industries, Inc., Carlton
Cards Retail, Inc.,
Learning Horizons, Inc.,
AmericanGreetings.com, and
AGC, Inc.; creation and
design of greeting cards,
gift wrap, paper party
goods, candles, balloons,
stationery and giftware
Bardstown, 413,500 Cutting, folding,finishing, and
Kentucky packaging of greeting cards
Corbin, 1,010,000 Printing of greeting cards,
Kentucky gift wrapping and paper party
goods and manufacture of
other related products
Danville, 1,374,000 2001 Distribution of everyday greeting
Kentucky cards and related products
Harrisburg, 417,000 2006 Warehousing for seasonal
Arkansas greeting cards and related
products
Lafayette, 194,000 Manufacture of envelopes
Tennessee for greeting cards and packaging
of cards
McCrory, 771,000 2004 Order filling and shipping of
Arkansas everyday and seasonal products
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Expiration
Approximate Square Date of
Feet Occupied Material Principal
Location Owned Leased Leases Activity
- -------------- --------------------------- ------------ --------
<S> <C> <C> <C> <C>
Osceola, 2,800,800 Cutting, folding, finishing and
Arkansas packaging of seasonal greeting
cards and warehousing;
distribution of seasonal
products
Ripley, 165,000 Seasonal card printing and
Tennessee forms
Philadelphia, 120,000 2003 Hand finishing of greeting cards
Mississippi
Kalamazoo, 458,000 Manufacturing and distribution
Michigan of party supplies
Shelbyville, 250,000 2001 Warehousing for Carlton
Kentucky Cards Retail, Inc. and distribution
for Learning Horizons, Inc.
Forest City, 498,000 302,500 2001 Manufacture of the
North Carolina Corporation's display
fixtures and other custom display
fixtures by AG Industries, Inc.
Greeneville, 1,410,000 Printing and packaging of
Tennessee seasonal wrapping items
(2 locations) and order filling and shipping for
Plus Mark, Inc.
Ft. Lauderdale / 108,000 2000 General offices of Magnivision,
Miami and Inc.; manufacture, order filling
Florida 2001 and shipping of non-prescription
(2 locations) reading glasses
Toronto, 1,084,500 General offices of Carlton
Ontario, Cards (Canada) Limited;
Canada manufacture and distribution
(2 locations) of greeting cards and related
products
Clayton, 208,000 General offices of John Sands
Victoria, (Australia) Ltd.; manufacture of
Australia greeting cards and related
products
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Expiration
Approximate Square Date of
Feet Occupied Material Principal
Location Owned Leased Leases Activity
- -------------- --------------------------- ------------ --------
<S> <C> <C> <C> <C>
Auckland, 80,000 General offices of John
New Zealand Sands (New Zealand) Ltd.
Dewsbury, 317,000 87,000 2001 General offices of
England and Carlton Cards (UK) Limited;
(5 locations) 2014 manufacture of greeting
cards and related products
Corby, 85,000 Distribution of greeting cards
England and related products for
Carlton Cards (UK) Limited
Mexico City, 166,000 General offices of Carlton
Mexico Mexico, S.A. de C.V. and
manufacture of greeting
cards and related products
Paris, 93,000 2001 General offices of Carlton
France and Cards (France) SNC;
2003 distribution of greeting cards
and related products
Roodepoort, 113,600 2000 General offices of
South Africa thru S.A. Greetings Corporation;
2003 manufacture and distribution
of greeting cards and related
products
London, 42,000 2000 General offices of Camden Graphics;
England and publishing and distribution of
(3 locations) 2011 greeting cards.
Croydon, 42,000 104,000 2001 General offices of Hanson White;
England thru manufacturer and distributor of
(8 locations) 2011 greeting cards and related products.
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Expiration
Approximate Square Date of
Feet Occupied Material Principal
Location Owned Leased Leases Activity
- -------------- --------------------------- ------------ --------
<S> <C> <C> <C> <C>
Durban, Manufacture of
South Africa 54,000 greeting cards and
related products
Ezakheni, Distribution and
South Africa 56,000 21,000 2000 manufacture of
greeting cards and
related products
Kajang 331,000 Cutting, printing,
Selangor and distribution of
Malaysia greeting cards
</TABLE>
9
<PAGE> 10
Item 3. Legal Proceedings
1. In re: Underground Storage Tank Release Report
US EPA Facility ID# TN 1-300153
Tennessee Department of Environment and Conservation (TDEC) v. Plus Mark
In January 2000, Plus Mark, a wholly owned subsidiary of American
Greetings, received a request from US EPA in connection with the
excavation of eight underground storage tanks at Plus Mark's Afton, TN
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.
2. In re: Tennessee Dept. of Environment and Conservation (TDEC) v. Cleo
Tennessee State Superfund Site - Carl Wright Site, Henry County, TN
In May 1998, TDEC informed Gibson Greetings, now a wholly owned
subsidiary of American Greetings, that Cleo, a former subsidiary of
Gibson Greetings, may be a potentially responsible party for the costs
incurred by the State of Tennessee in remediating the Carl Wright Site.
TDEC notified Gibson Greetings 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.
Item 4. Submission of Matters to Vote of Security Holders
None
10
<PAGE> 11
Executive Officers of the Registrant
- ------------------------------------
The following is a list of the Corporation's executive officers,
their ages as of May 1, 2000, their positions and offices, and number of years
in executive office:
<TABLE>
<CAPTION>
Years as
Name Age Executive Officer Current Position and Office
- ---- --- ----------------- ---------------------------
<S> <C> <C> <C>
Morry Weiss 60 28 Chairman and
Chief Executive Officer
Edward Fruchtenbaum 52 14 President and
Chief Operating Officer
Michael B. Birkholm 48 2 Senior Vice President
Mary Ann Corrigan-Davis 46 3 Senior Vice President
Jon Groetzinger, Jr. 51 12 Senior Vice President,
General Counsel and
Secretary
William R. Mason 55 18 Senior Vice President
William S. Meyer 53 12 Senior Vice President,
Chief Financial Officer
Patricia A. Papesh 52 5 Senior Vice President
Erwin Weiss 51 10 Senior Vice President
Jeffrey M. Weiss 36 2 Senior Vice President
George A. Wenz 55 2 Senior Vice President
Thomas T. Zinn, Sr. 51 2 Senior Vice President
Dale A. Cable 52 8 Vice President, Treasurer
Patricia L. Ripple 44 4 Vice President,
Corporate Controller
</TABLE>
Morry Weiss and Erwin Weiss are brothers. Jeffrey M. Weiss is the
son of Morry Weiss. The Board of Directors annually elects all executive
officers; however, executive officers are subject to removal, with or without
cause, at any time.
All of the executive officers listed above have served in the
capacity shown or similar capacities with the Corporation (or major subsidiary)
over the past five years, with the following exceptions.
11
<PAGE> 12
Michael B. Birkholm was Plant Manager at Osceola, Arkansas from
September 1992 until June 1994; and Vice President, Manufacturing from June 1994
until becoming Senior Vice President in March 1998.
Mary Ann Corrigan-Davis was President of Carlton Cards Retail, Inc.
from December 1992 until January 1996, and Group Managing Director of the John
Sands Group from January 1996 until becoming Senior Vice President in May 1997.
Patricia L. Ripple was Director, Tax and Financial Reporting of the
Corporation from November 1991 until April 1993; and Executive Director, Tax and
Financial Reporting of the Corporation from April 1993 until becoming Vice
President and Corporate Controller in September 1996.
Jeffrey M. Weiss was Vice President, Materials Management of the
Corporation's U.S. Greeting Card Division from October 1996 until May 1997; and
Vice President, Product Management of the Corporation's U.S. Greeting Card
Division from May 1997 until becoming Senior Vice President in January 1998.
George A. Wenz was Vice President, National Accounts from October
1984 until becoming Senior Vice President in June 1997.
Thomas T. Zinn, Sr. was a Principal with Ernst & Young LLP before
joining the Corporation January 1995 as Vice President, Information Services. He
became Senior Vice President in March 1998.
12
<PAGE> 13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
- ----------------------
The Corporation's Class A Common Stock is listed on the New York Stock Exchange
under the symbol AM. The high and low stock prices, as reported in the New York
Stock Exchange listing, for the years ended February 29, 2000 and February 28,
1999:
<TABLE>
<CAPTION>
2000 1999
-------------------------------- ------------------------------
High Low High Low
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
1st Quarter........... $ 28-13/16 $ 22-5/16 $ 49-7/16 $ 44-7/8
2nd Quarter........... 32-3/8 27-3/16 53-3/4 36-5/8
3rd Quarter........... 28-1/2 23-1/16 44 35
4th Quarter........... 25-11/16 17-1/4 44-5/16 22
</TABLE>
The ratio of the Corporation's share price to earnings per share was 12.6 at
February 29, 2000 and 9.3 at February 28, 1999.
National City Bank, Cleveland, Ohio, is the Corporation's registrar and transfer
agent. There is no public market for the Class B Common Shares of the
Corporation. Pursuant to the Corporation's Amended Articles of Incorporation, a
holder of Class B Common Shares may not transfer such Class B Common Shares
(except to permitted transferees, a group that generally includes members of the
holder's extended family, family trusts and charities) unless such holder first
offers such shares to the Corporation for purchase at the most recent closing
price for the Corporation's Class A Common Shares. If the Corporation does not
purchase such Class B Common Shares, the holder must convert such shares, on a
share for share basis, into Class A Common Shares prior to any transfer.
(b) Shareholders
- ----------------
At February 29, 2000, there were approximately 28,790 holders of Class A Common
Shares and 210 holders of Class B Common Shares of record and individual
participants in security position listings.
(c) Cash Dividends
- ------------------
<TABLE>
<CAPTION>
Dividends per share 2000 1999
- -------------------------- --------- ---------
<S> <C> <C>
1st Quarter (paid June 10, 1998) $ $ .18
2nd Quarter (paid September 10, 1999 and 1998) .20 .19
3rd Quarter (paid December 10, 1999 and 1998) .20 .19
4th Quarter (paid March 10, 2000 and 1999) .20 .19
(to be paid June 10, 2000 and paid June 10, 1999) .20 .19
--------- ---------
$ .80 $ .94
</TABLE>
13
<PAGE> 14
Item 6. Selected Financial Data
Years ended February 28 or 29
Thousands of dollars except per share amounts
Summary of Operations
- ---------------------
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales..................................... $ 2,175,236 $ 2,205,706 $ 2,198,765 $ 2,161,089 $ 2,003,038
Gross profit ................................. 1,365,889 1,448,626 1,408,077 1,355,965 1,241,032
Non-recurring charge (gain) ................... 38,873 13,925 (22,125) -- 52,061
Interest expense .............................. 34,255 29,326 22,992 30,749 24,290
Net Income.................................... 89,999 180,222 190,084 167,095 115,135
Earnings per share............................. 1.37 2.56 2.58 2.23 1.54
Earnings per share - assuming dilution......... 1.37 2.53 2.55 2.22 1.53
Cash dividends per share ...................... .80 .94** .71 .67 .62
Fiscal year end market price per share ........ 17.25 23.69 45.63 31.00 27.38
Average number of shares outstanding .......... 65,591,798 70,345,980 73,708,100 74,818,960 74,528,809
Financial Position
- ------------------
Accounts receivable ........................... $ 430,825 $ 390,740 $ 373,594 $ 375,324 $ 353,671
Inventories ................................... 249,433 251,289 271,205 303,611 335,074
Working capital ............................... 518,196 728,144 506,029 562,148 516,346
Total assets .................................. 2,517,983 2,419,328 2,161,464 2,135,120 2,005,832
Property, plant and equipment additions ....... 50,753 60,950 67,898 92,895 91,590
Long-term debt ................................ 442,102 463,246 148,800 219,639 231,073
Shareholders' equity .......................... 1,252,411 1,346,611 1,345,217 1,361,655 1,235,022
Shareholders' equity per share ................ 19.41 19.49 18.90 18.16 16.53
Net return on average shareholders' equity..... 6.9% 13.4% 14.0% 12.9% 9.6%
Return on net sales before income taxes........ 6.5% 12.8% 13.3% 11.8% 8.7%
</TABLE>
** See Part II, Item 5(c) for detailed table.
14
<PAGE> 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
Throughout 2000, the Corporation embarked on initiatives to improve sales
productivity, reduce its cost structure and improve manufacturing and
distribution efficiency. Highlights of these initiatives and activities for the
year include:
- - Reduced everyday card shipments to lower retailer inventories and improve
greeting card department sales productivity.
- - Integrated Canadian manufacturing and distribution in the United States.
- - Finalized plans for the rationalization of various warehouse, distribution
and manufacturing facilities in the United Kingdom.
- - Completed various domestic and foreign acquisitions, the most significant
being Contempo Colours Inc., a Michigan-based party goods company.
- - Received approval from the Federal Trade Commission to acquire Gibson
Greetings Inc., the No. 3 greeting card company in the industry.
- - Established the Corporation's electronic marketing group,
AmericanGreetings.com, Inc. as a separate subsidiary.
Cash flow remained strong and the Corporation continued its share repurchase
program with the purchase of 4.6 million shares.
CONSOLIDATED RESULTS OF OPERATIONS
REVENUE
The Corporation's initiative to improve the productivity of retailer's
inventories resulted in a net sales decrease of 1.4% in 2000 compared to 1999.
While the Corporation did not achieve overall revenue growth, significant sales
gains were recorded in the UK market, as well as increased sales of seasonal
promotional boxed cards and gift wrap, party goods, candles and stationery in
the United States. In 1999, the net sales increase of .3% was adversely affected
by reduced seasonal shipments, subsidiary divestitures in 1998, and unfavorable
movements in certain foreign currencies.
Net sales of everyday cards declined 7.1% in 2000 over 1999 primarily as a
result of the productivity initiative in the United States. Everyday card sales
were again strong however, in the United Kingdom increasing 14.3% in 2000 over
1999 due to both increased productivity and increased market share. In 1999,
everyday card sales increased 4% reflecting strong US everyday sales and to
increased UK market share due to both improvements in the existing UK business
and the acquisition of Camden Graphics and Hanson White.
During 2000, initiatives begun in the prior year to improve sell-through of
seasonal card sales resulted in a 19.3% decrease in seasonal card returns. As a
result, the Corporation further reduced seasonal card shipments in 2000 over
1999 to improve seasonal sales productivity. Net seasonal card sales decreased
2.6% in 2000 after decreasing 3.5% in 1999. Total unit sales of all greeting
cards decreased approximately 3% in 2000 after increasing 4% in 1999. Excluding
acquisitions, total unit sales would have decreased 1% in 1999.
15
<PAGE> 16
Sales of non-card products were again strong in 2000 increasing 7.9% after
increasing 4.3% in 1999. Key components of this performance were significant
sales increases in both party goods and seasonal promotional gift wrap. Sales of
party goods increased over 86% in 2000 reflecting both the acquisition of
Contempo Colours, Inc. in the third quarter and core volume growth. Excluding
this acquisition, sales of non-card products would have increased 5.4%. Due to
gains in both new and existing customers, seasonal promotional gift wrap sales
increased 21% in 2000, after declining $13.1 million in 1999. Other significant
sales increases occurred in the following non-card products categories:
non-prescription reading glasses, candles and stationery.
The contribution of each major product category as a percent of net sales for
the past three years (due to the divestiture, excludes picture frames and hair
accessories from all three years) is:
2000 1999 1998
---------- --------- ---------
Everyday Greeting Cards 45% 48% 47%
Seasonal Greeting Cards 20% 20% 22%
Gift Wrapping and Wrap Accessories 14% 14% 14%
All Other Products 21% 18% 17%
The All Other Products classification includes giftware, ornaments,
non-prescription reading glasses, party goods, candles, custom display fixtures,
stationery, educational products, stickers, calendars and balloons.
EXPENSES AND PROFIT MARGINS
The Corporation's initiative to reduce everyday greeting card shipments and the
impact of its AmericanGreetings.com subsidiary decreased the pre-tax margin.
Excluding non-recurring items and special charges, pre-tax margins were 8.6% in
2000 compared to 13.4% in 1999 and 12.3% in 1998. Material, labor and other
production costs were 37.2% of net sales, including a $7.7 million inventory
write-down related 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 36.9% of
net sales, up from 34.3% in 1999 and 36.0% in 1998. Key components of this
increase were increased sales of lower margin products and reduced production
levels which resulted in unfavorable manufacturing variances of $7.8 million in
the United States. The improvement in 1999 from 1998 was gained by both reducing
shipments of low margin seasonal cards, promotional gift wrap and other
accessories and by lowering the manufacturing costs of the remaining seasonal
products.
16
<PAGE> 17
Selling, distribution and marketing expenses increased to 42.4% of net sales,
compared to 40.5% in 1999 and 39.9% in 1998. The increase over 1999 primarily
reflects additional costs for AmericanGreetings.com, Inc. of $20.3 million of
which $15.2 million relates to expenses associated with internet agreements and
$3.5 million for increased advertising costs. Additionally, based on the
strength of seasonal promotional gift wrap sales, order distribution costs
increased $9.9 million primarily due to increased freight costs. Competitive
costs in 2000 decreased slightly compared to 1999. Deferred costs and the
Corporation's method of accounting for them are described in Note G to the
Consolidated Financial Statements. The increase in selling, distribution and
marketing expenses in 1999 over 1998 was primarily due to a new national
advertising campaign and to increased in-store merchandiser costs due primarily
to store remodelings resulting from retailer consolidations.
Administrative and general expenses decreased $1.1 million in 2000 after
decreasing $5.3 million in 1999. Both 2000 and 1999 benefited from reduced costs
of corporate owned life insurance, while 2000 also reflected lower profit
sharing and other employee benefit costs of $4.6 million. Partially offsetting
these expense declines was an increase of $9.7 million for systems development
and infrastructure costs primarily associated with AmericanGreetings.com, Inc.
Other expense - net was $3.7 million in 2000, $1.3 million in 1999 and $4.5
million in 1998. The decrease in other expense - net in 1999 was primarily
attributable to a gain on the sale of an equity investment.
Interest expense amounted to $34.3 million in 2000, compared to $29.3 million in
1999 and $23.0 million in 1998. The Corporation's common stock repurchase
program and acquisitions were funded by both free cash flow and additional
borrowings in 2000 and 1999. As a result, debt less cash increased to $490.8
million at the end of 2000 compared to $336.5 million last year. Slightly higher
interest rates also adversely impacted interest expense in 2000 and 1999.
The 2000 and 1999 effective tax rates were 36.0% compared to 35.0% in 1998. The
rate for 2000 includes a 2.1 percentage point benefit for utilization of a
foreign net operating loss carryforward while the rate for 1999 and 1998
reflected tax benefits of the corporate-owned life insurance. Those benefits
were reduced due to the phase out of the Federal income tax deduction for
interest on loans associated with these policies. The deduction for this
interest expense was entirely eliminated as of January 1, 1999. See Note N to
the Consolidated Financial Statements for details of the differences between the
Federal statutory rate and the effective tax rate.
RESTRUCTURING ACTIVITIES AND SPECIAL CHARGES
Fiscal 2000 - Fourth Quarter
During the fourth quarter, the Corporation recorded a $6.1 million ($4.8 million
net of tax, or earnings per share of $.08) restructure charge related to various
foreign operations. The primary component of this charge was for the
rationalization of various warehouse, distribution and manufacturing facilities
in the United Kingdom in order to increase operating efficiency and lower fixed
expenses. Additional initiatives include, to a lesser extent, the integration of
Mexican manufacturing in the United States and the realignment of various
business functions in Australia.
17
<PAGE> 18
The restructure charge included $5.2 million for costs of severing employees,
$.6 million for lease exit costs, $.3 million for the write off of assets no
longer in use and other restructure costs. In total, approximately 336 positions
will be eliminated comprised of 304 hourly and 32 salaried employees. All
activities are expected to be completed by the end of 2001 and the Corporation
anticipates annual cost savings to be approximately $4.0 million.
Fiscal 2000 - Second Quarter
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. As of February 29, 2000, 428 hourly and 178 salaried
employees have left the company. All activities associated with the Canadian
restructuring are expected to be completed by the end of August 2000 and the
Corporation anticipates annual aggregate cost savings to be approximately $12
million.
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.
18
<PAGE> 19
The following table summarizes the provisions, payments and remaining reserves
associated with the restructure charges recorded in both 2000 and 1999.
<TABLE>
<CAPTION>
Facility Kiosk Lease
Termination Shut-Down Exit Exit Other Total
Benefits Costs Costs Costs Costs
------------- ------------ --------- --------- --------- -----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Provision in 1999 $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
Provision in 2000 31,018 $4,634 $2,108 1,113 38,873
ACTIVITY RELATING TO
1999 PROVISION:
Cash expenditures (3,645) (620) (469) (4,734)
Non-cash charges (588) (588)
Change in estimate 162 (162)
ACTIVITY RELATING TO
2000 PROVISION:
Cash expenditures (1,646) (454) (930) (3,030)
Non-cash charges (4,358) (99) (162) (519) (5,138)
------------ ------------ --------- --------- --------- -----------
Balance 2/29/00 $25,156 $4,081 $48 $1,016 $626 $30,927
============ ============ ========= ========= ========= ===========
</TABLE>
Included in accounts payable and accrued liabilities at February 29, 2000 is
$30.9 million related to severance and other exit costs for those actions not
completed. The Corporation believes the remaining accrued restructure liability
is adequate for its remaining cash and non-cash obligations.
Fiscal 1998 Special Item
In 1998 the Corporation divested the net assets of Acme Frame Products, Inc., a
manufacturer and distributor of picture frames and Wilhold, Inc., a manufacturer
and distributor of hair accessories. As a result of the transaction, the
Corporation recorded a non-recurring gain of $22.1 million ($13.2 million net of
tax, or earnings per share of $0.18).
19
<PAGE> 20
NET INCOME AND EARNINGS PER SHARE
Net income of $90.0 million for 2000 reflected special charges relating to
initiatives to streamline its international operations and a net loss associated
with the Corporation's electronic marketing unit. Excluding special charges and
the net loss incurred by the Corporation's electronic marketing unit, adjusted
net income for 2000 was $131.5 million or $2.00 per share. This compares to net
income, excluding the impact of non-recurring items, of $188.6 million or $2.68
in 1999 and $176.9 million or $2.40 per share in 1998. Assuming dilution,
earnings per share excluding the net loss incurred by the Corporation's
AmericanGreetings.com subsidiary in 2000 and non-recurring items were $2.00 in
2000, $2.65 in 1999 and $2.37 in 1998.
SEGMENT INFORMATION
The Corporation is organized and managed according to a number of factors,
including product categories, geographic locations and channels of distribution.
The Social Expression Products segment primarily designs, manufacturers and
sells greeting cards and other products through various channels of distribution
with mass retailers as the primary channel. As permitted under SFAS 131, certain
operating divisions have been aggregated into the Social Expression Products
segment. These operating divisions have similar economic characteristics,
products, production processes, types of customers and distribution methods.
AmericanGreetings.com is a web-based provider of greetings and other social
communication content to consumers and web-based businesses.
SOCIAL EXPRESSION PRODUCTS SEGMENT
Net sales in 2000 decreased 5.2% due primarily to reduced everyday card
shipments in the United States. The effect of this retailer productivity
initiative was partially offset by significant growth in net sales of 23.6% in
the UK market. Net sales in 1999 increased 3.6% due primarily to sales growth in
the United Kingdom from both improvement in the existing business and the
favorable impact of two greeting card acquisitions. While total segment greeting
card unit sales decreased approximately 3% in 2000, unit sales in the UK
increased approximately 14%. Greeting card unit sales increased 5% in 1999 as a
result of the UK acquisitions.
Segment earnings, net of intersegment items, decreased 28.1% in 2000 reflecting
the decrease in high margin everyday card sales in the United States partially
offset by the strength of the UK market. Segment earnings, net of intersegment
items, increased 7.2% in 1999 due primarily to a more favorable product mix,
increased everyday sales in the core United Kingdom business and the impact of
the two U.K. acquisitions.
AMERICANGREETINGS.COM, INC. SEGMENT
Net sales almost doubled in 2000 due to significant increases in subscription
revenue and to increased advertising revenue resulting from new online
distribution agreements with key internet service providers. The increase in
1999 reflects the first full year of operations for the emerging business and
the development of an internet growth strategy.
The segment loss in 2000 reflects the increased costs associated with the
amortization of payments relating to various internet distribution agreements
and increased advertising expenditures. Also impacting the 2000 results is the
Corporation's commitment to provide essential technological investment for
expanded internet services and increased volume growth. The increase in segment
earnings in 1999 compared to 1998 was attributable to growth in subscription
revenue.
20
<PAGE> 21
YEAR 2000
In prior years, the Corporation discussed the nature and progress of its plans
to become Year 2000 compliant. In late calendar 1999, the Corporation completed
its remediation and testing of information technology ("IT") system programs. As
a result of those planning and implementation efforts, the Corporation
experienced no significant disruptions in any of its IT or non-IT business
systems and believes those systems responded to the Year 2000 date change. The
Corporation expended $11.5 million during 2000, of which $8.4 million was
expensed and $3.1 million was capitalized, in connection with remediating its
business systems and has expended $35.3 million cumulatively. The Corporation is
not aware of any material problems resulting from Year 2000 issues, either with
its products, its internal systems, or the products and services of third
parties. The Corporation will continue to monitor its business systems and those
of its suppliers and vendors throughout calendar 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow before acquisitions, divestitures and financing decreased $82.5
million in 2000 after increasing $54.2 million in 1999 primarily due to lower
net income. Cash flow provided by operating activities for 2000 decreased $42.7
million after increasing $16.1 million in 1999.
Deferred income tax expense increased $63.2 million in 2000 due to the
acceleration of certain expenses for tax purposes. In 1999, deferred income
taxes increased $11.2 million also due to the timing of expenses.
Trade accounts receivable, net of the effect of acquisitions and divestitures,
used $35.9 million of cash in 2000 compared to $10.5 million in 1999. The
accounts receivable performance in 2000 primarily reflected strong fourth
quarter party goods and everyday gift wrap sales and timing of cash receipts.
The cash use in 1999 reflects an increase in extended payment terms granted to
customers. As a percent of net sales, accounts receivable were 19.8% in 2000,
17.7% in 1999 and 17.0% in 1998.
Inventories as a percent of material, labor and other production costs continued
to improve and were 30.8% in 2000, compared to 33.2% in 1999 and 34.3% in 1998.
In 2000, the Corporation realized a $19.3 million inventory reduction in both
Canada and the United States relating to the integration of Canadian
manufacturing and distribution in the United States and to other production
efficiencies. The improvement in 1999 reflects the Corporation's focus to reduce
production lead times and therefore inventory levels. The improvement in 1999
was driven by the greeting card divisions, where inventories declined $23.0
million, excluding acquisitions, from 1998 levels.
Other current assets used $52.1 million of cash in 2000 compared to $3.3 million
in 1999 and $4.2 million in 1998. This increase in 2000 reflected payments to
key internet service providers by AmericanGreetings.com, Inc., of $14.8 million
and an increase in refundable income taxes of $25.7 million.
21
<PAGE> 22
Deferred costs, representing payments under agreements with certain retailers
(net of related amortization), used $5.6 million in 2000, down from the $65.6
million in 1999 and $15.0 million in 1998. The payments, which were made in
connection with both new and existing agreements, reflect the fluctuations
resulting from various contract payment and renewal dates. However, the deferred
costs which result from the payments are less volatile as they are amortized
over the effective period of the agreement. Total commitments under the
agreements are capitalized as deferred costs when the agreements are
consummated, and any future payment commitments are recorded as liabilities at
that time. Future payment commitments under existing agreements at the end of
2000 were $282.1 million with $118.3 million due within the next year. See Note
G to the Consolidated Financial Statements for further discussion of deferred
costs related to certain customer agreements.
Accounts payable and other liabilities used cash of $.7 million in 2000 compared
to providing cash of $24.2 million in 1999 and $10.4 million in 1998. The change
in 2000 reflects lower income tax accruals and employee profit sharing
liability.
Investing activities included the $35.5 million acquisition of Contempo Colours,
Inc. and an escrow payment of $30 million relating to the pending acquisition of
Gibson Greetings. In 1999, investing activities reflect the $53.0 million cash
portion of the acquisition of two greeting card companies in the United Kingdom.
Capital expenditures were $50.8 million in 2000 down from $61.0 million in 1999
and $67.9 million in 1998. The decrease in 2000 reflects lower capitalized
system projects as the Corporation focused its efforts on Year 2000 remediation.
Expenditures in 1999 were principally for asset replacement, cost reduction,
system and productivity improvements. Capital expenditures are expected to be
approximately $75 million in 2001.
Investing activities other than capital expenditures and acquisitions and
divestitures used $20.9 million of cash in 2000 compared to providing $29.0
million of cash in 1999. The use of cash in 2000 reflects a supply agreement
loan to a customer and lower cash distributions received from the Corporation's
investment in corporate owned life insurance. The cash provided in 1999 reflects
cash distributions received from the Corporation's investment in corporate owned
life insurance and proceeds from the sale of Artistic Greetings stock.
In March 1998, the Corporation announced that its Board of Directors authorized
a repurchase of up to 4 million shares of Class A stock. During 1999, 2.9
million shares were repurchased under this program at an average price of $42.73
per share or $124.2 million. The final 1.1 million shares of stock under this
program were repurchased in March 1999 at an average price of $23.33 per share
or $25.5 million. The entire 4.0 million shares were purchased at an average
price of $37.42 per share or a total of $149.7 million. The Corporation on
February 24, 1999 again announced its intention to repurchase an additional 5
million shares of Class A stock. During 2000, 3.5 million shares were
repurchased under this program at an average price of $29.79 per share or $104.5
million. In total, 4.6 million shares were repurchased during 2000 at an average
price of $28.25 per share or approximately $130 million.
22
<PAGE> 23
Net cash used in financing activities was $114.4 million, primarily related to
the Corporation's stock repurchase program of $130 million and dividend payments
of $51.2 million, partially offset by a net increase in total debt of $65.8
million. The Corporation's total 2000 dividend payment was $51.2 million
compared to $52.4 million in 1999. In 1999, the Corporation utilized a portion
of the proceeds from the sales of $300 million of debt securities to effectively
shift much of its previously short-term debt to long-term. The remaining portion
of the proceeds were used to fund various other activities including the
Corporation's share repurchase programs. Debt as a percent of total
capitalization in 2000 increased to 30.6% compared to 26.3% in 1999 and 20.6% in
1998.
The Corporation's operating cash flow and existing credit facilities are
expected to meet currently anticipated funding requirements. The seasonal nature
of the business results in peak working capital requirements which are financed
through short term borrowings. See Note H to the Consolidated Financial
Statements for further discussion of the Corporation's credit facilities.
MARKET RISK
The Corporation's market risk is impacted from changes in interest rates and
foreign currency exchange rates. The Corporation manages interest rate exposure
through a mix of fixed and floating rate debt. Most of the Corporation's debt
has a fixed rate, limiting its exposure to fluctuations in interest rates. To
date, risks associated with interest rate movements have not been significant
and are not expected to be so in the near term.
Approximately 19% of the Corporation's 2000 revenues were generated from
operations outside the United States. Operations in Australasia, Canada, France,
Malaysia, Mexico, South Africa, and the United Kingdom, are denominated in
currencies other than U.S. dollars. Each of these operations conducts
substantially all of its business in its local currency and is not subject to
material operational risks associated with fluctuations in exchange rates. While
intercompany balances with the parent company are denominated in U.S. dollars,
the Corporation's multi-currency credit facility provides the foreign operations
the ability to satisfy these balances and reduce exchange risk. Additionally,
the Corporation's net income was not materially impacted by the translation of
the foreign operations' currencies into U.S. dollars. Exposure to exchange rate
fluctuations historically have not been significant however, no assurance can be
given that future results will not be adversely affected by significant changes
in foreign currency exchange rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No.133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS
133). In June 1999, the FASB issued SFAS No. 137 which defers the effective date
of SFAS 133 and requires the Corporation to adopt March 1, 2001. The Corporation
is currently assessing the effect of adopting SFAS 133 but does not anticipate a
material impact on the results of operations due to the Corporation's minimal
use of derivatives.
23
<PAGE> 24
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
among other guidance, clarifies the Staff's views on various revenue recognition
and reporting matters. As a result, effective March 1, 2000, the Company will
adopt a change in its method of accounting for certain shipments of seasonal
product. The implementation of this change will be 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 will be a one-time non-cash reduction to the
Company's earnings of approximately $21 million in fiscal 2001. Had this change
been adopted effective March 1, 1999, fiscal 2000 net sales and earnings before
the cumulative effect of this accounting change would not have been materially
impacted.
While the effect of the change may impact future quarterly results, it will not
impact the Company's reported cash flows, and is not expected to have a material
impact on fiscal 2001 income before the cumulative effect or fiscal 2001 net
sales.
FACTORS THAT MAY AFFECT FUTURE RESULTS
On March 2, 2000, the Federal Trade Commission approved the proposed acquisition
of all outstanding shares of Gibson Greetings Inc. common stock in a cash
transaction estimated at $163 million. The cash tender offer was completed and
the acquisition was closed on March 9, 2000. Initially this transaction will be
financed by short-term commercial paper borrowings however, the Corporation is
exploring long-term financing options. Gibson Greetings Inc. is the No. 3
greeting card company in the industry and provides growth opportunities to the
Corporation's U.S. and international greeting card businesses and its electronic
marketing unit. The Corporation has developed an integration strategy and while
some integration costs are likely over the next year, the full extent of these
costs cannot be quantified at this time. The Corporation expects to realize
significant operating synergies and cost reductions from the Gibson transaction
which is expected to be accretive to earnings in 2002.
The Corporation has maintained a strong customer base in a wide variety of
channels of distribution through its investment in deferred costs related to
agreements with certain retailers and other competitive arrangements. The
agreements have lessened the impact to the Corporation from loss of business due
to the retailer consolidations which continued, to a lesser extent, in 2000.
These agreements have been a strategic element of the Corporation's growth and
the financial condition of the retail customers is continually evaluated and
monitored to reduce risk.
The Corporation has included in the Annual Report certain information other than
historical facts that may constitute "forward-looking" information. Actual
results may differ materially from these projected in the "forward-looking"
statements, including but not limited to the risks discussed above, as well as
retail bankruptcies, a weak retail environment and competitive terms of sale
offered to customers to expand or maintain business. Other risks, which are not
all-inclusive, include the demand for the Corporation's goods and services;
competitive factors in the industries in which the Corporation competes; the
ability to achieve anticipated synergies and other cost savings in connection
with acquisitions; the timing, impact and other uncertainties of future
acquisitions; as well as economic conditions in the various markets served by
the Corporation's operations.
24
<PAGE> 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
DERIVATIVE FINANCIAL INSTRUMENTS - The Corporation does not hold or issue
derivative financial instruments for trading purposes.
INTEREST RATE EXPOSURE - Based on the Corporation's overall interest rate
exposure as of and during the year ended February 29, 2000, a hypothetical 10%
movement in interest rates would not materially affect the Corporation's results
of operations.
FOREIGN CURRENCY EXPOSURE - The Corporation's international operations expose it
to translation risk when the local currency financial statements are translated
into U.S. dollars. As currency exchange rates fluctuate, translation of the
statements of income of international subsidiaries to U.S. dollars could affect
comparability of results between years. The earnings of the Corporation were not
materially affected by exchange rate fluctuations for the years ended February
29, 2000, and February 28, 1999 or 1998. At February 29, 2000, a hypothetical
10% movement in foreign exchange rates would not have a material effect on the
Corporation's results of operations.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", for a discussion of the Corporation's exposure to
foreign currency translation risk.
25
<PAGE> 26
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENT OF INCOME
Years ended February 29, 2000, February 28, 1999 and 1998
Thousands of dollars except per share amounts
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 2,175,236 $ 2,205,706 $ 2,198,765
Costs and expenses:
Material, labor and other production costs 809,347 757,080 790,688
Selling, distribution and marketing 921,392 894,323 876,822
Administrative and general 227,075 228,183 233,457
Non-recurring items 38,873 13,925 (22,125)
Interest 34,255 29,326 22,992
Other expense - net 3,670 1,272 4,494
------------ ------------ ------------
2,034,612 1,924,109 1,906,328
------------ ------------ ------------
Income before income taxes 140,624 281,597 292,437
Income taxes 50,625 101,375 102,353
------------ ------------ ------------
Net income $ 89,999 $ 180,222 $ 190,084
============ ============ ============
Earnings per share $ 1.37 $ 2.56 $ 2.58
============ ============ ============
Earnings per share - assuming dilution $ 1.37 $ 2.53 $ 2.55
============ ============ ============
Average number of shares outstanding 65,591,798 70,345,980 73,708,100
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
February 29, 2000 and February 28, 1999
Thousands of dollars
<TABLE>
<CAPTION>
ASSETS 2000 1999
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 61,010 $ 144,555
Trade accounts receivable, less allowances for
sales returns of $116,792 ($132,103 in 1999) and
for doubtful accounts of $19,245 ($15,583 in 1999) 430,825 390,740
Inventories 249,433 251,289
Deferred and refundable income taxes 99,709 133,092
Prepaid expenses and other 259,707 226,142
---------- ----------
Total current assets 1,100,684 1,145,818
GOODWILL 149,437 135,516
OTHER ASSETS 820,447 703,188
PROPERTY, PLANT AND EQUIPMENT - NET 447,415 434,806
---------- ----------
$2,517,983 $2,419,328
========== ==========
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Debt due within one year $ 109,694 $ 17,777
Accounts payable and accrued liabilities 213,180 175,366
Accrued compensation and benefits 84,456 89,284
Dividends payable 25,808 26,337
Income taxes 13,090 27,165
Other current liabilities 136,260 81,745
----------- -----------
Total current liabilities 582,488 417,674
LONG-TERM DEBT 442,102 463,246
OTHER LIABILITIES 195,985 142,045
DEFERRED INCOME TAXES 44,997 49,752
SHAREHOLDERS' EQUITY Common shares - par value $1:
Class A - 71,736,804 shares issued
less 11,863,921 Treasury shares in 2000
and 71,717,174 shares issued less
7,283,846 Treasury shares in 1999 59,873 64,433
Class B - 6,066,096 shares issued
less 1,418,762 Treasury shares in 2000
and 6,066,096 shares issued less
1,405,711 Treasury shares in 1999 4,647 4,660
Capital in excess of par value 304,946 304,086
Treasury stock (445,758) (320,492)
Accumulated other comprehensive loss (27,572) (23,565)
Retained earnings 1,356,275 1,317,489
----------- -----------
Total shareholders' equity 1,252,411 1,346,611
----------- -----------
$ 2,517,983 $ 2,419,328
=========== ===========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended February 29, 2000, February 28, 1999 and 1998
<TABLE>
<CAPTION>
Thousands of dollars 2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 89,999 $ 180,222 $ 190,084
Adjustments to reconcile to net cash
provided by operating activities:
Non-recurring items 30,704 5,544 (22,125)
Depreciation 64,342 67,049 65,926
Deferred and refundable income taxes 54,248 (8,940) (20,186)
Changes in operating assets and liabilities,
net of effects from divestiture and acquisitions:
Increase in trade accounts receivable (35,883) (10,450) (20,567)
Decrease in inventories 11,655 17,809 5,915
Increase in other current assets (52,061) (3,271) (4,232)
Increase in deferred costs - net (5,640) (65,588) (15,043)
(Decrease) increase in accounts payable and other liabilities (689) 24,211 10,402
Other - net 11,844 4,682 5,018
--------- --------- ---------
Cash Provided by Operating Activities 168,519 211,268 195,192
INVESTING ACTIVITIES:
Business (acquisitions) divestiture (65,947) (52,957) 82,000
Property, plant and equipment additions (50,753) (60,950) (67,898)
Proceeds from sale of fixed assets 1,490 2,522 2,148
Investment in corporate-owned life insurance 2,746 18,413 (6,358)
Other (25,183) 8,040 2,057
--------- --------- ---------
Cash (Used) Provided by Investing Activities (137,647) (84,932) 11,949
FINANCING ACTIVITIES:
Increase in long-term debt 1,076 317,096 9,430
Reduction of long-term debt (16,397) (22,669) (6,988)
Increase (decrease) in short-term debt 81,097 (158,657) 8,049
Sale of stock under benefit plans 1,171 18,981 16,915
Purchase of treasury shares (130,151) (131,745) (170,015)
Dividends to shareholders (51,213) (52,410) (51,959)
--------- --------- ---------
Cash Used by Financing Activities (114,417) (29,404) (194,568)
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (83,545) 96,932 12,573
Cash and Equivalents at Beginning of Year 144,555 47,623 35,050
--------- --------- ---------
Cash and Equivalents at End of Year $ 61,010 $ 144,555 $ 47,623
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended February 29, 2000, February 28, 1999 and 1998
Thousands of dollars except per share amounts
<TABLE>
<CAPTION>
Common Shares Capital in
---------------------- Excess of Treasury
Class A Class B Par Value Stock
-------------------------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE MARCH 1, 1997 $70,594 $4,388 $272,262 $(34,850)
Net income
Other comprehensive income:
Foreign currency translation adjustment
Comprehensive income
Cash dividends - $0.71 per share
Exchange of shares 107 (107)
Sale of shares under benefit
plans, including tax benefits 713 33 18,386 438
Purchase of treasury shares (4,510) (45) (166,105)
Sale of treasury shares 9 172 137
----------- ---------- ------------ -------------
BALANCE FEBRUARY 28, 1998 66,904 4,278 290,820 (200,380)
Net income
Other comprehensive income:
Foreign currency translation adjustment
Unrealized gain on available-for-sale securities
(net of tax of $3,360)
Comprehensive income
Issuance of shares to trust
Cash dividends - $0.94 per share
Exchange of shares 40 (40)
Sale of shares under benefit
plans, including tax benefits 395 574 13,033 8,403
Purchase of treasury shares (2,906) (162) (128,677)
Sale of treasury shares 10 233 162
----------- ---------- ------------ -------------
BALANCE FEBRUARY 28, 1999 64,433 4,660 304,086 (320,492)
Net income
Other comprehensive income:
Foreign currency translation adjustment
Unrealized loss on available-for-sale securities
(net of tax of $1,131)
Comprehensive income
Cash dividends - $0.80 per share
Exchange of shares 23 (23)
Sale of shares under benefit
plans, including tax benefits 20 2 826 122
Purchase of treasury shares (4,603) (6) (125,556)
Sale of treasury shares 14 34 168
----------- ---------- ------------ -------------
BALANCE FEBRUARY 29, 2000 $59,873 $4,647 $304,946 $(445,758)
=========== ========== ============ =============
<CAPTION>
Accumulated
Shares Deferred Other
Held Compensation Comprehensive Retained
In Trust Plans Income (Loss) Earnings Total
------------ ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE MARCH 1, 1997 $(19,646) $1,068,907 $1,361,655
Net income 190,084 190,084
Other comprehensive income:
Foreign currency translation adjustment (3,791) (3,791)
------------
Comprehensive income 186,293
Cash dividends - $0.71 per share (51,959) (51,959)
Exchange of shares
Sale of shares under benefit
plans, including tax benefits 19,570
Purchase of treasury shares (170,660)
Sale of treasury shares 318
------------ ------------- ------------
BALANCE FEBRUARY 28, 1998 (23,437) 1,207,032 1,345,217
Net income 180,222 180,222
Other comprehensive income:
Foreign currency translation adjustment (6,819) (6,819)
Unrealized gain on available-for-sale securities
(net of tax of $3,360) 6,691 6,691
------------
Comprehensive income 180,094
Issuance of shares to trust $(20,480) $20,480 -
Cash dividends - $0.94 per share (65,935) (65,935)
Exchange of shares
Sale of shares under benefit
plans, including tax benefits (3,830) 18,575
Purchase of treasury shares (131,745)
Sale of treasury shares 405
------------ ----------- ------------ ------------- ------------
BALANCE FEBRUARY 28, 1999 (20,480) 20,480 (23,565) 1,317,489 1,346,611
Net income 89,999 89,999
Other comprehensive income:
Foreign currency translation adjustment (1,744) (1,744)
Unrealized loss on available-for-sale securities
(net of tax of $1,131) (2,263) (2,263)
------------
Comprehensive income 85,992
Cash dividends - $0.80 per share (51,213) (51,213)
Exchange of shares
Sale of shares under benefit
plans, including tax benefits 970
Purchase of treasury shares (130,165)
Sale of treasury shares 216
------------ ----------- ------------ ------------- ------------
BALANCE FEBRUARY 29, 2000 $(20,480) $20,480 $(27,572) $1,356,275 $1,252,411
============ =========== ============ ============= ============
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 29, 2000 and February 28, 1999 and 1998
Thousands of dollars except per share amounts
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts of the
Corporation and its subsidiaries. All significant intercompany accounts and
transactions are eliminated. The Corporation's wholly-owned subsidiary,
AmericanGreetings.com, Inc., is consolidated on a two-month lag corresponding
with its fiscal year-end of December 31.
Reclassifications: Certain amounts in the prior year financial statements have
been reclassified to conform with the 2000 presentation.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash Equivalents: The Corporation considers all highly liquid instruments
purchased with a maturity of less than three months to be cash equivalents.
Financial Instruments: The carrying value of the Corporation's financial
instruments approximate their fair market values, other than the fair value of
the Corporation's publicly-traded debt. See Note H.
Concentration of Credit Risks: The Corporation sells primarily to customers in
the retail trade, including those in the mass merchandiser, drug store,
supermarket and other channels of distribution. These customers are located
throughout the United States, Canada, the United Kingdom, Australia, New
Zealand, France, Mexico, South Africa, Malaysia, Hong Kong and Singapore. Sales
to the Corporation's five largest customers accounted for approximately 33% and
32% of net sales in 2000 and 1999, respectively. Sales to one customer accounted
for 10% of net sales in 2000.
The Corporation conducts business based on periodic evaluations of its
customers' financial condition and generally does not require collateral. While
the competitiveness of the retail industry presents an inherent uncertainty, the
Corporation does not believe a significant risk of loss from a concentration of
credit exists.
Inventories: Finished products, work in process and raw material inventories are
carried at the lower of cost or market. The last-in, first-out (LIFO) cost
method is used for the majority of the domestic inventories. The foreign
subsidiaries principally use the first-in, first-out method. Display material
and factory supplies are carried at average cost.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Life Insurance: The Corporation's investment in corporate-owned
life insurance policies is recorded in other assets net of policy loans. The net
life insurance expense, including interest expense, is included in
administrative and general expenses in the Consolidated Statement of Income. The
related interest expense, which approximates amounts paid, was $40,564, $54,670
and $59,642 in 2000, 1999 and 1998, respectively.
Goodwill: Goodwill represents the excess of purchase price over the estimated
fair value of net assets acquired and is amortized on a straight-line basis over
a period of 40 years for goodwill associated with the social expression product
segment and 15 years for goodwill associated with all other businesses.
Accumulated amortization of goodwill at February 29, 2000 and February 28, 1999
was $25,908 and $20,851, respectively. Goodwill is reviewed annually for
impairment in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of " (SFAS No. 121).
Translation of Foreign Currencies: Asset and liability accounts are translated
into U.S. dollars using exchange rates in effect at the date of the consolidated
balance sheet; revenue and expense accounts are translated at average monthly
exchange rates. Translation adjustments are reflected as a component of
shareholders' equity. For subsidiaries operating in highly inflationary
economies, both historical and current exchange rates are used in translating
balance sheet accounts, and translation adjustments are included in net income.
Property and Depreciation: Property, plant and equipment are carried at cost.
Depreciation and amortization of buildings, equipment and fixtures is computed
principally by the straight-line method over the useful lives of the various
assets. The cost of buildings is depreciated over 25 to 40 years and equipment
and fixtures over 3 to 20 years. Property, plant and equipment are reviewed
annually for impairment in accordance with SFAS No. 121.
Revenue Recognition: Sales and related costs are recorded by the Corporation
upon shipment of products to non-related retailers and upon the sale of products
at Corporation-owned retail locations. Seasonal cards are sold with the right of
return on unsold merchandise. The Corporation provides for estimated returns of
seasonal cards when those products are shipped to non-related retailers.
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
among other guidance, clarifies the Staff's views on various revenue recognition
and reporting matters. As a result, effective March 1, 2000, the Corporation
will adopt a change in its method of accounting for certain shipments of
seasonal product. The implementation of this change will be 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 will be a one-time non-cash
reduction to the Corporation's earnings of approximately $21,000 in fiscal 2001.
Had this change been adopted effective March 1, 1999, fiscal 2000 net sales and
earnings before the cumulative effect of this accounting change would not have
been materially impacted.
While the effect of the change may impact future quarterly results, it will not
impact the Corporation's reported cash flows, and is not expected to have a
material impact on fiscal 2001 income before the cumulative effect or fiscal
2001 net sales.
Advertising Expense: Advertising costs are expensed as incurred. Advertising
expense was $76,879, $67,369 and $61,062 in 2000, 1999 and 1998, respectively.
Other Expense - Net: Other expense - net consists primarily of costs to convert
the Corporation's computer systems to be Year 2000 compliant, amortization of
goodwill, foreign exchange gains and losses, gains and losses on asset
disposals, and royalty and interest income.
Income Taxes: Deferred income taxes are provided for temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Stock-Based Compensation: The Corporation has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its employee stock options. Because
the exercise price of the Corporation's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. The Corporation has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation".
New Pronouncements: In June 1998, SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", was issued. This standard, which
establishes new accounting and reporting standards for derivative financial
instruments, must be adopted no later than the fiscal quarter beginning March 1,
2001. The Corporation is currently analyzing the effect of this standard and
does not expect it to have a material effect on the Corporation's consolidated
financial position, results of operations or cash flows.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - NON-RECURRING ITEMS AND SPECIAL CHARGES
During the quarter ended February 29, 2000, the Corporation recorded a
restructuring charge of $6,126 ($4,849 net of tax, or earnings per share of
$0.08) related to various foreign operations. The primary component of this
charge was for the rationalization of various warehouse, distribution and
manufacturing facilities in the United Kingdom. The balance of the charge is
composed of costs associated with the integration of Mexican manufacturing in
the United States and the realignment of various business functions in
Australia.
During the second quarter ended August 31, 1999, the Corporation recorded a
restructuring charge of $32,747. The primary components of this charge were
costs associated with the shutdown of the Corporation's Canadian manufacturing
and distribution operations, including employee severance and benefit
termination costs and the costs of closing down the facilities used for those
operations. In addition, the Corporation recorded a charge of $7,682 during the
period to write down inventory in the Canadian operations. This amount is
classified as material, labor and other production costs. The total impact of
the restructuring and inventory charges net of tax was $24,224, or $0.36 per
share.
During the quarter ended November 30, 1998, the Corporation recorded a
restructuring charge of $13,925 ($8,342 net of tax, or earnings per share of
$0.12). The primary components of this charge were employee severance and
termination benefit costs. The balance of the charge is comprised of costs
associated with exiting the Corporation's kiosk business and lease exit costs
due to the closure of certain sales offices.
34
<PAGE> 35
The following table summarizes the provisions, payments and remaining reserves
associated with the restructure charges recorded in both 2000 and 1999.
<TABLE>
<CAPTION>
Facility Kiosk Lease
Termination Shut-Down Exit Exit Other
Benefits Costs Costs Costs Costs Total
----------- ----------- -------- -------- -------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Provision in 1999 $8,644 $4,618 $663 $13,925
Cash expenditures (5,019) (5,019)
Non-cash charges (3,362) (3,362)
----------- -------- -------- ---------
Balance February 28, 1999 3,625 1,256 663 5,544
Provision in 2000 31,018 $4,634 $2,108 1,113 38,873
Activity relating to 1999
Provision:
Cash expenditures (3,645) (620) (469) (4,734)
Non-cash charges (588) (588)
Change in estimate 162 (162)
Activity relating to 2000
Provision:
Cash expenditures (1,646) (454) (930) (3,030)
Non-cash charges (4,358) (99) (162) (519) (5,138)
----------- ----------- -------- -------- -------- ---------
Balance February 29, 2000 $25,156 $4,081 $48 $1,016 $626 $30,927
=========== =========== ======== ======== ======== =========
</TABLE>
At February 29, 2000 and February 28, 1999, $30,927 and $5,544, respectively,
was included in accounts payable and accrued liabilities representing the
portion of the restructuring charge not yet expended.
On August 12, 1997, the Corporation divested the net assets of two subsidiaries,
Acme Frame Products, Inc., a manufacturer and distributor of picture frames, and
Wilhold, Inc., a manufacturer and distributor of hair accessories. As a result
of the transaction, the Corporation recorded a one-time pre-tax gain of $22,125
($13,192 net of tax, or earnings per share of $0.18).
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - EARNINGS PER SHARE
The following table sets forth the computation of earnings per share and
earnings per share - assuming dilution:
<TABLE>
<CAPTION>
2000 1999 1998
---------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income for earnings per share and earnings
per share - assuming dilution $89,999 $180,222 $190,084
========== ======== ========
Denominator (thousands):
Denominator for earnings per share
- weighted average shares outstanding 65,592 70,346 73,708
Effect of dilutive securities - stock options - 758 838
---------- -------- --------
Denominator for earnings per share - assuming dilution
- adjusted weighted average shares outstanding 65,592 71,104 74,546
========== ======== ========
Earnings per share $1.37 $2.56 $2.58
========== ======== ========
Earnings per share - assuming dilution $1.37 $2.53 $2.55
========== ======== ========
</TABLE>
Certain stock options have been excluded for the year ended February 29, 2000
because they would have been antidilutive.
NOTE D - COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) consists of the following
components:
<TABLE>
<CAPTION>
Foreign Unrealized Gains Accumulated
Currency (Losses) on Other
Translation Available-For-Sale Comprehensive
Adjustments Securities Income (Loss)
-------------- ------------------ --------------
<S> <C> <C> <C>
Balance at March 1, 1997 $(19,646) $(19,646)
Other comprehensive loss (3,791) (3,791)
-------- --------
Balance at February 28, 1998 (23,437) (23,437)
Other comprehensive income (loss) (6,819) $6,691 (128)
-------- -------- --------
Balance at February 28, 1999 (30,256) 6,691 (23,565)
Other comprehensive loss (1,744) (2,263) (4,007)
-------- -------- --------
Balance at February 29, 2000 $(32,000) $4,428 $(27,572)
======== ======== ========
</TABLE>
Gross unrealized holding gains on available-for-sale securities as of February
29, 2000 and February 28, 1999 are $6,657 and $10,051, respectively.
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - INVENTORIES
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Raw material $ 38,218 $ 37,745
Work in process 27,099 25,523
Finished products 229,887 229,220
------------- -------------
295,204 292,488
Less LIFO reserve 90,343 89,207
------------- -------------
204,861 203,281
Display material and factory supplies 44,572 48,008
-------------
-------------
$249,433 $251,289
============= =============
</TABLE>
NOTE F - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Land $ 14,589 $ 11,288
Buildings 307,713 281,726
Equipment and fixtures 696,819 665,609
------------- -------------
1,019,121 958,623
Less accumulated depreciation 571,706 523,817
------------- -------------
$ 447,415 $ 434,806
============= =============
</TABLE>
37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - 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.
At February 29, 2000 and February 28, 1999, deferred costs and future payment
commitments are included in the following financial statement captions:
2000 1999
------------- -------------
Prepaid expenses and other $ 200,517 $ 192,619
Other assets 679,214 595,136
Other current liabilities (118,250) (81,745)
Other liabilities (163,865) (113,799)
------------- -------------
$ 597,616 $ 592,211
============= =============
38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - LONG AND SHORT-TERM DEBT
On July 27, 1998, the Corporation issued $300,000 of 30-year senior notes with a
6.10% coupon rate under its $600,000 shelf registration with the Securities and
Exchange Commission. The majority of the proceeds were used to retire commercial
paper and other short-term debt, with the remainder used for other general
corporate purposes and short-term investments. The fair value of the
Corporation's publicly traded debt, based on quoted market prices, was $267,000
at February 29, 2000.
On August 7, 1998, the Corporation entered into a multi-currency credit facility
to provide liquidity and working capital financing for the Corporation and its
subsidiaries in the United States, Canada, the United Kingdom, Australia, New
Zealand and France. The aggregate availability under this facility is
approximately $718,000 of which approximately $627,000 is available at February
29, 2000. The United States portion and one-half of the Canadian portion of the
facilities, totaling $501,735, mature on August 3, 2000. The balance of the
facility matures on August 7, 2003. The United States portion and one half of
the Canadian portion of the facility are annually renewable for additional
364-day periods and are convertible to term loans with a maturity of August 7,
2003. A facility fee is due on the aggregate amount of the facility and can vary
with the Corporation's debt rating. At February 29, 2000, the facility fee is
0.075% for the non-364 day portion of the facility and 0.080% for the 364-day
portion.
The borrowings of the Corporation in Canada consist solely of commercial paper.
At February 29, 2000, commercial paper borrowings were $68,227, which are
classified as long-term. The commercial paper borrowings are supported by the
multi-currency credit facility described above.
The Corporation's subsidiaries in Mexico and South Africa have credit agreements
permitting borrowings of up to $2,106. At February 29, 2000, $1,263 is
outstanding under these foreign revolving credit facilities.
All of the Corporation's revolving credit and term loan agreements provide for
various borrowing alternatives in their respective currencies with interest
rates generally ranging from 5.0% to 9.0% for amounts borrowed as of February
29, 2000.
At February 29, 2000 and February 28, 1999, debt due within one year consists of
the following:
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
Current maturities of long-term debt $ 1,016 $ 968
Foreign revolving credit facilities 1,263 1,250
--------------- ---------------
Aggregate current maturities 2,279 2,218
Commercial paper 101,716 15,504
Other short-term debt 5,699 55
--------------- ---------------
$ 109,694 $ 17,777
=============== ===============
</TABLE>
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - LONG AND SHORT-TERM DEBT (CONTINUED)
At February 29, 2000 and February 28, 1999, long-term debt consists of the
following:
<TABLE>
<CAPTION>
2000 1999
------------ -------------
<S> <C> <C>
Revolving credit, commercial paper and
term loan agreements $132,524 $154,674
Notes payable 311,294 310,145
Other 563 645
------------ -------------
444,381 465,464
Less current maturities 2,279 2,218
------------ -------------
$442,102 $463,246
============ =============
</TABLE>
Aggregate maturities of long-term debt are as follows:
2001 $ 2,279
2002 12,377
2003 175
2004 131,435
2005 175
Thereafter 297,940
--------------
$444,381
==============
At February 29, 2000, the Corporation had credit arrangements to support the
issuance of letters of credit in the amount of $73,474 with $24,744 of open
credits outstanding.
Interest paid on short-term and long-term debt was $34,051 in 2000, $27,831 in
1999 and $22,735 in 1998.
The weighted average interest rate on short-term borrowings outstanding was 5.4%
and 5.1% as of February 29, 2000 and February 28, 1999, respectively.
40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - RETIREMENT PLANS
The Corporation has a non-contributory profit-sharing plan with a contributory
401(k) provision covering most of its United States employees. Contributions to
the profit-sharing plan were $11,858, $22,687 and $23,850 for 2000, 1999 and
1998, respectively. The Corporation matches a portion of 401(k) employee
contributions contingent upon meeting specified annual operating results goals.
The Corporation's matching contributions were $4,517, $4,622 and $2,802 for
2000, 1999 and 1998, respectively.
The Corporation also has several defined benefit and defined contribution
pension plans covering certain employees in foreign countries. The cost of these
plans was not material in any of the years presented. In the aggregate, the
actuarially computed plan benefit obligation approximates the fair value of the
plan assets.
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation sponsors a defined benefit health care plan that provides
postretirement medical benefits to full-time United States employees who are age
65 or over at retirement with 15 or more years of service and who were hired on
or before December 31, 1991. In addition, for retirements on or after January 2,
1992 the retiree must have been continuously enrolled for health care for a
minimum of five years or since January 2, 1992. The plan is contributory, with
retiree contributions adjusted periodically, and contains other cost-sharing
features such as deductibles and coinsurance. The Corporation maintains a trust
for the payment of retiree health care benefits. This trust is funded at the
discretion of management.
<TABLE>
<CAPTION>
2000 1999
------------ -------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $75,276 $ 63,677
Service cost 2,327 1,817
Interest cost 5,637 4,702
Actuarial losses 1,961 9,183
Benefit payments (4,749) (4,103)
------------ ------------
Benefit obligation at end of year 80,452 75,276
------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year 44,714 39,760
Actual return on plan assets 2,178 3,072
Contributions 5,126 5,985
Benefit payments (4,749) (4,103)
------------ ------------
Fair value of plan assets at year end 47,269 44,714
------------ ------------
Funded status as of February 29 or 28 (33,183) (30,562)
Unrecognized loss 23,215 21,774
------------- -------------
Accrued benefit cost recognized in the consolidated
statement of financial position $(9,968) $ (8,788)
============= =============
</TABLE>
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Components of net periodic benefit cost:
Service cost $ 2,327 $ 1,817
Interest cost 5,637 4,702
Expected return on plan assets (3,441) (3,064)
Amortization of actuarial loss 1,784 716
-------- --------
Net periodic benefit cost $ 6,307 $ 4,171
======== ========
Weighted average assumptions as of February 29 or 28:
Discount rate 7.50% 6.75%
Expected long-term return on plan assets 8.00% 8.00%
Health care cost trend rate 5.00% 5.00%
Effect of a 1% increase in health care cost trend rate on:
Service cost plus interest cost $ 1,522 $ 1,295
Accumulated postretirement benefit obligation 13,642 13,447
Effect of a 1% decrease in health care cost trend rate on:
Service cost plus interest cost $ (1,202) $ (1,015)
Accumulated postretirement benefit obligation (10,980) (10,726)
</TABLE>
43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - LONG-TERM LEASES AND COMMITMENTS
The Corporation is committed under noncancelable operating leases for commercial
properties (certain of which have been subleased) and equipment, terms of which
are generally less than 25 years. Rental expense under operating leases for the
years ended February 29, 2000, February 28, 1999 and 1998 follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- ------------
<S> <C> <C> <C>
Gross rentals $59,876 $58,616 $57,320
Less sublease rentals 3,638 4,470 4,985
------------ ----------- ------------
Net rental expense $56,238 $54,146 $52,335
============ =========== ============
</TABLE>
At February 29, 2000, future minimum rental payments for noncancelable operating
leases, net of aggregate future minimum noncancelable sublease rentals, follow:
Gross Rentals:
2001 $ 48,164
2002 41,086
2003 33,801
2004 27,973
2005 21,955
Later years 52,567
-------------
225,546
Sublease rentals (14,623)
-------------
Net rentals $ 210,923
=============
The Corporation's wholly-owned subsidiary, AmericanGreetings.com, Inc., has
entered into several online distribution relationship agreements with various
Internet business partners. Under the terms of these agreements, the following
minimum amounts are due to be paid as follows:
Year ending February 28 or 29:
------------------------------
2001 $ 24,950
2002 25,988
2003 25,000
2004 15,000
-------------
$ 90,938
=============
44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - COMMON SHARES AND STOCK OPTIONS
At February 29, 2000 and February 28, 1999, common shares authorized consisted
of 187,600,000 Class A and 15,832,968 Class B shares.
Class A shares have one vote per share and Class B shares have ten votes per
share. There is no public market for the Class B common shares of the
Corporation. Pursuant to the Corporation's Amended Articles of Incorporation, a
holder of Class B common shares may not transfer such Class B common shares
(except to permitted transferees, a group that generally includes members of the
holder's extended family, family trusts and charities) unless such holder first
offers such shares to the Corporation for purchase at the most recent closing
price for the Corporation's Class A common shares. If the Corporation does not
purchase such Class B common shares, the holder must convert such shares, on a
share for share basis, into Class A common shares prior to any transfer.
Under the Corporation's Stock Option Plans, options to purchase Class A and
Class B shares are granted to directors, officers and other key employees at the
then-current market price. In general, subject to continuing employment, options
become exercisable commencing one year after date of grant in four annual
installments and expire over a period of not more than ten years from the date
of grant. The options granted to non-employee directors become exercisable in
six installments over five years.
The Corporation has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Corporation's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Corporation had accounted for its
employee stock options issued subsequent to February 28, 1995 under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using the Black-Scholes option pricing model.
45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - COMMON SHARES AND STOCK OPTIONS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The pro forma
information for stock options indicates decreases in net income of $8,520 in
2000, $3,248 in 1999 and $4,931 in 1998. The pro forma information and related
assumptions under the Black-Scholes method follow:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
Net income $ 81,479 $176,974 $185,153
Earnings per share $ 1.24 $ 2.52 $ 2.51
Earnings per share - assuming dilution $ 1.24 $ 2.49 $ 2.48
Assumptions:
Risk-free interest rate 5.4% 5.4% 6.1%
Dividend yield 3.2% 1.6% 2.0%
Expected stock volatility 0.41 0.27 0.26
Expected life in years:
Grant date to exercise date 5.7 5.6 5.6
Vest date to exercise date 2.4 2.4 2.3
</TABLE>
46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - COMMON SHARES AND STOCK OPTIONS (CONTINUED)
Stock option transactions and prices are summarized as follow:
<TABLE>
<CAPTION>
Number of Options Weighted-Average Exercise Price Per Share
---------------------------- -------------------------------------------------
Class A Class B Class A Class B
------------ ------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Options outstanding
February 28, 1997 1,956,383 912,512 $ 23.57 $ 14.42
Granted 1,453,677 470,000 30.45 29.50
Exercised (616,675) (33,500) 21.14 19.85
Cancelled (182,250) - 28.96 -
------------ ------------
Options outstanding
February 28, 1998 2,611,135 1,349,012 $ 27.58 $ 19.54
Granted 189,850 596 45.73 48.06
Exercised (395,754) (573,422) 25.54 9.07
Cancelled (127,200) (7,000) 30.25 26.13
------------ ------------
Options outstanding
February 28, 1999 2,278,031 769,186 $ 29.18 $ 27.30
Granted 3,648,950 - 23.81 -
Exercised (20,800) (2,000) 20.28 19.25
Cancelled (293,000) (1,000) 26.09 26.13
------------ ------------
Options outstanding
February 29, 2000 5,613,181 766,186 $ 25.87 $ 27.32
============ ============
Options exercisable at February 29 or 28:
2000 1,709,281 649,436 $ 27.47 $ 26.93
1999 1,235,331 490,936 26.23 26.23
1998 1,077,035 902,262 24.42 14.84
</TABLE>
The weighted average remaining contractual life of the options outstanding as of
February 29, 2000 is 7.4 years.
47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - COMMON SHARES AND STOCK OPTIONS (CONTINUED)
Range of exercise prices for options outstanding:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------- ----------------------------
Weighted-
Weighted- Weighted- Average
Average Average Remaining
Exercise Optioned Exercise Optioned Exercise Contractual
Price Ranges Shares Price Shares Price Life (Years)
- -------------------- ------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
$15.75 - 19.25 435,250 $19.12 410,550 $19.18 2.3
19.81 - 23.56 3,061,800 23.55 102,700 23.25 8.6
23.69 - 26.00 261,500 24.47 47,800 25.01 8.3
26.06 - 27.25 692,792 27.15 676,492 27.17 5.9
27.50 - 29.44 173,687 28.45 61,487 28.42 7.6
29.50 - 29.50 1,338,442 29.50 893,892 29.50 6.5
29.88 - 48.50 392,146 38.33 174,246 37.49 7.6
50.00 - 50.00 16,000 50.00 4,000 50.00 8.3
50.25 - 50.25 7,600 50.25 2,600 50.25 8.1
51.63 - 51.63 150 51.63 150 51.63 8.3
------------- ------------
6,379,367 2,373,917
============= ============
</TABLE>
48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - BUSINESS SEGMENT INFORMATION
The Corporation is organized and managed according to a number of factors,
including product categories, geographic locations and channels of distribution.
The Social Expression Products segment primarily designs, manufactures and sells
greeting cards and other products through various channels of distribution with
mass retailers as the primary channel. 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 one
reportable segment. These operating divisions have similar economic
characteristics, products, production processes, types of customers and
distribution methods.
AmericanGreetings.com is a web-based provider of greetings and other social
communication content to consumers and web-based businesses.
The Corporation's non-reportable operating segments include the design,
manufacture and sale of promotional Christmas product, non-prescription reading
glasses, educational materials and display fixtures; and the sale of both the
Corporation's products and other products through retail stores.
The Corporation evaluates segment performance based on earnings before foreign
currency exchange gains or losses, interest income, interest expense and income
taxes. Centrally incurred and managed costs and non-recurring items are not
allocated back to the operating segments. The accounting policies of the
reportable segments are the same as those described in Note A - Significant
Accounting Policies, except those that are related to LIFO or applicable to only
corporate items.
Intersegment sales are recorded at wholesale prices. Intersegment sales and
profits are eliminated in consolidation. All inventories resulting from
intersegment sales are carried at cost.
The reporting and evaluation of segment assets include net accounts receivable,
inventory on a "first-in, first-out" basis, display materials and factory
supplies, prepaid expenses, other assets (including net deferred costs), and net
property, plant and equipment.
Segment results are reported and evaluated at consistent exchange rates between
years to eliminate the impact of foreign currency fluctuations. An exchange rate
adjustment is included in the reconciliation of the segment results to the
consolidated results; this adjustment represents the impact on the segment
results of the difference between the exchange rates used for segment reporting
and evaluation and the actual exchange rates for the periods presented.
49
<PAGE> 50
Operating Segment Information
- -----------------------------
<TABLE>
<CAPTION>
Net Sales Earnings
----------------------------------- --------------------------------
2000 1999 1998 2000 1999 1998
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Social Expressions Products $1,742,993 $1,829,397 $1,761,814 $340,471 $446,663 $415,167
Intersegment items (84,822) (80,264) (77,346) (59,486) (56,533) (51,849)
---------- ---------- ---------- -------- -------- --------
Net 1,658,171 1,749,133 1,684,468 280,985 390,130 363,318
AmericanGreetings.com 14,345 7,577 1,314 (20,373) 3,794 1,099
Non-reportable segments 498,687 440,445 479,930 50,635 44,105 29,178
Non-recurring items - - - (46,387) (13,925) 22,125
Exchange rate adjustment 4,033 8,551 33,053 (631) 883 2,908
Unallocated items - net - - - (123,605) (143,390) (126,191)
---------- ---------- ---------- -------- -------- --------
Consolidated $2,175,236 $2,205,706 $2,198,765 $140,624 $281,597 $292,437
========== ========== ========== ======== ======== ========
<CAPTION>
Assets Depreciation Capital Expenditures
------------------------------------ ------------------------------- ----------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---------- ---------- ---------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Social Expressions Products $1,671,288 $1,672,557 $1,520,391 $40,940 $42,689 $39,676 $25,666 $43,907 $45,984
AmericanGreetings.com 31,663 13,309 7,695 1,133 694 702 3,762 401 228
Non-reportable segments 308,346 261,128 284,956 22,233 23,370 24,893 21,103 17,152 21,836
Unallocated and intersegment 503,032 469,016 321,428 (140) (98) 1,627 - - -
items
Exchange rate adjustment 3,654 3,318 26,994 176 394 (972) 222 (510) (150)
---------- ---------- ---------- ------- ------- ------- ------- ------- -------
Consolidated $2,517,983 $2,419,328 $2,161,464 $64,342 $67,049 $65,926 $50,753 $60,950 $67,898
========== ========== ========== ======= ======= ======= ======= ======= =======
</TABLE>
Other Information
- -----------------
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Product Information
Everyday greeting cards $976,922 $1,051,374 $1,010,857
Seasonal greeting cards 438,921 450,611 466,761
Gift wrapping and wrap 301,131 301,517 309,763
accessories
All other 458,262 402,204 411,384
---------- ---------- ----------
Consolidated Net Sales $2,175,236 $2,205,706 $2,198,765
========== ========== ==========
</TABLE>
Geographic Information
<TABLE>
<CAPTION>
Net Sales Fixed Assets - Net
----------------------------------- -----------------------------------
2000 1999 1998 2000 1999 1998
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States $1,751,686 $1,819,857 $1,864,368 $371,622 $363,802 $371,733
Foreign 423,550 385,849 334,397 75,793 71,004 75,899
---------- ---------- ---------- -------- -------- --------
Consolidated $2,175,236 $2,205,706 $2,198,765 $447,415 $434,806 $447,632
========== ========== ========== ======== ======== ========
</TABLE>
50
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - INCOME TAXES
Income (loss) before income taxes:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
United States $ 135,039 $ 300,411 $ 298,817
Foreign 5,585 (18,814) (6,380)
------------- ------------ ------------
$ 140,624 $ 281,597 $ 292,437
============= ============ ============
</TABLE>
Income taxes (benefit) have been provided as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 3,029 $ 111,736 $ 107,135
Foreign (9,082) (18,423) (6,873)
State and local 1,197 16,977 21,318
------------- ------------ ------------
(4,856) 110,290 121,580
Deferred (principally federal) 55,481 (8,915) (19,227)
------------- ------------ ------------
$ 50,625 $ 101,375 $ 102,353
============= ============ ============
</TABLE>
Significant components of the Corporation's deferred tax assets and liabilities
at February 29, 2000 and February 28, 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Employee benefit and incentive plans $ 36,781 $ 34,878
Sales returns 2,708 36,924
Other 73,311 98,253
------------ ------------
112,800 170,055
Valuation allowance (9,467) (10,819)
------------ ------------
Total deferred tax assets 103,333 159,236
Deferred tax liabilities:
Depreciation 44,969 47,440
Other 29,374 28,457
------------ ------------
Total deferred tax liabilities 74,343 75,897
------------ ------------
Net deferred tax assets $ 28,990 $ 83,339
============ ============
</TABLE>
The decrease in the valuation allowance was due to decreases in net operating
loss carryforwards in the United Kingdom.
51
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - INCOME TAXES (CONTINUED)
The statutory federal income tax rate and the effective income tax rate are
reconciled as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal tax benefit 3.8 3.7 4.0
Corporate-owned life insurance investments 0.1 (2.9) (3.4)
Foreign differences (2.1) - 0.7
Other (0.8) 0.2 (1.3)
------ ------ ------
Effective tax rate 36.0% 36.0% 35.0%
====== ====== ======
</TABLE>
Income taxes paid were $19,821 in 2000, $102,363 in 1999 and $101,261 in 1998.
Deferred taxes have not been provided on approximately $51,218 of undistributed
earnings of foreign subsidiaries since substantially all of these earnings are
necessary to meet their business requirements. It is not practicable to
calculate the deferred taxes associated with these earnings, however, foreign
tax credits would be available to reduce federal income taxes in the event of
distribution. At February 29, 2000, the Corporation had approximately $44,432 of
foreign operating loss carryforwards, of which $17,155 have no expiration dates
and $27,277 have expiration dates ranging from 2001 through 2010.
The Internal Revenue Service has examined the Corporation's federal income tax
returns for the fiscal years ended 1992 through 1995 and, as part of its
Coordinated Issues Program, has made inquiries related to the Corporation's
corporate-owned life insurance programs. Additional inquiries related to these
programs have been made for years 1996 through 1998 which are currently under
examination. Although no adjustments to taxable income have been proposed, it is
estimated that an unfavorable adjustment, if made, would represent a potential
exposure for tax and interest of approximately $130,000 for years 1992 through
1998. The Corporation plans to vigorously contest any proposed adjustments or
assessments relative to corporate owned life insurance.
52
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - SUBSEQUENT EVENT
On March 2, 2000, the Federal Trade Commission approved the proposed acquisition
of all outstanding shares of Gibson Greetings Inc. common stock in a cash
transaction estimated at $163,000. The cash tender offer was completed and the
acquisition was closed on March 9, 2000.
53
<PAGE> 54
QUARTERLY RESULTS OF OPERATIONS
- -------------------------------
(Unaudited)
Thousands of dollars except per share amounts
The following is a summary of the unaudited quarterly results of operations for
the years ended February 29, 2000 and February 28, 1999:
<TABLE>
<CAPTION>
Quarter Ended
------------ ------------ ----------- -----------
May 31 Aug 31 Nov 30 Feb 29
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Fiscal 2000
- -----------
Net sales $458,757 $477,783 $623,356 $615,340
Gross profit 298,992 288,962 372,583 405,352
Non-recurring charge - 32,747 - 6,126
Net income (loss) 10,847 (26,298) 53,882 51,568
Earnings (loss) per share .16 (.39) .81 .79
Earnings (loss)per share -
assuming dilution .16 (.39) .81 .79
<CAPTION>
Quarter Ended
---------------------------------------------------------
May 31 Aug 31 Nov 30 Feb 28
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Fiscal 1999
- -----------
Net sales $487,908 $479,733 $638,363 $599,702
Gross profit 328,189 309,246 412,032 399,159
Non-recurring gain - - 13,925 -
Net income 33,831 13,925 74,561 57,905
Earnings per share .47 .20 1.06 .83
Earnings per share - assuming dilution .47 .20 1.04 .82
</TABLE>
54
<PAGE> 55
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
American Greetings Corporation
We have audited the accompanying consolidated statement of financial position of
American Greetings Corporation as of February 29, 2000 and February 28, 1999,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended February 29, 2000.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a) 3. These financial statements and schedule are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Greetings
Corporation at February 29, 2000 and February 28, 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended February 29, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 28, 2000
55
<PAGE> 56
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the Corporation's independent auditors
on accounting or financial disclosure matters within the three year period ended
February 29, 2000, or in any period subsequent to such date.
PART III
The Corporation hereby incorporates by reference the information called
for by Part III of Form 10-K from the Corporation's Notice of Annual Meeting of
Shareholders to be held June 23, 2000, and related Proxy Statement filed with
the Securities and Exchange Commission on May 16, 2000.
(Next item is Part IV)
56
<PAGE> 57
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)
1. Financial Statements
--------------------
Included in Part II of this report:
Consolidated Statement of Income -
Years ended February 29, 2000, February 28, 1999 and 1998
Consolidated Statement of Financial Position -
February 29, 2000 and February 28, 1999
Consolidated Statement of Cash Flows - Years ended
February 29, 2000, February 28, 1999 and 1998
Consolidated Statement of Shareholders' Equity - Years
ended February 29, 2000, February 28, 1999 and 1998
Notes to Consolidated Financial Statements - Years ended
February 29, 2000, February 28, 1999 and 1998
Quarterly Results of Operations (Unaudited)
Report of Independent Auditors
2. Exhibits required by Item 601 of Regulation S-K:
------------------------------------------------
(3) Articles of Incorporation and By-laws
(i) Amended Articles of Incorporation of the Registrant
This Exhibit has been previously filed as an
Exhibit to the Registrant's 10-K Annual Report for
the Fiscal year ended February 28, 1999, and is
incorporated herein by reference.
(ii) Amended Regulations of the Registrant
This Exhibit has been previously filed as an
Exhibit to the Registrant's 10-K Annual Report for
the Fiscal year ended February 28, 1999, and is
incorporated herein by reference.
(4) Instruments Defining the Rights of Security Holders,
including indentures
(i) Trust Indenture, dated as of July 27, 1998
This Exhibit has been previously filed as an
Exhibit to the Registrant's 10-K Annual Report for
the Fiscal year ended February 28, 1999, and is
incorporated herein by reference.
57
<PAGE> 58
PART IV - Continued
(ii) Credit Agreement dated as of August 7, 1998.
This Exhibit has been previously filed as an
Exhibit to the Registrant's 10-K Annual Report for
the Fiscal year ended February 28, 1999, and is
incorporated herein by reference.
(10) Material Contracts
(i)(A) (i) Officers' contracts *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form 10-K Annual
Report for the fiscal year ended February 28,
1999, and is incorporated herein by reference.
(ii) Employment Agreement with Edward Fruchtenbaum,
dated January 1, 1998 * This Exhibit has been
previously filed as an Exhibit to the
Registrant's Form 10-K Annual Report for the
fiscal year ended February 28, 1998, and is
incorporated herein by reference.
(ii)(A)(i) Shareholders Agreement dated November 19, 1984 *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form 10-K Annual
Report for the fiscal year ended February 28,
1997, and is incorporated herein by reference.
(ii) Executive Bonus Plan *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form 10-K Annual
Report for the fiscal year ended February 28,
1997, and is incorporated herein by reference.
(iii) Executive Incentive Compensation Plan (as Amended
and Restated as at March 6, 1989) *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form 10-K Annual
Report for the fiscal year ended February 28,
1997, and is incorporated herein by reference.
(iv) Executive Deferred Compensation Plan *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form 10-K Annual
Report for the Fiscal Year ended February 28,
1999, and is incorporated herein by reference.
58
<PAGE> 59
PART IV - Continued
(v) 1982 Incentive Stock Option Plan *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form S-8 Registration
Statement (Registration No. 2-84911) dated July
1, 1983, and is incorporated herein by reference.
(vi) 1985 Incentive Stock Option Plan *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form S-8 Registration
Statement (Registration
No. 33-975) dated November 7, 1985, and is
incorporated herein by reference.
(vii) Supplemental Executive Retirement Plan *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form 10-K Annual
Report for the Fiscal Year ended February 28,
1999, and is incorporated herein by reference.
(viii) 1987 Class B Stock Option Plan
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form S-8 Registration
Statement (Registration No. 33-16180) dated July
31, 1987, and is incorporated herein by
reference.
(ix) Stock Option Agreement with Morry Weiss dated
January 25,1988 *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form 10-K Annual
Report for the fiscal year ended February 28,
1997, and is incorporated herein by reference.
(x) Loan Agreement with Edward Fruchtenbaum dated
March 1,1990 *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form 10-K Annual
Report for the fiscal year ended February 28,
1997, and is incorporated herein by reference.
(xi) 1992 Stock Option Plan *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form S-8 Registration
Statement (Registration No. 33-58582) dated
February 22,1993, and is incorporated herein
by reference.
59
<PAGE> 60
PART IV - Continued
(xii) CEO/COO Compensation Plans *
(xiii) 1995 Director Stock Plan *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form S-8 Registration
Statement (Registration No. 33-61037) dated July
14, 1995, and is incorporated herein by
reference.
(xiv) 1996 Employee Stock Option Plan *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form S-8 Registration
Statement (Registration No. 33-08123) dated July
15, 1996, and is incorporated herein by
reference.
(xv) 1997 Equity and Performance Incentive Plan *
This Exhibit has been previously filed as an
Exhibit to the Registrant's Form 10-K Annual
Report for the fiscal year ended February 28,
1997, and is incorporated herein by reference.
(iii)(A) (i) Agreement to defer stock option gains with Morry
Weiss dated December 15, 1997 *
This Exhibit has been previously filed as an
Exhibit to the Registrant's 10-K Annual Report
for the Fiscal year ended February 28, 1997, and
is incorporated herein by reference.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(27) Financial Data Schedule
Executive Compensation Plans and Arrangements
The Corporation's executive compensation plans and
arrangements are listed under Exhibit 10 hereof and
marked by an asterisk (*).
(b) Reports on Form 8-K
On March 24, 2000, the Corporation filed Form 8-K with
the Securities and Exchange Commission. This filing
reported that the Corporation had completed its
acquisition of Gibson Greetings, Inc. On May 23, 2000,
the Corporation filed Form 8-K/A with the Securities and
Exchange Commission. This filing amended the Form 8-K
filed March 24, 2000 to include the historical and pro
forma information required for the combined entity.
On May 11, 2000, the Corporation filed Form 8-K with the
Securities and Exchange Commission. This filing reported
that the Corporation had adopted a change in its method
of accounting for certain shipments of seasonal product
which carry implied acceptance provisions.
(c) Exhibits listed in Item 14(a) 3. are included herein or
incorporated herein by reference.
60
<PAGE> 61
PART IV - Continued
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted
below.
3. Financial Statement Schedules
-----------------------------
Included in Part IV of the report:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
61
<PAGE> 62
PART IV - Continued
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
------------------------------
(Registrant)
Date: May 26, 2000 By: /s/ Jon Groetzinger, Jr.
-------------- -----------------------------
Jon Groetzinger, Jr.
Secretary
62
<PAGE> 63
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Morry Weiss Chairman of the Board; )
- ------------------------------------ Chief Executive Officer;
Morry Weiss Director )
)
)
/s/ Edward Fruchtenbaum President; )
- ------------------------------------ Chief Operating Officer;
Edward Fruchtenbaum Director )
)
)
/s/ Scott S. Cowen Director )
- ------------------------------------
Scott S. Cowen )
)
/s/ Stephen R. Hardis Director )
- ------------------------------------
Stephen R. Hardis )
)
/s/ Albert B. Ratner Director ) May 26, 2000
- ------------------------------------
Albert B. Ratner )
)
/s/ Harry H. Stone Director )
- ------------------------------------
Harry H. Stone )
)
/s/ Harriet Mouchly-Weiss Director )
- ------------------------------------
Harriet Mouchly-Weiss )
)
/s/ James C. Spira Director )
- ------------------------------------
James C. Spira )
)
/s/ William S. Meyer Senior Vice President; )
- ------------------------------------ Chief Financial Officer
William S. Meyer (principal financial officer) )
)
)
/s/ Patricia L. Ripple Vice President; )
- ------------------------------------ Corporate Controller )
Patricia L. Ripple (principal accounting officer) )
</TABLE>
63
<PAGE> 64
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AMERICAN GREETINGS CORPORATION AND SUBSIDIARIES
(000)
- -----------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
---------------------------------
Balance (1) (2) Balance
at Beginning Charged to Costs Charged to Other at End
Description of Period and Expenses Accounts-Describe Deductions-Describe of Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended February 29, 2000:
Deduction from asset account:
Allowance for doubtful accounts $ 15,583 $ 7,808 $ (9)(A) $ 4,137(B) $ 19,245
======== ======== ======== ======== ========
Allowance for sales returns $132,103 $282,170 $ 1,796 (A) $299,277(C) $116,792
======== ======== ======== ======== ========
Allowance for other assets $ 16,400 $ 0 $ 0 $ 1,500 $ 14,900
======== ======== ======== ======== ========
Year ended February 28, 1999:
Deduction from asset account:
Allowance for doubtful accounts $ 15,661 $ 8,472 $ 91 (A) $ 8,641(B) $ 15,583
======== ======== ======== ======== ========
Allowance for sales returns $135,584 $342,267 $ 308 (A) $346,056(C) $132,103
======== ======== ======== ======== ========
Allowance for other assets $ 16,400 $ 0 $ 0 $ 0 $ 16,400
======== ======== ======== ======== ========
Year ended February 28, 1998:
Deduction from asset account:
Allowance for doubtful accounts $ 15,264 $ 11,585 $ (1,119)(A) $ 10,069(B) $ 15,661
======== ======== ======== ======== ========
Allowance for sales returns $121,856 $337,320 $ (1,040)(A) $322,552(C) $135,584
======== ======== ======== ======== ========
Allowance for other assets $ 16,400 $ 0 $ 0 $ 0 $ 16,400
======== ======== ======== ======== ========
</TABLE>
Note A: Includes translation adjustment on foreign subsidiary balances; business
unit acquisitions for the year ended February 29, 2000 of $440
allowance for doubtful accounts and $1,025 allowance for sales returns;
and other minor reclasses and adjustments.
Note B: Accounts charged off, less recoveries.
Note C: Sales returns charged to the allowance account for actual returns for
the year.
S - 1
<PAGE> 1
Exhibit (10)(ii)(A)(xii)
CEO/COO COMPENSATION PLANS
GENERAL
Several years ago the shareholders approved the plans described below
(the "Plans"). These Plans were established to reward the Company's Chairman and
Chief Executive Officer ("CEO") and President and Chief Operating Officer
("COO") on the basis of the Company's performance. In order for the Company to
be able to deduct for tax purposes all amounts payable to the CEO and the COO
under the Plans in excess of $1,000,000 (the "Compensation Cap"), the Company's
shareholders are required to reapprove the terms of the Plans every fifth year.
If the Plans are not reapproved by the shareholders, the Company will lose the
tax deduction on such excess amounts that the Company expects to pay these
individuals. The terms of both Plans are the same as the One Year Bonus Plan and
Three Year Bonus Plan described above under the caption "Executive Bonus Plans"
in the Report of the Compensation Committee of the Board of Directors on
Executive Compensation, except for the special CEO bonus described below. The
only change in these Plans since approved by the shareholders in 1994 is that
receipt of a bonus under either of the Plans also will be conditioned upon
achievement of a specified revenue goal.
CEO/COO ANNUAL BONUS PLAN. Under this Plan, the CEO and COO each
receive a bonus ("Target Bonus") equal to 40% of their respective base
salaries if the Company achieves the revenue goal and the target consolidated
pre-tax profit goal for the applicable fiscal year. In the case of the CEO, the
target bonus shall also include an additional $230,000 payable in cash or the
Company's Class A or Class B Common Shares, at the CEO's election. If the
revenue goal is achieved and the Company's performance is above the pre-tax
profit goal by a percentage of not more than 10 percent, or below the target
profit goal by a percentage of not more than 20 percent, the bonus is increased
or decreased by a percentage equal to twice the excess or shortfall. If
performance is less than 80 percent of the target profit goal, no bonus is paid;
if it is greater than 110 percent of the target profit goal, the bonus remains
at 120 percent of the target bonus. The maximum effective bonus percentage is
48%.
CEO/COO THREE YEAR BONUS PLAN. Under this Plan, the CEO and COO each
receive 100% of the Target Bonus described above (without percentage adjustment)
for each of the three preceding fiscal years, if the Company achieves its
revenue goal and the target consolidated pre-tax goal for this plan as
established by the Board for each of the three years. If the profit goals under
the CEO/COO Three Year Bonus Plan are met in only two of the three years, the
CEO and COO each receive 60% of their respective Target Bonuses for this Plan
(without percentage adjustment). If the profit goal is met in only one year, no
Three Year Bonus is paid.
PRESIDENT AND CHIEF OPERATING OFFICER RESTRICTED STOCK PLAN. Under this
plan, the President and Chief Operating Officer (COO) was previously granted
options for restricted Class A or Class B Common Shares. Given the effect of a
stock split, these options vested with respect to 29,000, but not with respect
to 26,000 such shares. On January 5, 1998, the Company and the COO agreed to
modify the vesting schedule to provide that the 26,000 granted but not yet
vested shares will vest upon the COO's retirement, death, permanent disability
or termination of employment by the Company. In lieu of any future stock grants
provided under the COO's employment agreement, he will receive an annual cash
bonus equal to the closing price of Class A Common Shares on March 1st of each
year of his employment multiplied by 10,000 shares; provided however, that the
multiplier will be reduced to 6,000 shares if the Company has not attained its
profit goal for the prior fiscal year. The Company did meet its pre-tax profit
goal for FY 2000 and therefore the COO was entitled to receive $167,500 in cash.
The COO deferred receipt of the $167,500.
The profit goals and bonus calculation formulas relating to the Plans
are determined by the Compensation Committee of the Company's Board, which may
modify these Plans or establish and administer new plans in its discretion
without further shareholder approval.
<PAGE> 1
EXHIBIT 21
AMERICAN GREETINGS CORPORATION
Subsidiaries of the Registrant
State / Jurisdiction
Subsidiary of Incorporation
- ----------------------------------------- --------------------------
A.G. Industries, Inc. North Carolina
Camden Graphics Group United Kingdom
Carlton Cards (Canada) Limited Canada
Carlton Cards (United Kingdom) Limited United Kingdom
Carlton Cards Retail, Inc. Connecticut
AmericanGreetings.com Ohio
Hanson White Ltd. United Kingdom
John Sands (Australia) Ltd. Delaware
John Sands (New Zealand) Ltd. Delaware
Magnivision, Inc. Delaware
Plus Mark, Inc. Ohio
Gibson Greetings, Inc. Ohio
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in (i) Post-Effective Amendment
Number 1 dated May 27, 1986 to Registration Statement No. 2-89471 on Form S-3,
(ii) Post-Effective Amendment Number 1 dated May 31, 1984 to Registration
Statement No. 2-84911 on Form S-8, (iii) Registration Statement No. 33-975 on
Form S-8 dated November 7, 1985, (iv) Registration Statement No. 33-16180 on
Form S-8 dated July 31, 1987, (v) Registration Statement No. 33-45673 on Form
S-8 dated February 4, 1992, (vi) Registration Statement No. 33-58582 on Form S-8
dated February 22, 1993, (vii) Post-Effective Amendment Number 1 dated March 29,
1993 to Registration Statement No. 33-52196 on Form S-3, (viii) Registration
Statement No. 33-50255 on Form S-3 dated September 15, 1993, (ix) Registration
Statement No. 33-57221 on Form S-3 dated January 16, 1995, (x) Registration
Statement No. 33-61037 on form S-8 dated July 14, 1995, and (xi) Registration
Statement No. 33-08123 on Form S-8 dated July 15, 1996 and (xii) Registration
Statement No. 33-53197 on Form S-3A dated June 5, 1998 of our report dated March
28, 2000 with respect to the consolidated financial statements and schedule of
American Greetings Corporation included in this Annual Report (Form 10-K) for
the year ended February 29, 2000.
/s/ Ernst & Young LLP
Cleveland, Ohio
May 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PART II,
ITEM 8 OF THE FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 61,010
<SECURITIES> 0
<RECEIVABLES> 430,825
<ALLOWANCES> 19,245
<INVENTORY> 249,433
<CURRENT-ASSETS> 1,100,684
<PP&E> 1,019,121
<DEPRECIATION> 571,706
<TOTAL-ASSETS> 2,517,983
<CURRENT-LIABILITIES> 582,488
<BONDS> 0
0
0
<COMMON> 64,520
<OTHER-SE> 1,187,891
<TOTAL-LIABILITY-AND-EQUITY> 2,517,983
<SALES> 2,175,236
<TOTAL-REVENUES> 2,175,236
<CGS> 809,347
<TOTAL-COSTS> 809,347
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,808
<INTEREST-EXPENSE> 34,255
<INCOME-PRETAX> 140,624
<INCOME-TAX> 50,625
<INCOME-CONTINUING> 89,999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89,999
<EPS-BASIC> 1.37
<EPS-DILUTED> 1.37
</TABLE>
