-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WQW/XzLyohKzpP4SXDaAqUgrsD29dbI1g5csf2u0xHwvRyKx9EgpIDRXuMbrhNnc yGNfw7YxdyPNeFJ+Bj/AnA== 0000950152-00-004382.txt : 20000524 0000950152-00-004382.hdr.sgml : 20000524 ACCESSION NUMBER: 0000950152-00-004382 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000309 ITEM INFORMATION: FILED AS OF DATE: 20000523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GREETINGS CORP CENTRAL INDEX KEY: 0000005133 STANDARD INDUSTRIAL CLASSIFICATION: GREETING CARDS [2771] IRS NUMBER: 340065325 STATE OF INCORPORATION: OH FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-13859 FILM NUMBER: 642207 BUSINESS ADDRESS: STREET 1: ONE AMERICAN ROAD CITY: CLEVELAND STATE: OH ZIP: 44144 BUSINESS PHONE: 2162527300 MAIL ADDRESS: STREET 1: ONE AMERICAN ROAD CITY: CLEVELAND STATE: OH ZIP: 44144 8-K/A 1 AMERICAN GREETINGS CORPORATION 8-K/AMEND. 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 TO CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) March 9, 2000 ------------- AMERICAN GREETINGS CORPORATION ------------------------------ (Exact name of registrant as specified in Charter) 1-13859 ------- Commission File Number Ohio 34-0065325 ---- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One American Road, Cleveland, Ohio 44144 - ------------------------------------------------------------- (Address of principal executive Offices) (Zip Code) (216) 252-7300 -------------- Registrant's telephone number, including area code 2 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS The Registrant hereby amends Item 7 of its Current Report on Form 8-K previously filed with the Securities and Exchange Commission on March 24, 2000 relating to the acquisition by American Greetings Corporation, an Ohio Corporation ("American Greetings"), of Gibson Greetings, Inc., an Ohio Corporation ("Gibson"), on March 9, 2000. The following documents are included as part of this report: (a) Financial Statements of Business Acquired The audited consolidated financial statements of Gibson Greetings, Inc. as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 and the independent auditors' report are filed as Exhibit 99.1 to this report. (b) Unaudited Pro Forma Financial Information The accompanying unaudited pro forma financial information has been prepared to give effect to the acquisition of Gibson by American Greetings. The unaudited pro forma combined statement of income for the year ended February 29, 2000 gives effect to the acquisition as if the acquisition had occurred on March 1, 1999. The unaudited pro forma combined statement of income presented for the year ended February 29, 2000 includes the historical financial results of American Greetings for the year ended February 29, 2000 and of Gibson for the year ended December 31, 1999. Synergies and expected cost savings from the integration of Gibson with American Greetings' previously existing businesses or any additional profitability resulting from the application of American Greetings revenue enhancement measures have not been included in the unaudited pro forma combined statement of income. The unaudited pro forma combined statement of financial position as of February 29, 2000 gives effect to the acquisition as if the acquisition had occurred on that date. The unaudited pro forma combined statement of financial position includes the balance sheet of American Greetings as of February 29, 2000 and the balance sheet of Gibson as of December 31, 1999. The unaudited pro forma financial information includes the adjustments that have a continuing impact to the combined company to reflect the transaction using purchase accounting. The pro forma adjustments are described in the notes to the unaudited pro forma financial information. The adjustments are based upon preliminary information and certain management judgments. The purchase accounting adjustments are preliminary and subject to revisions for the final resolution of preacquisition contingencies and restructuring. Any revisions will be reflected in future periods. Certain reclassifications have been reflected to conform to American Greetings' presentation. The unaudited pro forma financial information and accompanying notes are presented for illustrative purposes only and do not purport to be indicative of and should not be relied upon as indicative of the financial position or operating results which may occur in the future, or that would have occurred if the acquisition had been consummated on March 1, 1999. The unaudited pro forma financial information should be read in conjunction with Gibson's consolidated financial statements and notes thereto for the year ended December 31, 1999 filed as Exhibit 99.1 to this report and American Greetings' consolidated financial statements and notes thereto and management's discussion and analysis for the year ended February 29, 2000 filed as Exhibits 99.2 and 99.3, respectively, to this report. 3 Unaudited Pro Forma Combined Statement of Income For the Year Ended February 29, 2000 Thousands of dollars except per share amounts
Historical -------------------------------- American Gibson Greetings Greetings, Pro-Forma Pro Forma Corporation Inc. Adjustments Combined --------------- -------------- ----------------- ------------ Net sales $2,175,236 $296,205 $ 48,825 (1) $2,521,663 (1,484) (8) 2,881 (14) Costs and expenses: Material, labor and other production costs 809,347 168,713 10,100 (2) 1,015,342 30,847 (3) 271 (9) 788 (15) (4,724)(11) Selling, distribution and marketing 921,392 189,117 48,825 (1) 1,081,086 (10,100) (2) (30,847) (3) (42,767) (4) (271) (9) 3,644 (10) 2,881 (14) (788)(15) Administrative and general 227,075 41,797 (4) 268,175 614 (5) (450)(13) (861)(12) Non-recurring items 38,873 38,873 Interest expense 34,255 336 10,344 (6) 44,935 Other expense-net 3,670 (1,484) (8) (488) 970 (4) (3,644)(10) --------------- -------------- ----------------- -------------- 2,034,612 358,166 55,145 2,447,923 --------------- -------------- ----------------- -------------- Income (loss) before income taxes 140,624 (61,961) (4,923) 73,740 Income tax provision (benefit) 50,625 (26,228) (1,761) (7) 22,636 --------------- -------------- ----------------- -------------- Net income (loss) $ 89,999 $ (35,733) $ (3,162) $ 51,104 =============== ============== ================= ============== Earnings per share $1.37 $0.78 Earnings per share - assuming dilution $1.37 $0.78 Average number of shares outstanding 65,591,798 65,591,798
See notes to Unaudited Pro Forma Combined Statement of Income 4 Notes to Unaudited Pro Forma Combined Statement of Income - --------------------------------------------------------- (1) Amortization of deferred costs relating to agreements with certain customers is included in selling, distribution and marketing costs by American Greetings. Amortization of deferred costs is classified as a reduction of net sales by Gibson. This adjustment conforms the classification of these costs to that of American Greetings. (2) Costs related to facilities, plant operation and processing of returned goods are included in material, labor and other production costs by American Greetings. These costs are classified as selling and administrative costs by Gibson. This adjustment conforms the classification of these costs to that of American Greetings. (3) Costs related to providing display fixtures to customers are included in material, labor and other production costs by American Greetings. These costs are classified as selling and administrative costs by Gibson. This adjustment conforms the classification of these costs to that of American Greetings. (4) Costs related to administrative functions are included in administrative and general expenses by American Greetings. These costs are classified as selling and administrative costs by Gibson. This adjustment conforms the classification of these costs to that of American Greetings. (5) Amortization of goodwill created in the acquisition based on a 40-year life. (6) Interest expense on financing of acquisition. (7) Provision for income taxes on Pro Forma adjustments, except goodwill amortization, at 37%. (8) Royalty income is included in other income by American Greetings. Royalty income is included in total revenue by Gibson. This adjustment conforms the classification of royalty income to that of American Greetings. (9) A portion of creative costs are included in selling and administrative costs by Gibson. These costs are included in material, labor and other production costs by American Greetings. This adjustment conforms the classification of creative costs to that of American Greetings. (10) Miscellaneous income is included in selling and administrative costs by Gibson. This income is included in other income by American Greetings. This adjustment conforms the classification of miscellaneous income to that of American Greetings. (11) Fixtures provided to customers are expensed when shipped by American Greetings. Fixtures are capitalized and amortized over five years by Gibson. This adjustment reflects the net difference in accounting treatment to conform to that of American Greetings. (12) Gibson's results include amortization of capitalized costs associated with computer equipment and software. This project has been cancelled and the related capitalized costs expensed by American Greetings. This adjustment reflects the elimination of that amortization expense included in Gibson's results. (13) Adjustment to remove amortization expense associated with goodwill included in Gibson's historical results. (14) Certain other competitive expenses are classified as reductions of net sales by Gibson. This adjustment conforms the classification of these costs to that of American Greetings. (15) Freight expenses for returned goods are classified as selling costs by Gibson. This adjustment conforms the classification of these costs to that of American Greetings. 5 Unaudited Pro Forma Combined Statement of Financial Position As of February 29, 2000 Thousands of dollars except per share amounts
Historical ----------------------------- American Gibson Greetings Greetings, Pro Forma Pro Forma ASSETS Corporation Inc. Adjustments Combined ----------- --------- ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 61,010 $ 4,674 $ 65,684 Marketable securities 68,579 (30,268)(4) 38,311 Trade accounts receivable, less allowances for sales returns and for doubtful accounts 430,825 66,936 (7,904)(1) 483,713 (6,144)(2) Inventories 249,433 50,474 (8,780)(2) 291,127 Deferred and refundable income taxes 99,709 30,689 12,129 (4) 168,070 27,476 (9) (1,933)(13) Prepaid expenses and other 259,707 14,271 (1,129)(2) 272,849 ----------- --------- ---------- ----------- Total Current Assets 1,100,684 235,623 (16,553) 1,319,754 GOODWILL 149,437 9,762 24,555 (12) 173,992 (9,762)(8) OTHER ASSETS 820,447 97,793 (2,412)(6) 920,692 9,439 (9) (4,575)(13) PROPERTY, PLANT AND EQUIPMENT-NET 447,415 87,497 (31,621)(3) 462,420 (15,032)(6) (25,839)(5) ----------- --------- ---------- ----------- $ 2,517,983 $ 430,675 $ (71,800) $ 2,876,858 =========== ========= ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Debt due within one year $ 109,694 $ 31,943 177,722(10) $ 319,359 Accounts payable and accrued liabilities 213,180 20,761 29,246 (1) 260,823 (715)(6) (1,649)(2) Accrued compensation and benefits 84,456 16,600 (1) 115,644 200 (2) 14,388 (6) Dividends payable 25,808 25,808 Income taxes 13,090 13,090 Other current liabilities 136,260 59,714 (53,750)(1) 147,029 761 (6) 4,044 (2) ----------- --------- ---------- ----------- Total Current Liabilities 582,488 112,418 186,847 881,753 LONG-TERM DEBT 442,102 9,389 451,491 OTHER LIABILITIES 195,985 46,431 (16,092)(2) 242,144 7,945 (6) 17,414 (6) (9,539)(6) DEFERRED INCOME TAXES 44,997 44,997 SHAREHOLDERS' EQUITY Common shares - par value $1 Class A 59,873 171 (171)(11) 59,873 Class B 4,647 4,647 Capital in excess of par value 304,946 54,986 (54,986)(11) 304,946 Treasury stock (445,758) (21,999) 21,999 (11) (445,758) Accumulated other comprehensive (loss) income (27,572) 27,476 (9,337)(11) (27,572) (18,139)(4) Retained earnings 1,356,275 201,803 (201,803)(11) 1,360,337 4,062 (7) ----------- --------- ---------- ----------- Total shareholders' equity 1,252,411 262,437 (258,375) 1,256,473 ----------- --------- ---------- ----------- $ 2,517,983 $ 430,675 $ (71,800) $ 2,876,858 =========== ========= ========== ===========
See notes to Unaudited Pro Forma Combined Statement of Financial Position. 6 Notes to Unaudited Pro Forma Combined Statement of Financial Position - ------------------------------------------------------------------------- (1) Reclassification of payroll and payroll taxes, customer allowances and other accrued liabilities to conform with the presentation of American Greetings. (2) Certain items included in Gibson's results have been adjusted to reflect their fair value at the date of acquisition. (3) Adjustment to expense capitalized costs associated with computer equipment and software that will not be used by the combined company. (4) Adjustment to reflect decline in market value of investment in Egreetings Network from December 31, 1999 to February 29, 2000. (5) Fixtures provided to customers are expensed when shipped by American Greetings. Fixtures are capitalized and amortized over five years by Gibson. Adjustment to expense capitalized fixture costs in Gibson's results. (6) Represents accruals for costs related to the assumption and cancellation of facility leases and the related exit costs for the closure of those facilities and the related termination of employees in connection with redundant activities and operations. (7) Difference in acquisition date net book value vs December 31, 1999 net book value. (8) Represents the write-off of goodwill associated with previous acquisitions of Gibson. (9) Represents deferred tax asset established in purchase accounting. (10) Represents commercial paper borrowings used to finance the acquisition. (11) Represents the elimination of the shareholders' equity related to Gibson. (12) Represents goodwill generated from acquisition. (13) Represents adjustment in tax rate for Gibson's deferred tax assets. 7 (c) Exhibits:
Page Number ----------- Exhibit 23.1 Consent of Deloitte & Touche LLP A-1 Exhibit 23.2 Consent of Ernst & Young LLP B-1 Exhibit 99.1 Audited Consolidated Financial Statements of Gibson Greetings, Inc. C-1 as of December 31, 1999 and 1998 and for the three years ended December 31, 1999 Exhibit 99.2 Audited Consolidated Financial Statements of American Greetings D-1 Corporation as of February 29, 2000 and February 28, 1999 and for the three years ended February 29, 2000 Exhibit 99.3 Management's Discussion and Analysis of American Greetings E-1 Corporation for the years ended February 29, 2000 and February 28, 1999 and 1998
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMERICAN GREETINGS CORPORATION By: /s/ Patricia L. Ripple -------------------------- Patricia L. Ripple Vice President-Controller May 23, 2000 EX-23.1 2 EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF DELOITTE & TOUCHE LLP We consent to the use of the Current Report on Form 8-K/A of American Greetings Corporation of our report dated March 3, 2000, except for Note 17, as to which the date is March 30, 2000, relating to the consolidated financial statements of Gibson Greetings, Inc. and subsidiaries as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999. /s/ Deloitte & Touche LLP - ------------------------- Cincinnati, Ohio May 17, 2000 A - 1 EX-23.2 3 EXHIBIT 23.2 1 Exhibit 23.2 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, (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 of American Greetings Corporation for the year ended February 29, 2000 included in this Current Report on Form 8-K/A dated May 23, 2000. /s/ Ernst & Young LLP - --------------------- Cleveland, Ohio May 22, 2000 B - 1 EX-99.1 4 EXHIBIT 99.1 1 Exhibit 99.1 GIBSON GREETINGS, INC. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Gibson Greetings, Inc. Covington, Kentucky We have audited the accompanying consolidated balance sheets of Gibson Greetings, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 17, on March 9, 2000, American Greetings Corporation completed its merger with the Company by acquiring 97.4% of the outstanding common shares of the Company for a cash price of $10.25 per share. /s/ Deloitte & Touche LLP - ------------------------- March 3, 2000, except for Note 17, as to which the date is March 30, 2000 C-1 2 GIBSON GREETINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
1999 1998 1997 --------- --------- --------- REVENUES: Net sales $ 294,721 $ 407,933 $ 397,115 Royalty income 1,484 597 602 --------- --------- --------- Total revenues 296,205 408,530 397,717 --------- --------- --------- COSTS AND EXPENSES: Operating expenses: Cost of products sold 168,713 179,903 159,648 Selling, distribution and administrative expenses 189,117 202,466 202,109 Restructuring charge, net -- 23,055 -- --------- --------- --------- Total operating expenses 357,830 405,424 361,757 --------- --------- --------- OPERATING (LOSS) INCOME (61,625) 3,106 35,960 --------- --------- --------- Financing expenses: Interest expense, net of capitalized interest 1,230 3,410 5,432 Interest income (894) (4,864) (5,776) --------- --------- --------- Total financing expenses, net 336 (1,454) (344) --------- --------- --------- (LOSS) INCOME BEFORE INCOME TAXES (61,961) 4,560 36,304 INCOME TAX (BENEFIT) PROVISION (26,228) 2,377 14,706 --------- --------- --------- NET (LOSS) INCOME $ (35,733) $ 2,183 $ 21,598 ========= ========= ========= NET (LOSS) INCOME PER SHARE: Basic $ (2.26) $ 0.13 $ 1.32 ========= ========= ========= Diluted $ (2.26) $ 0.13 $ 1.27 ========= ========= =========
See accompanying notes to consolidated financial statements. C-2 3 GIBSON GREETINGS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 4,674 $ 44,267 Marketable securities 68,579 -- Trade receivables, net 66,936 71,438 Inventories 50,474 84,489 Income taxes receivable 15,351 -- Deferred income taxes 15,338 39,897 Other current assets 14,271 4,958 -------- -------- Total current assets 235,623 245,049 Plant and equipment, net 87,497 75,906 Deferred income taxes 36,300 28,445 Other assets, net 71,255 88,051 -------- -------- $430,675 $437,451 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Debt due within one year $ 31,943 $ 155 Accounts payable 20,761 32,990 Income taxes payable -- 13,415 Other current liabilities 59,714 61,494 -------- -------- Total current liabilities 112,418 108,054 Long-term debt 9,389 10,384 Other liabilities 46,431 47,535 -------- -------- Total liabilities 168,238 165,973 -------- -------- Commitments and contingencies (Notes 14 and 15) Stockholders' Equity: Preferred stock, par value $1.00; 5,100,000 shares authorized, none issued -- -- Preferred stock, Series B, par value $1.00; 200,000 shares authorized, none issued -- -- Common stock, par value $.01; 50,000,000 shares authorized, 17,138,264 and 17,123,498 shares issued, respectively 171 171 Paid-in capital 54,986 54,926 Retained earnings 201,803 237,536 Accumulated other comprehensive income 27,476 844 -------- -------- 284,436 293,477 Less treasury stock, at cost, 1,291,601 shares 21,999 21,999 -------- -------- Total stockholders' equity 262,437 271,478 -------- -------- $430,675 $437,451 ======== ========
See accompanying notes to consolidated financial statements. C-3 4 GIBSON GREETINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (35,733) $ 2,183 $ 21,598 --------- --------- --------- Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation including write-down of display fixtures 25,128 22,120 22,948 Impairment of plant and equipment 558 12,967 -- Loss on disposal of plant and equipment 1,274 1,091 1,339 Deferred income taxes (1,684) (9,577) 1,267 Amortization of deferred costs and goodwill 32,939 22,903 22,206 Change in assets and liabilities, net of effects of acquistion and divestiture: Trade receivables, net 4,146 (39,807) 12,098 Inventories 34,015 (39,462) 5,645 Income taxes receivable (15,351) -- -- Other current assets (9,313) (2,027) (1,477) Other assets, net of amortization (22,838) (23,453) (18,519) Accounts payable (12,229) 19,585 (1,610) Income taxes payable (13,415) (1,221) (1,314) Other current liabilities (2,592) (7,757) (12,995) Other liabilities (1,459) 720 (995) All other, net 708 163 44 --------- --------- --------- Total adjustments 19,887 (43,755) 28,637 --------- --------- --------- Net cash (used in) provided by operating activities (15,846) (41,572) 50,235 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of plant and equipment (37,755) (38,404) (17,677) Proceeds from sale of plant and equipment 2,473 1,987 481 Investment in Internet Companies (15,336) (2,700) (4,144) Acquisition of The Ink Group Companies -- (1,000) -- Proceeds from sale of The Paper Factory of Wisconsin, Inc. -- 36,216 -- Acquisition of Gibson Greetings International Limited minority interest (1,046) -- -- --------- --------- --------- Net cash used in investing activities (51,664) (3,901) (21,340) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in short-term borrowings 30,984 -- -- Payments on long-term debt, net (3,127) (11,967) (16,751) Issuance of common stock 60 2,055 5,401 Acquisition of common stock for treasury -- (14,615) (1,433) --------- --------- --------- Net cash (used in) provided by financing activities 27,917 (24,527) (12,783) --------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (39,593) (70,000) 16,112 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 44,267 114,267 98,155 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,674 $ 44,267 $ 114,267 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Noncash investing and financing activities: Fair value adjustment to available-for-sale investments $ 46,121 $ -- $ -- Purchase of plant and equipment through capital lease obligations 2,936 -- --
See accompanying notes to consolidated financial statements. C-4 5 GIBSON GREETINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
ACCUMULATED OTHER TOTAL TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' COMPREHENSIVE STOCK CAPITAL EARNINGS INCOME STOCK EQUITY INCOME (LOSS) DECEMBER 31, 1996 $ 167 $ 47,474 $ 213,755 $ 871 $ (5,951) $ 256,316 ----- -------- --------- -------- --------- ---------- Net income 21,598 21,598 $ 21,598 Other comprehensive income - Currency translation, net (138) (138) (138) Exercise of stock options 3 5,344 5,347 Purchase of treasury stock (1,433) (1,433) Other 54 54 ----- -------- --------- -------- --------- ---------- -------- DECEMBER 31, 1997 170 52,872 235,353 733 (7,384) 281,744 $ 21,460 ----- -------- --------- -------- --------- ---------- ======== Net income 2,183 2,183 $ 2,183 Other comprehensive income - Currency translation, net 111 111 111 Exercise of stock options 1 1,994 1,995 Purchase of treasury stock (14,615) (14,615) Other 60 60 ----- -------- --------- -------- --------- ---------- -------- DECEMBER 31, 1998 171 54,926 237,536 844 (21,999) 271,478 $ 2,294 ----- -------- --------- -------- --------- ---------- ======== Net loss (35,733) (35,733) $ (35,733) Other comprehensive income: Currency translation, net (722) (722) (722) Unrealized gains on securities, net 27,625 27,625 27,625 Minimum pension liability adjustment, net (271) (271) (271) Other 60 60 ----- -------- --------- -------- --------- ---------- -------- DECEMBER 31, 1999 $ 171 $ 54,986 $ 201,803 $ 27,476 $ (21,999) $ 262,437 $ (9,101) ===== ======== ========= ======== ========= ========== ========
See accompanying notes to consolidated financial statements. C-5 6 GIBSON GREETINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1. NATURE OF BUSINESS AND STATEMENT OF ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Gibson Greetings, Inc. and its wholly-owned and majority-owned subsidiaries (the Company). All material intercompany transactions have been eliminated. NATURE OF BUSINESS - The Company operates in a single industry segment: the design and sale of greeting cards, paper partywares, gift wrap and related specialty relationship-fostering products. The Company sells to customers in several channels of the retail trade principally located in the United States. The Company conducts business based upon periodic credit evaluations of its customers' financial condition and generally does not require collateral. Sales are recognized at the time of shipment from the Company's facilities. Provisions for sales returns are recorded at the time of the sale, based upon current conditions and the Company's historic experience. Consistent with general industry practice, the Company has entered into long-term sales agreements with certain retailers. These sales agreements typically have terms ranging from three to five years, and generally specify a minimum sales volume commitment. In certain of these sales agreements, negotiated cash payments or credits constitute advance discounts against future sales. These payments are capitalized and amortized over the initial term of the sales agreement. In the event of default by a retailer, such as bankruptcy or liquidation, a sales agreement may be deemed impaired and unamortized amounts may be charged against operations immediately following the default. Business risk is also inherent in the Company's industry due to the salability of products being dependent upon the ability to anticipate and respond promptly to changing trends and consumer tastes. Certain of the Company's product lines are particularly susceptible to these risks. However, management believes that business risks are somewhat mitigated by the diversity of the Company's products and distribution channels and by the geographic location of its customers. Through August 1998, The Paper Factory of Wisconsin, Inc. (The Paper Factory) was a wholly-owned subsidiary of the Company (see Note 16) which operated retail stores located primarily in manufacturers' outlet shopping centers. The Paper Factory offered broad product assortments of nationally recognized brand gift wrap, greeting cards, paper decorations, wedding supplies and other paper products. During the years ended December 31, 1999, 1998 and 1997, Winn-Dixie Stores, Inc. accounted for approximately 14%, 13% and 15% of net sales, respectively, and the geographic distribution of the Company's net sales, based upon customer location, was as follows:
1999 1998 1997 United States $241,084 $362,625 $370,581 United Kingdom 34,107 32,219 21,043 Other foreign countries 19,530 13,089 5,491 -------- -------- -------- $294,721 $407,933 $397,115 ======== ======== ========
C-6 7 INTERNATIONAL OPERATIONS - International operations are conducted by the Company's subsidiaries Gibson Greetings International Limited (Gibson International) and The Ink Group Companies (The Ink Group) (see Note 16). Gibson International markets the Company's products primarily in the United Kingdom and other European countries, and The Ink Group is a leading publisher of alternative cards, calendars, address books and diaries in Australia, with additional operations in New Zealand and the United Kingdom. Gibson International was wholly-owned by the Company at December 31, 1999. At December 31, 1998, the minority stockholders of Gibson International were principal officers of Gibson International. The minority stockholders of The Ink Group's operations in Australia and New Zealand are principal officers of The Ink Group. The assets and liabilities of the international operations are translated at the exchange rates in effect as of the balance sheet date and results of operations are translated at average exchange rates prevailing during the period. Translation adjustments are recorded within the accumulated other comprehensive income component of stockholders' equity. Gains and losses from foreign currency transactions are included as a component of selling, distribution and administrative expenses within the Consolidated Statements of Operations. For the years ended December 31, 1999, 1998 and 1997, net foreign currency losses totaled $317, $103 and $519, respectively. The Company's foreign-located long-lived assets at December 31, 1999, 1998 and 1997 were not material to the consolidated total of such assets. CASH AND CASH EQUIVALENTS - Cash and cash equivalents are stated at cost. Cash equivalents include time deposits, money market instruments and short-term debt obligations with original maturities of three months or less. The carrying amount approximates fair value because of the short maturity of these instruments. The effect of exchange rate changes on cash and cash equivalents is not material. MARKETABLE SECURITIES - At December 31, 1999, marketable securities is comprised of the Company's investment in common shares of Egreetings Network (Egreetings), a pioneer in providing digital greetings through the Internet, and warrants to purchase shares in the future. The Company's holdings in Egreetings, with a cost to the Company of $21,780, represent a less-than-20% ownership interest and are categorized as available-for-sale. The investment is recorded at fair value, which is based on Egreetings' market price per common share as quoted in the Nasdaq National Market. See Note 17. OTHER CURRENT ASSETS - At December 31, 1999, other current assets is comprised of prepaid expenses and assets held in a grantor tax trust, known as a "Rabbi" trust, which was established in connection with the Company's proposed merger with American Greetings Corporation (see Notes 2 and 17) for the purpose of providing employee retention incentives. At December 31, 1998, other current assets consists solely of prepaid expenses. Assets held in the Rabbi trust are recorded at fair value and are subject to claims of the Company's creditors, but otherwise must be used only for the purpose of providing employee retention incentives. The trust is classified as current due to management's expectation that incentive payments sufficient to exhaust the trust will be made during the upcoming year. The $10,086 carrying amount approximates fair value at December 31, 1999 due to the trust holding primarily cash and cash equivalents. INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out) or market. PLANT AND EQUIPMENT - Plant and equipment are stated at cost. Plant and equipment, except for leasehold improvements, are depreciated over their related estimated useful lives, using the straight-line method. Generally, buildings are depreciated over 40 years; machinery and equipment are depreciated over three to 11 years; and display fixtures are depreciated over three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the C-7 8 respective leases (see Note 14), using the straight-line method, and property acquired under capital leases is amortized over the terms of the respective leases, using the straight-line method. Expenditures for maintenance and repairs are charged to operations in the period incurred; renewals and betterments are capitalized. OTHER ASSETS - Other assets include deferred and prepaid costs, investments and goodwill. Deferred and prepaid costs principally represent costs incurred relating to long-term customer sales agreements. Deferred and prepaid costs are amortized ratably over the terms of the agreements, generally three to five years. At December 31, 1999, investments consist primarily of assets held in Rabbi trusts for certain of the Company's retirement plans. At December 31, 1998, investments consist of the Rabbi trusts and the Company's investments in Egreetings. Assets held in the Rabbi trusts are recorded at fair value and are subject to claims of the Company's creditors, but otherwise must be used only for purposes of providing benefits under the retirement plans. The cost and market value of the Rabbi trusts were $6,237 and $5,633, respectively, at December 31, 1999 and $5,692 and $5,766, respectively, at December 31, 1998. The market value of the Company's investments in Egreetings at December 31, 1998, which represented a less-than-20% ownership interest, was not readily determinable and the investments were recorded at cost. Goodwill, which represents the excess of cost over fair value of net assets acquired, relates to both Gibson International and The Ink Group as of December 31, 1999 and only The Ink Group as of December 31, 1998. Goodwill is amortized over 20 years, using the straight-line method. Accumulated goodwill amortization at December 31, 1999 and 1998 was $738 and $280, respectively. The realizability of goodwill is evaluated periodically as events or circumstances indicate a possible inability to recover its carrying amount. ACCOUNTING FOR LONG-LIVED ASSETS - Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. In connection with a 1999 customer bankruptcy and the Company's 1998 restructuring plan, the carrying values of certain plant and equipment were written-down to their estimated future cash flows (see Note 3). INCOME TAXES - Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of currently enacted tax laws. FINANCIAL INSTRUMENTS - The Company's financial instruments consist primarily of investments in cash and cash equivalents, holdings in Egreetings, trade receivables and certain other assets, including long-term customer sales agreements and investments, as well as obligations under accounts payable, short- and long-term debt and liabilities for payments on sales agreements. The carrying values of these financial instruments, with the exception of the holdings in Egreetings and the retirement plans' Rabbi trusts (see "Marketable Securities" and "Other Assets" above), approximate fair value. COMPUTATION OF NET INCOME PER SHARE - The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding for the years ended December 31, 1999, 1998 and 1997. There are no adjustments to net income for the basic or diluted earnings per share (EPS) computations. C-8 9
1999 1998 1997 Basic weighted average shares outstanding 15,837,075 16,205,383 16,379,250 Effect of dilutive stock options -- 263,803 560,791 ---------- ---------- ---------- Diluted weighted average shares outstanding 15,837,075 16,469,186 16,940,041 ========== ========== ==========
Options to purchase 2,355,804, 815,898 and 91,014 shares for the years ended December 31, 1999, 1998 and 1997, respectively, were not included in the computation of diluted EPS due to their having an anti-dilutive effect. STOCK OPTIONS - The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), and continues to apply Accounting Principles Board Opinion No. 25 and related interpretations in the accounting for its stock option plans. See Note 13 for discussion of stock options and the disclosures required by SFAS No. 123. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). In general, SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities in the balance sheet at their fair value, and sets forth the manner in which gains or losses thereon are to be recorded. The treatment of such gains and losses depends on the intended use of the derivative and the resulting designation. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." Based on the new effective date, the Company will adopt the provisions of this statement in the first quarter of the fiscal year ending December 31, 2001. Although the Company has not fully evaluated the effects of SFAS No. 133 on its consolidated financial statements, its adoption is not expected to have a significant impact. USE OF ESTIMATES - The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. RECLASSIFICATIONS - Certain reclassifications have been made to the prior years' consolidated financial statements to conform with the current year presentation. 2. AGREEMENT WITH AMERICAN GREETINGS On November 2, 1999, the Company entered into a definitive Agreement and Plan of Merger (Merger Agreement) with American Greetings Corporation (American Greetings) and a subsidiary of American Greetings under which the subsidiary has offered to purchase all outstanding shares of the Company's common stock (and associated Rights) for $10.25 per share. Closing of the tender offer is subject to the satisfaction of certain conditions, including regulatory approval, the absence of any injunction and the tender of a majority of the outstanding shares of common stock. Subsequent to the consummation of the tender offer, the subsidiary will be merged into the Company and each remaining share of outstanding common stock of the Company (other than shares held by American Greetings and dissenting shares) will be exchanged for a right to receive $10.25 in cash. The transaction is subject to termination under certain conditions, including if the transaction has not closed on or before 18 months C-9 10 from the date of the Merger Agreement. Upon closing of the transaction, an additional $800 will be owed by the Company to certain of its third-party financial advisors, with no such amount being due in the event the transaction is terminated. In the event of a termination, one of two Termination Fees would be due among the parties to the Merger Agreement, depending upon the circumstances of the termination - either $20,000 would be owed by American Greetings to the Company, or $7,000 would be owed by the Company to American Greetings. See Note 17. Simultaneously with approving this transaction, the Company's Board of Directors amended the Common Stock Rights Agreement (see Note 13) to exempt the transaction from the provisions of the Agreement. 3. RESTRUCTURING AND OTHER ITEMS CUSTOMER BANKRUPTCY - On October 12, 1999, one of the Company's major customers, Jitney-Jungle Stores of America, Inc. (Jitney-Jungle), filed for Chapter 11 bankruptcy protection. Due to the uncertainty surrounding the financial stability of Jitney-Jungle, during the quarter ended September 30, 1999, the Company recorded a pretax charge totaling $7,864 to write down the assets considered to be impaired as a result of the bankruptcy filing as follows: write-off of the unamortized balance of deferred sales agreement costs ($5,100), doubtful accounts provision for the outstanding trade receivable balance ($1,500) and write-off of the net book value of greeting card fixtures ($1,264). These expenses are included as components of net sales ($5,100) and selling, distribution and administrative expenses ($2,764) within the Consolidated Statement of Operations for the year ended December 31, 1999. SILLY SLAMMERS CHARGES - In June 1999, the Company made the decision to seek a buyer for its Silly Slammers business. With the Company's focus on its core card line, alternative card business and its expanding role as a provider of creative content to the Internet, the Company believes the Silly Slammers brand can best be marketed outside of Gibson. However, at the present time, no transaction is anticipated and pretax charges of $2,000 and $21,152 were recorded in the quarters ended September 30, 1999 and June 30, 1999, respectively, to write down inventory and related assets. The charges are included as a component of cost of products sold within the Consolidated Statement of Operations for the year ended December 31, 1999. RESTRUCTURING CHARGE - During 1998, the Company recorded asset write-downs and other charges of $26,100 in connection with a restructuring plan (the Plan) announced March 31, 1998 under which the Company outsourced its principal manufacturing operations formerly performed at its Cincinnati, Ohio headquarters. The costs related to the Plan, which were recognized as a separate component of operating expenses in the first quarter of 1998, included approximately $17,100 related to the facility, $5,800 related to involuntary severance of approximately 480 employees and $3,200 in other costs. The facility costs of $17,100 included an adjustment of $12,967 to write off the capitalized lease asset, leasehold improvements and certain machinery and equipment (included in plant and equipment) associated with the Cincinnati operations, and a reserve of $4,133 included in other liabilities representing the amount by which total future lease commitments and related operating costs of the Cincinnati facility exceed the recorded lease obligation and estimated sublease income over the remaining term of the lease. The recorded lease obligation of $12,040, representing the portion of the capital lease obligation associated with the Cincinnati facility, was reclassified from debt to other liabilities (see Notes 8 and 11). Involuntary employee severance costs and other costs were included in other current liabilities. C-10 11 During 1999, certain events occurred that required the Company to reassess the adequacy of the restructuring-related asset write-downs and remaining reserve balances. Most notable of these events were the Company's delay in vacating its Cincinnati, Ohio headquarters and the planned disposal of certain property and equipment for proceeds lower than originally anticipated. While the reassessment indicated that the total cost of the asset write-downs and other charges connected with the Plan remained $26,100, the components of the total cost and the activity therein through December 31, 1999 were as follows:
Reserve for Write-down ------------------------------------- Property and Excess Lease Involuntary Other Equipment Commitments Severance Costs Total Restructuring charges - original $ 12,967 $ 4,133 $ 5,800 $ 3,200 $ 26,100 Reclassification of capital lease obligation from debt to other liabilities -- 12,040 -- -- 12,040 -------- -------- -------- -------- -------- 12,967 16,173 5,800 3,200 38,140 Less 1998 usage: Non-cash write-downs (12,967) (1,200) (14,167) Payment of termination benefits (3,421) (3,421) Other payments, net -- (447) -- (909) (1,356) -------- -------- -------- -------- -------- Balance at December 31, 1998 -- 15,726 2,379 1,091 19,196 Effect of 1999 reassessment 558 1,024 (782) (800) -- Less 1999 usage: Non-cash write-downs (558) (558) Payment of termination benefits (247) (247) Other payments, net -- (924) -- (64) (988) -------- -------- -------- -------- -------- Balance at December 31, 1999 $ -- $ 15,826 $ 1,350 $ 227 $ 17,403 ======== ======== ======== ======== ========
As of December 31, 1999, the Company had completed the outsourcing of manufacturing operations and had eliminated approximately 400 employee positions. The termination of employees in connection with the Plan resulted in a curtailment of a defined benefit pension plan, and a curtailment gain of $3,045 before income taxes was recognized as a restructuring gain in the third quarter of 1998 (see Note 12), resulting in a net pretax restructuring charge of $23,055. C-11 12 4. TRADE RECEIVABLES Trade receivables at December 31, 1999 and 1998, consisted of the following:
1999 1998 Trade receivables $123,169 $128,136 Less reserves for returns, allowances, cash discounts and doubtful accounts 56,233 56,698 -------- -------- $ 66,936 $ 71,438 ======== ========
5. INVENTORIES Inventories at December 31, 1999 and 1998, consisted of the following:
1999 1998 Finished goods $34,655 $54,523 Work-in-process 12,067 27,498 Raw materials and supplies 3,752 2,468 ------- ------- $50,474 $84,489 ======= =======
6. PLANT AND EQUIPMENT Plant and equipment at December 31, 1999 and 1998, consisted of the following:
1999 1998 Land and buildings $ 10,493 $ 12,939 Land and buildings under capital lease, net of restructuring charge (see Note 3) 7,654 7,654 Machinery and equipment 31,211 26,924 Machinery and equipment under capital leases 2,936 -- Display fixtures 75,360 88,614 Leasehold improvements 4,718 2,829 Construction in progress, principally management information systems (see Note 14) 28,365 14,600 -------- -------- 160,737 153,560 Less accumulated depreciation 73,240 77,654 -------- -------- $ 87,497 $ 75,906 ======== ========
At December 31, 1999 and 1998, accumulated depreciation included depreciation on assets acquired under capital lease obligations of $2,232 and $1,323, respectively. C-12 13 7. OTHER ASSETS Other assets at December 31, 1999 and 1998, consisted of the following:
1999 1998 Deferred and prepaid costs $147,858 $140,476 Investments 6,033 12,205 Goodwill 9,762 10,495 Other 7,174 6,900 -------- -------- 170,827 170,076 Less accumulated amortization 99,572 82,025 -------- -------- $ 71,255 $ 88,051 ======== ========
8. DEBT Debt at December 31, 1999 and 1998, consisted of the following:
1999 1998 Secured Credit Agreement bearing variable interest (7.80% at December 31, 1999) $18,114 $ -- Financing Arrangement bearing variable interest (weighted average rate of 6.39% at December 31, 1999) 3,761 2,449 American Greetings note, including accrued interest at 8.10%, payable January 19, 2000 9,109 -- Other notes bearing interest at a weighted average rate of 5.20%, payable in quarterly installments -- 155 ------- ------- 30,984 2,604 Land and building capital lease obligation payable in monthly installments through 2013, net of $12,288 and $12,040 included in other liabilities at December 31, 1999 and 1998, respectively (see Note 3) 8,192 7,935 Equipment capital lease obligations payable in monthly installments through 2001 2,156 -- ------- ------- 41,332 10,539 Less debt due within one year 31,943 155 ------- ------- $ 9,389 $10,384 ======= =======
As a result of the Silly Slammers charge during the quarter ended June 30, 1999, the Company no longer met the conditions for borrowings under its 364-day $30,000 revolving credit agreement (Credit Agreement) entered into on May 11, 1999, an agreement which replaced a similar $30,000 facility expiring in April 1999. Accordingly, beginning July 27, 1999, the Company and its lenders entered into a series of amendments to the Credit Agreement, each of which included a commitment of funds to the Company for approximately 30 days, with any borrowings secured by the Company's trade receivables and inventory. The Credit Agreement was terminated and replaced with the Secured Credit Agreement on November 30, 1999. During 1999, the average interest rate for borrowings outstanding under the Credit Agreement was 8.20%; no borrowings were outstanding throughout 1998. On November 30, 1999, the Company entered into the Secured Credit Agreement, under which up to $50,000 is available to the Company during the next three years for general corporate purposes. The exact amount of funds available is determined by the Company's level of qualifying assets (trade receivables and inventory). Outstanding borrowings are secured by substantially all of the Company's assets and bear interest at prevailing commercial C-13 14 paper rates plus 175 to 275 basis points, depending upon the Company's level of earnings as defined in the Secured Credit Agreement. During 1999, the average interest rate for borrowings outstanding under the Secured Credit Agreement was 7.79%. In addition, the Company pays a standby letter of credit fee and a commitment fee, both of which are determined at fluctuating rates depending upon the Company's level of earnings. During 1999, the average standby letter of credit fee was 2.00% of the balance of such instruments outstanding and the commitment fee was 0.375% of the unused portion of funds available. In November 1998, the Company replaced The Ink Group's existing debt with an Australian-Dollar-denominated multi-option financing arrangement (Financing Arrangement) which expired January 31, 2000. At December 31, 1999, the maximum amount available under the Financing Arrangement was approximately $4,265. Depending upon the financing option elected, borrowings under the Financing Arrangement bear interest at varying rates, which are based upon prevailing rates. During 1999, the average interest rates for borrowings under the Financing Arrangement were 6.15%. As a result of the January 31, 2000 expiration of the Financing Arrangement and the Company's subsequent renegotiation efforts, borrowings under the Financing Arrangement have been classified as short-term debt as of December 31, 1999. As of December 31, 1998, such borrowings were classified as long-term debt. In connection with the exercise of warrants to purchase Egreetings common stock, on December 20, 1999, the Company entered into a 30-day $9,087 promissory note with American Greetings. On January 19, 2000, the note principal was repaid in full, along with interest accrued at 8.10%. The fair value of the Company's long-term debt (excluding capital lease obligations) is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair value of the Company's gross long-term debt approximated its carrying value at December 31, 1999 and 1998 given the nature of then-outstanding debt. Interest payments, net of the amount capitalized, for the years ended December 31, 1999, 1998 and 1997 totaled $3,654, $5,269 and $5,930, respectively. Capitalized interest for each of these years totaled $852, $198 and $0, respectively. The Company's debt agreements contain customary covenants and events of default including, among other things, provisions which require the maintenance of minimum amounts of earnings and net worth and of certain financial ratios, limit the amount of capital expenditures, payments made in connection with customer sales agreements and dividend payments. The Company was not in compliance with certain of these provisions as of December 31, 1999. See Note 17. C-14 15 9. INCOME TAXES The income tax (benefit) provision for the years ended December 31, 1999, 1998 and 1997, consisted of the following:
1999 1998 1997 Federal: Current $(19,778) $ 8,917 $ 10,942 Deferred 5,501 (11,122) 1,038 Valuation allowance (4,692) 4,260 -- Deferred investment tax credits, net -- (64) (64) -------- -------- -------- (18,969) 1,991 11,916 -------- -------- -------- State and local: Current (4,749) 1,952 2,497 Deferred (1,438) (2,540) 293 Valuation allowance (1,072) 974 -- -------- -------- -------- (7,259) 386 2,790 -------- -------- -------- $(26,228) $ 2,377 $ 14,706 ======== ======== ========
The effective income tax rate for the years ended December 31, 1999, 1998 and 1997, varied from the statutory federal income tax rate as follows:
1999 1998 1997 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 7.6 7.5 4.9 Nondeductible goodwill amortization (0.2) 7.7 1.2 Other (0.1) 1.9 (0.6) ------ ------ ------ 42.3% 52.1% 40.5% ====== ====== ======
The net deferred taxes at December 31, 1999 and 1998, consisted of the following:
1999 1998 Current deferred taxes: Gross assets $ 37,533 $ 40,126 Gross liabilities (22,195) (229) -------- -------- 15,338 39,897 -------- -------- Noncurrent deferred taxes: Gross assets 38,583 37,997 Valuation allowance (300) (6,064) Gross liabilities (1,983) (3,488) -------- -------- 36,300 28,445 -------- -------- $ 51,638 $ 68,342 ======== ========
Included within the net deferred taxes at December 31, 1999 and 1998 were net deferred tax liabilities totaling $18,479 and $74, respectively, recorded in connection with the Other Comprehensive Income items reflected in the Consolidated Statements of Changes in Stockholders' Equity. In addition, the Company has recorded valuation allowances with respect to the deferred tax assets as a result of recent capital losses and uncertainties with respect to C-15 16 the amount of taxable capital gain income which will be generated in future years. Capital loss carryforwards of $45 will expire in 2001 and $255 will expire in 2003. The tax balances of significant temporary differences representing deferred tax assets and liabilities at December 31, 1999 and 1998, consisted of the following:
1999 1998 Marketable securities fair value adjustment $(18,571) $ -- Reserves for returns, allowances, cash discounts and doubtful accounts 21,867 21,734 Reserve for inventories and related items 5,766 7,925 Depreciation of plant and equipment (1,621) (3,275) Reserve for display fixtures 5,368 2,391 Accrued compensation and benefits 10,029 14,011 Postretirement benefits 2,301 2,317 Sales agreement payments due 11,410 8,139 Restructuring-related reserves 8,725 8,396 Capital losses 300 6,064 State net operating losses 2,209 -- Alternative minimum tax credit 247 -- Other accruals and reserves, net 3,908 6,704 -------- -------- 51,938 74,406 Valuation allowance (300) (6,064) -------- -------- $ 51,638 $ 68,342 ======== ========
Income tax payments, net of refunds received, for the years ended December 31, 1999, 1998 and 1997 totaled $3,865, $12,222 and $14,753, respectively. 10. OTHER CURRENT LIABILITIES Other current liabilities at December 31, 1999 and 1998, consisted of the following:
1999 1998 Compensation, payroll taxes and related withholdings $16,600 $ 7,878 Customer allowances 7,904 8,240 Accrued insurance 6,163 10,749 Sales agreement payments due within one year 5,964 8,349 Accrued interest 4,975 6,476 Property and other taxes 4,731 4,796 Restructuring-related reserves (see Note 3) 1,577 3,470 Other 11,800 11,536 ------- ------- $59,714 $61,494 ======= =======
C-16 17 11. OTHER LIABILITIES Other liabilities at December 31, 1999 and 1998, consisted of the following:
1999 1998 Accrued pension and postretirement expense (see Note 12) $21,421 $21,580 Restructuring-related reserves (see Note 3) 15,826 15,726 Sales agreement payments due after one year 6,485 7,778 Other 2,699 2,451 ------- ------- $46,431 $47,535 ======= =======
12. RETIREMENT AND POSTRETIREMENT BENEFIT PLANS RETIREMENT PLANS - The Company combined its two defined contribution plans during 1997. The combined plan incorporates the provisions of the former plans which, pursuant to Section 401(k) of the Internal Revenue Code, provide that employees meeting certain eligibility requirements may defer a portion of their salary subject to certain limitations. The Company pays certain administrative costs of the plan and makes contributions based upon a percentage of the employee's salary deferral and an annual additional contribution at the discretion of the Board of Directors consistent with the terms of the former plans. For the years ended December 31, 1999, 1998 and 1997, the expense for these plans totaled $194, $287 and $385, respectively. The Company also sponsors a defined benefit pension plan (the Retirement Plan) covering substantially all employees who meet certain eligibility requirements. Benefits are based upon years of service and average compensation levels. The Company's general funding policy is to contribute amounts deductible for federal income tax purposes. Contributions are intended to provide not only for benefits earned to date, but also for benefits expected to be earned in the future. In addition to the Retirement Plan, the Company has established the following plans (collectively, the Nonqualified Plans): a nonqualified defined benefit plan for employees whose benefits under the Retirement Plan are limited by provisions of the Internal Revenue Code; a nonqualified defined benefit plan to provide supplemental retirement benefits for selected executives in addition to benefits provided under other Company plans; and a nonqualified plan to provide retirement benefits for members of the Company's Board of Directors who are not covered under any of the Company's other plans. These plans were unfunded at December 31, 1999 and 1998, although assets for these plans totaling $5,633 and $5,766, respectively, were held in Rabbi trusts. C-17 18 The following table sets forth summarized information on the Company's defined benefit pension plans for the years ended December 31, 1999 and 1998:
RETIREMENT PLAN NONQUALIFIED PLANS 1999 1998 1999 1998 Change in projected benefit obligation: Projected benefit obligation at beginning of year $ 91,300 $ 79,306 $ 7,418 $ 6,613 Service cost 1,888 2,063 270 256 Interest cost 5,739 5,927 446 480 Actuarial (gain) loss (13,902) 13,070 (1,221) 516 Curtailment (1,052) (3,088) -- -- Benefit payments (5,292) (5,978) (490) (447) -------- -------- -------- -------- Projected benefit obligation at end of year $ 78,681 $ 91,300 $ 6,423 $ 7,418 ======== ======== ======== ======== Change in plan assets: Fair value of plan assets at beginning of year $ 86,194 $ 87,709 $ -- $ -- Actual return on plan assets 6,773 4,463 -- -- Employer contributions -- -- 490 447 Benefit payments (5,292) (5,978) (490) (447) -------- -------- -------- -------- Fair value of plan assets at end of year $ 87,675 $ 86,194 $ -- $ -- ======== ======== ======== ======== Funded status: Funded status at end of year - assets over (under) projected benefit obligation $ 8,994 $ (5,106) $ (6,423) $ (7,418) Unrecognized net actuarial (gain) loss (18,533) (6,206) 161 1,200 Unrecognized prior service cost 34 178 509 1,091 -------- -------- -------- -------- Net amount recognized $ (9,505) $(11,134) $ (5,753) $ (5,127) ======== ======== ======== ======== Accrued benefit liability included in other liabilities $ (9,505) $(11,134) $ (6,564) $ (5,127) Intangible asset included in other assets -- -- 359 -- Accumulated other comprehensive income, pretax -- -- 452 -- -------- -------- -------- -------- Net amount recognized $ (9,505) $(11,134) $ (5,753) $ (5,127) ======== ======== ======== ======== Weighted average assumptions: Discount rate 7.50% 6.50% 7.50% 6.50% Expected return on plan assets 9.00% 9.00% 9.00% 9.00% Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
C-18 19 A summary of the components of net periodic pension (income) expense for all of the Company's defined benefit plans for the years ended December 31, 1999, 1998 and 1997, is as follows:
RETIREMENT PLAN NONQUALIFIED PLANS --------------------------------- ------------------------------- 1999 1998 1997 1999 1998 1997 Components of net periodic benefit (income) expense: Service cost $ 1,888 $ 2,063 $ 2,001 $ 270 $ 256 $ 169 Interest cost 5,739 5,927 5,555 446 480 466 Expected return on plan assets (7,112) (6,707) (6,246) -- -- -- Amortization of: Prior service cost 105 258 337 262 284 278 Actuarial (gain) loss (228) -- (512) 6 32 26 Curtailment (gain) loss (2,022) (3,024) -- 130 -- -- ------- ------- ------- ------- ------- ------- Net periodic benefit (income) expense $(1,630) $(1,483) $ 1,135 $ 1,114 $ 1,052 $ 939 ======= ======= ======= ======= ======= =======
The increase in the discount rate from 6.50% to 7.50% in 1999 increased the actuarial gain component of the Retirement Plan's and the Nonqualified Plans' projected benefit obligation by $10,009 and $592, respectively; while the decrease in the discount rate from 7.25% to 6.50% in 1998 increased the actuarial loss component of the respective plans' projected benefit obligation by $8,441 and $551, respectively. In addition, headcount reductions and subsidiary dispositions resulted in curtailments of the Retirement Plan and the Nonqualified Plans, the effects of which are reflected in the preceding tables as well as the following tables related to the Company's postretirement benefits. POSTRETIREMENT BENEFITS - In addition to providing pension benefits, the Company provides medical and life insurance benefits for eligible employees upon retirement from the Company. Substantially all employees may become eligible for such benefits upon retiring from active employment of the Company. Medical and life insurance benefits for employees and retirees are paid by a combination of Company and employee or retiree contributions. Retiree insurance benefits are provided by insurance companies whose premiums are based on claims paid during the year. C-19 20 The following table sets forth summarized information on the Company's postretirement benefits for the years ended December 31, 1999 and 1998:
1999 1998 Change in projected benefit obligation: Projected benefit obligation at beginning of year $ 3,944 $ 3,587 Service cost 157 155 Interest cost 202 248 Participants' contributions 268 261 Actuarial (gain) loss (1,100) 428 Curtailment -- (319) Benefit payments (437) (416) ------- ------- Projected benefit obligation at end of year $ 3,034 $ 3,944 ======= ======= Change in plan assets: Fair value of plan assets at beginning of year $ -- $ -- Employer contributions 169 155 Participants' contributions 268 261 Benefit payments (437) (416) ------- ------- Fair value of plan assets at end of year $ -- $ -- ======= ======= Funded status: Funded status at end of year - assets under projected benefit obligation $(3,034) $(3,944) Unrecognized net actuarial gain (2,279) (1,328) Unrecognized prior service cost (39) (47) ------- ------- Accrued benefit liability included in other liabilities $(5,352) $(5,319) ======= ======= Weighted average assumptions: Discount rate 7.50% 6.50% Health care cost trend rates: * - through age 65 7.50% 8.00% - over age 65 5.50% 6.00%
* Trend rates assumed to decrease 0.5% annually to 5.5% in the year 2003 (4.5% in 2001 for over age 65 coverage), and remaining level thereafter. C-20 21 Net periodic expense of the Company's postretirement benefits for the years ended December 31, 1999, 1998 and 1997, was as follows:
1999 1998 1997 Components of net periodic benefit expense: Service cost $ 157 $ 155 $ 146 Interest cost 202 248 248 Amortization of: Prior service cost (8) (10) (11) Actuarial gain (149) (86) (112) Curtailment gain -- (21) -- ----- ----- ----- Net periodic benefit expense $ 202 $ 286 $ 271 ===== ===== =====
The health care cost trend rate assumption does not have a significant effect on the amounts reported. For example, a 1% change in the health care cost trend rate would have the following effects:
INCREASE DECREASE Effect on total of service and interest cost components $ 21 $ (19) Effect on postretirement benefit obligation 148 (133)
13. STOCKHOLDERS' EQUITY EMPLOYEE STOCK PLANS - Under various stock option and incentive plans, the Company may grant incentive and nonqualified stock options to purchase up to 5,565,500 shares of common stock. All incentive options are granted at the fair market value on the date of grant. Incentive stock options become exercisable equally over three years beginning one year after the date granted and expire ten years after the date granted. Nonqualified stock options become exercisable according to a vesting schedule determined at the date granted and expire on the date set forth in the option agreement. Nonqualified stock options were granted in 1999, 1998 and 1997 at exercise prices at least equal to the fair market value of the common stock on the date of grant. Of these, nonqualified stock options for 30,000 shares of common stock in 1997 and 300,000 shares of common stock in 1996 were granted to certain of the Company's officers contingent on stockholder approval of an increase in the number of shares authorized for issuance under one of the Company's employee stock plans. For financial reporting purposes, these 330,000 options were deemed to have been granted on April 24, 1997, the date stockholder approval was obtained. At that date, the exercise prices were less than the market price of the common stock. As a result, the contingent options are reported as having been granted at exercise prices below the fair market value of the common stock. Under certain employee stock plans, the Company may grant the right to purchase restricted shares of its common stock. No restricted shares were granted in 1999, 1998 or 1997. C-21 22 A summary of stock option activity during the years ended December 31, 1999, 1998 and 1997, is as follows:
1999 1998 1997 ------------------------- -------------------------- ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE Outstanding at beginning of year 2,416,917 $ 18.99 1,995,256 $ 16.80 1,424,273 $ 13.29 Granted - exercise price on date of grant: Equal to market price of stock 28,000 6.09 228,667 21.27 623,500 22.62 Greater than market price of stock - - 333,333 29.00 22,000 20.19 Less than market price of stock - - - - 330,000 16.67 Exercised - - (97,870) 13.12 (312,481) 12.59 Forfeited (301,832) 20.97 (42,469) 20.38 (92,036) 16.01 --------- ------- --------- ------- --------- ------- Outstanding at end of year 2,143,085 $ 18.55 2,416,917 $ 18.99 1,995,256 $ 16.80 ========= ======= ========= ======= ========= ======= Exercisable at end of year 1,803,737 $ 17.36 1,582,885 $ 15.85 860,516 $ 13.76 ========= ======= ========= ======= ========= =======
The range of exercise prices on shares outstanding as of December 31, 1999, was as follows:
OUTSTANDING EXERCISABLE ----------------------------------------- ---------------------- WEIGHTED AVERAGE WEIGHTED ---------------- REMAINING AVERAGE RANGE OF EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICES SHARES PRICE LIFE IN YEARS SHARES PRICE $ 4.06 18,000 $4.06 9.65 -- $ -- 9.75-14.38 528,285 12.08 6.48 518,285 12.13 14.50-20.75 886,467 16.76 7.05 861,468 16.68 22.00-30.00 710,333 25.94 8.15 423,984 25.15
For the years ended December 31, 1999, 1998 and 1997, compensation expense recognized under stock-based employee compensation plans was not material. At December 31, 1999, 1,072,273 shares were available under the stock option and incentive plans, all of which were available to be issued as restricted shares. C-22 23 If the Company had adopted the expense recognition provisions of SFAS No. 123 for purposes of determining compensation expense related to stock options granted during the years ended December 31, 1999, 1998 and 1997, net (loss) income and net (loss) income per share would have been changed to the following pro forma amounts:
1999 1998 1997 Pro forma net (loss) income $ (36,900) $ 77 $ 19,822 ========== ==== ========== Pro forma net (loss) income per share: Basic $ (2.33) $ - $ 1.21 ========== ==== ========== Diluted $ (2.33) $ - $ 1.17 ========== ==== ==========
Compensation expense reflected in the pro forma disclosures is not indicative of future amounts when the SFAS No. 123 prescribed method will apply to all outstanding nonvested awards. The weighted average fair values at date of grant for options granted during 1999, 1998 and 1997 were $3.08, $5.71 and $7.23 per option, respectively. The fair values were determined using the Black-Scholes option-pricing model with the following assumptions for the years ended December 31, 1999, 1998 and 1997: 1999 1998 1997 Expected life in years 5 5 5 Interest rate 5.47 % 5.35 % 5.90 % Volatility 52.14 % 27.91 % 36.81 % Dividend yield -- -- 0.30 % STOCK REPURCHASE PROGRAM - On August 12, 1998, the Company announced that its July 30, 1997 stock repurchase program had been extended until July 31, 1999. This program provided for the repurchase of up to one million shares of common stock. The repurchases were to be made on the open market or in private negotiated transactions at prevailing market prices, with the dates and amount of repurchases determined by market conditions. The common stock acquired is held as treasury stock and used in the Company's employee stock plans and for general corporate purposes. As of its expiration, the Company had repurchased 795,000 shares of its common stock under this program. On October 8, 1998, the Company announced a second stock repurchase program, providing for the purchase of up to an additional one million shares of common stock over the 12-month period ending October 6, 1999 at terms similar to the July 30, 1997 stock repurchase program. No shares were repurchased under this program. COMMON STOCK RIGHTS - On August 26, 1999, the Company's Board of Directors declared a dividend distribution of one Right for each outstanding share of the Company's common stock to stockholders of record on September 8, 1999. Each Right entitles the holder to purchase, at the price of $25 per share, 1/100th of a share of Series B Preferred Stock. Until exercisable, the Rights are attached to all outstanding shares of the Company's common stock. The Rights are exercisable only in the event that a person or group of persons (i) acquires 15% or more of the Company's common stock and there is a public announcement to that effect (25% in the case of a person or group of persons which was a 15% stockholder on August 26, 1999), or (ii) announces an intention to commence or commences a tender or exchange offer which would result in that person or group beneficially owning 15% or more of the Company's common stock. If the Rights become exercisable, upon a subsequent merger or other business combination transaction, each Right may entitle the holder to purchase common stock of the acquiring company worth two times the exercise price of the Right. Under certain other circumstances (defined in the Rights Agreement) each Right may entitle the holder (with certain exceptions) to purchase common stock, or in certain C-23 24 circumstances, cash, property or other securities of the Company, having a value worth two times the exercise price of the Right. The Rights are redeemable at one cent per Right at any time prior to 20 days after the public announcement that a person or group has acquired 15% of the Company's common stock. Unless exercised or redeemed earlier by the Company, the Rights expire on August 31, 2009. The Company's Board of Directors retains the right to amend the terms of the Rights Agreement, subject to certain restrictions. See Note 2. ACCUMULATED OTHER COMPREHENSIVE INCOME - The components of accumulated other comprehensive income, net of tax, at December 31, 1999 were: currency translation, $122; unrealized gains on securities, $27,625; and minimum pension liability adjustment, $(271). Currency translation, net, was the only component of accumulated other comprehensive income at December 31, 1998. 14. COMMITMENTS LEASE COMMITMENTS - In August 1998, the Company entered into a noncancelable operating lease for approximately 150,000 square feet of office space in Covington, Kentucky, of which approximately 33,000 square feet has been subleased back to the lessor as of February 1, 2000 at a rate equal to that being paid by the Company. The lease and the related sublease arrangement, which expire in December 2008, contain lease rates which escalate on an annual basis. The Company has a noncancelable long-term lease for certain of its principal facilities, including its former corporate headquarters, which runs through November 30, 2013, with one 10-year renewal option available. The basic rent under the lease contains scheduled rent increases every five years, including the renewal period. The lease contains a purchase option in 2005 (and again in 2010) at the fair market value of the properties at the date of exercise. As a condition of the lease, all property taxes, insurance costs and operating expenses are to be paid by the Company. For accounting purposes, this lease has been treated as a capital lease (see Note 8). The Company also leases additional distribution and administrative facilities, sales offices and personal property under noncancelable operating leases which expire on various dates through 2004. Certain of these leases contain renewal and escalating rental payment provisions as well as contingent payments. Rental expense for the years ended December 31, 1999, 1998 and 1997, on all real and personal property, was $9,585, $12,884 and $15,743, respectively. C-24 25 Minimum rental commitments under noncancelable leases as of December 31, 1999 are as follows:
CAPITAL OPERATING LEASES LEASES Year Ending December 31, 2000 $ 4,001 $ 8,860 2001 4,828 7,428 2002 3,857 5,145 2003 3,720 4,078 2004 3,720 2,746 Thereafter 41,800 10,946 ------ ------ Net minimum commitments 61,926 $39,203 ======= Less amount representing interest 39,290 ------ Present value of net minimum lease commitments (see Note 3) $22,636 =======
Total net minimum rental commitments have not been reduced by future minimum sublease rentals of $4,980 under the Company's operating lease for its Covington, Kentucky corporate headquarters. MANAGEMENT INFORMATION SYSTEMS UPGRADE - The Company is in the process of investing up to $35,000 to implement a major management information systems plan to replace core business applications which support sales and customer services, procurement and manufacturing, distribution and finance with Enterprise Resource Planning (ERP) software. As of December 31, 1999 and 1998, approximately $30,200 and $10,800, respectively, had been spent on the ERP project. CONTRACT COMMITMENTS - The Company has several long-term customer sales agreements which require payments and credits for each of the years in the four-year period ended December 31, 2003, of $5,964, $2,572, $2,366 and $1,547, respectively, and no payments and credits thereafter. These amounts are included as other current liabilities or other liabilities in the accompanying consolidated balance sheet as of December 31, 1999. During January 2000, the Company entered into a sales agreement with a customer which requires payments totaling $7,650 over the life of the contract - $2,850 in 2000 and $1,200 in each of the years in the four-year period ended December 31, 2004. In addition, in the ordinary course of business, the Company has entered into various contracts including contracts with third-party suppliers with which the Company contracted in connection with outsourcing its manufacturing operations. LETTERS OF CREDIT - At December 31, 1999 and 1998, the Company had outstanding letters of credit of $387 and $4,388, respectively, which served to collateralize the Company's obligations to third parties for the purchase of inventory. In addition, at December 31, 1999, the Company had a $500 standby letter of credit related to certain of its office facilities. The fair value of these letters of credit approximates contract values. C-25 26 EMPLOYMENT AGREEMENTS - The Company has employment agreements with certain executives which provide for, among other things, minimum annual base salaries which may be adjusted periodically, continued payment of salaries in certain circumstances and incentive bonuses. Certain agreements further provide for employment termination payments, including payments contingent upon any person becoming the beneficial owner of 30% or more of the Company's outstanding common stock. See Note 17. 15. LEGAL PROCEEDINGS The Company is a defendant in certain routine litigation which is not expected to result in a material adverse effect on the Company's net worth, total cash flows or operating results. 16. ACQUISITIONS AND DIVESTITURES On July 3, 1998, the Company acquired a majority interest in The Ink Group, based in Sydney, Australia, with additional operations in New Zealand and the United Kingdom, for $1,000 and an agreement to provide operating loans. These operating loans totaled $9,399 as of December 31, 1999. The Company acquired 60% ownership of The Ink Group's operating companies in Australia and New Zealand and 100% ownership of its operating company in the United Kingdom. This transaction was accounted for using the purchase method of accounting, resulting in the Company recording goodwill totaling $10,495. The pro forma effect of the acquisition was not material to the Company's results of operations for 1998 or 1997. On August 31, 1998, the Company sold The Paper Factory to PFW Acquisition Corp. for $36,216, which approximated the Company's investment. The Paper Factory's sales totaled $46,635 for the eight-month period in 1998 and $86,149 for full-year 1997. 17. SUBSEQUENT EVENTS AMERICAN GREETINGS TRANSACTION - Pursuant to the Merger Agreement described in Note 2, on March 9, 2000, American Greetings completed its merger with the Company by acquiring 97.4% of the Company's outstanding common shares, thereby triggering the change-in-control provisions contained in certain of the Company's agreements. Included in these provisions were the following: i) accelerated payment of the balance owed under employee retention agreements (see "Other Current Assets" in Note 1); ii) increased termination benefits under executive employment contracts; and iii) Egreetings' right to repurchase at fair market value (as defined in the stock purchase agreement) all common shares of Egreetings held by the Company. As of March 30, 2000, Egreetings' right to repurchase had expired. On that date, the Company's investment in Egreetings had a market value of approximately $39,369, based on the $5 13/16 per share closing price quoted in the Nasdaq National Market. In addition, on March 30, 2000, American Greetings repaid and terminated the Company's Secured Credit Agreement. Accordingly, the debt covenant violations referred to in Note 8 became no longer applicable. EX-99.2 5 EXHIBIT 99.2 1 Exhibit 99.2 REPORT OF ERNST & YOUNG LLP, 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. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements 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. /s/ Ernst & Young LLP Cleveland, Ohio March 28, 2000 D-1 2 CONSOLIDATED STATEMENT OF INCOME Years ended February 29, 2000 and February 28, 1999 and 1998 Thousands of dollars except per share amounts
2000 1999 1998 ------------ ------------ ------------ 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
See notes to consolidated financial statements. D-2 3 CONSOLIDATED STATEMENT OF FINANCIAL POSITION February 29, 2000 and February 28, 1999 Thousands of dollars
ASSETS 2000 1999 ------------ ------------ 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 ============ ============
See notes to consolidated financial statements. D-3 4
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 ----------- ----------- 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 =========== ===========
See notes to consolidated financial statements. D-4 5 CONSOLIDATED STATEMENT OF CASH FLOWS Years ended February 29, 2000 and February 28, 1999 and 1998
Thousands of dollars 2000 1999 1998 --------- --------- --------- 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 ========= ========= =========
See notes to consolidated financial statements. 6 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended February 29, 2000 and February 28, 1999 and 1998 Thousands of dollars except per share amounts
Common Shares Capital in Shares ---------------------- Excess of Treasury Held Class A Class B Par Value Stock In Trust ---------------------- ---------- ----------- ------------ 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 $(20,480) 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) (20,480) 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) $(20,480) ========= ========= ========== =========== ============
Accumulated Deferred Other Compensation Comprehensive Retained Plans Income (Loss) Earnings Total -------------- ---------------- ------------ ----------- 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 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 (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 $(27,572) $1,356,275 $1,252,411 ============== ================ ============ ===========
See notes to consolidated financial statements. D-6 7 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. D-7 8 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. D-8 9 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. D-9 10 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. D-10 11 The following table summarizes the provisions, payments and remaining reserves associated with the restructure charges recorded in both 2000 and 1999.
Facility Kiosk Lease Termination Shut-Down Exit Exit Other Benefits Costs Costs Costs Costs Total -------------- --------------- ---------- ---------- ---------- ---------- (Thousands of dollars) 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 ============== =============== ========== ========== ========== ==========
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). D-11 12 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:
2000 1999 1998 --------------- --------------- ---------------- 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 =============== =============== ================
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:
Foreign Unrealized Gains Accumulated Currency (Losses) on Other Translation Available-For-Sale Comprehensive Adjustments Securities Income (Loss) ---------------- ----------------------- --------------------- 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) ================ ======================= =====================
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. D-12 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE E - INVENTORIES
2000 1999 ----------------- --------------- 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 ================= ===============
NOTE F - PROPERTY, PLANT AND EQUIPMENT
2000 1999 ----------------- --------------- 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 ================= ===============
D-13 14 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 ================= ===============
D-14 15 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:
2000 1999 ------------------- ----------------- 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 =================== =================
D-15 16 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:
2000 1999 --------------- --------------- 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 =============== ===============
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. D-16 17 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. D-17 18 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.
2000 1999 ---------------- ---------------- 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 at 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) =============== ================
D-18 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE J - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
2000 1999 ----------------- ------------------ 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)
D-19 20 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:
2000 1999 1998 --------------- --------------- --------------- 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 =============== =============== ===============
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 ================
D-20 21 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. D-21 22 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:
2000 1999 1998 ----------- ----------- ----------- 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
D-22 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE L - COMMON SHARES AND STOCK OPTIONS (CONTINUED) Stock option transactions and prices are summarized as follow:
Number of Options Weighted-Average Exercise Price Per Share ----------------------------------- -------------------------------------------------------- Class A Class B Class A Class B --------------- ---------------- ------------------------- -------------------------- 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
The weighted average remaining contractual life of the options outstanding as of February 29, 2000 is 7.4 years. D-23 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE L - COMMON SHARES AND STOCK OPTIONS (CONTINUED) Range of exercise prices for options outstanding:
Outstanding Exercisable ----------------------------------- ---------------------------------- Weighted- Weighted- Weighted- Average Average Average Remaining Exercise Optioned Exercise Optioned Exercise Contractual Price Ranges Shares Price Shares Price Life (Years) - ------------------------- --------------- --------------- --------------- --------------- ---------------- $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 =============== ===============
D-24 25 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. D-25 26 OPERATING SEGMENT INFORMATION
NET SALES EARNINGS ------------------------------------------ --------------------------------------- 2000 1999 1998 2000 1999 1998 ------------ ----------- ----------- ----------- ---------- ---------- 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 ============ =========== =========== =========== ========== ==========
ASSETS DEPRECIATION ------------------------------------------- -------------------------------------- 2000 1999 1998 2000 1999 1998 ------------ ----------- ----------- ---------- ---------- ---------- Social Expressions Products $1,671,288 $1,672,557 $1,520,391 $40,940 $42,689 $39,676 AmericanGreetings.com 31,663 13,309 7,695 1,133 694 702 Non-reportable segments 308,346 261,128 284,956 22,233 23,370 24,893 Unallocated and intersegment items 503,032 469,016 321,428 (140) (98) 1,627 Exchange rate adjustment 3,654 3,318 26,994 176 394 (972) ------------ ----------- ----------- ---------- ---------- ---------- Consolidated $2,517,983 $2,419,328 $2,161,464 $64,342 $67,049 $65,926 ============ =========== =========== ========== ========== ==========
CAPITAL EXPENDITURES ------------------------------------- 2000 1999 1998 ---------- --------- ---------- Social Expressions Products $25,666 $43,907 $45,984 AmericanGreetings.com 3,762 401 228 Non-reportable segments 21,103 17,152 21,836 Unallocated and intersegment items - - - Exchange rate adjustment 222 (510) (150) ---------- --------- ---------- Consolidated $50,753 $60,950 $67,898 ========== ========= ==========
OTHER INFORMATION
2000 1999 1998 ------------ ----------- ------------ 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 accessories 301,131 301,517 309,763 All other 458,262 402,204 411,384 ------------ ----------- ------------ Consolidated Net Sales $2,175,236 $2,205,706 $2,198,765 ============ =========== ============
GEOGRAPHIC INFORMATION
NET SALES FIXED ASSETS - NET ------------------------------------------- ------------------------------------------- 2000 1999 1998 2000 1999 1998 ------------ ----------- ----------- ----------- ------------ ------------ 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 ============ =========== =========== =========== ============ ============
D-26 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE N - INCOME TAXES Income (loss) before income taxes:
2000 1999 1998 ---------------- --------------- ---------------- United States $ 135,039 $ 300,411 $ 298,817 Foreign 5,585 (18,814) (6,380) ---------------- --------------- ---------------- $ 140,624 $ 281,597 $ 292,437 ================ =============== ================ Income taxes (benefit) have been provided as follows: 2000 1999 1998 ---------------- --------------- ---------------- 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 ================ =============== ================
Significant components of the Corporation's deferred tax assets and liabilities at February 29, 2000 and February 28, 1999 are as follows:
2000 1999 ---------------- ---------------- 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 ================ ================
The decrease in the valuation allowance was due to decreases in net operating loss carryforwards in the United Kingdom. D-27 28 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:
2000 1999 1998 ------------- ------------ ------------- 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% ============= ============ =============
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. D-28 29 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. D-29 EX-99.3 6 EXHIBIT 99.3 1 Exhibit 99.3 MANAGEMENT'S DISCUSSION AND ANALYSIS 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. E-1 2 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. 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. E-2 3 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. 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 E-3 4 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. 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. E-4 5 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. E-5 6 The following table summarizes the provisions, payments and remaining reserves associated with the restructure charges recorded in both 2000 and 1999.
Facility Kiosk Lease Termination Shut-Down Exit Exit Other Benefits Costs Costs Costs Costs Total ----------------- ---------------- ----------- ---------- --------- ------------ (Thousands of dollars) 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 ================= ================ =========== ========== ========= ============
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. E-6 7 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). 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. E-7 8 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. 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. E-8 9 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. 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. E-9 10 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. 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. E-10 11 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. 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. E-11 12 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. E-12 -----END PRIVACY-ENHANCED MESSAGE-----