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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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