Notes to
Financial Statements
1. Description of Plan
The following description of the American Greetings Retirement Profit Sharing and Savings Plan (the Plan) provides only general information. Participants should refer to the Plan Document for
a more complete description of the Plans provisions.
General
The Plan is a defined contribution plan covering substantially all employees of American Greetings Corporation (the Corporation and Plan Sponsor) and its domestic subsidiaries.
Employees classified as Territory Leads, Merchandisers, leased employees and certain union employees are not eligible to participate in the Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974
(ERISA).
Contributions
The Corporation, at its discretion, may make a profit sharing contribution in an amount to be determined by the Corporation. Historically, the Corporation annually contributed 8% of its consolidated
domestic pretax profits, excluding gains and losses from capital assets, intercompany dividends and foreign currency transactions, to the Plan. The Corporation made contributions of $7,535,329 and $9,413,356, which were recorded as contributions
receivable for 2012 and 2011, respectively. The profit sharing contributions were based on the Corporations pre-tax profits for its fiscal years ended February 28, 2013 and February 29, 2012, respectively.
Participants may contribute 1% to 50% of pre-tax annual compensation (401(k) contributions) or after-tax annual compensation (Roth
contributions) to the Plan, as defined in the Plan. The Corporation may restrict individual contributions below 50% in order to meet certain governmental limitations. The Corporation, at its discretion, may annually contribute 40% of up to the
first 6% of annual compensation that a participant contributes to the Plan. The Corporations matching contributions which were recorded as contributions receivable, were $5,055,192 and $5,222,886 for 2012 and 2011, respectively. All
contributions are invested in accordance with the participants investment elections.
Participants direct the investment of their
accounts, together with their share of the Corporations annual contributions, to any of the investment options offered under the Plan.
Participant Accounts and Vesting
Each
participants account is credited with the participants 401(k) contributions, Roth contributions and allocations of (a) the Corporations profit sharing contribution and 401(k) matching contribution and (b) Plan earnings,
and is charged with allocations of administrative expenses. Allocations are based on participant compensation, participant elections or account balances, as defined. Individuals who have retired or terminated employment with the Corporation do not
participate in the Corporations future contributions to the Plan. The benefit to which a participant is entitled is the benefit that can be provided from the participants account. Participants are immediately vested in both their and the
Corporations contributions, plus actual earnings thereon.
4
American Greetings
Retirement Profit Sharing and Savings Plan
Notes to Financial Statements (continued)
1. Description of the Plan (continued)
Participant Loans
Participants may borrow against their elected deferred 401(k) contribution, Roth contribution or rollover contribution accounts, a minimum of $1,000 up to a maximum equal to the lesser of $50,000 (or less
if a participant had an outstanding Plan loan in the prior twelve months) or 50% of their account balance. Loan terms range from 12 to 54 months for general purpose loans and 12 to 240 months for loans used for the purchase of a participants
primary residence. The loans are secured by the balance in the participants account. The interest rate on a participant loan is set at the prime rate plus 1% on the first business day of the calendar quarter in which the loan originates and
remains fixed for the loans term. Principal and interest are paid ratably through payroll deductions.
Payment of Benefits
At the time of a participants retirement or termination of service, the participant may elect to receive an immediate lump sum
distribution, installment payments to be paid monthly, quarterly or annually, or rollover their distribution to an individual retirement account or other eligible plan.
Plan Termination
Although it has not expressed any intent to do so, the Corporation has
the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, the assets of the Plan will be distributed to the participants on the basis of
individual account balances at the date of termination.
2. Summary of Accounting Policies
Basis of Accounting
The financial
statements have been prepared on the accrual basis of accounting.
Investment Valuation and Income Recognition
The Plans investments are stated at fair value. The shares of registered investment companies are valued at quoted market prices, which represent
the net asset values of shares held by the Plan at year-end. The Corporations Class A common shares included in the American Greetings Company Stock Fund (AG Stock Fund) are valued at the last reported sales price on the last
business day of the Plan year.
Purchases and sales of investments are recorded on a trade-date basis. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. Capital gain distributions are included in dividend income.
5
American Greetings
Retirement Profit Sharing and Savings Plan
Notes to Financial Statements (continued)
2. Summary of Accounting Policies (continued)
Notes Receivable from Participants
Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest.
Payment of Benefits
Benefits are recorded when paid.
Use of Estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Subsequent Events
The Plans
management evaluated subsequent events for potential recognition and disclosure through the date the financial statements were issued. (See Note 10 regarding the proposal to acquire the Corporation.)
6
American Greetings
Retirement Profit Sharing and Savings Plan
Notes to Financial Statements (continued)
3. Investments
The Plans investments are held by Vanguard Fiduciary Trust Company, Trustee of the Plan. The fair value of individual investments that represent 5% or more of the fair value of the Plans net
assets are as follows:
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December 31,
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2012
|
|
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2011
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|
Vanguard PRIMECAP Fund Investor Shares
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$
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151,568,424
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|
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$
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147,857,992
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JPMorgan Core Bond Fund; Select Class
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127,058,976
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|
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125,951,002
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Vanguard 500 Index Fund Signal Shares
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98,649,133
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|
|
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92,040,168
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Vanguard Prime Money Market Fund
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70,016,892
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|
|
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71,700,897
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Vanguard Wellington Fund Investor Shares
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52,123,882
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|
|
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48,601,621
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During the years ended December 31, 2012 and 2011, the Plans investments (including investments purchased,
sold, as well as held during the year) appreciated (depreciated) in fair value as determined by quoted market prices as follows:
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2012
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2011
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Registered investment companies
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$
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57,636,464
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$
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(11,387,492
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)
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AG Stock Fund
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4,908,099
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(8,515,126
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)
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Net appreciation (depreciation) in fair value of investments
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$
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62,544,563
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$
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(19,902,618
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)
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7
American Greetings
Retirement Profit Sharing and Savings Plan
Notes to Financial Statements (continued)
4. Income Tax Status
The Plan has received a determination letter from the Internal Revenue Service (the IRS) dated December 9, 2004, stating that the Plan is qualified under Section 401(a) of the
Internal Revenue Code (the Code) and, therefore, the related trust is exempt from taxation. Subsequent to this determination by the IRS, the Plan was amended and restated. Once qualified, the Plan is required to operate in conformity
with the Code to maintain its qualification. The Plan administrator believes the Plan is being operated, in all material respects, in compliance with the applicable requirements of the Code and, therefore, believes that the Plan, as amended and
restated, is qualified and the related trust is tax exempt.
Accounting principles generally accepted in the United States of America require
Plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The Plan administrator has
analyzed the tax positions taken by the Plan, and believes that as of December 31, 2012, there were no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial
statements. The plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Plan administrator believes it is no longer subject to income tax examinations for years prior to
2009.
5. Transactions with Parties in Interest
The Plan held 962,977 Class A common shares of the Corporation in the AG Stock Fund at December 31, 2012, with a fair value of $16,264,682 (1,032,663 Class A common shares at
December 31, 2011, with a fair value of $12,918,615). Dividend income on the Corporations common shares of $646,851 and $542,824 was recognized in 2012 and 2011, respectively.
The Plan invests in shares of mutual funds managed by an affiliate of the Trustee. Accounting, legal and certain other administrative fees are paid by the Corporation. All other expenses of the Plan are
paid by the Plan. Investment advisory fees for portfolio management of Vanguard Funds are paid directly from individual fund earnings.
6.
Risks and Uncertainties
The Plan invests in various investment securities. Investment securities are exposed to various risks such as
interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes
could materially affect participants account balances and the amounts reported in the statement of net assets available for benefits.
8
American Greetings
Retirement Profit Sharing and Savings Plan
Notes to Financial Statements (continued)
7. Fair Value Measurements
Assets and liabilities measured at fair value are classified using the fair value hierarchy based upon the transparency of inputs as of the measurement date. The classification of fair value measurements
within the hierarchy is based upon the lowest level of input that is significant to the measurement. The three levels are defined as follows:
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Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities.
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Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
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Level 3 Valuation is based upon unobservable inputs that are significant to the fair value measurement.
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The following table summarizes the assets measured at fair value on a recurring basis as of the measurement dates, December 31, 2012 and 2011, and
the basis for that measurement, by level within the fair value hierarchy:
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At December 31, 2012:
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Level 1
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Level 2
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Level 3
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Total
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Money market fund
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$
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$
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70,016,892
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$
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$
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70,016,892
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Bond fund
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127,058,976
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127,058,976
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Balanced funds
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183,133,537
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|
|
|
|
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|
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183,133,537
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Stock funds
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|
|
|
|
|
|
|
|
|
|
|
|
|
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International growth
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26,810,805
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|
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26,810,805
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Market index
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123,727,411
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|
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123,727,411
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Large cap
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31,073,454
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|
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31,073,454
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Prime cap growth
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151,568,424
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|
|
|
|
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|
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|
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151,568,424
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AG Stock Fund
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16,264,682
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16,264,682
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Total investments
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$
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643,372,607
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$
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86,281,574
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$
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$
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729,654,181
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At December 31, 2011:
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Level 1
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Level 2
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Level 3
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Total
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Money market fund
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$
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$
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71,700,897
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$
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$
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71,700,897
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Bond fund
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|
125,951,002
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|
|
|
|
|
|
|
|
|
|
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125,951,002
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Balanced funds
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154,463,765
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|
|
|
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154,463,765
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Stock funds
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|
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International growth
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23,162,274
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|
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23,162,274
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Market index
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114,732,719
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|
|
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|
|
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114,732,719
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Large cap
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28,240,202
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|
|
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28,240,202
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Prime cap growth
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|
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147,857,992
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|
|
|
|
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|
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|
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147,857,992
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AG Stock Fund
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|
|
|
|
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12,918,615
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12,918,615
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Total investments
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$
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594,407,954
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$
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84,619,512
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$
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$
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679,027,466
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9
American Greetings
Retirement Profit Sharing and Savings Plan
Notes to Financial Statements (continued)
7. Fair Value Measurements (continued)
The Plans valuation methodology used to measure the fair values of the mutual funds included in
Level 1 were derived from quoted market prices as substantially all of these instruments have active markets. The money market fund, previously classified as Level 1, has been reclassified as Level 2 as substantially all of the funds
investments were determined using amortized cost. The above table for 2011 has been revised to reflect managements determination for the reclassification of this investment. This change had no impact on the Plans net assets or changes in
net assets for either 2012 or 2011. The AG Stock Fund is valued at the net asset value of units held by the Plan at year-end.
8.
Reconciliation of Financial Statements to Form 5500
Upon an event of default on a participant loan, to the extent a distribution to the
participant is not permissible under the Plan, the amount due to the Plan on account of the defaulted loan will be treated as a deemed distribution. A loan that is a deemed distribution is treated as a distribution on Form 5500 and removed from Plan
assets on Form 5500. However, in the Plan financial statements, and in accordance with the Plan, such deemed distributions remain part of the participants account balance until a distributable event occurs for the participant.
The following is a reconciliation of participant loans and net assets available for benefits per the financial statements at December 31, 2012 and
2011 to Form 5500:
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December 31,
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2012
|
|
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2011
|
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Participant loans per the financial statements
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$
|
6,051,168
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$
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5,505,793
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Less: Certain deemed distributions of participant loans
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50,190
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32,981
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|
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|
|
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Participant loans per Form 5500
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$
|
6,000,978
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$
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5,472,812
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Net assets available for benefits per the financial statements
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$
|
750,163,017
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$
|
699,840,770
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Less: Certain deemed distributions of participant loans
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50,190
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32,981
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Net assets available for benefits per Form 5500
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$
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750,112,827
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$
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699,807,789
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The following is a reconciliation of the net increase in net assets available for benefits per the financial statements
for the year ended December 31, 2012 to Form 5500 net income:
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Net increase per the financial statements
|
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$
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50,322,247
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Less: Certain deemed distributions of participant loans
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17,209
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|
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Net income per Form 5500
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|
$
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50,305,038
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10
American Greetings
Retirement Profit Sharing and Savings Plan
Notes to Financial Statements (continued)
9. Voluntary Correction Program
In 2011, the Corporation identified the following operational errors relating to the Plan: (i) the failure to correctly apply the Plans definition of compensation in determining the level of
participant deferrals and Company profit sharing and matching contributions, (ii) the failure to use the correct loan interest rate and certain failures in loan administration, (iii) the improper inclusion of certain employees who did not
satisfy the Plans eligibility requirements, and (iv) the failure to implement automatic enrollment and escalator provisions for certain employees. To correct these operational errors, the Corporation made a Voluntary Corrections Program
(VCP) submission to the IRS on September 7, 2011. In 2012, an additional error relating to the exclusion of certain elements of eligible compensation used in the determination of elective deferrals and matching contributions was
discovered. Accordingly, the Corporation supplemented its original VCP application with an updated submission to the IRS on November 13, 2012. Based upon the advice of legal counsel, the Corporation expects that the IRS will accept the
Corporations updated VCP submission, and the Corporation is committed to take such corrective actions as may be required by the IRS in response to such submission. The estimated amount of the corrective payments is $1,799,322 and is
included in the employer contributions receivable at December 31, 2012, ($600,000 at December 31, 2011).
10. Proposal by Members
of the Weiss Family and Related Entities to Acquire the Corporation
On September 26, 2012, the Corporation announced that its Board
of Directors received a non-binding proposal from Zev Weiss, its Chief Executive Officer, and Jeffrey Weiss, its President and Chief Operating Officer, on behalf of themselves and certain other members of the Weiss family and related parties
(Family Shareholders) to acquire all of the outstanding Class A and Class B common shares of the Corporation not currently owned by them. Subsequently, on March 29, 2013, the Corporation signed an agreement and plan of merger
(the Merger Agreement) by and among American Greetings Corporation, Century Intermediate Holding Company (Parent), which upon the closing of the Merger (as defined below) will be indirectly owned by the Family Shareholders,
and Century Merger Company, a wholly-owned subsidiary of Parent (Merger Sub). As more fully described in the Corporations Current Report on Form 8-K filed with the Securities and Exchange Commission on April 1, 2013, at
the effective time of the Merger, each issued and outstanding share of the Corporation (other than shares owned by the Corporation, Parent (which will include at the effective time of the Merger all shares currently held by the Family Shareholders),
Merger Sub or holders who have properly exercised dissenters rights under Ohio law) will be converted into the right to receive $18.20 per share, in cash, without interest and subject to any withholding taxes, and Merger Sub will merge with
and into the Corporation, with the Corporation surviving the Merger as a wholly-owned subsidiary of Parent (the Merger).
11
American Greetings
Retirement Profit Sharing and Savings Plan
Notes to Financial Statements (continued)
10. Proposal by Members of the Weiss Family and Related Entities to Acquire the Corporation
(continued)
The consummation of the Merger is subject to customary conditions, and is further conditioned on the
favorable vote of (1) at least two-thirds of the outstanding voting power of the Corporation represented by the Class A common shares and Class B common shares, voting together as a single class, and (2) a majority of the Class A
common shares and Class B common shares held by persons other than the Family Shareholders, the Irving I. Stone Foundation and the Corporations executive officers and directors.
The Plans Trustee will vote the Class A common shares according to the directions received from the Plan participants that are invested in the AG Stock Fund. The Trustee will vote shares for
which it has not received instructions based on the directions of the Plans administrative committee.
12