UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549 | | |
| (Mark One) | | |
|
xþ
| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended February 28, 2009
OR
| | ¨For the fiscal year ended February 28, 2011 |
OR |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
For the transition period from to .
Commission FileNo. 1-13859 American Greetings Corporation (Exact name of registrant as specified in its charter) | | |
Ohio | | 34-0065325 |
Ohio
(State or other jurisdiction
of incorporation or organization)
| | 34-0065325
(I.R.S. Employer Identification No.) |
| |
| One American Road, Cleveland, Ohio | | 44144 |
(Address of principal executive offices) | | 44144
(Zip Code) |
Registrant’s telephone number, including area code:(216) 252-7300 Securities registered pursuant to Section 12(b) of the Act: | | |
Title of each class
| | |
Title of Each Class | | Name of each exchangeEach Exchange on which registeredWhich Registered |
|
| Class A Common Shares, Par Value $1.00 | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: Class B Common Shares, Par Value $1.00 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES
xþ NO
¨oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES
¨o NO
xþIndicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES
xþ NO
¨oIndicate by a check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES
¨þ NO
¨oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. xþIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
| | |
Large accelerated filer xþ
| | Accelerated filer ¨o |
Non-accelerated filer ¨o (Do not check if a smaller reporting company)
| | Smaller reporting company ¨o |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act) YES
¨o NO
xþState the aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, August
29, 2008— $692,183,81327, 2010 — $729,061,401 (affiliates, for this purpose, have been deemed to be directors, executive officers and certain significant shareholders).
Number of shares outstanding as of April 27, 2009:2011:
CLASS A COMMON—35,919,772
37,482,554
CLASS B COMMON—3,507,512
2,937,927
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the American Greetings Corporation Definitive Proxy Statement for the Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year (incorporated into Part III).
AMERICAN GREETINGS CORPORATION
INDEX
Unless otherwise indicated or the context otherwise requires, the “Corporation,” “we,” “our,” “us” and “American Greetings” are used in this report to refer to the businesses of American Greetings Corporation and its consolidated subsidiaries. Founded in 1906, American Greetings operates predominantly in a single industry: the design, manufacture and sale of everyday and seasonal greeting cards and other social expression products. Greeting cards, gift wrap, party goods, stationery and giftware are manufactured or sold by us in North America, including the United States, Canada and Mexico, and throughout the world, primarily in the United Kingdom, Australia and New Zealand. In addition, our subsidiary, AG Interactive, Inc., distributes social expression products, including electronic greetings, physical
productsgreeting cards incorporating consumer photos, and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices. Design licensing is done primarily by our subsidiary AGC, LLC, and character licensing is done primarily by our subsidiaries, Those Characters From Cleveland, Inc. and Cloudco, Inc. Our A.G. Industries, Inc. (doing business as AGI In-Store) subsidiary manufactures custom display fixtures for our products and products of others.
As of February 28, 2009, we also owned and operated 341 card and gift retail stores throughout North America. On April 17, 2009, however, we sold our Retail Operations segment, including all of the card and gift store assets.Our fiscal year ends on February 28 or 29. References to a particular year refer to the fiscal year ending in February of that year. For example,
20092011 refers to the year ended February 28,
2009.2011.
American Greetings creates, manufactures
andand/or distributes social expression products including greeting cards, gift wrap, party goods,
calendarsgiftware and stationery as well as custom display fixtures. Our major domestic greeting card brands are American Greetings,
Recycled Paper Greetings, Papyrus, Carlton Cards, Gibson, Tender Thoughts and Just For You.
In addition, on February 24, 2009, we acquired Recycled Paper Greetings (“Recycled Paper” or “RPG”) and now offer Recycled Paper branded greeting card products. On April 17, 2009, we also acquired the Papyrus brand and now offer Papyrus branded products. Our other domestic products include
DesignWareAGI In-Store display fixtures, as well as other paper product offerings such as Designware party goods
and Plus Mark gift wrap and boxed
cards, DateWorks calendars and AGI In-Store display fixtures.cards. Electronic greetings and other digital content, services and products are available through our subsidiary, AG Interactive, Inc. Our major Internet brands are AmericanGreetings.com, BlueMountain.com, Egreetings.com, Kiwee.com,
PhotoWorks.comCardstore.com and Webshots.com. Through its Webshots
and PhotoWorks sites,site, our AG Interactive business also operates an online photo sharing space and
through its Cardstore.com site, our AG Interactive business provides consumers
the ability to purchase physical greeting cards, including custom cards that incorporate their own photos and sentiments. Until April 2011, we also operated PhotoWorks.com through which we provided customers the ability to use their own photos to create
unique, high qualitya variety of physical products
includingin addition to greeting cards,
including calendars,
onlineon-line photo albums and photo books.
As we considered our strategy around these photo-personalized physical products, we decided to de-emphasize photo prints and other miscellaneous photo-personalized physical products. As a result we wound down our PhotoWorks website. We also create and license our intellectual properties, such as the “Care Bears” and “Strawberry Shortcake” characters. Information concerning sales by major product classifications is included in Part II, Item 7.
At February 28, 2009,2011, we operated in fivefour business segments:North American Social Expression Products, International Social Expression Products, Retail Operations, AG Interactive and non-reportable operating segments. For information regarding the various business segments comprising our business, see the discussion included in Part II, Item 7 and in Note 16 to the Consolidated Financial Statements included in Part II, Item 8.
1
CONCENTRATION OF CREDIT RISKS Net sales to our five largest customers, which include mass merchandisers and national drug store
and supermarket chains, accounted for approximately
36%42%,
37%39% and 36% of total revenue in
2009, 20082011, 2010 and
2007,2009, respectively. Net sales to Wal-Mart Stores, Inc. and its subsidiaries accounted for approximately 15%,
16%14% and
16%15% of total revenue in
2011, 2010 and 2009,
2008respectively. Net sales to Target Corporation accounted for approximately 14% and
2007, respectively.13% of total revenue in 2011 and 2010, respectively, but less than 10% of total revenue in 2009. No other customer accounted for 10% or more of our consolidated total revenue. Approximately
55%54%, 51% and 54% of the North American Social Expression Products segment’s revenue in
2011, 2010 and 2009,
2008 and 2007respectively, was attributable to its top five customers. Approximately
40%44%, 45% and 39% of the International Social Expression Products segment’s revenue in
2011, 2010 and 2009,
2008 and 2007respectively, was attributable to its top three customers.
We believe that women purchase the majority of all greeting cards sold and that the median age of our consumers is approximately
47.46. We also believe that approximately
86%85% of American households purchase greeting cards each year, the average number of greeting
card occasions for which cards
are purchased
per transactioneach year is approximately
2.7,seven, and consumers
makepurchase approximately
ten card purchasing trips15 greeting cards per year.
The greeting card and gift wrap industries are intensely competitive. Competitive factors include quality, design, customer service and terms, which may include payments and other concessions to retail customers under long-term agreements. These agreements are discussed in greater detail below. There are an estimated 3,000 greeting card publishers in the United States, ranging from small family-run organizations to major corporations.
With the expansion of the Internet as a distribution channel for greeting cards, together with the growing use of technology by consumers to create personalized greetings cards with digital photographs and other personalized content, we are also seeing increased competition from greeting card publishers as well as a wide range of personal publishing businesses distributing greeting cards and other social expression products directly to the individual consumer through the Internet. In general, however, the greeting card business is extremely concentrated. We believe that we are one of only two main suppliers offering a full line of social expression products. Our principal competitor is Hallmark Cards, Inc. Based upon our general familiarity with the greeting card and gift wrap
industryindustries and limited information as to our competitors, we believe that we are the second-largest company in the industry and the largest publicly owned greeting card company.
The market for consumer photofinishing and digital imaging services is highly competitive and still emerging. Competitive factors include brand awareness, innovative and differentiated products and services, quality and competitive prices. The major competitors in the consumer photofinishing and digital imaging market are Kodak, Snapfish and Shutterfly. In addition to these major competitors, there are numerous other companies that offer online photofinishing services. There are no significant proprietary or other barriers to entry into the digital or consumer photofinishing industry.
PRODUCTION AND DISTRIBUTION In
2009,2011, our channels of distribution continued to be primarily through mass retail, which is comprised of mass merchandisers,
discount retailers, chain drug stores and supermarkets. Other major channels of distribution included card and gift retail stores, department stores, military post exchanges, variety stores and combo stores (stores combining food, general merchandise and drug items).
As of February 28, 2009, we owned and operated 341 card and gift retail stores in the United States and Canada through the Retail Operations segment, which are primarily located in malls and strip shopping centers. Prior to the sale of our Retail Operations segment on April 17, 2009, we also sold our products through these company-owned card and gift retail stores. Following the sale, we will continue to sell products to these stores, but the stores are no longer owned by us. From time to time, we also sell our products to independent, third-party distributors. Our AG Interactive segment provides social
expressionsexpression content,
including electronic and physical greeting cards, through the Internet and wireless platforms.
Many of our products are manufactured at common production facilities and marketed by a common sales force. Our manufacturing operations involve complex processes including printing, die cutting, hot stamping and embossing. We employ modern printing techniques which allow us to perform short runs and multi-color
2
printing, have a quick changeover and utilizedirect-to-plate technology, which minimizes time to market. Our products are manufactured globally, primarily at facilities located in North America and the United Kingdom. We also source products from domestic and foreign third party suppliers. Beginning on or about March 2010, we discontinued manufacturing party goods and now purchase our party goods from a third party vendor. The photofinishingphysical products provided through our AG Interactive segment are provided primarily by third party vendors. Additionally, information by geographic area is included in Note 16 to the Consolidated Financial Statements included in Part II, Item 8.
2
Production of our products is generally on a level basis throughout the
year.year, with the exception of gift wrap for which production generally peaks in advance of the Christmas season. Everyday inventories (such as birthday and anniversary related products) remain relatively constant throughout the year, while seasonal inventories peak in advance of each major holiday season, including Christmas, Valentine’s Day, Easter, Mother’s Day, Father’s Day and Graduation. Payments for seasonal shipments are generally received during the month in which the major holiday occurs, or shortly thereafter. Extended payment terms may also be offered in response to competitive situations with individual customers. Payments for both everyday and seasonal sales from customers that
have been converted toare on a scan-based trading (“SBT”) model are received generally within 10 to 15 days of the product being sold by those customers at their retail locations. As of February 28,
2009,2011, three of our five largest customers in
20092011 conduct business with us under an SBT
model.Themodel. The core of this business model rests with American Greetings owning the product delivered to its retail customers until the product is sold by the retailer to the ultimate consumer, at which time we record the
sale.Americansale. American Greetings and many of its competitors sell seasonal greeting cards
and other seasonal products
and everyday cards at certain foreign locations with the right of return. Sales of other products are generally sold without the right of return. Sales credits for these products are issued at our discretion for damaged, obsolete and outdated products. Information regarding the return of product is included in Note 1 to the Consolidated Financial Statements included in Part II, Item 8.
During the year, we experienced no material difficulties in obtaining raw materials from our suppliers.
INTELLECTUAL PROPERTY RIGHTS We have a number of trademarks, service marks, trade secrets, copyrights, inventions, patents, and other intellectual property, which are used in connection with our products and services. Our designs, artwork, musical compositions, photographs and editorial verse are protected by copyright. In addition, we seek to register our trademarks in the United States and elsewhere.
From time to time, weWe routinely seek protection of our inventions by filing patent applications for which patents may be granted. We also obtain license agreements for the use of intellectual property owned or controlled by others. Although the licensing of intellectual property produces additional revenue, we do not believe that our operations are dependent upon any individual invention, trademark, service mark, copyright, patent or other intellectual property license. Collectively, our intellectual property is an important asset to us. As a result, we follow an aggressive policy of protecting our rights in our intellectual property and intellectual property licenses.
At February 28, 2009,2011, we employed approximately 9,0007,400 full-time employees and approximately 17,60017,400 part-time employees which, when jointly considered, equate to approximately 17,80016,100 full-time equivalent employees. Approximately 1,6001,200 of our hourly plant employees are unionized and covered by collective bargaining agreements.
The following table sets forth by location the unions representing our
domestic employees, together with the expiration date,
if any, of the applicable governing collective bargaining agreement.
We believe that labor relations at each location in which we operate have generally been satisfactory. | | | | |
Union
| | Location
| | |
| Union | | Location | | Contract Expiration Date |
|
| AMICUS GPMS | | Leeds, England | | N/A |
| Australian Municipal, Administrative, Clerical & Services Union | | South Victoria, Australia | | February 28, 2014 |
| International Brotherhood of Teamsters | | Bardstown, Kentucky;Kentucky | | March 20, 201123, 2014 |
| | Kalamazoo, Michigan; | | April 30, 2015 |
| International Brotherhood of Teamsters | | Cleveland, Ohio | | March 31, 20102013 |
UNITE-HERE Union
Workers United | | Greeneville, Tennessee (Plus Mark) | | October 19, 2011 |
Other locations with unions are the United Kingdom, Mexico and Australia. We believe that labor relations at each location where we operate have generally been satisfactory.
3
In the normal course of business, we enter into agreements with certain customers for the supply of greeting cards and related products. We view the use of such agreements as advantageous in developing and maintaining business with our retail customers. Under these agreements, the customer typically receivesmay receive from American Greetings a combination of cash payments, credits, discounts, allowances and other incentive
3
considerations to be earned by the customer as product is purchased from us over the stated term of the agreement or the
effective time period of the agreement to meet a minimum purchase volume commitment. The agreements are negotiated individually to meet competitive situations and, therefore, while some aspects of the agreements may be similar, important contractual terms vary. The agreements may or may not specify American Greetings as the sole supplier of social expression products to the customer. In the event an agreement is not completed, in most instances, we have a claim for unearned advances under the agreement.
Although risk is inherent in the granting of advances, we subject such customers to our normal credit review. We maintain an allowance for deferred costs based on estimates developed by using standard quantitative measures incorporating historical write-offs. In instances where we are aware of a particular customer’s inability to meet its performance obligation, we record a specific allowance to reduce the deferred cost asset to our estimate of its value based upon expected recovery. These agreements are accounted for as deferred costs. Losses attributed to these specific events have historically not been material.
The balances and movement of the valuation allowance accounts are disclosed on Schedule II of this Annual Report on Form 10-K. See Note 10 to the Consolidated Financial Statements in Part II, Item 8, and the discussion under the “Deferred Costs” heading in the “Critical Accounting Policies” in Part II, Item 7 for further information and discussion of deferred costs.
ENVIRONMENTAL AND GOVERNMENTAL REGULATIONS Our business is subject to numerous foreign and domestic environmental laws and regulations maintained to protect the environment. These environmental laws and regulations apply to chemical usage, air emissions, wastewater and storm water discharges and other releases into the environment as well as the generation, handling, storage, transportation, treatment and disposal of waste materials, including hazardous waste. Although we believe that we are in substantial compliance with all applicable laws and regulations, because legal requirements frequently change and are subject to interpretation, these laws and regulations may give rise to claims, uncertainties or possible loss contingencies for future environmental remediation liabilities and costs. We have implemented various programs designed to protect the environment and comply with applicable environmental laws and regulations. The costs associated with these compliance and remediation efforts have not and are not expected to have a material adverse effect on our financial condition, cash flows or operating results. In addition, the impact of increasingly stringent environmental laws and regulations, regulatory enforcement activities, the discovery of unknown conditions and third party claims for damages to the environment, real property or persons could also result in additional liabilities and costs in the future.
The legal environment of the Internet is evolving rapidly in the United States and elsewhere. The manner in which existing laws and regulations will be applied to the Internet in general, and how they will relate to our business in particular, is unclear in many cases. Accordingly, we often cannot be certain how existing laws will apply in the online context, including with respect to such topics as privacy, defamation, pricing, credit card fraud, advertising, taxation, sweepstakes, promotions, content regulation, net neutrality, quality of products and services and intellectual property ownership and infringement. In particular, legal issues relating to the liability of providers of online services for activities of their users are currently unsettled both within the United States and abroad.
Numerous laws have been adopted at the national and state level in the United States that could have an impact on our business. These laws include the following:
| | |
| • | The CAN-SPAM Act of 2003 and similar laws adopted by a number of states. These laws are intended to regulate unsolicited commerciale-mails, create criminal penalties for unmarked sexually-oriented material ande-mails containing fraudulent headers and control other abusive online marketing practices. |
|
| • | The Communications Decency Act, which gives statutory protection to online service providers who distribute third-party content. |
|
| • | The Digital Millennium Copyright Act, which is intended to reduce the liability of online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights of others. |
4
| | |
| • | The Children’s Online Privacy Protection Act and the Prosecutorial Remedies and Other Tools to End Exploitation of Children Today Act of 2003, which are intended to restrict the distribution of certain materials deemed harmful to children and impose additional restrictions on the ability of online services to collect user information from minors. In addition, the Protection of Children From Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. |
|
| • | Statutes adopted in the State of California require online services to report certain breaches of the security of personal data, and to report to California consumers when their personal data might be disclosed to direct marketers. |
To resolve some of the remaining legal uncertainty, we expect new U.S. and foreign laws and regulations to be adopted over time that will be directly or indirectly applicable to the Internet and to our activities. Any existing or new legislation applicable to us could expose us to government investigations or audits, prosecution for violations of applicable lawsand/or substantial liability, including penalties, damages, significant attorneys’ fees, expenses necessary to comply with such laws and regulations or the need to modify our business practices.
We post on our websites our privacy policies and practices concerning the use and disclosure of user data. Any failure by us to comply with our posted privacy policies, Federal Trade Commission requirements or other privacy-related laws and regulations could result in proceedings that could potentially harm our business, results of operations and financial condition. In this regard, there are a large number of federal and state legislative proposals before the United States Congress and various state legislative bodies regarding privacy issues related to our business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, such as required use of disclaimers or explicit opt-in mechanisms, if adopted, could harm our business through a decrease in user registrations and revenues.
We make available, free of charge, on or through the Investors section of our
www.corporate.americangreetings.com Web site, our Annual Report on
Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on
Form 8-K and, if applicable, amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Copies of our filings with the SEC also can be obtained at the SEC’s Internet site,
www.sec.gov. Information contained on our Web site shall not be deemed incorporated into, or be part of, this report.
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of the Board’s Audit Committee, Compensation and Management Development Committee, and Nominating and Governance Committee are available on or through the Investors section of our
www.corporate.americangreetings.com Web
site, and will be made available, free of charge, in print upon request by any shareholder to the Secretary of American Greetings.4
site.You should carefully consider each of the risks and uncertainties we describe below and all other information in this report. The risks and uncertainties we describe below are not the only ones we face. Additional risks and uncertainties of which we are currently unaware or that we currently believe to be immaterial may also adversely affect our business, financial condition, cash flows or results of operations. Additional information on risk factors is included in
Item“Item 1.
—Business Business” and
Item“Item 7.
—Management’s Discussion and Analysis of Financial Condition and Results of Operations.
”
Our business, resultsThere are factors outside of operations and financial conditionour control that may be adversely affected by volatility indecrease the demand for our products and services, which may be adversely affected by factors outside ofaffect our control.performance.Our success depends on the sustained demand for our products. Many factors affect the level of consumer spending on our products, including, among other things, general economicbusiness conditions, interest rates, the availability of consumer credit, taxation, the effects of war, terrorism,weather, fuel prices and consumer confidence in future economic
5
conditions, all of which are beyond our control. EconomicBeginning in fiscal 2009, economic conditions have recently deteriorated significantly in the United States, and worldwide, and, may remain depressed forwhile the foreseeable future. Because consumereconomy has improved, unemployment remains at historically high levels. During periods of economic decline, when discretionary income is lower, consumers or potential consumers could delay, reduce or forego their purchases of our products and services, which reduces our sales. In addition, during such periods, advertising revenue in our AG Interactive businesses decline, during periods ofas advertisers reduce their advertising budgets. A prolonged economic downturn when disposable income is lower, our revenuesor slow economic recovery may also lead to restructuring actions and earnings have been adversely affectedassociated expenses.
Providing new and may continue to be if the global economic downturn continues.The growth of our greeting card businesscompelling products is critical to our future profitability and cash flow.
One of our key business strategies has been to gain profitable market share
by revamping our core greeting card business. Although the majority of the expense associated with these efforts has now been incurred,through product leadership, providing relevant, compelling and a superior product offering. As a result, the need to continuously update and refresh our product offerings is an ongoing, evolving process
requiring expenditures and investments that will continue to impact net sales, earnings and cash flows over future periods.
The actualAt times, the amount and timing of
thesuch expenditures
will dependand investments depends on the success of
the strategy anda product offering as well as the schedules of our retail partners.
Moreover, our long-term success will depend in part on how well we implement our strategy to revamp the greeting card business and weWe cannot assure you that this strategy will either increase our revenue or profitability.
Even if we are able to implement, to a significant degree, this strategy, we may experience systemic, cultural and operational challenges that may prevent any significant increase in profitability or that may otherwise negatively influence our cash flow. In addition, even if our strategy is successful, our profitability may be adversely affected if consumer demand for lower priced, value cards continues to expand, thereby eroding our average selling prices. Our strategy may also have flaws and may not be successful. For example, we may not be able to anticipate or respond in a timely manner to changing customer demands and preferences for greeting cards. If we misjudge the market, we may significantly
sell or overstock unpopular products and be forced to grant significant credits,
or accept significant returns
or write-off a significant amount of inventory, which would have a negative impact on our results of operations and cash
flows.flow. Conversely, shortages of
keypopular items could materially and adversely impact our results of operations and financial condition.
We rely on a few mass-market retail customers for a significant portion of our sales.sales. A few of our customers are material to our business and operations. Net sales to our five largest customers, which include mass merchandisers and chain drug stores, accounted for approximately
36%42%,
37%39% and 36% of total revenue for fiscal years
2009, 20082011, 2010 and
2007,2009, respectively. Approximately
55%54%, 51% and 54% of the North American Social Expression Products segment’s revenue in
2011, 2010 and 2009,
2008 and 2007respectively, was attributable to its top five customers, and approximately
40%44%, 45% and 39% of the International Social Expression Products segment’s revenue in
2011, 2010 and 2009,
2008 and 2007respectively, was attributable to its top three customers. Net sales to Wal-Mart Stores, Inc. and its subsidiaries accounted for approximately 15%,
16%14% and
16%15% of total revenue in
2011, 2010 and 2009,
2008respectively, and
2007,net sales to Target Corporation accounted for approximately 14% and 13% of total revenue in 2011 and 2010, respectively. There can be no assurance that our large customers will continue to purchase our products in the same quantities that they have in the past. The loss of sales to one of our large customers could materially and adversely affect our business, results of operations,
cash flows, and financial condition.
5
Difficulties in integrating acquisitions could adversely affect our business and we may not achieve the cost savings and increased revenues anticipated as a result of these acquisitions.
We operate in extremely competitive markets,continue to regularly evaluate potential acquisition opportunities to support and strengthen our business. We cannot be sure that we will be able to locate suitable acquisition candidates, acquire candidates on acceptable terms or integrate acquired businesses successfully. Future acquisitions could cause us to take on additional compliance obligations as well as experience dilution and incur debt, contingent liabilities, increased interest expense, restructuring charges and amortization expenses related to intangible assets, which may materially and adversely affect our business, results of operations and financial conditioncondition.
Integrating future businesses that we may acquire involves significant challenges. In particular, the coordination of geographically dispersed organizations with differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration of these acquired businesses has and will suffer if we are unablecontinue to compete effectively.require the dedication of significant management resources, which may temporarily distract management’s attention from ourday-to-day operations. The process of integrating operations may also cause
6
We operate in highly competitive industries. There are
an
estimated 3,000 greeting card publishersinterruption of, or loss of momentum in, the
United States ranging from small family-run organizations to major corporations. In general, however,activities of one or more of our businesses and the
greeting card business is extremely concentrated. We believe that we are oneloss of
only two main suppliers offering a full line of social expression products. Our main competitor, Hallmark Cards, Inc., may have substantially greater financial, technical or marketing resources, a greater customer base, stronger name recognitionkey personnel. Employee uncertainty and
a lower cost of funds than we do. That competitordistraction during the integration process may also
have longstanding relationships with certain large customersdisrupt our business. Our strategy is, in part, predicated on our ability to
which it may offer productsrealize cost savings and to increase revenues through the acquisition of businesses that
we do not provide, putting us at a competitive disadvantage. As a result, this competitor as well as other competitors that may be smaller than us, may be able to:adapt to changes in customer requirements or consumer preferences more quickly;
take advantage of acquisitions and other opportunities more readily;
devote greater resourcesadd to the marketingbreadth and saledepth of its products; and
adopt more aggressive pricing policies.
There can be no assurance that we will be able to continue to compete successfully in this market or against such competition. If we are unable to introduce new and innovative products that are attractive to our customers and ultimate consumers, or if we are unable to allocate sufficient resources to effectively market and advertise our products to achieve widespread market acceptance,and services. Achieving these cost savings and revenue increases is dependent upon a number of factors, many of which are beyond our control. In particular, we may not be able to compete effectively,realize the benefits of anticipated integration of sales forces, asset rationalization, systems integration, and more comprehensive product and service offerings.
If Schurman Fine Papers is unable to operate its retail stores successfully, it could have a material adverse effect on us.
On April 17, 2009, we sold our salesRetail Operations segment, including all 341 of our card and gift retail store assets, to Schurman Fine Papers (“Schurman”), which now operates stores under the American Greetings, Carlton Cards and Papyrus brands. Although we do not control Schurman, because Schurman is licensing the “Papyrus,” “American Greetings” and “Carlton Cards” names from us for its retail stores, actions taken by Schurman may be seen by the public as actions taken by us, which, in turn, could adversely affected,affect our reputation or brands. In addition, the failure of Schurman to operate its retail stores profitably could have a material adverse effect on us, our reputation and our brands, and could materially and adversely affect our business, financial condition, and results of operations, because, under the terms of the transaction:
| | |
| • | we remain subject to certain of the Retail Operations store leases on a contingent basis through our subleasing of stores to Schurman (as described in Note 13 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report, as of February 28, 2011, Schurman’s aggregate commitments to us under these subleases was approximately $36 million); |
|
| • | we are the predominant supplier of greetings cards and other social expression products to the retail stores operated by Schurman; and |
|
| • | we have provided credit support to Schurman, including a guaranty of up to $12 million in favor of the lenders under Schurman’s senior revolving credit facility, and up to $10 million of subordinated financing under a loan agreement with Schurman, each as described in Note 2 to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report. |
As a result, if Schurman is unable to operate its retail stores profitably, we may
incur significant costs if (1) Schurman is unable to pay for product that it has purchased from us, (2) Schurman is unable to pay rent and other amounts due with respect to the retail store leases that we have subleased to it, (3) we become obligated under our guaranty of its indebtedness, or (4) Schurman is unable to repay amounts that it may borrow from us from time to time under our loan agreement with Schurman. Accordingly, we may decide in the future to provide Schurman with additional financial or operational support to assist Schurman successfully operate its stores. Providing such support, however, could result in it being determined that we have a “controlling financial interest” in Schurman under the Financial Accounting Standards Board’s standards pertaining to the consolidation of a variable interest entity. For information regarding the consolidation of variable interest entities, see Note 1 to the Consolidated Financial Statements included in Part II, Item 8. If it is determined that we have a controlling financial interest in Schurman, we will be required to
take certain financial charges, including goodwill impairments, andconsolidate Schurman’s operations into our
results, which could materially affect our reported results of operations and financial
condition could otherwiseposition as we would be
adversely affected.required to include a portion of Schurman’s income or losses and assets and liabilities into our financial statements.
Our business, results of operations and financial condition may be adversely affected by retail consolidations. With the growing trend towardcontinued retail trade consolidation,consolidations, we are increasingly dependent upon a reduced number of key retailers whose bargaining strength is growing. We may be negatively affected by changes in the policies of our retail customers, such as inventory de-stocking, limitations on access to display space, scan-based trading and other conditions. Increased consolidations in the retail industry could result in other changes that could damage our business, such as a loss of customers, decreases in volume, and less favorable contractual terms.terms and
7
the growth of discount chains. In addition, as the bargaining strength of our retail customers grows, we may be required to grant greater credits, discounts, allowances and other incentive considerations to these customers. We may not be able to recover the costs of these incentives if the customer does not purchase a sufficient amount of products during the term of its agreement with us, which could materially and adversely affect our business, results of operations and financial condition.
Bankruptcy of key customers could give rise to an inability to pay us and increase our exposure to losses from bad debts. Many of our largest customers are mass-market retailers. The mass-market retail channel
in the U.S. has experienced significant shifts in market share among competitors in recent years. In addition, the retail industry in general has experienced significant declines due to the worldwide downturn in the economy and decreasing consumer demand. As a result, retailers have experienced liquidity problems and some have been forced to file for bankruptcy protection. There is a risk that certain of our key customers will not pay us, or that payment may be delayed because of bankruptcy or other factors beyond our control, which could increase our exposure to losses from bad debts and may require us to write-off deferred cost assets. Additionally, our business, results of operations and financial condition could be materially and adversely affected if certain of these mass-market retailers were to cease doing business as a result of bankruptcy, or significantly reduce the number of stores they operate.
For example, in the United Kingdom, the bankruptcy of a major customer and another major customer implementing buying freezes during fiscal 2009 contributed to our recording a goodwill impairment with respect to one reporting unit located in the United Kingdom within the International Social Expression Products segment.6
Rapidly changing trends in the children’s entertainment market could adversely affect our business.A portion of our business and results of operations depends upon the appeal of our licensed character properties, which are used to create various toy and entertainment items for children. Consumer preferences, particularly among children, are continuously changing. The children’s entertainment industry experiences significant, sudden and often unpredictable shifts in demand caused by changes in the preferences of children to more “on trend” entertainment properties. In recent years, there have been trends towards shorter life cycles for individual youth entertainment products. Our ability to maintain our current market share and increase our market share in the future depends on our ability to satisfy consumer preferences by enhancing existing entertainment properties and developing new entertainment properties. If we are not able to successfully meet these challenges in a timely and cost-effective manner, demand for our collection of entertainment properties could decrease and our business, results of operations and financial condition may be materially and adversely affected. In addition, we may incur significant costs developing entertainment properties that may not generate future revenues at the levels that we anticipated, which could in turn create fluctuations in our reported results based on when those costs are expensed and could otherwise materially and adversely affect our results of operations and financial condition.
Our results of operations fluctuate on a seasonal basis.
The social expression industry is a seasonal business, with sales generally being higher in the second half of our fiscal year due to the concentration of major holidays during that period. Consequently, our overall results of operations in the future may fluctuate substantially based on seasonal demand for our products. Such variations in demand could have a material adverse effect on the timing of cash flows and therefore our ability to meet our obligations with respect to our debt and other financial commitments. Seasonal fluctuations also affect our inventory levels, since we usually order and manufacture merchandise in advance of peak selling periods and sometimes before new trends are confirmed by customer orders or consumer purchases. We must carry significant amounts of inventory, especially before the holiday season selling period. If we are not successful in selling the inventory during the holiday period, we may have to sell the inventory at significantly reduced prices, or we may not be able to sell the inventory at all.
We rely on foreign sources of production and face a variety of risks associated with doing business in foreign markets.
We rely to a significant extent on foreign manufacturers and suppliers for various products we distribute to customers. In addition, many of our domestic suppliers purchase a portion of their products from foreign sources. We generally do not have long-term supply contracts and some of our imports are subject to existing or potential duties, tariffs or quotas. In addition, a portion of our current operations are conducted and located abroad. The success of our sales to, and operations in, foreign markets depends on numerous factors, many of which are beyond our control, including economic conditions in the foreign countries in which we sell our products. We also face a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as:
political instability, civil unrest and labor shortages;
| | |
| • | political instability, civil unrest and labor shortages; |
|
| • | imposition of new legislation and customs’ regulations relating to imports that may limit the quantityand/or increase the cost of goods which may be imported into the United States from countries in a particular region; |
|
| • | lack of effective product quality control procedures by foreign manufacturers and suppliers; |
|
| • | currency and foreign exchange risks; and |
|
| • | potential delays or disruptions in transportation as well as potential border delays or disruptions. |
imposition of new legislation and customs’ regulations relating to imports that may limit the quantity and/or increase the cost of goods which may be imported into the United States from countries in a particular region;
lack of effective product quality control procedures by foreign manufacturers and suppliers;
currency and foreign exchange risks; and
potential delays or disruptions in transportation as well as potential border delays or disruptions.
7
Also, new regulatory initiatives may be implemented that have an impact on the trading status of certain countries and may include antidumping and countervailing duties or other trade-related sanctions, which could increase the cost of products purchased from suppliers in such countries.
Additionally, as a large, multinational corporation, we are subject to a host of governmental regulations throughout the world, including antitrust and tax requirements, anti-boycott regulations, import/export/export customs regulations and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act. Failure to comply with any such legal requirements could subject us to criminal or monetary liabilities and other sanctions, which could harm our business, results of operations and financial condition.
8
Our inability to protect our intellectual property rights could reduce the value of our productsWe have foreign currency translation and brand.Our trademarks, trade secrets, copyrights, patents and all of our other intellectual property rights are important assets. We rely on copyright, trademark, patent and trade secret laws in the United States and other jurisdictions and on confidentiality agreements with some employees and others to protect our proprietary rights. If these rights were infringed or invalidated, our business could betransaction risks that may materially and adversely affected. In addition,affect our activities could infringe uponoperating results.
The financial position and results of operations of our international subsidiaries are initially recorded in various foreign currencies and then translated into U.S. dollars at the proprietary rightsapplicable exchange rate for inclusion in our financial statements. The strengthening of others, who could assert infringement claimsthe U.S. dollar against us. We could face costly litigation if wethese foreign currencies ordinarily has a negative impact on our reported sales and operating income (and conversely, the weakening of the U.S. dollar against these foreign currencies has a positive impact). For the year ended February 28, 2011, foreign currency translation favorably affected revenues by $10.0 million and favorably affected segment operating income by $5.0 million compared to the year ended February 28, 2010. Certain transactions, particularly in foreign locations, are forceddenominated in other than that location’s local currency. Changes in the exchange rates between the two currencies from the original transaction date to defendthe settlement date will result in a currency transaction gain or loss that directly impacts our reported earnings. For the year ended February 28, 2011, the impact of currency movements on these claims. If wetransactions unfavorably affected operating income by $0.2 million. The volatility of currency exchange rates may materially and adversely affect our results of operations.
The greeting card and gift wrap industries are unsuccessful in doing so,extremely competitive, and our business, results of operations and financial condition may be materially and adversely affected.will suffer if we are unable to compete effectively.
We seek to register our trademarks and file for patents on significant inventionsoperate in highly competitive industries. There are an estimated 3,000 greeting card publishers in the United States ranging from small, family-run organizations to major corporations. With the expansion of the Internet as a distribution channel for greeting cards, together with the growing use of technology by consumers to create personalized greetings cards with digital photographs and elsewhere.other personalized content, we are also seeing increased competition from greeting card publishers as well as a wide range of personal publishing businesses distributing greeting cards and other social expression products directly to the individual consumer through the Internet. In general, however, the greeting card business is extremely concentrated. We believe that we are one of only two main suppliers offering a full line of social expression products. Our main competitor, Hallmark Cards, Inc., may have substantially greater financial, technical or marketing resources, a greater customer base, stronger name recognition and a lower cost of funds than we do. This competitor may also have longstanding relationships with certain large customers to which it may offer products that we do not provide, putting us at a competitive disadvantage. As a result, this competitor as well as other competitors that may be smaller than us, may be able to:
| | |
| • | adapt to changes in customer requirements or consumer preferences more quickly; |
|
| • | take advantage of acquisitions and other opportunities more readily; |
|
| • | devote greater resources to the marketing and sale of its products, including sales directly to consumers through the Internet; and |
|
| • | adopt more aggressive pricing policies. |
There can be no assurance that we will be able to continue to compete successfully in this market or against such competition. If we are unable to introduce new and innovative products that are attractive to our customers and ultimate consumers, or if we are unable to allocate sufficient resources to effectively market and advertise our products to achieve widespread market acceptance, we may not be able to compete effectively, our sales may be adversely affected, we may be required to take certain financial charges, including goodwill impairments, and our results of operations and financial condition could otherwise be adversely affected.
We are subject to a number of restrictive covenants under our borrowing arrangements, which could affect our flexibility to fund ongoing operations, uses of capital and strategic initiatives, and, if we are unable to maintain compliance with such covenants, could lead to significant challenges in meeting our liquidity requirements.
The terms of our borrowing arrangements contain a number of restrictive covenants, including customary operating restrictions that limit our ability to engage in such activities as borrowing and making investments,
9
capital expenditures and distributions on our capital stock, and engaging in mergers, acquisitions and asset sales. We are also subject to customary financial covenants, including a leverage ratio and an interest coverage ratio. These registrationscovenants restrict the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives. These borrowing arrangements are described in more detail in “Liquidity and Capital Resources” under Item 7 and in Note 11 to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report. Compliance with some of these covenants is based on financial measures derived from our operating results. If economic conditions deteriorate, we may experience material adverse impacts to our business and operating results, such as through reduced customer demand and inflation. A decline in our business could make us unable to maintain compliance with these financial covenants, in which case we may be challengedrestricted in how we manage our business and deploy capital, including by otherslimiting our ability to make acquisitions and dispositions, pay dividends and repurchase our stock. In addition, if we are unable to maintain compliance with our financial covenants or invalidated through administrative process or litigation.otherwise breach the covenants that we are subject to under our borrowing arrangements, our lenders could demand immediate payment of amounts outstanding and we would need to seek alternate financing sources to pay off such debts and to fund our ongoing operations. Such financing may not be available on favorable terms, if at all. In addition, our confidentiality agreements with some employees or otherscredit agreement is secured by substantially all of our domestic assets, including the stock of certain of our subsidiaries. If we cannot repay all amounts that we have borrowed under our credit agreement, our lenders could proceed against our assets.
Pending litigation could have a material, adverse effect on our business, financial condition, liquidity, results of operations, and cash flows.
As described in “Item 3. Legal Proceedings,” from time to time we are engaged in lawsuits which may require significant management time and attention and legal expense, and may result in an unfavorable outcome, which could have a material, adverse effect on our business, financial condition, liquidity, results of operations, and cash flows. Current estimates of loss regarding pending litigation are based on information that is then available to us and may not provide adequate protectionreflect any particular final outcome. The results of rulings, judgments or settlements of pending litigation may result in financial liability that is materially higher than what management has estimated at this time. We make no assurances that we will not be subject to liability with respect to current or future litigation. We maintain various forms of insurance coverage. However, substantial rulings, judgments or settlements could exceed the amount of insurance coverage, or could be excluded under the terms of an existing insurance policy.
The amount of various taxes we pay is subject to ongoing compliance requirements and audits by federal, state and foreign tax authorities.
Our estimate of the potential outcome of uncertain tax issues is subject to our assessment of relevant risks, facts, and circumstances existing at that time. We use these assessments to determine the adequacy of our provision for income taxes and other tax-related accounts. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the eventperiod the assessments are made or resolved, which may impact our effective tax rateand/or our financial results.
We have deferred tax assets that we may not be able to use under certain circumstances.
If we are unable to generate sufficient future taxable income in certain jurisdictions, or if there is a significant change in the time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowances against our deferred tax assets. This would result in an increase in our effective tax rate and would have an adverse effect on our future operating results. In addition, changes in statutory tax rates may change our deferred tax assets or liability balances, with either favorable or unfavorable impact on our effective tax rate. Our deferred tax assets may also be impacted by new legislation or regulation.
10
We may not be able to acquire or maintain advantageous content licenses from third parties to produce products.
To provide an assortment of
unauthorized use or disclosurerelevant, compelling and superior product offerings, an important part of our
proprietary information,business involves obtaining licenses to produce products based on various popular brands, celebrities, character properties, designs, content, and other material owned by third parties. In the event that we are not able to acquire or
ifmaintain advantageous licenses, we may not be able to meet changing customer demands and preferences for greetings cards and our
proprietary information otherwise becomes known, or is independently developed by competitors.other products, which could materially and adversely affect our business, results of operations and financial condition.
We may not realize the full benefit of the material we license from third parties if the licensed material has less market appeal than expected or if sales revenue from the licensed products is not sufficient to earn out the minimum guaranteed royalties.An important part of our business involves obtaining licenses to produce products based on various
The agreements under which we license popular brands, celebrities, character properties, designsdesign, content and other licensed material owned by third parties. Such license agreementsparties usually require that we pay an advanceand/or provide a minimum royalty guarantee that may be substantial, and insubstantial. In some cases, these advances or minimums may be greater than what we will be able to recoup in profits from actual sales, which could result in write-offs of such amounts that would adversely affect our results of operations. In addition, we may acquire or renew licenses requiring minimum guarantee payments that may result in us paying higher effective royalties, if the overall benefit of obtaining the license outweighs the risk of potentially losing, not renewing or otherwise not obtaining a valuable license. When obtaining a license, we realize there is no guarantee that a particular licensed property will make a successful greeting card or other product in the eye of the ultimate consumer. Furthermore, there can be no assurance that a successful licensed property will continue to be successful or maintain a high level of sales in the future. In
Our inability to protect or defend our intellectual property rights could reduce the eventvalue of our products and brands.
We believe that our trademarks, copyrights, trade secrets, patents and other intellectual property rights are important to our brands, success and competitive position. We rely on trademark, copyright, trade secrets, and patent laws in the United States and similar laws in other jurisdictions and on confidentiality and other types of agreements with some employees, vendors, consultants and others to protect our intellectual property rights. Despite these measures, if we are unable to successfully file for, register or otherwise enforce our rights or if these rights are infringed, invalidated, challenged, circumvented, or misappropriated, our business could be materially and adversely affected. Also, we are, and may in the future be, subject to intellectual property rights claims in the United States or foreign countries, which could limit our ability to use certain intellectual property, products or brands in the future. Defending any such claims, even claims without merit, could be time-consuming, result in costly settlements, litigation or restrictions on our business and damage our reputation.
Rapidly changing trends in the children’s entertainment market could adversely affect our business.
A portion of our business and results of operations depends upon the appeal of our licensed character properties, which are used to create various toy and entertainment items for children. Consumer preferences, particularly among children, are continuously changing. The children’s entertainment industry experiences significant, sudden and often unpredictable shifts in demand caused by changes in the preferences of children to more “on trend” entertainment properties. Moreover, the life cycle for individual youth entertainment products tends to be short. Therefore, our ability to maintain our current market share and increase our market share in the future depends on our ability to satisfy consumer preferences by enhancing existing entertainment properties and developing new entertainment properties. If we are not able to
acquire or maintain advantageous licenses,successfully meet these challenges in a timely and cost-effective manner, demand for our collection of entertainment properties could decrease and our business, results of operations and financial condition may be materially and adversely affected.
We are subject to a number of restrictive covenants under our borrowing arrangements, which could affect our flexibility to fund ongoing operations, uses of capital and strategic initiatives, and, if we are unable to maintain compliance with such covenants, could lead to significant challenges in meeting our liquidity requirements.
The terms of our borrowing arrangements contain a number of restrictive covenants, including customary operating restrictions that limit our ability to engage in such activities as borrowing and making investments, capital expenditures and distributions on our capital stock, and engaging in mergers, acquisitions and asset sales. We are also subject to customary financial covenants, including a leverage ratio and an interest coverage ratio. These covenants restrict the amount of our borrowings, reducing our flexibility to fund ongoing operations and
8
strategic initiatives. These borrowing arrangements are described in more detail in “Liquidity and Capital Resources” under Item 7 and in Note 11 to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K. Compliance with some of these covenants is based on financial measures derived from our operating results. If economic conditions deteriorate, we may experience material adverse impacts to our business and operating results, such as through reduced customer demand. A decline in our business could make us unable to maintain compliance with these financial covenants, in which case, we may be restricted in how we fund ongoing operations and strategic initiatives and deploy capital, including by limiting our ability to make acquisitions and dispositions, pay dividends and repurchase our stock. In addition, if we our unable to maintain compliance with our financial covenants or otherwise breach the covenants that we are subject to under our borrowing arrangements, our lenders could demand immediate payment of amounts outstanding and we would need to seek alternate financing sources to pay off such debts and to fund our ongoing operations. Such financing may not be available on favorable terms, if at all. In addition, our credit agreement is secured by substantially all of our domestic assets, including the stock of certain of our subsidiaries. If we cannot repay all amounts that we have borrowed under our credit agreement, our lenders could proceed against our assets.
Difficulties in integrating acquisitions could adversely affect our business and we may not achieve the cost savings and increased revenues anticipated as a result of these acquisitions.
We recently acquired two photo sharing and personal publishing businesses, the greeting card company Recycled Paper Greetings, and the Papyrus brand and associated wholesale division of Schurman Fine Papers (“Schurman”), which supplies Papyrus brand greetings cards primarily to leading specialty, mass, grocery and drug store channels. In addition, we continue to regularly evaluate potential acquisition opportunities to support and strengthen our business. We cannot be suremay incur significant costs developing entertainment properties that may not generate future revenues at the levels that we will be able to locate suitable acquisition candidates, acquire candidatesanticipated, which could in turn create fluctuations in our reported results
11
based on
acceptable terms or integrate acquired businesses successfully. Future acquisitionswhen those costs are expensed and could
cause us to take on additional compliance obligations as well as incur debt, dilution, contingent liabilities, increased interest expense, restructuring charges and amortization expenses related to intangible assets, which mayotherwise materially and adversely affect our
business, results of operations and financial condition.
Integrating our recent acquisitions, as well as future businesses that we may acquire, involves significant challenges. In particular, the coordination
Our results of geographically dispersed organizationsoperations fluctuate on a seasonal basis.
The social expression industry is a seasonal business, with
differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration of these acquired businesses will also require the dedication of significant management resources, which may temporarily distract management’s attention from our day-to-day operations. The process of integrating operations may also cause an interruption of, or loss of momentumsales generally being higher in the
activities of one or moresecond half of our
businesses and the loss of key personnel. Employee uncertainty and distraction during the integration process may also disrupt our business. Our strategy is, in part, predicated on our ability to realize cost savings and to increase revenues through the acquisition of businesses that addfiscal year due to the
breadth and depthconcentration of
major holidays during that period. Consequently, our
products and services. Achieving these cost savings and revenue increases is dependent upon a numberoverall results of
factors, many of which are beyondoperations in the future may fluctuate substantially based on seasonal demand for our
control. In particular, we may not be able to realize the benefits of anticipated integration of sales forces, asset rationalization, systems integration, and more comprehensive product and service offerings.If Schurman Fine Papers is unable to operate its retail stores successfully, itproducts. Such variations in demand could have a material adverse effect on us.
On April 17, 2009, we soldthe timing of cash flow and therefore our Retail Operations segment, including all 341 ofability to meet our cardobligations with respect to our debt and gift retail store assets, to Schurman, which will operate stores under the American Greetings, Carlton Cards and Papyrus brands. The failure of Schurman to operate the retail stores successfully could have a material adverse effect on us, our reputation and our brands, and could materially adverselyother financial commitments. Seasonal fluctuations also affect our business, financial condition,inventory levels, since we usually order and resultsmanufacture merchandise in advance of operations, because, underpeak selling periods and sometimes before new trends are confirmed by customer orders or consumer purchases. We must carry significant amounts of inventory, especially before the terms ofholiday season selling period. If we are not successful in selling the transaction,inventory during the holiday period, we will remain subjectmay have to certain ofsell the Retail Operations store leases on a contingent basis through our subleasing of stores to Schurman. We are also the predominant supplier of greeting cards and other social expression products to the retail stores, and we have provided credit support to Schurman, including up to $24.0 million of guarantees in favor of the lenders under Schurman’s senior
9
revolving credit facility as described in our Current Report on Form 8-K, dated April 20, 2009. In addition, although we do not control Schurman, because Schurman is licensing the “Papyrus,” “American Greetings” and “Carlton Cards” names for the retail stores, actions taken by Schurman may be seen by the public as actions taken by us, which, in turn, could adversely affect our reputationinventory at significantly reduced prices, or brands.
We may be unsuccessful in increasing revenues or generating a profit from the recent acquisitions of PhotoWorks and Webshots in the digital services markets, which could adversely affect our results of operations.
Our recent acquisitions of two photo sharing and personal publishing businesses are designed to provide us with an entry into the online photo sharing space, a significant number of unique visitors and a platform to provide consumers the ability to use their own photos to create unique, high quality physical products, including greeting cards, calendars, photo albums and photo books. However, the market for consumer photofinishing and digital imaging services is highly competitive and still emerging. The major competitors in our market are Kodak, Snapfish and Shutterfly. In addition to these major competitors, there are numerous other companies that offer online photofinishing services. Even if we establish a strong position among consumers for digital products and services, we may not be able to generate significant revenues or a profit from this market. The photography industry is also currently characterized by rapidly evolving technology and consumer demand for services and products. The introduction of digital services and products that use new technologies could render existing services and products obsolete. Our future success in this market will depend on our ability to adapt to new technologies and develop new or modify existing services, products and marketing techniques to satisfy changing consumer needs and attract new customers.
sell the inventory at all.
We may be unsuccessful in completing the divestiture of the Strawberry Shortcake and Care Bears properties.We have entered into agreements to sell our Strawberry Shortcake and Care Bears properties for net proceeds to us of approximately $76.0 million. If this transaction fails to close, it could limit some of our financial flexibility due to the absence of additional liquidity that would have been available from the proceeds of the transaction. For information regarding the proposed divestiture of these properties, see Note 19 to the Consolidated Financial Statements included in Part II, Item 8.
Increases in raw material and energy costs may materially raise our cost of goods soldcosts and materially impact our profitability.
Paper is a significant expense in the production of our greeting cards. Significant increases in paper prices, which have been volatile in past years, or increased costs of other raw materials or energy, such as fuel, may result in declining margins and operating results if market conditions prevent us from passing these increased costs on to our customers through timely price increases on our greeting cards and other social expression products.
The loss of key members of our senior management and creative teams could adversely affect our business. Our success and continued growth depend largely on the efforts and abilities of our current senior management team as well as upon a number of key members of our creative staff, who have been instrumental in our success thus far, and upon our ability to attract and retain other highly capable and creative individuals. The loss of some of our senior executives or key members of our creative staff, or an inability to attract or retain other key individuals, could materially and adversely affect us. We seek to compensate our key executives, as well as other employees, through competitive salaries, stock ownership, bonus plans, or other incentives, but we can make no assurance that these programs will enable us to retain key employees or hire new employees.
10
If we fail to extend or renegotiate our primary collective bargaining contracts with our labor unions as they expire from time to time, or if our unionized employees were to engage in a strike, or other work stoppage, our business and results of operations could be materially adversely affected. We are party to collective bargaining contracts with our labor unions, which represent a significant number of our employees. In particular, approximately 1,6001,200 of our employees are unionized and are covered by collective bargaining agreements. Although we believe our relations with our employees are satisfactory, no assurance can be given that we will be able to successfully extend or renegotiate our collective bargaining agreements as they expire from time to time. If we fail to extend or renegotiate our collective bargaining agreements, if disputes with our unions arise, or if our unionized workers engage in a strike or other work related stoppage, we could incur higher ongoing labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business.
Employee benefit costs constitute a significant element of our annual expenses, and funding these costs could adversely affect our financial condition.
Employee benefit costs are a significant element of our cost structure. Certain expenses, particularly postretirement costs under defined benefit pension plans and healthcare costs for employees and retirees, may increase significantly at a rate that is difficult to forecast and may adversely affect our financial results, financial condition or cash flows. In addition, the newly enacted federal healthcare legislation is expected to
12
increase our employer-sponsored medical plan costs, some of which increases could be significant. Declines in global capital markets may cause reductions in the value of our pension plan assets. Such circumstances could have an adverse effect on future pension expense and funding requirements. Further information regarding our retirement benefits is presented in Note 12 to the Consolidated Financial Statements included in Part II, Item 8.
Various environmental regulations and risks applicable to a manufacturer and/or distributor of consumer products may require us to take actions, which will adversely affect our results of operations. Our business is subject to numerous federal, state, provincial, local and foreign laws and regulations, including regulations with respect to chemical usage, air emissions, wastewater and storm water discharges and other releases into the environment as well as the generation, handling, storage, transportation, treatment and disposal of waste materials, including hazardous materials. Although we believe that we are in substantial compliance with all applicable laws and regulations, because legal requirements frequently change and are subject to interpretation, we are unable to predict the ultimate cost of compliance with these requirements, which may be significant, or the effect on our operations as these laws and regulations may give rise to claims, uncertainties or possible loss contingencies for future environmental remediation liabilities and costs. We cannot be certain that existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations, will not have a material and adverse effect on our business, results of operations and financial condition. The impact of environmental laws and regulations, regulatory enforcement activities, the discovery of unknown conditions, and third party claims for damages to the environment, real property or persons could result in additional liabilities and costs in the future.
We may be subject to product liability claims and our products could be subject to voluntary or involuntary recalls and other actions. We are subject to numerous federal, state, provincial and stateforeign laws and regulations governing product safety including, but not limited to, those regulations enforced by the Consumer Product Safety Commission. A failure to comply with such laws and regulations, or concerns about product safety may lead to a recall of selected products. We have experienced, and in the future may experience, recalls and defects or errors in products after their production and sale to customers. Such recalls and defects or errors could result in the rejection of our products by our retail customers and consumers, damage to our reputation, lost sales, diverted development resources and increased customer service and support costs, any of which could harm our business. Individuals could sustain injuries from our products, and we may be subject to claims or lawsuits resulting from such injuries. Governmental agencies could pursue us and issue civil finesand/or criminal penalties for a failure to comply with product safety regulations. There is a risk that these claims or liabilities may exceed, or fall outside the scope of, our insurance coverage. Additionally, we may be unable to obtain adequate liability insurance in the future. Recalls, post-manufacture repairs of our products, product liability claims, absence or cost of insurance and administrative costs associated with recalls could harm our reputation, increase costs or reduce sales.
Government regulation of the Internet ande-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet ande-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property use and ownership, sales and other taxes, fraud, libel and personal privacy apply to the Internet ande-commerce as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet ore-commerce. Those laws that do reference the Internet are only beginning to be interpreted by the courts and their applicability
13
and reach are therefore uncertain. For example, the Digital Millennium Copyright Act, or DMCA, is intended, in part, to limit the liability of eligible online service providers for including (or for listing or linking to third-party websites that include) materials that infringe copyrights or other rights of others. Portions of the Communications Decency Act, or CDA, are intended to provide statutory protections to online service providers who distribute third-party content. We rely on the protections provided by both the DMCA and CDA in conducting our AG Interactive business. Any changes in these laws or judicial interpretations narrowing their protections will subject us to greater risk of liability and may increase our costs of compliance with these regulations or limit our ability to operate certain lines of business. The Children’s Online Privacy Protection Act is intended to impose additional restrictions on the ability of online service providers to collect user information from minors. In addition, the Protection of Children From Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. The costs of compliance with these regulations may increase in the future as a result of changes in the regulations or the interpretation of them. Further, any failures on our part to comply with these regulations may subject us to significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may substantially harm our business and results of operations.
Information technology infrastructure failures could significantly affect our business.business.
We depend heavily on our information technology (“IT”) infrastructure in order to achieve our business objectives.
If wePortions of our IT infrastructure are old and difficult to maintain. We could experience a problem that impairs this infrastructure, such as a computer virus, a problem with the functioning of an important IT application, or an intentional disruption of our IT
systems. In addition, our IT systems
the resultingcould suffer damage or interruption from human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, acts of war and similar events. The disruptions
caused by any such events could impede our ability to record or process orders, manufacture and ship in a timely manner,
properly store consumer images, or
11
otherwise carry on our business in the ordinary course. Any such event could cause us to lose customers or revenue, damage our reputation, and could require us to incur significant expense to eliminate these problems and address related security concerns.
We are refreshing
Over the next five to seven years, we expect to allocate resources, including capital, to refresh our IT systems
in stages in an effort to redesignby modernizing our systems, redesigning and
deploydeploying new processes,
and evolving new organization structures
all intended to drive efficiencies within the business and
a common information system over a period of seven to ten years.add new capabilities. Such an implementation
is expensive and carries substantial
operationsoperational risk, including loss of data or information, unanticipated increases in costs, disruption of operations or business interruption. Further, we may not be successful implementing new systems or any new system may not perform as expected. This could have a material adverse effect on our business.
Acts of nature could result in an increase in the cost of raw materials; other catastrophic events, including earthquakes, could interrupt critical functions and otherwise adversely affect our business and results of operations. Acts of nature could result in an increase in the cost of raw materials or a shortage of raw materials, which could influence the cost of goods supplied to us. Additionally, we have significant operations, including our largest manufacturing facility, near a major earthquake fault line in Arkansas. A catastrophic event, such as an earthquake, fire, tornado, or other natural or man-made disaster, could disrupt our operations and impair production or distribution of our products, damage inventory, interrupt critical functions or otherwise affect our business negatively, harming our results of operations.
Members of the Weiss family and related entities, whose interests may differ from those of other shareholders, own a substantial portion of our common shares. Our authorized capital stock consists of Class A common shares and Class B common shares. The economic rights of each class of common shares are identical, but the voting rights differ. Class A common shares are entitled to one vote per share and Class B common shares are entitled to ten votes per share. There is no public trading market for the Class B common shares, which are held by members of the extended family of
14
American Greetings’ founder, officers and directors of American Greetings and their extended family members, family trusts, institutional investors and certain other persons. As of April
28, 2009,27, 2011, Morry Weiss, the Chairman of the Board of Directors, Zev Weiss, the Chief Executive Officer, Jeffrey Weiss, the President and Chief Operating Officer, and Erwin Weiss, the Senior Vice President, Enterprise Resource Planning, together with other members of the Weiss family and certain trusts and foundations established by the Weiss family beneficially owned approximately
90%93% in the aggregate of our outstanding Class B common shares (approximately
87%91%, excluding
restricted stock units that vest, and stock options that are presently exercisable or exercisable, within 60 days of April
28, 2009)27, 2011), which, together with Class A common shares beneficially owned by them, represents approximately
50%48% of the voting power of our outstanding capital stock (approximately
43%40%, excluding
restricted stock units that vest, and stock options that are presently exercisable or exercisable, within 60 days of April
28, 2009)27, 2011). Accordingly, these members of the Weiss family, together with the trusts and foundations established by them, would be able to significantly influence the outcome of shareholder votes, including votes concerning the election of directors, the adoption or amendment of provisions in our Articles of Incorporation or Code of Regulations, and the approval of mergers and other significant corporate transactions, and their interests may not be aligned with your interests. The existence of these levels of ownership concentrated in a few persons makes it less likely that any other shareholder will be able to affect our management or strategic direction. These factors may also have the effect of delaying or preventing a change in our management or voting control or
ourits acquisition by a third party.
Our charter documents and Ohio law may inhibit a takeover and limit our growth opportunities, which could adversely affect the market price of our common shares. Certain provisions of Ohio law and our charter documents, together or separately, could have the effect of
discouraging, or making it more difficult
or discouraging for, a third party to acquire or attempt to acquire control of American Greetings and limit the price that certain investors might be willing to pay in the future for our common shares. For example, our charter documents establish a classified board of directors, serving staggered three-year terms,
12
allow the removal of directors only for cause, and establish certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at shareholders’ meetings. In addition, while shareholders do have the right to cumulative voting in the election of directors, Class B common shares have ten votes per share.
share which limits the ability of holders of Class A common shares to elect a director by exercising cumulative voting rights. | |
| Item 1B. | Unresolved Staff Comments |
None.
None.
15
As of February 28,
2009,2011, we
ownowned or
leaseleased approximately
109.5 million square feet of plant, warehouse and office space throughout the world, of which approximately
365,000470,000 square feet is leased space. We believe our manufacturing and distribution facilities are well maintained and are suitable and adequate, and have sufficient productive capacity to meet our current needs.
The following table summarizes, as of February 28,
2009,2011, our principal plants and materially important physical properties and identifies as of such date the respective segments that use the properties described. In addition to the following,
as of February 28, 2009,although we sold our Retail Operations segment
owned and operated approximately 341 card and giftin April 2009, we remain subject to certain of the Retail Operations store leases on a contingent basis through our subleasing of stores to Schurman Fine Papers, which operates these retail stores throughout North America.
Most of these stores operate on premises that we lease from third parties.See Note 13 to the Consolidated Financial Statements included in Part II, Item 8.
*
—Indicates— Indicates calendar year
| | | | | | | | | | | | | | | |
| | | Approximate Square
| | | Expiration
| | | |
| | | Feet
| | | Date of
| | | |
| | | Occupied | | | Material
| | | |
Location | | Owned | | | Leased | | | Leases* | | | Principal Activity |
| |
Cleveland,(1)(3)(4)
Ohio | | | 1,700,000 | | | | | | | | | | | World Headquarters: General offices of North American Greeting Card Division; Plus Mark LLC; AG Interactive, Inc.; and AGC, LLC; creation and design of greeting cards, gift wrap, party goods, stationery and giftware; marketing of electronic greetings |
Bardstown,(1)
Kentucky | | | 413,500 | | | | | | | | | | | Cutting, folding, finishing and packaging of greeting cards |
Danville,(1)
Kentucky | | | 1,374,000 | | | | | | | | | | | Distribution of everyday products including greeting cards |
Osceola,(1)
Arkansas | | | 2,552,000 | | | | | | | | | | | Cutting, folding, finishing and packaging of greeting cards and warehousing; distribution of seasonal products |
Ripley,(1)
Tennessee | | | 165,000 | | | | | | | | | | | Greeting card printing (lithography) |
Kalamazoo,(1)(5)
Michigan | | | 602,500 | | | | | | | | | | | Formerly manufacture and distribution of party goods |
Forest City,(4)
North Carolina | | | 498,000 | | | | | | | | | | | General offices of A.G. Industries, Inc.; manufacture of display fixtures and other custom display fixtures by A.G. Industries, Inc. |
Forest City,(4)
North Carolina | | | | | | | 140,000 | | | | 2012 | | | Warehousing for A.G. Industries, Inc. |
Greeneville,(1)
Tennessee | | | 1,044,000 | | | | | | | | | | | Printing and packaging of seasonal greeting cards and wrapping items and order filling and shipping for Plus Mark LLC. |
Chicago,(1)
Illinois | | | | | | | 45,000 | | | | 2018 | | | Administrative offices of Papyrus-Recycled Greetings, Inc. |
Fairfield,(1)
California | | | | | | | 34,000 | | | | 2014 | | | General offices of Papyrus-Recycled Greetings, Inc. |
Mississauga,(1)
Ontario, Canada | | | | | | | 38,000 | | | | 2018 | | | General offices of Carlton Cards Limited (Canada) |
Clayton,(2)
Australia | | | | | | | 208,000 | | | | 2011 | | | General offices of John Sands companies |
Dewsbury,(2)
England (Two Locations) | | | 441,500 | | | | | | | | | | | General offices of UK Greetings Ltd. and manufacture and distribution of greeting cards and related products |
Gibson House(2)
Telford, England | | | 55,000 | | | | | | | | | | | General offices of UK Greetings Ltd. |
Corby, England(2) | | | 85,000 | | | | | | | | | | | Distribution of greeting cards and related products |
| | | | | | | | |
Location
| | Approximate Square
Feet Occupied | | Expiration
Date of
Material Leases * | | Principal Activity
|
| Owned | | Leased | | |
Cleveland,(1)(3)(4)(5)
Ohio
| | 1,700,000 | 1 | | | | | World Headquarters: General offices of North American Greeting Card Division; Plus Mark, Inc.; Carlton Cards Retail, Inc.; AG Interactive, Inc.; and AGC, LLC; creation and design of greeting cards, gift wrap, party goods, stationery and giftware; marketing of electronic greetings |
| | | | |
Bardstown,(1)
Kentucky
| | 413,500 | | | | | | Cutting, folding, finishing and packaging of greeting cards |
| | | | |
Danville,(1)
Kentucky
| | 1,374,000 | | | | | | Distribution of everyday products including greeting cards |
| | | | |
Osceola,(1)
Arkansas
| | 2,552,000 | | | | | | Cutting, folding, finishing and packaging of greeting cards and warehousing; distribution of seasonal products |
| | | | |
Ripley,(1)
| | 165,000 | | | | | | Greeting card printing (lithography) |
Tennessee
| | | | | | | | |
| | | | |
Kalamazoo,(1)
| | 602,500 | | | | | | Manufacture and distribution of party goods |
Michigan
| | | | | | | | |
| | | | |
Forest City,(5)
North Carolina
| | 498,000 | | | | | | Manufacture of display fixtures and other custom display fixtures by A.G. Industries, Inc. |
13
| | | | | | | | |
Location | | Approximate Square
Feet Occupied | | Expiration
Date of
Material Leases * | | Principal Activity |
| | Owned | | Leased | | |
Greeneville,(1) Tennessee (Two Locations) | | 1,410,000 | | | | | | Printing and packaging of seasonal greeting cards and wrapping items and order filling and shipping for Plus Mark, Inc. |
| | | | |
Chicago,(1) Illinois | | | | 145,000 | | 2018 | | Recycled Paper Greetings administrative office |
| | | | |
University Park,(1) Illinois | | | | 182,000 | | 2010 | | Recycled Paper Greetings warehousing and distribution |
| | | | |
Toronto,(1) Ontario, Canada | | | | 38,000 | | 2018 | | General office of Carlton Cards Limited (Canada) |
| | | | |
Clayton,(2) Australia | | 208,000 | | | | | | General offices of John Sands companies |
Dewsbury,(2) England (Two Locations) | | 441,500 | | | | | | General offices of UK Greetings Ltd. and manufacture and distribution of greeting cards and related products |
| | | | |
Corby, England(2) | | 85,000 | | | | | | Distribution of greeting cards and related products |
| | | | |
Telford,(2) England | | 55,000 | | | | | | General offices and distribution for UK Greetings Ltd. |
| | | | |
Mexico City,(1) Mexico | | 89,000 | | | | | | General offices of Carlton Mexico, S.A. de C.V. and distribution of greeting cards and related products |
1
| North American Social Expression Products |
|
| 2 | | International Social Expression Products |
5 |
| 4 | | Non-reportable |
|
| 5 | | In connection with our sale of certain assets, equipment and processes used in the manufacture and distribution of party goods, during fiscal 2011, this facility was wound-down and is currently an asset held for sale. See Note 14 to the Consolidated Financial Statements included in Part II, Item 8. |
16
On
Electrical Workers Pension Fund, Local 103, I.B.E.W. Litigation. As previously disclosed, on March 20, 2009, a shareholder derivative complaint was filed in the Court of Common Pleas of Cuyahoga County, Ohio, by the Electrical Workers Pension Fund, Local 103, I.B.E.W., against certain of our current and former officers and directors.directors (the “Individual Defendants”) and names American Greetings Corporation as a nominal defendant. The suit alleges that the named partiesIndividual Defendants breached their fiduciary duties to theAmerican Greetings Corporation by, among other things, backdating stock options granted to our officers and directors, accepting backdated options and/orand causing theAmerican Greetings Corporation to file false and misleading financial statements. The suit seeks an unspecified amount of damages from the named partiesIndividual Defendants and modifications to our corporate governance policies. The parties recently participated in mediation and have reached an agreement in principle on the general terms of settlement, which contemplates a payment to plaintiff’s counsel as well as certain modifications to our corporate governance policies, none of which we believe are material. Upon finalizing the terms of the settlement, the settlement will be subject to preliminary and final approval of the Court of Common Pleas of Cuyahoga County, Ohio.
Cookie Jar/MoonScoop Litigation. As previously disclosed, on May 6, 2009, American Greetings Corporation and its subsidiary, Those Characters From Cleveland, Inc. (“TCFC”), filed an action in the Cuyahoga County (Ohio) Court of Common Pleas against Cookie Jar Entertainment Inc. (“Cookie Jar”) and its affiliates, Cookie Jar Entertainment (USA) Inc. (formerly known as DIC Entertainment Corporation) (“DIC”), and Cookie Jar Entertainment Holdings (USA) Inc. (formerly known as DIC Entertainment Holdings, Inc.) relating to the July 20, 2008 Binding Letter Agreement between American Greetings Corporation and Cookie Jar (the “Cookie Jar Agreement”) for the sale of the Strawberry Shortcake and Care Bears properties (the “Properties”). On April 16,May 7, 2009, the individual defendantsCookie Jar removed the mattercase to the United States District Court for the Northern District of Ohio. Simultaneously, Cookie Jar filed an action against American Greetings Corporation, TCFC, Mike Young Productions, LLC (“Mike Young Productions”) and MoonScoop SAS (“MoonScoop”) in the Supreme Court of the State of New York, County of New York. Mike Young Productions and MoonScoop were named as defendants in the action in connection with the binding term sheet between American Greetings Corporation and MoonScoop dated March 24, 2009 (the “MoonScoop Binding Agreement”), providing for the sale to MoonScoop of the Properties.
On May 7, 2010, the legal proceedings involving American Greetings Corporation, TCFC, Cookie Jar and DIC were settled, without a payment to any of the parties. As part of the settlement, on May 7, 2010, the Cookie Jar Agreement was amended to, among other things, terminate American Greetings Corporation’s obligation to sell to Cookie Jar, and Cookie Jar’s obligation to purchase, the Properties. As part of the settlement, Cookie Jar Entertainment (USA) Inc. will continue to represent the Strawberry Shortcake property on behalf of American Greetings Corporation, and will become an international agent for the Care Bears property. On May 19, 2010, the Northern District of Ohio Eastern Division. Management believescourt granted the parties’ joint motion to dismiss all claims and counterclaims without prejudice.
On August 11, 2009, MoonScoop filed an action against American Greetings Corporation and TCFC in the United States District Court for the Northern District of Ohio, alleging breach of contract and promissory estoppel relating to the MoonScoop Binding Agreement. On MoonScoop’s request, the court agreed to consolidate this lawsuit with the first Ohio lawsuit (described above) for all pretrial purposes. The parties filed motions for summary judgment on various claims. On April 27, 2010, the court granted American Greetings Corporation’s motion for summary judgment on MoonScoop’s breach of contract and promissory estoppel claims, dismissing these claims with prejudice. On the same day, the court also ruled that American Greetings Corporation must indemnify MoonScoop against Cookie Jar’s claims in this lawsuit. On May 21, 2010, MoonScoop appealed the court’s summary judgment ruling. On June 4, 2010, American Greetings Corporation and TCFC appealed the court’s ruling that it must indemnify MoonScoop against the cross claims asserted against it. We believe that the allegations made in the complaintlawsuit against American Greetings Corporation and TCFC are without merit and the defendants intend to vigorouslycontinue to defend this action.the actions vigorously. We currently do not believe that the impact of thisthe lawsuit against American Greetings Corporation and TCFC, if any, will have a material adverse effect on our financial position, liquidity or results of operations. We currently believe that any liability will be covered by insurance coverage available with financially viable insurance companies, subject to self-insurance retentions and customary exclusions, conditions, coverage gaps, and policy limits, as well as insurer solvency.
17
In addition to the foregoing, we are involved in certain legal proceedings arising in the ordinary course of business. We, however, do not believe that any of the
other litigation in which we are currently engaged, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations.
14
| |
| Item 4. | Submission of Matters to Vote of Security HoldersReserved |
None.
Executive Officers of the Registrant The following table sets forth our executive officers, their ages as of April 29,
2009,2011, and their positions and offices:
| | | | |
Name
| | Age | | | | |
| Name | | Age | | Current Position and Office |
|
| Morry Weiss | | 68 | 70 | | | Chairman |
Zev Weiss | | 42 | 44 | | | Chief Executive Officer |
Jeffrey Weiss | | 45 | 47 | | | President and Chief Operating Officer |
John W. Beeder | | 49 | 51 | | | Senior Vice President, Executive Sales and Marketing Officer |
John S. N. Charlton
Michael L. Goulder | | 62 | 51 | | Senior Vice President, International and Managing Director, UK Greetings |
Michael L. Goulder
| | 49 | | Senior Vice President, Executive Supply Chain Officer |
Thomas H. Johnston | | 61 | 63 | | | Senior Vice President, Creative/Merchandising; President, Carlton Cards RetailMerchandising |
Catherine M. Kilbane | | 46 | 48 | | | Senior Vice President, General Counsel and Secretary |
Brian T. McGrath | | 58 | 60 | | | Senior Vice President, Human Resources |
Douglas W. Rommel | | | 55 | | | Senior Vice President, Chief Information Officer |
| Stephen J. Smith | | 45 | 47 | | | Senior Vice President and Chief Financial Officer |
Erwin Weiss | | 60 | 62 | | | Senior Vice President, Enterprise Resource Planning |
Joseph B. Cipollone | | 50 | 52 | | | Vice President, Corporate ControllerChief Accounting Officer |
| | |
Josef Mandelbaum
| • | Morry Weiss and Erwin Weiss are brothers. Jeffrey Weiss and Zev Weiss are the sons of Morry Weiss. The Board of Directors annually elects all executive officers; however, executive officers are subject to removal, with or without cause, at any time; provided, however, that the removal of an executive officer would be subject to the terms of their respective employment agreements, if any. |
|
| | 42• | Morry Weiss has held various positions with the Corporation since joining in 1961, including most recently Chief Executive Officer of the Corporation from October 1987 until June 2003. Mr. Morry Weiss has been Chairman since February 1992. |
|
| | CEO—AG Intellectual Properties• | Zev Weiss has held various positions with the Corporation since joining in 1992, including most recently Executive Vice President from December 2001 until June 2003 when he was named Chief Executive Officer. |
|
| • | Jeffrey Weiss has held various positions with the Corporation since joining in 1988, including most recently Executive Vice President, North American Greeting Card Division of the Corporation from March 2000 until June 2003 when he was named President and Chief Operating Officer. |
|
| • | John W. Beeder held various positions with Hallmark Cards, Inc. from 1983 to 2006, most recently as Senior Vice President and General Manager — Greeting Cards from 2002 to 2006. Thereafter, Mr. Beeder served as the President and Chief Operating Officer of Handleman Corporation (international music distribution company) in 2006, and the Managing Partner and Chief Operating Officer of Compact Clinicals (medical publishing company) in 2007. He became Senior Vice President, Executive Sales and Marketing Officer of the Corporation in April 2008. |
|
| • | Michael L. Goulder was a Vice President in the management consulting firm of Booz Allen Hamilton from October 1998 until September 2002. He became a Senior Vice President of the Corporation in November 2002 and is currently the Senior Vice President, Executive Supply Chain Officer. |
|
| • | Thomas H. Johnston was Managing Director of Gruppo, Levey & Co., an investment banking firm focused on the direct marketing and specialty retail industries, from November 2001 until May 2004, |
18
| | |
| | when he became Senior Vice President and President of Carlton Cards Retail, a position he held until May 2009, shortly after the sale of the Corporation’s Retail Operations segment in April 2009. Mr. Johnston became Senior Vice President, Creative/Merchandising in December 2004. |
| | |
| • | Catherine M. Kilbane was a partner with the law firm of Baker & Hostetler LLP until becoming Senior Vice President, General Counsel and Secretary in October 2003. |
|
| • | Brian T. McGrath has held various positions with the Corporation since joining in 1989, including most recently Vice President, Human Resources from November 1998 until July 2006, when he became Senior Vice President, Human Resources. |
|
| • | Douglas W. Rommel | | 53 | | has held various positions with the Corporation since joining in 1978, including most recently Vice President, Information Services from November 2001 until March 2010, when he became Senior Vice President, Chief Information Officer. |
|
| • | Stephen J. Smith was Vice President and Treasurer of General Cable Corporation, a wire and cable company, from 1999 until 2002. He became Vice President, Treasurer and Investor Relations of the Corporation in April 2003, and became Senior Vice President and Chief Financial Officer in November 2006. |
|
| • | Erwin Weiss has held various positions with the Corporation since joining in 1977, including most recently Senior Vice President, Program Realization from June 2001 to June 2003, and Senior Vice President, Specialty Business from June 2003 until becoming Senior Vice President, Enterprise Resource Planning in February 2007. |
|
| • | Joseph B. Cipollone has held various positions with the Corporation since joining in 1991, including most recently Executive Director, International Finance from December 1997 until becoming Vice President and Corporate Controller in April 2001 and Vice President and Chief Accounting Officer in October 2010. |
Morry Weiss and Erwin Weiss are brothers. Jeffrey Weiss and Zev Weiss are the sons of Morry Weiss. The Board of Directors annually elects all executive officers; however, executive officers are subject to removal, with or without cause, at any time; provided, however, that the removal of an executive officer would be subject to the terms of their respective employment agreements, if any.
Morry Weiss has held various positions with the Corporation since joining in 1961, including most recently Chief Executive Officer of the Corporation from October 1987 until June 2003. Mr. Morry Weiss has been Chairman since February 1992.
19
Zev Weiss has held various positions with the Corporation since joining in 1992, including most recently Executive Vice President from December 2001 until June 2003 when he was named Chief Executive Officer.
Jeffrey Weiss has held various positions with the Corporation since joining in 1988, including most recently Executive Vice President, North American Greeting Card Division of the Corporation from March 2000 until June 2003 when he was named President and Chief Operating Officer.
John W. Beeder held various positions with Hallmark Cards, Inc. since 1983, most recently as Senior Vice President and General Manager – Greeting Cards from 2002 to 2006. Thereafter, Mr. Beeder served as the President and Chief Operating Officer of Handleman Corporation (international music distribution company) in 2006, and the Managing Partner and Chief Operating Officer of Compact Clinicals (medical publishing company) in 2007. He became Senior Vice President, Executive Sales and Marketing Officer of the Corporation in April 2008.
John S. N. Charlton was Managing Director of the Consumer Products Division of Pentland Group plc in the United Kingdom from 1988 until 1998, and Managing Director of UK Greetings Ltd. (a wholly-owned subsidiary of American Greetings) from 1998 until becoming Senior Vice President, International in October 2000.
Michael L. Goulder was a Vice President in the management consulting firm of Booz Allen Hamilton from October 1998 until September 2002. He became a Senior Vice President of the Corporation in November 2002 and is currently the Senior Vice President, Executive Supply Chain Officer.
15
Thomas H. Johnston was Managing Director of Gruppo, Levey & Co., an investment banking firm focused on the direct marketing and specialty retail industries, from November 2001 until May 2004, when he became Senior Vice President and President of Carlton Cards Retail. Mr. Johnston became Senior Vice President, Creative/Merchandising in December 2004.
Catherine M. Kilbane was a partner with the law firm of Baker & Hostetler LLP until becoming Senior Vice President, General Counsel and Secretary in October 2003.
Brian T. McGrath has held various positions with the Corporation since joining in 1989, including most recently Vice President, Human Resources from November 1998 until July 2006, when he became Senior Vice President, Human Resources.
Stephen J. Smith was Vice President and Treasurer of General Cable Corporation, a wire and cable company, from 1999 until 2002. He became Vice President, Treasurer and Investor Relations of the Corporation in April 2003, and became Senior Vice President and Chief Financial Officer in November 2006.
Erwin Weiss has held various positions with the Corporation since joining in 1977, including most recently Senior Vice President, Program Realization from June 2001 to June 2003, and Senior Vice President, Specialty Business from June 2003 until becoming Senior Vice President, Enterprise Resource Planning in February 2007.
Joseph B. Cipollone has held various positions with the Corporation since joining in 1991, including most recently Executive Director, International Finance from December 1997 until becoming Vice President and Corporate Controller in April 2001.
Josef Mandelbaum has held various positions with the Corporation since joining in 1995, including most recently President and Chief Executive Officer of the Corporation’s subsidiary, AG Interactive, Inc. from May 2000 until becoming CEO – AG Intellectual Properties, which consists of the Corporation’s AG Interactive, outbound licensing and entertainment businesses, in February 2005.
Douglas W. Rommel has held various positions with the Corporation since joining in 1978, including most recently Executive Director of e-business within the Information Services division from July 2000 until becoming Vice President, Information Services in November 2001.
16
| |
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
(a)
Market InformationInformation.. Our Class A common shares are listed on the New York Stock Exchange under the symbol AM. The high and low sales prices, as reported in the New York Stock Exchange listing, for the years ended February 28,
20092011 and
February 29, 2008,2010, were as follows:
| | | | | | | | | | | | |
| | | 2009 | | 2008 |
| | High | | Low | | High | | Low |
1st Quarter | | $ | 19.99 | | $ | 16.95 | | $ | 26.26 | | $ | 22.23 |
2nd Quarter | | | 19.14 | | | 11.69 | | | 29.10 | | | 22.12 |
3rd Quarter | | | 18.45 | | | 7.85 | | | 28.49 | | | 22.65 |
4th Quarter | | | 13.04 | | | 3.73 | | | 24.35 | | | 17.77 |
| | | | | | | | | | | | | | | | | |
| | | 2011 | | | 2010 | |
| | | High | | | Low | | | High | | | Low | |
| |
1st Quarter | | $ | 26.21 | | | $ | 19.09 | | | $ | 8.85 | | | $ | 3.24 | |
2nd Quarter | | | 23.36 | | | | 17.89 | | | | 16.13 | | | | 6.33 | |
3rd Quarter | | | 21.64 | | | | 18.02 | | | | 24.10 | | | | 13.20 | |
4th Quarter | | | 23.89 | | | | 19.86 | | | | 25.58 | | | | 17.05 | |
There is no public market for our Class B common shares. Pursuant to our Amended and Restated 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 American Greetings for purchase at the most recent closing price for our Class A common shares. If we do 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.
National City Bank, Cleveland, Ohio, It is the Corporation’s general policy to repurchase Class B common shares, in accordance with the terms set forth in our Amended and Restated Articles of Incorporation, whenever they are offered by a holder, unless such repurchase is not otherwise permitted under agreements to which the Corporation is a party.
Wells Fargo, St. Paul, Minnesota, is our registrar and transfer agent.
ShareholdersShareholders.. At February 28,
2009,2011, there were approximately
14,70011,300 holders of Class A common shares and
156132 holders of Class B common shares of record and individual participants in security position listings.
DividendsDividends.. The following table sets forth the dividends declared by us in
20092011 and
2008. | | | | | | | |
Dividends per share declared in | | 2009 | | | 2008 |
1st Quarter | | $ | 0.12 | | | $ | 0.10 |
2nd Quarter | | | 0.12 | | | | 0.10 |
3rd Quarter | | | 0.12 | | | | 0.10 |
4th Quarter | | | 0.24 | * | | | 0.10 |
| | | | | | | |
Total | | $ | 0.60 | | | $ | 0.40 |
| | | | | | | |
2010.
| | | | | | | | | |
Dividends per share declared in | | 2011 | | | 2010 | |
| |
1st Quarter | | $ | 0.14 | | | $ | * | |
2nd Quarter | | | 0.14 | | | | 0.12 | |
3rd Quarter | | | 0.14 | | | | 0.12 | |
4th Quarter | | | 0.14 | | | | 0.12 | |
| | | | | | | | | |
| Total | | $ | 0.56 | | | $ | 0.36 | |
| | | | | | | | | |
On March 21, 2011, we raised our quarterly dividend by 1 cent, from 14 cents per share to 15 cents per share. Although we expect to continue paying dividends, payment of future dividends will be determined by the Board of Directors in light of appropriate business conditions. In addition, our borrowing arrangements, including our senior secured credit facility and our 7.375% Notes due 2016 restrict our ability to pay shareholder dividends. Our borrowing arrangements also contain certain other restrictive covenants that are customary for similar credit arrangements. For example, our credit facility contains covenants relating to financial reporting and notification, compliance with laws, preservation of existence, maintenance of books and records, use of proceeds, maintenance of properties and insurance, and limitations on liens, dispositions, issuance of debt, investments, repurchases of capital stock, acquisitions and transactions with affiliates. There are also financial covenants that require us to maintain a maximum leverage ratio (consolidated indebtedness minus unrestricted cash over consolidated EBITDA) and a minimum interest coverage ratio (consolidated EBITDA over consolidated interest expense). These restrictions are subject to customary baskets and financial covenant tests. For a further description of the limitations imposed by our borrowing arrangements, see the discussion in Part II, Item 7, under the heading “Liquidity and Capital Resources,” and Note 11 to the Consolidated Financial Statements included in Part II, Item 8.
| | |
| * | | We generally pay dividends on a quarterly basis. During the fourth quarter of fiscal 2009, however, two dividends were declared, but only one dividend of $0.12 per share was paid in the fourth quarter. The other $0.12 per share dividend was paid in the first quarter of fiscal 2010. |
20
17
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
AMERICAN GREETINGS CORPORATION, THE S&P 400 INDEX AND PEER GROUP INDEX
Set forth below is a line graph comparing the cumulative total return of a hypothetical investment in
the our Class A common shares with the cumulative total return of hypothetical investments in the S&P 400 Index, and the Peer Group
described below based on the respective market price of each investment at February
27, 2004, February 28, 2005, February 28, 2006, February 28, 2007, February 29, 2008,
February 27, 2009, February 26, 2010 and February
27, 2009.
| | | | | | | | | | | | | | | | | | |
| | | 2/04 | | 2/05 | | 2/06 | | 2/07 | | 2/08 | | 2/09 |
American Greetings | | $ | 100 | | $ | 109 | | $ | 94 | | $ | 106 | | $ | 87 | | $ | 18 |
S & P 400 | | $ | 100 | | $ | 112 | | $ | 132 | | $ | 144 | | $ | 137 | | $ | 80 |
Peer Group* | | $ | 100 | | $ | 113 | | $ | 107 | | $ | 123 | | $ | 117 | | $ | 81 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2/06 | | 2/07 | | 2/08 | | 2/09 | | 2/10 | | 2/11 |
| American Greetings | | | $100 | | | | $113 | | | | $93 | | | | $19 | | | | $103 | | | | $120 | |
| S & P 400 | | | $100 | | | | $110 | | | | $104 | | | | $61 | | | | $101 | | | | $134 | |
| Peer Group* | | | $100 | | | | $116 | | | | $110 | | | | $76 | | | | $132 | | | | $183 | |
Source: Bloomberg L.P.
*Peer Group
| | | | |
*Peer Group | | | | |
| Blyth Inc. (BTH) | | Fossil Inc. (FOSL) | | McCormick & Co.-Non Vtg Shrs (MKC) |
Central Garden & Pet Co. (CENT) | | Jo-Ann Stores Inc. (JAS) | | Scotts Miracle-Gro Co. (The) –- CL A (SMG) |
CSS Industries Inc. (CSS) | | Lancaster Colony Corp. (LANC) | | Tupperware Brands Corp. (TUP) |
The Peer Group Index takes into account companies selling cyclical nondurable consumer goods with the following attributes, among others, that are similar to those of American Greetings: customer demographics, sales, market capitalizations and distribution channels.
21
18
Securities Authorized for Issuance Under Equity Compensation Plans. Please refer to the information set forth under the heading “Equity Compensation Plan Information” included in Item 12 of this Annual Report on
Form 10-K. (c) The following table provides information with respect to our purchases of our common shares made during the three months ended February 28,
2009. | | | | | | | | | | | | | | | |
Period | | Total Number of
Shares Purchased | | | Average Price
Paid per Share | | | Total
Number of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs | | | Maximum Number
(or Approximate
Dollar Value)
of Shares that May
Yet Be Purchased
Under the Plans or
Programs |
December 2008 | | Class A – | | — | | | | — | | | — | | | $ | — |
| | Class B – | | 500 | (1) | | $ | 9.82 | | | — | | | | |
| | | | | |
January 2009 | | Class A – | | 1,375,000 | | | $ | 5.14 | (2) | | 1,375,000 | (3) | | $ | 67,937,453 |
| | Class B – | | — | | | | — | | | — | | | | |
| | | | | |
February 2009 | | Class A – | | 3,500,000 | | | $ | 4.88 | (2) | | 3,500,000 | (3) | | $ | 50,842,340 |
| | Class B – | | — | | | | — | | | — | | | | |
| | | | | |
Total | | Class A – | | 4,875,000 | | | | | | | 4,875,000 | (3) | | | |
| | Class B – | | 500 | (1) | | | | | | — | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Maximum
| |
| | | | | | | | | Total
| | | Number
| |
| | | | | | | | | Number of Shares
| | | (or Approximate
| |
| | | | | | | | | Purchased as
| | | Dollar Value) of Shares
| |
| | | | | | Average
| | | Part of Publicly
| | | that May Yet Be
| |
| | | Total Number of
| | | Price Paid
| | | Announced Plans or
| | | Purchased Under
| |
Period | | Shares Purchased | | | per Share | | | Programs | | | the Plans or Programs | |
| |
| December 2010 | | | Class A - | | | | - | | | | - | | | | - | | | $ | 46,578,874 | (2) |
| | | | Class B - | | | | - | | | | - | | | | - | | | | | |
| January 2011 | | | Class A - | | | | - | | | | - | | | | - | | | $ | 46,578,874 | (2) |
| | | | Class B - | | | | 3,701 | (1) | | $ | 22.12 | | | | - | | | | | |
| February 2011 | | | Class A - | | | | - | | | | - | | | | - | | | $ | 46,578,874 | (2) |
| | | | Class B - | | | | - | | | | - | | | | - | | | | | |
| Total | | | Class A - | | | | - | | | | - | | | | - | | | | | |
| | | | Class B - | | | | 3,701 | (1) | | | - | | | | - | | | | | |
| | |
| (1) | | There is no public market for our Class B common shares. Pursuant to our 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. It is the Corporation’s general policy to repurchase Class B common shares, in accordance with the terms set forth in our Amended and Restated Articles of Incorporation, allwhenever they are offered by a holder, unless such repurchase is not otherwise permitted under agreements to which the Corporation is a party. All of the Class B common shares were repurchased by American Greetings for cash pursuant to itsthis right of first refusal. |
|
| (2) | Excludes commissions paid, if any, related to the share repurchase transactions. |
(3) | On January 13, 2009, American Greetings announced that its Board of Directors authorized a program to repurchase up to $75 million of its Class A common shares. There is no set expiration date for this repurchase program and theprogram. No repurchases reflected above were made through a 10b5-1 program in open market or privately negotiated transactions, which were intended to be in compliance with the SEC’s Rule 10b-18.current quarter under this program. |
22
19
| |
| Item 6. | Selected Financial Data |
Thousands of dollars except share and per share amounts
| | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | | 2010(1) | | | 2009 | | | 2008 | | | 2007(2) | |
| |
Summary of Operations | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,560,213 | | | $ | 1,598,292 | | | $ | 1,646,399 | | | $ | 1,730,784 | | | $ | 1,744,798 | |
| Total revenue | | | 1,592,568 | | | | 1,635,858 | | | | 1,690,738 | | | | 1,776,451 | | | | 1,794,290 | |
| Goodwill and other intangible asset impairments | | | - | | | | - | | | | 290,166 | | | | - | | | | 2,196 | |
| Interest expense | | | 25,389 | | | | 26,311 | | | | 22,854 | | | | 20,006 | | | | 34,986 | |
| Income (loss) from continuing operations | | | 87,018 | | | | 81,574 | | | | (227,759) | | | | 83,320 | | | | 39,938 | |
| (Loss) income from discontinued operations, net of tax | | | - | | | | - | | | | - | | | | (317) | | | | 2,440 | |
| Net income (loss) | | | 87,018 | | | | 81,574 | | | | (227,759) | | | | 83,003 | | | | 42,378 | |
| Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | | 2.18 | | | | 2.07 | | | | (4.89) | | | | 1.54 | | | | 0.69 | |
| (Loss) income from discontinued operations, net of tax | | | - | | | | - | | | | - | | | | (0.01) | | | | 0.04 | |
| Earnings (loss) per share | | | 2.18 | | | | 2.07 | | | | (4.89) | | | | 1.53 | | | | 0.73 | |
| Earnings (loss) per share — assuming dilution | | | 2.11 | | | | 2.03 | | | | (4.89) | | | | 1.52 | | | | 0.71 | |
| Cash dividends declared per share | | | 0.56 | | | | 0.36 | | | | 0.60 | | | | 0.40 | | | | 0.32 | |
| Fiscal year end market price per share | | | 21.65 | | | | 19.07 | | | | 3.73 | | | | 18.82 | | | | 23.38 | |
| Average number of shares outstanding | | | 39,982,784 | | | | 39,467,811 | | | | 46,543,780 | | | | 54,236,961 | | | | 57,951,952 | |
| | | | | | | | | | | | | | | | | | | | | |
Financial Position | | | | | | | | | | | | | | | | | | | | |
| Inventories | | | 179,730 | | | | 163,956 | | | | 194,945 | | | | 207,629 | | | | 174,426 | |
| Working capital | | | 358,379 | | | | 310,704 | | | | 229,817 | | | | 245,654 | | | | 434,041 | |
| Total assets | | | 1,532,402 | | | | 1,529,651 | | | | 1,448,049 | | | | 1,809,133 | | | | 1,784,748 | |
| Property, plant and equipment additions | | | 36,346 | | | | 26,550 | | | | 55,733 | | | | 56,623 | | | | 41,716 | |
| Long-term debt | | | 232,688 | | | | 328,723 | | | | 389,473 | | | | 220,618 | | | | 223,915 | |
| Shareholders’ equity(3) | | | 748,911 | | | | 636,064 | | | | 529,189 | | | | 943,411 | | | | 1,012,574 | |
| Shareholders’ equity per share | | | 18.53 | | | | 16.11 | | | | 13.05 | | | | 19.35 | | | | 18.37 | |
| Net return on average shareholders’ equity from continuing operations | | | 12.6 | % | | | 14.0 | % | | | (30.9) | % | | | 8.5 | % | | | 3.6 | % |
| | |
| (1) | | During 2010, the Corporation incurred a loss of $29.3 million on the disposition of the Retail Operations segment. The Corporation also recorded a gain of $34.2 million related to the party goods transaction and a charge of approximately $15.8 million for asset impairments and severance associated with a facility closure. Also in 2010, the Corporation recognized a cost of $18.2 million in connection with the shutdown of its distribution operations in Mexico. See Notes 2 and 3 to the Corporation’s 2011 financial statements. |
|
| (2) | | During 2007, as a result of retailer consolidation, wherein multiple long-term supply agreements were terminated and a new agreement was negotiated with a new legal entity with substantially different terms and sales commitments, a gain of $20.0 million was recorded. Also, in 2007, the Corporation sold substantially all of the assets associated with its candle product lines and recorded a loss of approximately $16.0 million. |
|
| (3) | | The Corporation adopted accounting guidance for convertible debt instruments in 2010. This guidance requires an issuer of certain convertible instruments that may be settled in cash or other assets on conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The impact on shareholders’ equity of retrospectively applying this guidance related to the Corporation’s 7.00% convertible subordinated notes issued in 2002 and settled in 2007 would have been $35 million for 2007. The convertible subordinated notes were not outstanding in the four years ended February 28, 2011. |
23
| | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Summary of Operations | | | | | | | | | | | | | | | |
Net sales | | $1,646,399 | | | $1,730,784 | | | $1,744,798 | | | $1,875,472 | | | $1,871,386 | |
Total revenue | | 1,690,738 | | | 1,776,451 | | | 1,794,290 | | | 1,928,136 | | | 1,935,109 | |
Goodwill and other intangible assets impairment | | 290,166 | | | — | | | 2,196 | | | 43,153 | | | — | |
Interest expense | | 22,854 | | | 20,006 | | | 34,986 | | | 35,124 | | | 79,397 | |
(Loss) income from continuing operations | | (227,759 | ) | | 83,320 | | | 39,938 | | | 89,219 | | | 67,605 | |
(Loss) income from discontinued operations, net of tax | | — | | | (317 | ) | | 2,440 | | | (4,843 | ) | | 27,674 | |
Net (loss) income | | (227,759 | ) | | 83,003 | | | 42,378 | | | 84,376 | | | 95,279 | |
(Loss) earnings per share: | | | | | | | | | | | | | | | |
(Loss) income from continuing operations | | (4.89 | ) | | 1.54 | | | 0.69 | | | 1.35 | | | 0.99 | |
(Loss) income from discontinued operations, net of tax | | — | | | (0.01 | ) | | 0.04 | | | (0.07 | ) | | 0.40 | |
(Loss) earnings per share | | (4.89 | ) | | 1.53 | | | 0.73 | | | 1.28 | | | 1.39 | |
(Loss) earnings per share—assuming dilution | | (4.89 | ) | | 1.52 | | | 0.71 | | | 1.16 | | | 1.25 | |
Cash dividends declared per share | | 0.60 | | | 0.40 | | | 0.32 | | | 0.32 | | | 0.12 | |
Fiscal year end market price per share | | 3.73 | | | 18.82 | | | 23.38 | | | 20.98 | | | 24.63 | |
Average number of shares outstanding | | 46,543,780 | | | 54,236,961 | | | 57,951,952 | | | 65,965,024 | | | 68,545,432 | |
| | | | | |
Financial Position | | | | | | | | | | | | | | | |
Accounts receivable—net | | $ 63,281 | | | $ 61,902 | | | $ 104,000 | | | $ 139,385 | | | $ 179,833 | |
Inventories | | 203,873 | | | 216,671 | | | 182,618 | | | 213,109 | | | 216,255 | |
Working capital | | 217,990 | | �� | 237,049 | | | 425,228 | | | 603,797 | | | 828,484 | |
Total assets | | 1,433,788 | | | 1,804,428 | | | 1,778,214 | | | 2,218,962 | | | 2,524,207 | |
Property, plant and equipment additions | | 55,733 | | | 56,623 | | | 41,716 | | | 46,177 | | | 47,179 | |
Long-term debt | | 389,473 | | | 220,618 | | | 223,915 | | | 300,516 | | | 486,087 | |
Shareholders’ equity | | 529,189 | | | 943,411 | | | 1,012,574 | | | 1,220,025 | | | 1,386,780 | |
Shareholders’ equity per share | | 13.05 | | | 19.35 | | | 18.37 | | | 20.22 | | | 20.09 | |
Net return on average shareholders’ equity from continuing operations | | (30.9 | %) | | 8.5 | % | | 3.6 | % | | 6.8 | % | | 5.1 | % |
20
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements. This discussion and analysis, and other statements made in this Report, contain forward-looking statements. See “Factors That May Affect Future Results” at the end of this discussion and analysis for a discussion of the uncertainties, risks and assumptions associated with these statements.
Founded in 1906, we are the world’s largest publicly owned creator, manufacturer and distributor of social expression products. Headquartered in Cleveland, Ohio, as of February 28,
2009,2011, we employ approximately
17,80016,100 associates around the world and are home to one of the world’s largest creative studios.
Our major domestic greeting card brands are American Greetings,
Recycled Paper Greetings, Papyrus, Carlton Cards, Gibson, Tender Thoughts and Just For
You andYou. Our other domestic products include DesignWare party goods, Plus Mark gift wrap and boxed cards,
DateWorks calendars and AGI In-Store display fixtures. We also create and license our intellectual properties such as the Care Bears and Strawberry Shortcake characters. The Internet and wireless business unit, AG Interactive, is a leading provider of electronic greetings and other content for the digital marketplace. Our major Internet
and wireless brands are AmericanGreetings.com, BlueMountain.com, Egreetings.com, Kiwee.com,
PhotoWorks.comCardstore.com and WebShots.com.
As of February 28, 2009, the Retail Operations segment owned and operated 341 card and gift retail stores throughout North America.Our international operations include wholly-owned subsidiaries in the United Kingdom (“U.K.”), Canada, Australia
and New Zealand
and Mexico, as well as licensees in approximately
6070 other countries.
We experienced difficult industry conditions during 2009 as During 2010, we shut down our subsidiary in Mexico and now supply the global economic slowdown increased in severity throughoutMexican market through a third party distributor.
During 2011, our sales and operating results continued to be impacted by the
coursestrategic actions taken over the past couple of
the year, particularly during the second halfyears related to our strategy of
the year,product leadership and focusing our resources on growing our core competencies within greeting cards. These actions, all of which
is criticaloccurred prior to
2011, included the
social expressions industry due to the concentration of major holidays during that period. These industry conditions were characterized by lower customer traffic in retail stores, less consumer spending due to economic uncertainties and a number of retailer bankruptcies. These circumstances significantly impacted our results during 2009, leading to lower revenues and earnings throughout the Corporation.In addition, these conditions led to several significant asset impairments during the second half of 2009. Due to declining results, uncertainties regarding future forecasts and our declining stock price, we recorded goodwill, intangible asset and fixed asset impairments totaling approximately $296 million during 2009.
These difficult times also provided opportunities that we have leveraged to position ourselves for future success. Our pursuit of these opportunities have led to the following business transactions:
February 24, 2009 acquisition of Recycled Paper Greetings;
April 17, 2009Greetings (“RPG”), the acquisition of the Papyrus trademark and wholesale business division of Schurman Fine Papers that supplies Papyrus brand greeting cards to specialty, mass, grocery(“Schurman”), and drug store channels;the change in our operating model in Mexico and
April 17, 2009 divestiture of the party goods transaction with Amscan. In addition, we divested our Retail Operations segment.
These actions continuesegment, shut down our Mexican operations and closed our party goods operation in Michigan. The integration and shutdown activities associated with these strategic changes to our portfolio of businesses are now substantially complete and we are beginning to realize the associated cost savings and synergies. To further this strategy of focusing on growing our corean international dimension, in March 2011 we acquired Watermark, a greeting card business and divesting non-core businesses.company in the United Kingdom. The additionsacquisition of RPG and Papyrus provide us with an opportunity for new innovations and ideas. These acquisitions align with our corporate strategy to grow our business by building on our core competency of greeting cards. RPG has a history of creating humorous and alternative greeting cards with aWatermark adds another unique style and tone to meet consumers’ needs.our greeting card brand portfolio.
Total revenue for 2011 was $1.59 billion, down $43 million from the prior year. The
Papyrus brand provides the opportunity to servedecreased revenue was primarily driven by lower sales of party goods as a
consumer with distinct tastes, one that appreciates the Papyrus approach to design and quality. These acquisitions allow us to focus our efforts and stay true to our vision of providing relevant and compelling products to consumers.21
In addition to the above transactions, in March 2009, we came to an agreement with a potential buyer for our Strawberry Shortcake and Care Bears properties. We expect to receive approximately $76 million for our rights in the properties. The tight credit markets have created difficulty in completing this transaction. There are still hurdles to finalizing the transaction, but we are moving forward with the goal of closing the transaction during fiscal 2010.
Looking forward to fiscal 2010, we expect the economy to remain challenging at least through the first halfresult of the year. While we hope to see improvement later in theprior year our strategy is to remain conservative until that time. We have taken actions to reduce costs, including significant headcount reductions during the recent fourth quarter,transaction and are taking further actions to lower manufacturing costs, improve the efficiency of our supply chain and eliminate non-essential discretionary spending. Over the past several years we have incurred significant costs associated with our investment in cards strategy, which focused on improving the design, production, display and promotion of our cards, creating relevant and on-trend products, brought to market quickly and merchandised in a manner that enhances the shopping experience. That strategy, combined with the acquisitions, divestiture and cost savings programs described above, positions us to both withstand the current economic conditions and to be well positioned when the economy begins to improve.
We expect the divestiture of our retail stores, netthe Retail Operations segment. All other revenue factors offset each other, with favorable foreign exchange impacts, higher sales in the fixtures business and improved seasonal card sales offset by lower royalty revenue, lower sales of both everyday cards and other accessory products, and the impact of a scan-based trading implementation.
Operating income for 2011 was $174.7 million compared to $139.1 million in 2010. A significant amount of the acquisitionsyear-over-year variance of RPG$35.6 million was the result of the strategic actions described above and other charges that reduced the Papyrus wholesale business,prior year’s operating income.
24
Operating income in 2010 included the following items:
| | | | | |
| Loss on divestiture of our Retail Operations segment | | $ | (29.2 | ) |
| Changes to distribution model in Mexico | | | (18.2 | ) |
| Settlement of a lawsuit | | | (24.0 | ) |
| Severance expense | | | (9.4 | ) |
| Net benefit related to party goods transaction | | | 21.2 | |
| LIFO liquidation | | | 13.0 | |
| Income associated with certain corporate-owned life insurance programs | | | 7.0 | |
| Gain on liquidation of operation in France | | | 3.3 | |
| | | | | |
| Total 2010 impact | | $ | (36.3 | ) |
| | | | | |
Operating income in 2011 was unfavorably impacted by integration costs of approximately $10 million, severance costs of approximately $7 million and lower revenues. Favorably impacting the current year were cost savings and synergies from the integrations, improvements driven by a higher mix of card versus non-card products and lower manufacturing and distribution costs driven by efficiency and cost reduction initiatives.
Our operating income for the year, and during the fourth quarter in particular, was impacted by changes to negatively impact fiscalcertain customer agreements in the value channel that are expected to provide expanded distribution. As discussed in ourForm 10-Q for the third quarter ended November 26, 2010, revenueswe expected to incur incremental costs of approximately 2%$7 million to $11 million during the fourth quarter, prior to generating the incremental revenue that is expected through this expanded distribution. During the fourth quarter, these costs totaled approximately $9 million, including fixture costs, field sales expenses and retailer allowances, as well as approximately $5 million associated with the implementation of a new SBT arrangement in one of those retailers.
Our effective tax rate for 2011 was 44.2%. We also expectThe higher than statutory tax rate was primarily driven by the effective settlement of ten years of domestic tax audits which increased our estimated tax assessment and associated interest reserves by approximately $7 million. In addition, tax expense was impacted by the unfavorable settlements of audits in a foreign jurisdiction, the release of insurance reserves that earnings will be negatively impacted in fiscal 2010generated taxable income, as well as the recognition of the deferred tax effects of the reduced deductibility of postretirement prescription drug coverage due to the transactionrecently enacted U.S. Patient Protection and transition expenses we will incur during the period relating to these transactions. Additionally, other revenue, primarily royalty revenue, may be lower in fiscal 2010 based on the anticipated sale of the Strawberry Shortcake andAffordable Care Bears properties.Act.
25
We recognized a net loss of $227.8 million in 2009 compared to net income of $83.0 million in 2008, on total revenue of $1.69 billion in 2009 compared to $1.78 billion in 2008.
The lower consolidated revenues were significantly impacted by unfavorable foreign currency movements, which accounted for approximately half of the total revenue decline. In addition, revenues were lower in all segments except the AG Interactive segment and our non-reportable segments (which include the fixtures and licensing businesses). The increased revenue in the AG Interactive segment was primarily due to the digital photography acquisitions completed during the second half of 2008 partially offset by lower advertising revenues. Revenues in the North American Social Expression Products segment declined primarily due to lower sales of gift packaging products, party goods and specialty products, partially offset by the favorable impact of fewer SBT implementations compared to the prior year. Revenues were lower within the International Social Expression Products segment due to our U.K. business that was significantly impacted by the general economic downturn, with the bankruptcy of one major customer, a buying freeze by another major customer and a general decline in sales to most customers during the fourth quarter. The Retail Operations segment revenue decreased due to both fewer stores and the decrease in same-store sales, particularly during the fourth quarter.
In addition to the $296 million of impairments discussed above, earnings declined due to decreased revenue, an unfavorable product mix and continued increases in product content costs due to the growth in the sale of technology cards and changes in product design that add creative embellishments to the card lines. These increases in content costs along with the growth in value card sales put downward pressure on our gross margins. Supply chain, scrap and distribution costs were higher than the prior year as increases in card shipments outpaced increases of card unit sales.
22
Comparison of the years ended February 28, 20092011 and February 29, 20082010 In
2009,2011, net
lossincome was
$227.8$87.0 million, or
$4.89$2.11 per diluted share, compared to
net income of $83.0$81.6 million, or
$1.52$2.03 per diluted share, in
2008.2010.
Our results for
20092011 and
20082010 are summarized below:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2009 | | | % Total
Revenue | | | 2008 | | | % Total
Revenue | |
Net sales | | $ | 1,646,399 | | | 97.4 | % | | $ | 1,730,784 | | | 97.4 | % |
Other revenue | | | 44,339 | | | 2.6 | % | | | 45,667 | | | 2.6 | % |
| | | | | | | | | | | | | | |
Total revenue | | | 1,690,738 | | | 100.0 | % | | | 1,776,451 | | | 100.0 | % |
Material, labor and other production costs | | | 809,956 | | | 47.9 | % | | | 780,771 | | | 43.9 | % |
Selling, distribution and marketing expenses | �� | | 618,899 | | | 36.6 | % | | | 621,478 | | | 35.0 | % |
Administrative and general expenses | | | 226,317 | | | 13.4 | % | | | 246,722 | | | 13.9 | % |
Goodwill and other intangible assets impairment | | | 290,166 | | | 17.2 | % | | | — | | | 0.0 | % |
Other operating income—net | | | (1,396 | ) | | (0.1 | %) | | | (1,325 | ) | | (0.1 | %) |
| | | | | | | | | | | | | | |
Operating (loss) income | | | (253,204 | ) | | (15.0 | %) | | | 128,805 | | | 7.3 | % |
Interest expense | | | 22,854 | | | 1.4 | % | | | 20,006 | | | 1.1 | % |
Interest income | | | (3,282 | ) | | (0.2 | %) | | | (7,758 | ) | | (0.4 | %) |
Other non-operating expense (income)—net | | | 2,157 | | | 0.1 | % | | | (7,411 | ) | | (0.4 | %) |
| | | | | | | | | | | | | | |
(Loss) income from continuing operations before income tax (benefit) expense | | | (274,933 | ) | | (16.3 | %) | | | 123,968 | | | 7.0 | % |
Income tax (benefit) expense | | | (47,174 | ) | | (2.8 | %) | | | 40,648 | | | 2.3 | % |
| | | | | | | | | | | | | | |
(Loss) income from continuing operations | | | (227,759 | ) | | (13.5 | %) | | | 83,320 | | | 4.7 | % |
Loss from discontinued operations, net of tax | | | — | | | 0.0 | % | | | (317 | ) | | (0.0 | %) |
| | | | | | | | | | | | | | |
Net (loss) income | | $ | (227,759 | ) | | (13.5 | %) | | $ | 83,003 | | | 4.7 | % |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | % Total
| | | | | | % Total
| |
| (Dollars in thousands) | | 2011 | | | Revenue | | | 2010 | | | Revenue | |
| |
| Net sales | | $ | 1,560,213 | | | | 98.0 | % | | $ | 1,598,292 | | | | 97.7 | % |
| Other revenue | | | 32,355 | | | | 2.0 | % | | | 37,566 | | | | 2.3 | % |
| | | | | | | | | | | | | | | | | |
| Total revenue | | | 1,592,568 | | | | 100.0 | % | | | 1,635,858 | | | | 100.0 | % |
| Material, labor and other production costs | | | 682,368 | | | | 42.8 | % | | | 713,075 | | | | 43.6 | % |
| Selling, distribution and marketing expenses | | | 478,227 | | | | 30.0 | % | | | 507,960 | | | | 31.0 | % |
| Administrative and general expenses | | | 260,476 | | | | 16.4 | % | | | 276,031 | | | | 16.9 | % |
| Other operating income — net | | | (3,205 | ) | | | (0.2 | )% | | | (310 | ) | | | (0.0 | )% |
| | | | | | | | | | | | | | | | | |
| Operating income | | | 174,702 | | | | 11.0 | % | | | 139,102 | | | | 8.5 | % |
| Interest expense | | | 25,389 | | | | 1.6 | % | | | 26,311 | | | | 1.6 | % |
| Interest income | | | (853 | ) | | | (0.0 | )% | | | (1,676 | ) | | | (0.1 | )% |
| Other non-operating income — net | | | (5,841 | ) | | | (0.4 | )% | | | (6,487 | ) | | | (0.4 | )% |
| | | | | | | | | | | | | | | | | |
| Income before income tax expense | | | 156,007 | | | | 9.8 | % | | | 120,954 | | | | 7.4 | % |
| Income tax expense | | | 68,989 | | | | 4.3 | % | | | 39,380 | | | | 2.4 | % |
| | | | | | | | | | | | | | | | | |
| Net income | | $ | 87,018 | | | | 5.5 | % | | $ | 81,574 | | | | 5.0 | % |
| | | | | | | | | | | | | | | | | |
Revenue OverviewConsolidated
During 2011, consolidated net sales
in 2009 were
$1.65$1.56 billion,
a decrease of $84.4 milliondown from
$1.60 billion in the prior year.
Approximately half,This 2.4%, or
$42approximately $38 million,
of the decrease is attributable to unfavorable foreign currency translation impacts. The remaining decreasedecline was
primarily the result of
lowerdecreased net sales in our North American Social Expression Products segment
and our Retail Operations segment
of approximately $53 million and
$12 million, respectively. These decreases were partially offset by higher net sales in our fixtures business and in our International Social Expression Products segment
partially offset by increases in our AG Interactive segment of approximately
$6$11 million and
the non-reportable segments of$7 million, respectively. Foreign currency translation also favorably impacted net sales by approximately
$3$10 million.
The increased revenue in the AG Interactive segment was primarily due to the digital photography acquisitions completed during the second half of 2008 partially offset by lower advertising revenues. Net sales ofin our North American Social Expression Products segment decreased approximately $29$53 million. The majority of theThis decrease is attributable to decreasedlower sales of ourparty goods of approximately $31 million, gift packaging and other non-card products of approximately $13 million, and everyday cards of approximately $8 million. Net sales of party goods product lines of approximately $37 million and $11 million, respectively. Also contributingdecreased due to the decrease was a declinetransaction completed in specialty productthe prior year fourth quarter. SBT implementations unfavorably impacted net sales which include stationery, calendars and stickers, ofby approximately $7$6 million. These decreases were partially offset by the favorable impactimproved seasonal card sales of fewer SBT implementationsapproximately $5 million.
Net sales in
the current year and the favorable impact of an SBT implementation completed during the year that had previously been estimated, which together increased net sales by approximately $28 million in the current year compared to 2008.Theour Retail Operations segment’s net salessegment decreased approximately $15$12 million due to the bothsale of our retail store assets in April 2009. There were no net sales in our Retail Operations segment during the decreasetwelve months ended February 28, 2011.
The increase in
same-store sales of 4% and the reduction in stores.Net sales of our International Social Expression Products segment decreased approximately $7 million. The decrease in the current year is primarily attributable to reduced sales in the U.K. due to the recent bankruptcy of a
23
major customer; a buying freeze implemented by another major customer, including on our everyday products; and a general decline in seasonal and everyday card sales to most customers during the fourth quarter. This decrease was partially offset by an increase insegment’s net sales of approximately $11$7 million from thewas driven by our U.K. acquisition completed during the first quarter of this year.operations where boxed cards associated with our Christmas program and favorable overall card sales.
26
The contribution of each major product category as a percentage of net sales for the past two fiscal years was as follows:
| | | | | | |
| | | 2009 | | | 2008 | |
Everyday greeting cards | | 43 | % | | 41 | % |
Seasonal greeting cards | | 22 | % | | 22 | % |
Gift packaging | | 14 | % | | 15 | % |
All other products* | | 21 | % | | 22 | % |
| | | | | | | | | |
| | | 2011 | | | 2010 | |
| |
| Everyday greeting cards | | | 48 | % | | | 48 | % |
| Seasonal greeting cards | | | 24 | % | | | 23 | % |
| Gift packaging | | | 14 | % | | | 14 | % |
| All other products* | | | 14 | % | | | 15 | % |
| | |
| * | | The “all other products” classification includes, among other things, giftware, party goods, calendars,stationery, custom display fixtures, stickers, online greeting cards and other digital products. |
Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, decreased
$1.4$5.2 million from
$45.7$37.6 million during 2010 to $32.4 million in
2008 to $44.3 million in 2009. We have entered into an agreement to sell our Strawberry Shortcake and Care Bears properties. We expect to receive approximately $76 million for our rights in the properties. The anticipated sale is expected to close in fiscal 2010. See Note 19 to the Consolidated Financial Statements for further information.2011.
Wholesale Unit and Pricing Analysis for Greeting Cards Unit and pricing comparatives (on a sales less returns basis) for
20092011 and
20082010 are summarized below:
| | | | | | | | | | | | | | | | | | |
| | | Increase (Decrease) From the Prior Year | |
| | Everyday Cards | | | Seasonal Cards | | | Total Greeting Cards | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Unit volume | | 1.7 | % | | 9.6 | % | | 3.4 | % | | 7.0 | % | | 2.2 | % | | 8.8 | % |
Selling prices | | (1.5 | %) | | (5.6 | %) | | (5.3 | %) | | (4.4 | %) | | (2.7 | %) | | (5.2 | %) |
Overall increase / (decrease) | | 0.2 | % | | 3.5 | % | | (2.1 | %) | | 2.3 | % | | (0.5 | %) | | 3.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Increase (Decrease) From the Prior Year | |
| | | Everyday Cards | | | Seasonal Cards | | | Total Greeting Cards | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| |
| Unit volume | | | (2.2 | )% | | | 7.2 | % | | | (1.8 | )% | | | 6.7 | % | | | (2.1 | )% | | | 7.0 | % |
| Selling prices | | | 1.0 | % | | | 1.4 | % | | | 2.3 | % | | | (1.6 | )% | | | 1.4 | % | | | 0.4 | % |
| Overall increase / (decrease) | | | (1.2 | )% | | | 8.7 | % | | | 0.4 | % | | | 5.0 | % | | | (0.7 | )% | | | 7.5 | % |
During
2009,2011, combined everyday and seasonal greeting card sales less returns
decreased 0.5%declined 0.7%, compared to the prior year,
withdriven by a decrease in everyday card sales less returns of 1.2%. The overall decrease was driven by our North American Social Expression Products segment, where increases in
unit volumeour seasonal card sales less returns are more than offset by
lower average selling prices.decreases of everyday card sales less returns.
Everyday card unit volume was up 1.7% compared to the prior year. However, net of prior year SBT implementations that reduced unit volume, everyday card unit volume was essentially flat compared to the prior year. Overall unit volume had been strong through the first three-quarters of the year, up 6.0%, but dropped significantly during the fourth quarter due to the general economic downturn and reduced inventory at retail. Selling pricessales less returns were down 1.5%1.2%, compared to the prior year, as a result of decreases in unit volume of 2.2% more than offsetting increases in selling prices of 1.0%. The selling price improvement was largely driven by our prior year acquisitions, which more than offset the impact of the continued trend towardshift to a higher mix of value line cards. The
Seasonal card sales less returns increased
0.4%, with improved selling prices of 2.3% partially offset by a decline in unit volume of
value priced card sales is driven by expanded distribution and changes1.8%. The increase in
consumer preferences. This growth in the value priced cardsselling prices was primarily a result of our prior year acquisitions within our North American Social Expression Products segment, which more than
offsetsoffset the impact of the
growth in higher priced technology cards.Seasonal card unit volume increased 3.4% compared to the prior year, driven by improvement in most seasonal programs. Lower selling prices of 5.3% relatedcontinued shift to a higher mix of value priced cards across most seasonal programs comparedline cards. Based on current trends in the market, we expect the general shift to the prior year. The increased volumea higher mix of value priced card sales is driven by expanded distributionline cards will continue in the foreseeable future for both everyday and changes in consumer preferences.
seasonal cards.
Material, labor and other production costs (“MLOPC”) for 20092011 were $810.0$682.4 million, an increasea decrease of approximately $31 million from $780.8$713.1 million in 2008.during 2010. As a percentage of total revenue, these costs were 47.9%42.8% in 2009the current year compared to 43.9%43.6% in 2008. The increase2010. About 70% of $29.2 million isthe lower expense was due to unfavorable mixthe elimination of operating costs as a result of the divestiture of the retail store operations ($175 million), the wind down of our Mexican operations ($8 million) and spending variancesthe shutdown of party goods operations ($448 million). In addition, inventory levels increased during the current year fourth quarter related to the anticipated expanded distribution in the dollar channel, causing an overall increase in inventory levels compared to the prior year. As a result, an additional amount of certain production and product related costs were absorbed into ending inventory, providing a benefit to MLOPC expense. During the prior year, inventory decreased during the year, causing less absorption of these production and product related costs, increasing MLOPC expense in the prior year. The net impact of these changing inventory levels and related absorption rates was a netyear-over-year
27
MLOPC reduction of approximately $16 million. Partially offsetting these favorable items was an increase in product content costs ($6 million) and increased scrap and shrink expenses ($5 million). The prior year included impairment and severance charges related to the closure of the Kalamazoo, Michigan facility ($16 million) and the benefit of a favorable LIFO liquidation ($13 million) adjustment.
Selling, distribution and marketing expenses (“SDM”) for 2011 were $478.2 million, decreasing $29.8 million from $508.0 million in the prior year. The decrease in the current year was partially due to the elimination of operating costs due to the disposition of our retail stores ($13 million) and the wind down of our Mexican operations ($4 million), which both occurred in the prior year. Lower supply chain costs, specifically field sales and service operations costs ($18 million) and freight and distribution costs ($5 million) were the result of RPG and the Papyrus trademark and wholesale division of Schurman (collectively, “Papyrus-Recycled Greetings” or “PRG”) integration savings and a reduction in units shipped during the current year. These reductions were partially offset by increases in merchandiser expense ($3 million) and marketing, product management and product innovation costs ($4 million). Foreign currency translation ($3 million) was also unfavorable compared to the prior year.
Administrative and general expenses were $260.5 million in 2011, a decrease from $276.0 million during 2010. The decrease of $15.5 million in the current year is largely due to a prior year legal claim settlement ($24 million). Reductions in expense related to our pension and postretirement benefit plans ($6 million), as well as variable compensation expense ($7 million) also contributed to the decreased expense during the current year. Partially offsetting these favorable volume variances was increased stock compensation expense ($127 million) and continued PRG integration costs ($6 million). In addition, the prior year included a benefit related to corporate-owned life insurance ($7 million), which did not recur in the current year.
Other operating (income) expense — net was $3.2 million during the current year compared to $0.3 million in the prior year. The prior year included a loss on the sale of our retail stores to Schurman ($28 million) and a gain as a result of the party goods transaction ($34 million). The prior year also included a net loss on the recognition of cumulative foreign currency translation adjustments ($9 million) related to the shutdown of our distribution facility in Mexico and the liquidation of an operation in France.
Interest expense was $25.4 million during the current year, down from $26.3 million in 2010. The decrease of $0.9 million is primarily attributable to interest savings resulting from the $99.3 million repayment of our term loan, previously outstanding under our senior secured credit facility, as well as reduced borrowings under this facility in the current year.
Other non-operating income was $5.8 million during 2011 compared to $6.5 million during 2010. The decrease in the current year is primarily due to a swing from foreign exchange gain in the prior year to a loss in the current year, partially offset by $3.5 million of gains on the disposal of assets, primarily land and buildings in Mexico and Australia.
The effective tax rate was 44.2% and 32.6% during 2011 and 2010, respectively. The higher than statutory tax rate in 2011 was primarily driven by the effective settlement of ten years of domestic tax audits which increased our estimated tax assessment and associated interest reserves by approximately $7 million. The impact of unfavorable settlements of audits in a foreign jurisdiction, the release of insurance reserves that generated taxable income, as well as the recognition of the deferred tax effects of the reduced deductibility of postretirement prescription drug coverage due to the recently enacted U.S. Patient Protection and Affordable Care Act also contributed to the higher than statutory rate in 2011. The lower sales volumethan statutory rate during 2010 is primarily a result of favorable impacts of the wind down of our Mexican operations, settlements with taxing authorities in foreign jurisdictions, and the benefit of certain tax free proceeds from corporate-owned life insurance.
Segment Results
Our operations are organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. Our North American Social Expression Products and our International Social Expression Products segments primarily design, manufacture and sell greeting cards and
28
other related products through various channels of distribution, with mass retailers as the primary channel. As permitted under Accounting Standards Codification (“ASC”) Topic 280 (“ASC280”), “Segment Reporting,” certain operating divisions have been aggregated into both the North American Social Expression Products and International Social Expression Products segments. The aggregated operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. The AG Interactive segment distributes social expression products, including electronic greetings, personalized printable greeting cards and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices.
We review segment results, including the evaluation of management performance, using consistent exchange rates between years to eliminate the impact of foreign currency translation ($20 million).fluctuations from operating performance. The 2011 segment results below are presented using our planned foreign exchange rates, which were set at the beginning of the year. For a consistent presentation, 2010 segment results have been recast to reflect the 2011 foreign exchange rates. Refer to Note 16, “Business Segment Information,” to the Consolidated Financial Statements for further information and a reconciliation of total segment revenue to consolidated “Total revenue” and total segment earnings (loss) to consolidated “Income before income tax expense.”
North American Social Expression Products Segment
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2011 | | 2010 | | % Change |
| |
| Total revenue | | $ | 1,173,599 | | | $ | 1,226,520 | | | | (4.3 | )% |
| Segment earnings | | | 210,154 | | | | 232,614 | | | | (9.7 | )% |
Total revenue of our North American Social Expression Products segment, excluding the impact of foreign exchange and intersegment items, decreased $52.9 million compared to 2010. Decreased sales of party goods due to the transaction completed in the prior year fourth quarter reduced total revenue by approximately $31 million during 2011. Also contributing to the decline was a decrease in gift packaging and other non-card products of approximately $13 million and a decrease in everyday card sales of approximately $8 million. SBT implementations unfavorably impacted net sales by approximately $6 million. These decreases were partially offset by improved seasonal card sales of approximately $5 million.
Segment earnings, excluding the impact of foreign exchange and intersegment items, decreased $22.5 million in 2011 compared to the prior year. This decrease was primarily driven by the gross margin impact of lower sales volume of approximately $32 million due to the party goods transaction in the prior year fourth quarter and lower sales of gift packaging and other non-card products compared to the prior year. In addition, the prior year included a gain of approximately $34 million as a result of the party goods transaction, and a favorable LIFO liquidation adjustment of approximately $13 million, both of which did not recur in the current year. Incremental integration costs of approximately $6 million associated with our PRG acquisition, and increases in marketing, product management and product innovation costs of approximately $8 million also had an unfavorable spending variances areimpact on earnings. Partially offsetting these unfavorable items were reduced supply chain costs, specifically field sales and service operations, of approximately $18 million as a result of savings achieved through PRG integration efforts and a reduction in units shipped. In addition, inventory levels increased during the current year fourth quarter related to the anticipated expanded distribution in the dollar channel, causing an overall increase in inventory levels compared to the prior year. As a result, an additional amount of certain production and product related costs were absorbed into ending inventory, providing a benefit to MLOPC expense. During the prior year, inventory decreased during the year, causing less absorption of these production and product related costs, increasing MLOPC expense in the prior year. The net impact of these changing inventory levels and related absorption rates was a netyear-over-year MLOPC reduction of approximately $16 million. The prior year included impairment and severance charges related to the closure of the Kalamazoo, Michigan facility of approximately $16 million, which did not recur in 2011. The elimination of operating costs due to the wind down of our Mexican operations during the prior year third quarter also favorably impacted segment earnings by approximately $22 million.
29
International Social Expression Products Segment
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2011 | | 2010 | | % Change |
| |
| Total revenue | | $ | 256,507 | | | $ | 250,026 | | | | 2.6 | % |
| Segment earnings | | | 19,536 | | | | 16,693 | | | | 17.0 | % |
Total revenue of our International Social Expression Products segment, excluding the impact of foreign exchange, increased $6.5 million, or 2.6%, compared to the prior year. The increase in the current year was primarily driven by an increase in boxed cards associated with our Christmas program and favorable overall card sales.
Segment earnings, excluding the impact of foreign exchange, increased $2.8 million, or 17.0%, from the prior year to $19.5 million in the current year. This increase was attributable to higher sales, a gain on the sale of a building, reduced inventory scrap expense and reduced freight and distribution expense, partially offset by higher product costs and bad debt expense.
Retail Operations Segment
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2011 | | 2010 | | % Change |
| |
| Total revenue | | $ | - | | | $ | 11,727 | | | | (100 | )% |
| Segment loss | | | - | | | | (34,830 | ) | | | 100 | % |
In April 2009, we sold our retail store assets to Schurman. As a result, there was no activity in the Retail Operations segment during 2011. The prior year results included the loss on disposition of the segment of approximately $28 million.
AG Interactive Segment
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2011 | | 2010 | | % Change |
| |
| Total revenue | | $ | 78,407 | | | $ | 80,320 | | | | (2.4 | )% |
| Segment earnings | | | 14,103 | | | | 11,319 | | | | 24.6 | % |
Total revenue of our AG Interactive segment, excluding the impact of foreign exchange, was $78.4 million compared to $80.3 million in the prior year. During the current year, we experienced lowere-commerce revenue in our digital photography product group of approximately $1.9 million. Higher revenue from advertising and new product introductions was offset by lower subscription revenue in our online product group. At February 28, 2011, AG Interactive had approximately 3.8 million online paid subscriptions versus 3.9 million at February 28, 2010.
Segment earnings, excluding the impact of foreign exchange, increased $2.8 million during 2011 compared to the prior year. The increase in 2011 compared to the prior year was driven by the continued decrease in overhead expenses and technology costs that is being driven by ongoing efficiency and cost reduction initiatives. In addition, marketing expenses were down in the current year compared to the prior year. The prior year included a benefit of approximately $3 million related to the currency translation adjustment of equity that was recognized in conjunction with the liquidation of an operation in France.
Unallocated Items
Centrally incurred and managed costs, excluding the impact of foreign exchange, totaled $106.3 million and $116.5 million in 2011 and 2010, respectively, and are not allocated back to the operating segments. The unallocated items included interest expense for centrally incurred debt of $25.4 million and $26.3 million in 2011 and 2010, respectively, and domestic profit-sharing expense of $9.8 million and $9.3 million in 2011 and 2010, respectively. Unallocated items also included stock-based compensation expense of $13.0 million and $5.8 million in 2011 and 2010, respectively. In 2010, unallocated items included the settlement of a lawsuit totaling $24.0 million. In addition, unallocated items included costs associated with corporate operations including the senior management, corporate finance, legal and human resource functions, as well as insurance programs. These costs totaled $58.1 million and $51.1 million in 2011 and 2010, respectively.
30
24
Comparison of the years ended February 28, 2010 and 2009
In 2010, net income was $81.6 million, or $2.03 per diluted share, compared to a net loss of $227.8 million, or $4.89 per diluted share, in 2009.
Our results for 2010 and 2009 are summarized below:
| | | | | | | | | | | | | | | | | |
| | | | | | % Total
| | | | | | % Total
| |
| (Dollars in thousands) | | 2010 | | | Revenue | | | 2009 | | | Revenue | |
| |
| Net sales | | $ | 1,598,292 | | | | 97.7 | % | | $ | 1,646,399 | | | | 97.4 | % |
| Other revenue | | | 37,566 | | | | 2.3 | % | | | 44,339 | | | | 2.6 | % |
| | | | | | | | | | | | | | | | | |
| Total revenue | | | 1,635,858 | | | | 100.0 | % | | | 1,690,738 | | | | 100.0 | % |
| Material, labor and other production costs | | | 713,075 | | | | 43.6 | % | | | 809,956 | | | | 47.9 | % |
| Selling, distribution and marketing expenses | | | 507,960 | | | | 31.0 | % | | | 618,899 | | | | 36.6 | % |
| Administrative and general expenses | | | 276,031 | | | | 16.9 | % | | | 226,317 | | | | 13.4 | % |
| Goodwill and other intangible assets impairment | | | - | | | | 0.0 | % | | | 290,166 | | | | 17.2 | % |
| Other operating income — net | | | (310 | ) | | | (0.0 | )% | | | (1,396 | ) | | | (0.1 | )% |
| | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | 139,102 | | | | 8.5 | % | | | (253,204 | ) | | | (15.0 | )% |
| Interest expense | | | 26,311 | | | | 1.6 | % | | | 22,854 | | | | 1.4 | % |
| Interest income | | | (1,676 | ) | | | (0.1 | )% | | | (3,282 | ) | | | (0.2 | )% |
| Other non-operating (income) expense — net | | | (6,487 | ) | | | (0.4 | )% | | | 2,157 | | | | 0.1 | % |
| | | | | | | | | | | | | | | | | |
| Income (loss) before income tax expense (benefit) | | | 120,954 | | | | 7.4 | % | | | (274,933 | ) | | | (16.3 | )% |
| Income tax expense (benefit) | | | 39,380 | | | | 2.4 | % | | | (47,174 | ) | | | (2.8 | )% |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 81,574 | | | | 5.0 | % | | $ | (227,759 | ) | | | (13.5 | )% |
| | | | | | | | | | | | | | | | | |
Revenue Overview
Consolidated net sales in 2010 were $1.60 billion, compared to $1.65 billion in the prior year. This 2.9%, or approximately $48 million, decrease was primarily the result of lower net sales in our Retail Operations segment of approximately $158 million, unfavorable foreign currency translation of approximately $32 million and a decrease in net sales in our AG Interactive segment of approximately $3 million. These decreases were partially offset by higher net sales in our North American Social Expression Products segment of approximately $140 million and increased net sales in our International Social Expression Products segment of approximately $4 million due to improved sales of gifting and other non-card products.
Net sales of our North American Social Expression Products segment increased approximately $140 million compared to the prior year. Greeting cards improved approximately $169 million, due to the acquisition of PRG, which added approximately $129 million, as well as growth in our legacy greeting card business of approximately $26 million and the impact of lower deferred cost reserves of approximately $14 million. This increase was partially offset by lower accessories sales of approximately $24 million, including gift packaging, calendars and party goods, as well as lower sales of approximately $5 million in Mexico as we began winding down our operations there in the third quarter of 2010.
Net sales of our Retail Operations segment decreased approximately $158 million due to the sale of this business in April 2009. Approximately $12 million of sales is included in 2010 compared to approximately $170 million of sales in the prior year.
Net sales of our AG Interactive segment decreased approximately $3 million compared to 2009. The decrease is due primarily to lowere-commerce revenue in our digital photography product group and lower advertising revenue in our online product group, as market conditions continue to be challenging, partially offset by increased subscription revenue in our online product group.
31
The contribution of each major product category as a percentage of net sales for the past two fiscal years was as follows:
| | | | | | | | | |
| | | 2010 | | | 2009 | |
| |
| Everyday greeting cards | | | 48% | | | | 43% | |
| Seasonal greeting cards | | | 23% | | | | 22% | |
| Gift packaging | | | 14% | | | | 14% | |
| All other products* | | | 15% | | | | 21% | |
| | |
| * | | The “all other products” classification includes, among other things, giftware, party goods, stationery, custom display fixtures, stickers, online greeting cards and other digital products. |
Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, decreased $6.7 million from $44.3 million during 2009 to $37.6 million in 2010.
Wholesale Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis) for 2010 and 2009 are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Increase (Decrease) From the Prior Year | |
| | | Everyday Cards | | | Seasonal Cards | | | Total Greeting Cards | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| |
| Unit volume | | | 7.2 | % | | | 1.7 | % | | | 6.7 | % | | | 3.4 | % | | | 7.0 | % | | | 2.2 | % |
| Selling prices | | | 1.4 | % | | | (1.5 | )% | | | (1.6 | )% | | | (5.3 | )% | | | 0.4 | % | | | (2.7 | )% |
| Overall increase / (decrease) | | | 8.7 | % | | | 0.2 | % | | | 5.0 | % | | | (2.1 | )% | | | 7.5 | % | | | (0.5 | %) |
During 2010, combined everyday and seasonal greeting card sales less returns improved 7.5%, compared to the prior year, with increases coming from both everyday and seasonal cards. The overall increase was driven by the PRG acquisition.
Everyday card sales less returns were up 8.7%, compared to the prior year, as a result of increases in both unit volume and selling prices of 7.2% and 1.4%, respectively. The increase in unit volume was the result of the PRG acquisition. Increased selling prices were driven primarily by our North American Social Expression Products segment where higher priced technology and Papyrus cards are continuing to improve average prices despite the growing volume of value line cards.
Seasonal card sales less returns increased 5.0% compared to the prior year as a result of increases in unit volume of 6.7%. This increase in unit volume was driven by the acquisition of PRG as well as improvements in the Easter, Christmas and Father’s Day seasonal programs. The decrease in selling prices of 1.6% related primarily to the continued mix shift towards value priced cards across most seasonal programs and a more balanced offering of technology cards.
Expense Overview
MLOPC Expenses for 2010 were $713.1 million, a decrease from $810.0 million in 2009. As a percentage of total revenue, these costs were 43.6% in 2010 compared to 47.9% in 2009. The decrease of $96.9 million is driven by our continued focus on the efficiency of our operations, including tightened control of costs, reductions in supply chain, scrap, and distribution costs due to an improved balance of card unit shipments with card unit net sales, a favorable change in the product mix, and a favorable foreign currency translation impact of approximately $16 million. The favorable product mix of approximately $27 million is primarily due to a sales shift towards lower cost card products versus non-card products. This shift to a higher mix of greeting cards was due to the acquisition of PRG as well as increased net sales within our legacy greeting card business, as well as lower sales of gift packaging, calendars and party goods products. The disposition of the Retail Operations segment, which sold many non-card gifting products, also contributed to the favorable mix. The lower costs are also attributable to decreased scrap and shrink ($1923 million) and increased expensesthe LIFO liquidation ($1113 million) associated with our productionthat we experienced during 2010 as a result of film-based entertainment, whichimproved inventory management. The remaining
32
decrease of approximately $17 million is usedattributable to support our merchandise licensing strategies by increasinglower product input costs, realization of other cost savings initiatives put in place during the awarenessfourth quarter of our properties within the target audience. Costs2009 and a favorable volume variance. Included in 2009 were costs ($5 million) associated with the conversion to our new Canadian line of cards and increasedexpenses ($16 million) associated with our production of film-based entertainment, both of which did not recur in 2010. Partially offsetting these decreases were impairment and severance expenses ($3 million) in the current year also contributedcharges related to the unfavorable variances.closure of the Kalamazoo, Michigan facility ($16 million) and inventory charges associated with the wind down of our Mexico distribution facility ($4 million) during 2010.
SDM expenses were $508.0 million in 2010, decreasing from $618.9 million in 2009. The
unfavorable mixdecrease of $110.9 million is due to
a shift toward cards with more content, including music, lights and other embellishments.Selling, distribution and marketing expenses were $618.9 million in 2009, decreasing from $621.5 million in the prior year. The decrease of $2.6 million is due primarily to the impact of favorable foreign currency translation ($15 million) partially offset by increasedlower spending ($12 million). The increased spending is the result of higher supply chain costs, specifically merchandiser and distribution costs ($15 million) due to an increase in units shipped. This increase was partially offset by lower advertising expenses ($3 million) as the prior year included additional advertising related to our investment in cards strategy. Increased fixed asset impairment charges ($4 million) in our Retail Operations segment in 2009 compared to 2008 were substantially offset by reduced store expenses ($4 million) due to the reduced store doors in our Retail Operations segment.
Administrative and general expenses were $226.3 million in 2009, compared to $246.7 million in 2008. The $20.4 million decrease in expense in 2009 is due to reduced spending ($1697 million) and favorable foreign currency translation impacts ($414 million). The decreased spending is a result of the elimination of the costs to operate our retail stores ($98 million) due to the disposition of those stores during the first quarter of 2010, reduced supply chain costs ($36 million), specifically freight and distribution costs, due to a decrease in units shipped, as well as less expenses in our licensing business ($11 million). The lower expenses in our licensing business are attributable to the benefits from 2009 overhead reductions and less agency fees in line with the decrease in royalty revenue in 2010. These favorable variances were substantially offset by ongoing SDM expenses ($48 million) from our PRG acquisition.
Administrative and general expenses were $276.0 million in 2010, an increase from $226.3 million in 2009. The $49.7 million increase is due to increased spending ($53 million) offset by favorable foreign currency translation impacts ($3 million). The increase in spending is primarily
driven by variable compensation expense ($47 million) which includes bonus, profit-sharing contributions, and 401(k) matching contributions and the
resultsettlement of
decreaseda legal claim ($24 million). The fiscal year 2009 included a nominal amount of variable compensation expenses,
($29 million) including management bonuses and profit-sharing contributions. The current year resultsas we did not meet the 2009 operating results required to make these variable compensation payments.
This decrease wasThese increases were partially offset by
an increase ina corporate-owned life insurance benefit ($10 million) due to higher than average death benefit income reported by our third party administrators, lower bad debt expense ($
6 million) partially due to the recent bankruptcy of a major customer in the U.K., increased amortization of intangible assets ($3 million) due to the acquisitions in both 2009 and 2008 and increased business taxes ($4 million)
due primarily to revised assessment values for certain personal property.Goodwilland savings from prior year cost reduction initiatives.
During 2009, goodwill and other intangible assets impairment charges of $290.2 million were
recorded in 2009.recorded. In the third quarter of 2009, indicators emerged during the period that led us to conclude that an impairment test was required prior to the annual test. As a result, impairment was recorded for a reporting unit in the International Social Expression Products segment, located in the U.K., and in our AG Interactive segment. The goodwill impairment charge recorded in the U.K. was $82.1 million, which
representsrepresented all of the goodwill for this reporting unit. The goodwill and intangible assets impairment charge for the AG Interactive segment was
$160.8$160.1 million, which
includesincluded all of the goodwill for AG Interactive. An additional impairment analysis was performed at the end of the fourth quarter of 2009 as a result of the continued significant deterioration of the global economic environment and the decline in the price of our common shares. Based on that analysis, we recorded goodwill charges of $47.9 million, which
includesincluded all the goodwill for our North American Greeting Card Division (“NAGCD”)
and $0.1 million, which includes all the goodwill for our fixtures business.. NAGCD is part of our North American Social Expression Products
segment and the fixtures business is included in non-reportable segments. Also, in the fourth quarter, the estimated AG Interactive goodwill impairment charge recorded in the third quarter was finalized which resulted in a credit of $0.7 million being recorded due to final purchase accounting adjustments in the fourth quarter.segment.
Interest expense was $26.3 million in 2010, compared to $22.9 million in 2009, compared to $20.0 million in 2008.2009. The increase of $2.9$3.4 million is primarily attributable to increased borrowings on our revolving credit facility ($4 million)the new 7.375% notes and the accounts receivable securitization$100 million term loan facility ($1 million) inthat were issued and drawn down, respectively, during the current period.fourth quarter of 2009. These increases were partially offset by interest savings ($1 million)decreased borrowings on our revolving credit facility.
Other operating income — net was $0.3 million in 2010 compared to $1.4 million in 2009. 2010 includes a loss of approximately $28 million on the sale of our retail stores to Schurman and a net loss of approximately $8.6 million on the recognition of cumulative foreign currency translation adjustments related to the shutdown of our distribution facility in Mexico and the liquidation of an operation in France. These losses were partially offset by a gain of approximately $34 million associated with the
reduced balance outstanding of our 6.10% notes as well as reduced fees for our credit and accounts receivable facilities. The reduction in commitment fees is primarily due to increased borrowings under the facilities.party goods transaction.
Other non-operating (income) expense (income) –— net was income of $6.5 million during 2010 compared to expense of $2.2 million in 2009 compared to2009. The $8.7 million increase in income of $7.4 million in 2008. The decrease of $9.6 million is due primarily to a swing of approximately $8 million from a foreign exchange gain in 2008 to a loss in 2009 and to the loss of approximately $3 million on our investmenta gain in debt securities.2010.
33
25
The effective tax rate forwas 32.6% and 17.2% during 2010 and 2009, and 2008 was 17.2% and 32.8%, respectively. These rates reflect the United StatesThe lower than statutory rate of 35% combined with the additional net impactin 2010 is primarily a result of the variousfavorable effect of the wind down of our operations in Mexico, settlements with taxing authorities in foreign statejurisdictions and local incomethe benefit of certain tax rates.free proceeds from corporate-owned life insurance. The lower effective tax rate in 2009 reflectsis primarily related to the nondeductiblegoodwill impairment and its impact on the pretax loss in that period as only a portion of the goodwill impairment described above, interest expense on settled positionscharge was deductible for tax purposes.
Segment Results
Our operations are organized and
reduced charitable allowances partially offset bymanaged according to a number of factors, including product categories, geographic locations and channels of distribution. Our North American Social Expression Products and our International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through various channels of distribution, with mass retailers as the
favorable impactprimary channel. As permitted under ASC 280 certain operating divisions have been aggregated into both the North American Social Expression Products and International Social Expression Products segments. The aggregated operating divisions have similar economic characteristics, products, production processes, types of
customers and distribution methods. The AG Interactive segment distributes social expression products, including electronic greetings, personalized printable greeting cards and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices. The AG Interactive segment also offers online photo sharing and a platform to provide consumers the
closure of our French subsidiary. See Note 17ability to
the Consolidated Financial Statements for further information.Segment Results
use their own photos to create unique, high quality physical products, including greeting cards, calendars, photo albums and photo books.
We review segment results,
including the evaluation of management performance, using consistent exchange rates between years to eliminate the impact of foreign currency
fluctuations. For additionalfluctuations from operating performance. The segment
information, seeresults of prior years have been recast to reflect the 2011 foreign exchange rates for a consistent presentation. Refer to Note 16,
“Business Segment Information,” to the Consolidated Financial
Statements.Statements for further information and a reconciliation of total segment revenue to consolidated “Total revenue” and total segment earnings (loss) to consolidated “Income (loss) before income tax expense (benefit).”
North American Social Expression Products Segment | | | | | | | | | |
| (Dollars in thousands) | | 2009 | | 2008 | | % Change | |
Total revenue | | $ | 1,101,615 | | $ | 1,130,310 | | (2.5 | %) |
Segment earnings | | | 71,860 | | | 177,332 | | (59.5 | %) |
In 2009, total
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2010 | | 2009 | | % Change |
| |
| Total revenue | | $ | 1,226,520 | | | $ | 1,086,398 | | | | 12.9 | % |
| Segment earnings | | | 232,614 | | | | 67,412 | | | | 245.1 | % |
Total revenue of
theour North American Social Expression Products segment, excluding the impact of foreign exchange and intersegment items,
decreased $28.7increased $140.1 million
or 2.5%, from 2008.during 2010 compared to 2009. The
decreasemajority of the revenue improvement is
primarily attributable to
higher sales of greetings cards, from the acquisition of PRG, which added approximately $129 million, as well as growth in our legacy greeting card business, which increased by approximately $26 million and the impact of lower deferred cost reserves of approximately $14 million. The increased revenue from greeting cards was partially offset by lower sales
ofin our gift packaging,
($37 million)calendar and party goods
($11 million) product
lines. Also contributing tolines of approximately $24 million. Additionally, fiscal 2010 included the
decrease was a decline in specialty product sales ($7 million), which include stationery, calendars and stickers. Sales of our everyday and seasonal cards remained relatively flat compared to prior year sales. These decreases were partially offset by the favorable impact of
fewer SBT implementationslower revenue from our operations in
the current year and the favorable impactMexico of
an SBT implementation completedapproximately $5 million as we moved to a third party distribution business model during the
year that had previously been estimated, which together increased net sales by approximately $28 million in the current year compared to 2008.third quarter.
Segment earnings, excluding the impact of foreign exchange and intersegment items, decreased $105.5increased $165.2 million or 59.5%, in 2009the current year compared to 2009. Higher net sales combined with improvements in product mix, lower input costs and other cost savings initiatives provided benefits of approximately $35 million. An improved balance of card unit shipments compared to card unit net sales reduced supply chain, scrap and distribution costs by approximately $63 million. The gain on the prior year. Approximately halfsale of certain assets, equipment and processes of the decrease is attributable toDesignWare party goods product lines in conjunction with the goodwill impairment charge ($48 million) recordedparty goods transaction resulted in the fourth quarter.a gain of approximately $34 million. Segment earnings were also favorably impacted by a reduction of certain deferred cost reserves of approximately $14 million. The LIFO liquidation resulting from better inventory management of approximately $13 million and approximately $7 million in savings recognized from reductions in non-income tax expenses positively impacted earnings. Also contributing to the decrease are lower marginscurrent year favorability was the
34
prior year goodwill impairment charge of $48 million, which unfavorably impacted the 2009 earnings. Partially offsetting these improvements were the impairment and
increased supply chain costsseverance charges of approximately
$12 million. The lower margins are a result$16 million recorded in connection with the closing of
a shiftthe Kalamazoo, Michigan facility, increased variable compensation expense of approximately $17 million and approximately $18 million associated with the shutdown of the distribution facility in
product mix toward cards with more content, including music, lights and other embellishments. The additional supply chain spending, specifically freight and distribution costs, is due to an increase in card units shipped. The remaining decrease in earnings is attributable to an increase in SBT scrap costs.Mexico.
International Social Expression Products Segment | | | | | | | | | | |
| (Dollars in thousands) | | 2009 | | | 2008 | | % Change | |
Total revenue | | $ | 299,830 | | | $ | 307,959 | | (2.6 | %) |
Segment (loss) earnings | | | (81,616 | ) | | | 24,223 | | — | |
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2010 | | 2009 | | % Change |
| |
| Total revenue | | $ | 250,026 | | | $ | 245,331 | | | | 1.9 | % |
| Segment earnings (loss) | | | 16,693 | | | | (68,545 | ) | | | - | |
Total revenue of
theour International Social Expression Products segment, excluding the impact of foreign exchange,
decreased $8.1increased $4.7 million, or
2.6%, in 20091.9% during 2010, compared to
2008.the prior year. The
majority of the decrease in the current yearrevenue improvement is
due to lower sales in the U.K., which isprimarily attributable to
the significant decreases in theimproved sales of
everyday and seasonal cards, particularly during the fourth quarter. Everyday card sales were down across the customer base and were accentuated by the third quarter bankruptcy ofnon-card products as a
major customer, a buying freeze implemented by a second major customer and lost shelf space with a third major customer. The seasonal card decline was the result of
decreased sales in the Christmas and Valentine’s Day seasonal programs and year-over-year timing differences related to the Easter and Mother’s Day programs. These decreases were partially offset by an increase in revenue ($11 million) from the U.K. acquisition completed during the first quarter of this year.26
new product introductions.
Segment earnings, excluding the impact of foreign exchange,
decreased $105.8increased $85.2 million from
income of $24.2 million in 2008 to a loss of
$81.6$68.5 million in
2009. This decrease2009 to earnings of $16.7 million during the current year. The increase is
mainly attributable toprimarily the result of the goodwill impairment charge of approximately
$88$59 million (approximately $82 million reported above
plusless approximately
$6$23 million of foreign currency based on the consistent exchange rates utilized for segment reporting purposes)
. that was recorded during the third quarter of 2009. The remaining
decreaseincrease is attributable to the cost reduction initiatives implemented during 2009, higher sales in
earnings was2010, customer sales mix and charges taken in the prior year as a result of the
lower card sales, severance charges ($5 million) associated with headcount reductions and facility reorganizations and charges related to the recent bankruptcy of a major
customer in the U.K.customer.
Retail Operations Segment | | | | | | | | | | | |
| (Dollars in thousands) | | 2009 | | | 2008 | | | % Change | |
Total revenue | | $ | 183,913 | | | $ | 198,271 | | | (7.2 | %) |
Segment loss | | | (19,123 | ) | | | (3,772 | ) | | — | |
The Retail Operations segment exhibits considerable seasonality, which is typical for most
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2010 | | 2009 | | % Change |
| |
| Total revenue | | $ | 11,727 | | | $ | 170,066 | | | | (93.1 | )% |
| Segment loss | | | (34,830 | ) | | | (19,727 | ) | | | (76.6 | )% |
In April 2009, we sold our retail store
operations. A significant amount of the total revenue and segment earnings occur during the fourth quarter in conjunction with the major holiday seasons.Total revenue in our Retail Operations segment, excluding the impact of foreign exchange, decreased $14.4 million, or 7.2%, year over year. Total revenue at stores open one year or more was down 4.0%, or approximately $7 million, from 2008. This sales decline occurred primarily during the final four months of the year as consumer spending decreased dueassets to the severity of the economic downturn. Also contributing to the decrease is the reduction in store doors as the average number of stores was approximately 5% less than in the prior year period. During the fourth quarter of 2009, approximately 70 underperforming stores were closed.
Segment loss, excluding the impact of foreign exchange, was $19.1 million in 2009 compared to $3.8 million in 2008. Earnings during 2009 were unfavorably impacted by the lower sales level and a weakening of gross margins as a result of more promotional pricing. Gross margins decreased by approximately 3.6 percentage points. Also contributing to the decrease in earnings were the fixed asset impairment charges recorded during the year. Due to weak performance in certain of our stores and the anticipated store closures, long-lived assets within the segment were reviewed.Schurman. As a result, impairment charges2010 included results for the portion of approximately $5 million were recorded compared to fixed asset impairment charges of approximately $1 million in 2008.
AG Interactive Segment
| | | | | | | | | | |
| (Dollars in thousands) | | 2009 | | | 2008 | | % Change | |
Total revenue | | $ | 84,254 | | | $ | 78,652 | | 7.1 | % |
Segment (loss) earnings | | | (161,503 | ) | | | 6,755 | | — | |
the period that we operated the stores as well as the loss on disposition.
Total revenue, excluding the impact of foreign exchange,
increased $5.6in our Retail Operations segment decreased $158.3 million
or 7.1%, from 2008. This increase is primarilyfor 2010, compared to the prior year period due to the
digital photography acquisitions completed during the second half of 2008. Digital photography revenue contributed approximately $13 million to the increase. This increase was offset by reduced sales in the online product group ($7 million) as increases in subscription revenue were more than offset by reduced advertising revenue. At the end of 2009, AG Interactive had approximately 4.1 million paid subscriptions versus 3.8 million in 2008.disposition.
Segment earnings, excluding the impact of foreign exchange, decreased $168.3 million from incomewas a loss of $6.8$34.8 million in 20082010, compared to a loss of $161.5$19.7 million during 2009. The segment loss in 2010 included a $28 million loss on the disposition and approximately $1 million of severance expense as a result of the disposition of the stores.
AG Interactive Segment
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2010 | | 2009 | | % Change |
| |
| Total revenue | | $ | 80,320 | | | $ | 82,623 | | | | (2.8 | )% |
| Segment earnings (loss) | | | 11,319 | | | | (159,670 | ) | | | - | |
Total revenue of our AG Interactive segment for 2010, excluding the impact of foreign exchange, was $80.3 million compared to $82.6 million in 2009. This decrease wasthe prior year. The lower revenue is due primarily to lowere-commerce revenue in our digital photography product group and lower advertising revenue in our online product group, as market conditions continue to be challenging, partially offset by increased subscription revenue in our online product group. At the end of 2010, AG Interactive had approximately 3.9 million online paid subscriptions versus 4.1 million at the prior year-end.
Segment earnings, excluding the impact of foreign exchange, were $11.3 million in 2010 compared to a direct resultloss of $159.7 million during the prior year. The increase of $171.0 million compared to the prior year is primarily attributable to the goodwill and intangible asset impairments of $160.1approximately $153 million discussed above. The remaining decrease is attributable to severance charges ($2 million) due(approximately $160 million reported above less approximately $7 million of foreign currency based on the consistent
35
exchange rates utilized for segment reporting purposes). Fiscal 2010 included a benefit of approximately $3 million related to the
headcount reductions during 2009 and expenses incurred associatedcurrency translation adjustment of equity that was recognized in conjunction with the
digital photography product line, including marketing,liquidation of an operation in France. Also contributing to the improvement in 2010 were benefits of cost reduction efforts taken towards the end of the prior fiscal year and less intangible asset amortization
and technology costs.27
expense as a result of the intangible asset impairment recorded during the prior year.
Centrally incurred and managed costs, excluding the impact of foreign exchange, totaled
$76.6$116.5 million and
$84.2$80.2 million in
20092010 and
2008,2009, respectively, and are not allocated back to the operating segments. The unallocated items included interest expense for centrally incurred debt of
$26.3 million and $22.9 million
in 2010 and
$20.0 million in 2009,
and 2008, respectively, and domestic profit-sharing expense of
$5.2$9.3 million in
2008.2010. We did not incur profit-sharing expense during 2009 based on the operating results in the year. Unallocated items also included stock-based compensation expense
in accordance with SFAS No. 123 (revised 2004) (“SFAS 123R”) of
$5.8 million and $4.4 million
in 2010 and
$6.52009, respectively. In 2010, unallocated items included the settlement of a lawsuit totaling $24.0 million,
in 2009 and 2008, respectively.all of which was paid as of February 28, 2010. In addition, unallocated items included costs associated with corporate operations including the senior management,
staff, corporate finance, legal and human resource functions, as well as insurance
programs and other strategic costs.programs. These costs totaled
$49.3$51.1 million and
$52.5$52.9 million in
2010 and 2009,
and 2008, respectively.
Comparison of the years ended February 29, 2008 and February 28, 2007In 2008, net income was $83.0 million, or $1.52 per diluted share, compared to net income of $42.4 million, or $0.71 per diluted share, in 2007.
Our results for 2008 and 2007 are summarized below:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2008 | | | % Total
Revenue | | | 2007 | | | % Total
Revenue | |
Net sales | | $ | 1,730,784 | | | 97.4 | % | | $ | 1,744,798 | | | 97.2 | % |
Other revenue | | | 45,667 | | | 2.6 | % | | | 49,492 | | | 2.8 | % |
| | | | | | | | | | | | | | |
Total revenue | | | 1,776,451 | | | 100.0 | % | | | 1,794,290 | | | 100.0 | % |
Material, labor and other production costs | | | 780,771 | | | 43.9 | % | | | 826,791 | | | 46.1 | % |
Selling, distribution and marketing expenses | | | 621,478 | | | 35.0 | % | | | 627,940 | | | 35.0 | % |
Administrative and general expenses | | | 246,722 | | | 13.9 | % | | | 253,035 | | | 14.1 | % |
Goodwill impairment | | | — | | | 0.0 | % | | | 2,196 | | | 0.1 | % |
Other operating income—net | | | (1,325 | ) | | (0.1 | %) | | | (5,252 | ) | | (0.3 | %) |
| | | | | | | | | | | | | | |
Operating income | | | 128,805 | | | 7.3 | % | | | 89,580 | | | 5.0 | % |
Interest expense | | | 20,006 | | | 1.1 | % | | | 34,986 | | | 2.0 | % |
Interest income | | | (7,758 | ) | | (0.4 | %) | | | (8,135 | ) | | (0.5 | %) |
Other non-operating income—net | | | (7,411 | ) | | (0.4 | %) | | | (2,682 | ) | | (0.1 | %) |
| | | | | | | | | | | | | | |
Income from continuing operations before income tax expense | | | 123,968 | | | 7.0 | % | | | 65,411 | | | 3.6 | % |
Income tax expense | | | 40,648 | | | 2.3 | % | | | 25,473 | | | 1.4 | % |
| | | | | | | | | | | | | | |
Income from continuing operations | | | 83,320 | | | 4.7 | % | | | 39,938 | | | 2.2 | % |
(Loss) income from discontinued operations, net of tax | | | (317 | ) | | (0.0 | %) | | | 2,440 | | | 0.2 | % |
| | | | | | | | | | | | | | |
Net income | | $ | 83,003 | | | 4.7 | % | | $ | 42,378 | | | 2.4 | % |
| | | | | | | | | | | | | | |
Revenue Overview
Consolidated net sales in 2008 were $1.73 billion, a decrease of $14.0 million from the prior year. This decrease was primarily the result of lower sales in our North American Social Expression Products segment, our Retail Operations segment, AG Interactive and our fixtures business partially offset by an increase in our International Social Expression Products segment and the impact of favorable foreign currency translation.
The North American Social Expression Products segment decreased approximately $24 million. Our candle product lines, which were sold in January 2007, contributed approximately $33 million to net sales in the prior year. As a result, sales of products other than candles increased approximately $9 million. Approximately $32 million of the increase was due to lower spending on our investment in cards strategy and improvements in
28
everyday and seasonal card sales provided approximately $27 million. These increases were partially offset by approximately $3 million of increased SBT implementations in the current year, a decline in specialty product sales, which include stationery, calendars and stickers, of approximately $12 million, a decline in gift packaging sales of approximately $19 million as well as the impact of the temporary promotional activities related to the Canadian dual-priced products of approximately $13 million.
The Retail Operations segment decreased approximately $17 million as the reduction in stores more than offset the increase in same-store sales. Net sales in our fixtures business were lower by approximately $10 million.
The reduction of approximately $7 million in AG Interactive’s net sales was due to lower sales in the mobile product group partially offset by growth in the online product group and digital photography revenue from the two acquisitions made in the second half of 2008.
These decreases were partially offset by an increase of approximately $6 million in our International Social Expression Products segment as well as favorable foreign currency of approximately $39 million.
The contribution of each major product category as a percentage of net sales for the past two fiscal years was as follows:
| | | | | | |
| | | 2008 | | | 2007 | |
Everyday greeting cards | | 41 | % | | 38 | % |
Seasonal greeting cards | | 22 | % | | 21 | % |
Gift packaging | | 15 | % | | 16 | % |
All other products* | | 22 | % | | 25 | % |
* | The “all other products” classification includes, among other things, giftware, party goods, calendars, custom display fixtures, stickers, online greeting cards and other digital products in both years. Candles and balloons are included in 2007 only. |
Other revenue, primarily royalty revenue, decreased $3.8 million from $49.5 million in 2007 to $45.7 million in 2008.
Wholesale Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis) for 2008 and 2007 are summarized below:
| | | | | | | | | | | | | | | | | | |
| | | Increase (Decrease) From the Prior Year | |
| | Everyday Cards | | | Seasonal Cards | | | Total Greeting Cards | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
Unit volume | | 9.6 | % | | (10.6 | %) | | 7.0 | % | | (9.6 | %) | | 8.8 | % | | (10.3 | %) |
Selling prices | | (5.6 | %) | | 4.8 | % | | (4.4 | %) | | 5.7 | % | | (5.2 | %) | | 5.1 | % |
Overall increase / (decrease) | | 3.5 | % | | (6.3 | %) | | 2.3 | % | | (4.5 | %) | | 3.1 | % | | (5.7 | %) |
During 2008, combined everyday and seasonal greeting card sales less returns increased 3.1% compared to the prior year, with increases in both everyday and seasonal cards.
Everyday card unit volume was up 9.6% compared to the prior year. Approximately one-third of the increase was related to SBT implementation activities. The remaining improvement was driven by increases in the North American Social Expression Products segment where, through the investment in cards strategy, we have been focused on driving card productivity. The decrease in selling prices, down 5.6%, was the result of significant volume increases in the sales of value line cards.
29
Seasonal card unit volume increased 7.0% compared to the prior year. This increase was driven by improvements in the Valentine’s Day, Christmas and Easter seasons, slightly offset by a decline in the Mother’s Day season. The overall unit increase was within the North American Social Expression Products segment, with the International Social Expression Products segment flat compared to the prior year. Seasonal selling prices decreased 4.4% compared to the prior year. This decline in average selling prices was the result of significant volume increases in the sales of value line cards.
Expense Overview
MLOPC for 2008 were $780.8 million, a decrease from $826.8 million in 2007. As a percentage of total revenue, these costs were 43.9% in 2008 compared to 46.1% in 2007. The decrease of $46.0 million is due to favorable mix ($55 million) and volume variances ($16 million) due to lower sales volume in the current year partially offset by unfavorable spending variances ($8 million) and the impact of foreign currency translation ($17 million). The favorable product mix is due to a change to a richer mix of card versus non-card products. The mix impact was accentuated by the increase in card sales and the significant reduction of non-card sales, primarily as a result of the sale of our candle product lines in January 2007 and lower sales of gift packaging products. The increased spending is attributable to higher SBT scrap and shrink costs, which continue to increase as more customers are moved to the SBT business model, as well as higher expenses associated with our production of film-based entertainment, which is used to support our merchandise licensing strategies by increasing the awareness of our properties within the target audience.
Selling, distribution and marketing expenses were $621.5 million in 2008, decreasing from $627.9 million in the prior year. The decrease of $6.4 million is due primarily to reduced spending ($20 million) partially offset by the impact of unfavorable foreign currency translation ($14 million). The lower spending is the direct result of strategic actions taken in the prior and current periods. In the prior year, we closed 60 underperforming retail stores and exited lower margin products within the AG Interactive mobile products group. The store closures resulted in exit costs in the prior year ($7 million) and reduced store expenses ($10 million), including rent, depreciation and personnel costs, in the current year. The reduced offerings in the mobile products group drove lower current year marketing-related expenses in AG Interactive ($7 million). The current year also includes savings from supply chain cost reduction programs ($2 million). These amounts were partially offset by higher advertising and research expenses ($6 million), a portion of which is attributable to our focus on our core greeting card business.
Administrative and general expenses were $246.7 million in 2008, compared to $253.0 million in 2007. The $6.3 million decrease in expense in 2008 is due primarily to reduced spending ($10 million) partially offset by unfavorable foreign currency translation impacts ($4 million). The lower spending is the direct result of cost savings initiatives taken in the prior and current periods. The decreased spending is attributable to lower payroll and benefits-related expenses ($3 million), reduced information technology-related expenses ($2 million), less profit-sharing expense ($2 million), lower business taxes ($2 million), reduced consulting expenses ($2 million) and less stock-based compensation expense ($1 million). These were partially offset by higher amortization expense ($2 million) of intangible assets, primarily due to the acquisitions in 2008 and 2007.
A goodwill impairment charge of $2.2 million was recorded in 2007 representing all the goodwill of our entertainment development and production joint venture. There were no goodwill impairment charges in 2008.
Interest expense was $20.0 million in 2008, compared to $35.0 million in 2007. The decrease of $15.0 million is primarily attributable to interest savings ($11 million) associated with the reduced balances outstanding of our 6.10% notes, 7.00% convertible notes and facility borrowings. The reduced balances for our 6.10% notes and the 7.00% convertible notes are due to the financing activities undertaken in 2007. The remaining decrease in interest expense in 2008 is also attributable to the prior year refinancing activities. As a result of those activities, certain additional expenses were incurred in 2007, such as the write-off of deferred financing fees, which did not recur in 2008. Also, certain expenses were reduced in the current year due to the 2007 activities such as commitment fees, which decreased as a result of the reduced availability under the term loan facility. See Note 11 to the Consolidated Financial Statements for further information on the financing activities in 2007.
30
Other operating income – net was $1.3 million in 2008 compared to $5.3 million in 2007. The decrease of $4.0 million is due primarily to a gain ($20 million) related to terminations of long-term supply agreements associated with retailer consolidations partially offset by the loss ($16 million) on the sale of our candle product lines, both of which were recorded in 2007. Other non-operating income – net was $7.4 million in 2008 compared to $2.7 million in 2007. The $4.7 million increase is attributable primarily to higher foreign exchange gains in 2008 compared to 2007.
The effective tax rate for 2008 and 2007 was 32.8% and 38.9%, respectively. These rates reflect the United States statutory rate of 35% combined with the additional net impact of the various foreign, state and local income tax rates. The lower rate in 2008 compared to 2007 is primarily the result of the restructuring and consolidation of several foreign entities that reduced our future tax liabilities and the recognition of additional interest income on our net tax positions during the current year. See Note 17 to the Consolidated Financial Statements for further information.
Loss from discontinued operations was $0.3 million for 2008 compared to income from discontinued operations of $2.4 million in 2007. The loss in 2008 primarily relates to income tax expense on the sale of Learning Horizons in the first quarter of 2008. The 2007 amount included a gain based on the closing balance sheet adjustments for the sale of Magnivision ($3 million after tax) and a tax benefit on the South African business unit sale ($2 million) partially offset by a loss from Learning Horizons ($3 million after tax). The Learning Horizons loss included goodwill and fixed asset impairment charges ($1 million). The impairments for Learning Horizons were primarily recorded as a result of the intention to sell the business, and therefore, present the operation at its estimated fair value.
Segment Results
We review segment results using consistent exchange rates between years to eliminate the impact of foreign currency fluctuations. For additional segment information, see Note 16 to the Consolidated Financial Statements.
North American Social Expression Products Segment
| | | | | | | | | |
| (Dollars in thousands) | | 2008 | | 2007 | | % Change | |
Total revenue | | $ | 1,130,310 | | $ | 1,154,240 | | (2.1 | %) |
Segment earnings | | | 177,332 | | | 164,281 | | 7.9 | % |
In 2008, total revenue of the North American Social Expression Products segment, excluding the impact of foreign exchange and intersegment items, decreased $23.9 million, or 2.1%, from 2007. Our candle product lines, which were sold in January 2007, contributed approximately $33 million to net sales in the prior year. As a result, sales of products other than candles increased approximately $9 million. Approximately $32 million of the increase was due to lower spending on our investment in cards strategy and improvements in everyday and seasonal card sales provided approximately $27 million. These increases were partially offset by approximately $3 million of increased SBT implementations in the current year, a decline in specialty product sales, which include stationery, calendars and stickers, of approximately $12 million, a decline in gift packaging sales of approximately $19 million as well as the impact of the temporary promotional activities related to the Canadian dual-priced products of approximately $13 million.
Segment earnings, excluding the impact of foreign exchange and intersegment items, increased $13.1 million, or 7.9%, in 2008 compared to the prior year. Approximately $32 million of the increase was due to lower spending on our investment in cards strategy and SBT conversions. Segment earnings were impacted by a favorable product mix due to a change to a richer mix of card versus non-card products, driven by improved everyday and seasonal card sales and decreased sales of non-card products, primarily as a result of the sale of our candle product lines in January 2007 and lower sales of gift packaging products. These improvements were partially offset by increases in card product costs associated with more technology cards (paper cards that include lights
31
and/or sound), increased SBT scrap, higher creative content costs and the impact on earnings of the decrease in total revenue. Segment earnings in 2007 benefited from the gain related to terminations of long-term supply agreements associated with retailer consolidations ($20 million), but was unfavorably impacted by the loss incurred on the sale of the candle product lines ($16 million).
International Social Expression Products Segment
| | | | | | | | | |
| (Dollars in thousands) | | 2008 | | 2007 | | % Change | |
Total revenue | | $ | 307,959 | | $ | 302,022 | | 2.0 | % |
Segment earnings | | | 24,223 | | | 10,433 | | 132.2 | % |
Total revenue of the International Social Expression Products segment, excluding the impact of foreign exchange, increased $5.9 million, or 2.0%, in 2008 compared to 2007. This increase was driven by additional distribution obtained during the year, primarily in the U.K.
Segment earnings, excluding the impact of foreign exchange, increased $13.8 million compared to 2007. This increase is attributable to improvements in our U.K. operations, including expanded distribution, changes in product mix and cost savings initiatives in manufacturing and supply chain. Also, the prior year earnings included severance charges ($3 million) primarily as a result of facility closures, including the manufacturing facility in Australia.
Retail Operations Segment
| | | | | | | | | | | |
| (Dollars in thousands) | | 2008 | | | 2007 | | | % Change | |
Total revenue | | $ | 198,271 | | | $ | 215,439 | | | (8.0 | %) |
Segment loss | | | (3,772 | ) | | | (16,526 | ) | | 77.2 | % |
The Retail Operations segment exhibits considerable seasonality, which is typical for most retail store operations. A significant amount of the total revenue and segment earnings occur during the fourth quarter in conjunction with the major holiday seasons.
Total revenue in our Retail Operations segment, excluding the impact of foreign exchange, decreased $17.2 million, or 8.0%, year over year. Total revenue at stores open one year or more was up approximately 3.6%, or approximately $7 million, from 2007 but was more than offset by the reduction in store doors. The average number of stores decreased approximately 13.0% compared to the prior year, which reduced revenues by approximately $24 million. The current year benefited from the performance of children’s gifting products, which was the driver of the same-store sales increase.
Segment loss, excluding the impact of foreign exchange, was $3.8 million in 2008 compared to $16.5 million in 2007. Approximately half of the $12.8 million improvement in earnings is due to the prior year charges associated with the closure of 60 underperforming stores during the fourth quarter. The remaining improvement is attributable to lower store and administrative expenses due to fewer doors as well as improved product mix. Gross margins increased by approximately 2 percentage points, partially due to less promotional pricing compared to the prior year.
32
AG Interactive Segment
| | | | | | | | | |
| (Dollars in thousands) | | 2008 | | 2007 | | % Change | |
Total revenue | | $ | 78,652 | | $ | 85,856 | | (8.4 | %) |
Segment earnings | | | 6,755 | | | 5,616 | | 20.3 | % |
Total revenue, excluding the impact of foreign exchange, decreased $7.2 million, or 8.4%, from 2007. This decrease is the result of the lower revenue in the mobile product group ($16 million) due to reduced offerings in 2008 partially offset by advertising and subscription revenue growth in the online product group ($4 million) and digital photography revenue ($5 million) in the current year associated with the two acquisitions made in the second half of the year. At the end of 2008, AG Interactive had approximately 3.8 million paid subscriptions versus 3.5 million in 2007.
Segment earnings, excluding the impact of foreign exchange, increased $1.1 million in 2008 compared to 2007. Growth in advertising and subscription revenue as well as lower expenses in the mobile product group due to the reduced offerings in that group were substantially offset by expenses incurred in the current year associated with the two digital photography acquisitions in the second half of the year.
Unallocated Items
Centrally incurred and managed costs, excluding the impact of foreign exchange, totaled $84.2 million and $105.0 million in 2008 and 2007, respectively, and are not allocated back to the operating segments. The unallocated items included interest expense for centrally incurred debt of $20.0 million and $35.0 million in 2008 and 2007, respectively, and domestic profit-sharing expense of $5.2 million and $6.8 million in 2008 and 2007, respectively. Unallocated items also included stock-based compensation expense in accordance with SFAS 123R of $6.5 million and $7.6 million in 2008 and 2007, respectively. In addition, unallocated items included costs associated with corporate operations including the senior management staff, corporate finance, legal and human resource functions, as well as insurance programs and other strategic costs. These costs totaled $52.5 million and $55.6 million in 2008 and 2007, respectively.
Liquidity and Capital Resources
During the year, cash flow from operating activities provided cash of
$73.0$179.8 million compared to
$243.5$197.5 million in
2008,2010, a decrease of
$170.5$17.7 million. Cash flow from operating activities for
20082010 compared to
20072009 resulted in
a decreasean increase of
$21.2$124.5 million from
$264.7$73.0 million in
2007.2009.
Other non-cash charges were $13.7$3.7 million during 20092011 compared to $9.3$12.4 million during 2008.in 2010 and $3.8 million in 2009. The increasedecrease from prior year is primarily due to an increase$8.6 million loss on foreign currency translation adjustments that were reclassified to earnings upon liquidation of approximately $4our operations in Mexico and France.
Accounts receivable was a source of cash of $15.3 million in
the fixed asset impairment charges recorded in the current year2011 compared to
the prior year related to our Retail Operations segment. Other non-cash charges in 2009 included $2.7 million for the loss on our investment in debt securities. This loss was substantially offset by a reduction in stock-based compensation expense.Accounts receivable, net of the effect of acquisitions and dispositions, was a use of cash of $6.4$56.1 million in 2009 compared to2010 and a sourceuse of cash of $41.8$6.5 million in 2008 and $42.2 million in 2007.2009. As a percentage of the prior twelve months’ net sales, net accounts receivable was 3.8%7.7% at February 28, 2009,2011 compared to 3.6%8.5% at February 29, 2008.28, 2010. The improvement in cash flow in the current year usewas the result of cash isa higher accounts receivable balance at February 28, 2010 as compared to February 28, 2009. As disclosed with our results for the year ended February 28, 2010, the increased balance was partially due to higher accounts receivable balances in the North American Social Expression Products segment as a result of less SBT implementation activitysales in the fourth quarter and the timing of the current yearcollections from certain customers compared to the prior year period. We generally experience lower sales and accounts receivable balancesyear. These amounts were collected during the twelve months ended February 28, 2011, thus resulting in the period a customer moves to the SBT business model. The prior year source of cash was primarily attributable to additional customers moving to the SBT business model during 2008, particularly in
33
the fourth quarter, which as noted above causes a lower accounts receivable balance in the period of implementation as sales are reversed. In addition, customers on the SBT business model generally tend to have shorter payment terms than non-SBT customers.
Inventories, net of the effect of acquisitions and dispositions, provided a source of cash of $1.0 million in 2009 compared tocash.
Inventories were a use of cash of
$28.5$13.1 million in
2008 and a source2011 compared to sources of cash of
$22.2$14.9 million in
2007.2010 and $2.9 million in 2009. The
increase in inventory, thus a use of cash in
2008 from 20072011 is primarily due to an inventory build during the fourth quarter related to expanded distribution expected within the dollar channel during the upcoming year. The source of cash in 2010 is attributable to the North American Social Expression Products segment,
primarily due to the increase in technology cards and thewhich lowered inventory
build related to the new Canadianlevels for all product
line.categories.
Other current assets
net of the effect of acquisitions and dispositions, were
a source of cash of $18.0 million in 2009 compared to $28.0 million in 2008 and a use of cash of
$36.1$1.9 million during 2011, compared to sources of cash of $16.9 million during 2010 and $17.3 million in
2007.2009. The decrease in the current year is primarily due to a large cash generation in 2010, which was attributable to the use of trust assets to fund active medical claim expenses. The activity in 2009
2008 and 2007 is
primarily attributable to a $90 million receivable recorded as part of the termination of several long-term supply agreements in fiscal 2007. Approximately $60 million of this receivable was collected in the fourth quarter of 2007 and the balance was received in 2008 and 2009.
Deferred costs –— net generally represents payments under agreements with retailers net of the related amortization of those payments. During 2009, 20082011, 2010 and 2007,2009, amortization exceeded payments by $14.3 million, $18.4 million and $27.6 million, $38.5 million and $52.4 million, respectively. In 2008, deferred costs – net also includes the impact of a reduction of deferred contract costs of approximately $15 million associated with the termination of a long-term supply agreement and related refund received. In 2007, deferred costs – net also included the reduction of approximately $76 million of deferred contract costs associated with retailer consolidations. See Note 10 to the consolidated financial statements for further detail of deferred costs related to customer agreements.
36
Accounts payable and other liabilities
net of the effect of acquisitions and dispositions, used
$67.5$31.0 million of cash in
20092011 compared to
providing $18.9 million of cash in 2008 and $0.6 million of cash in
2007.2010 and $68.2 million of cash in 2009. The change was
largely attributable
primarily to
lower 2009 year end accruals related tothe difference in variable compensation
and other normal coursepayments in the year ended February 28, 2011 compared to the year ended February 28, 2010. The current year includes the payment of
business accounts payable, accrued liabilities, and income and other taxes payable. For example, variable compensation
payable and income taxes payable were lower atfrom the year ended February 28,
2009 than at February 29, 2008 due to2010 where we exceeded our
poor financial results in fiscal 2009 compared to fiscal 2008. The increase in accounts payable and other liabilities in 2008 was attributable to accruedestablished compensation
and benefits and income taxes payable. The change in accounts payable and other liabilities in 2007 was primarily due totargets, thus a
reduction in trade payables and the profit-sharing accrual partially offset by an increase in income taxes payable.Investing Activities
Cash used by investing activities was $137.3 million during 2009 compared to $125.6 million during 2008 and cash provided of $177.5 million during 2007. Thelarge use of cash in the current year isperiod. The prior year included minimal compensation payments related to the Corporation’s performance in the year ended February 28, 2009, as compensations targets were not met.
Investing Activities
Cash provided by investing activities was $8.2 million during 2011 compared to cash used by investing activities of $40.0 million during 2010 and $137.3 million during 2009. The source of cash during 2011 included $25.2 million received for the sale of certain assets, equipment and processes of the DesignWare party goods product lines, which occurred in the prior year fourth quarter. This cash was held in escrow at February 28, 2010. The current year also included a $5.7 million return of capital related to our investment in AAH Holdings Corporation, the parent company of Amscan. In addition, we received approximately $12 million related to the sale of the land and buildings associated with the closure of our Mexico facility and a manufacturing facility within the International Expressions Product segment during the current year.
Capital expenditures totaled $36.3 million, $26.6 million and $55.7 million in 2011, 2010 and 2009, respectively. We currently expect 2012 capital expenditures to total in the range of $45 million to $50 million.
The use of cash during 2010 was primarily related to cash payments for business acquisitions and capital expenditures. During fiscal 2010, we acquired the Papyrus brand and its related wholesale business division from Schurman. At the same time, we sold the assets of our Retail Operations segment to Schurman and acquired an equity interest in Schurman. Cash paid, net of cash acquired, was $14.0 million. Also, in fiscal 2010, we paid $5.3 million of acquisition costs related to RPG, which we acquired in the fourth quarter of 2009. Partially offsetting these uses of cash were proceeds of $4.7 million from the sale of our calendar and candy product lines and $1.1 million from the sale of fixed assets.
The use of cash during 2009 was primarily related to investments in debt securities, business acquisitions and capital expenditures. During the second quarter of 2009, we paid $44.2 million to acquire, at a substantial discount, first lien debt securities of RPG. During the fourth quarter of 2009, we acquired all of the issued and outstanding capital stock of RPG for a combination of cash, long-term debt and the contribution of the debt securities that we acquired during the second quarter of 2009. The cash paid as a result of this transaction, net of cash acquired, was $22.3 million. We also issued approximately $55 million of long-term debt (with a fair market value of approximately $28 million) and relinquished the RPG first lien debt securities (with a fair market value of approximately $41 million), which we had previously purchased for $44.2 million.
See Notes 2 and 11 to the consolidated financial statements for further information.Also, in 2009, we purchased a card publisher and franchised distributor of greeting cards in the U.K. for $15.6 million.
Capital expenditures totaled $55.7
Financing Activities
Financing activities used $117.2 million
$56.6 million and $41.7 million in 2009, 2008 and 2007, respectively. We currently expect 2010 capital expenditures to total in the range of $35 million to $45 million.34
Cash used for investing activities in 2008 included the acquisition of two businesses for $70.2 million. In October 2007, we acquired the online assets of the Webshots brand, and in January 2008, we acquired PhotoWorks, Inc., an online photo sharing and personal publishing company. Also, the final payment of $6.1 million for the online greeting card business acquired in 2007 was made during the first quarter of 2008. These outflows were partially offset by cash inflows of $3.1 million from the sale of fixed assets and $4.3 million related to discontinued operations.
Cash flows from investing activities in 2007 also included the net proceeds from sales of short-term investments. Short-term investments decreased $208.7 million as sales of short-term investments exceeded purchases. In addition, $12.6 million was received related to discontinued operations, $6.2 million was received from the sale of the candle product lines and $4.8 million was received from the sale of fixed assets. These sources of cash were partially offset by a useduring 2011 compared to using $86.5 million of cash of $13.1 million for the acquisition of the online greeting card businessin 2010 and the final payment for the acquisition of Collage Designs Limited, which occurred in 2005.
Financing Activities
Financing activities providedproviding $23.0 million of cash in 2009 compared to using $146.9 million2009. The use of cash in 2008 and $518.5 million in 2007. Thethe current year relates primarily to the repayment of the term loan under our senior secured credit facility in the amount relatesof $99.3 million as well as share repurchases and dividend payments. During 2011, we paid $13.5 million to repurchase approximately 0.5 million Class B common shares in accordance with our Amended and Restated Articles of Incorporation and paid dividends of $22.4 million.
In 2010, the cash used related primarily to net repayments of long-term debt borrowings of $62.4 million as well as share repurchases and dividend payments. During 2010, $5.8 million was paid to repurchase approximately 1.5 million Class A common shares under our repurchase program and $6.0 million was paid to repurchase approximately 0.3 million Class B common shares in accordance with our Amended and Restated Articles of Incorporation. We paid dividends totaling $19.0 million during 2010.
37
In 2009, the cash provided by financing activities related primarily to additional long-term debt borrowings of $141.5 million partially offset by share repurchases and long-term debt repayments. During 2009, $73.8 million was paid to repurchase approximately 7.9 million shares under our Class A common share repurchase programs and $0.2 million was paid to repurchase approximately 10,000 Class B common shares in accordance with our Amended and Restated Articles of Incorporation. During the second quarter of 2009, $22.5 million was paid upon exercise of the put option on our 6.10% senior notes.
In 2008, cash used for financing activities primarily related to our Class A common share repurchase programs. During 2008, $149.2 million was paid to repurchase 6.7 million shares under the repurchase programs. We paid $23.1dividends totaling $22.6 million to repurchase 0.9 million Class B common shares during 2008, in accordance with our Amended and Restated Articles of Incorporation. The majority of the Class B common shares repurchased were held by the American Greetings Retirement Profit Sharing and Savings Plan (the “Plan”) on behalf of participants investing in the Plan’s company stock fund. In connection with the Plan’s determination that the company stock fund should consist solely of Class A common shares to facilitate participant transactions, during November 2007, the Plan sold the remaining Class B common shares back to American Greetings in accordance with our Amended and Restated Articles of Incorporation. The cash outflow for repurchases was partially offset by net borrowings of $20.1 million under our credit facility.
In 2007, cash used for financing activities related primarily to our debt activities in the period. We retired $277.3 million of our 6.10% senior notes and issued $200.0 million of 7.375% senior unsecured notes. We repaid $159.1 million of our 7.00% convertible subordinated notes. We paid $8.5 million of debt issuance costs during the period for our new credit facility, the 7.375% senior unsecured notes and the exchange offer on our 7.00% convertible subordinated notes. These amounts were deferred and are being amortized over the respective periods of the instruments. Our Class A common share repurchase programs also contributed to the cash used for financing activities in 2007. During 2007, $257.5 million was paid to repurchase 11.1 million shares under the repurchase programs. We paid $0.3 million to repurchase Class B common shares during 2007, in accordance with our Amended and Restated Articles of Incorporation.
2009.
Our receipt of the exercise price on stock options provided
$16.6 million, $6.6 million and $0.5 million
$27.2 millionin 2011, 2010 and
$6.8 million in 2009,
2008 and 2007, respectively.
We paid dividends totaling $22.6 million, $21.8 million and $18.4 million in 2009, 2008 and 2007, respectively.
35
Substantial credit sources are available to us. In total, we had available sources of approximately $540$430 million at February 28, 2009.2011. This included our $450$350 million senior secured credit facility and our $90$80 million accounts receivable securitization facility. WeBorrowings under the accounts receivable securitization facility are limited based on our eligible receivables outstanding. At February 28, 2011, we had $61.6 millionno borrowings outstanding under the accounts receivable securitization facility or the revolving credit facility and $100.0 million outstanding under the term loan facility at February 28, 2009. In addition to these borrowings, wefacility. We had, in the aggregate, $26.2$44.7 million outstanding under letters of credit, which reduces the total credit availability thereunder as of February 28, 2009. Additional letters of2011.
On June 11, 2010, we amended and restated our senior secured credit
have been issued subsequentfacility by entering into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”). Pursuant to
year end in connection with the
sale of our Retail Operations segment and the purchaseterms of the
Papyrus brand. See Note 19Amended and Restated Credit Agreement, we may continue to
the Consolidated Financial Statements for further information.The credit agreement includes aborrow, repay and re-borrow up to $350 million under the revolving credit facility, with the ability to increase the size of the facility to up to $400 million, subject to customary conditions. The Amended and Restated Credit Agreement also continues to provide for a $25 millionsub-limit for the issuance of swing line loans and a $100 million delay draw term loan. sub-limit for the issuance of letters of credit.
The obligations under the
credit agreementAmended and Restated Credit Agreement are guaranteed by our material domestic subsidiaries and are secured by substantially all of
theour personal property
of American Greetings and
each of our material domestic subsidiaries, including a pledge of all of the capital stock in substantially all of our domestic subsidiaries and 65% of the capital stock of our
material first tier
foreigninternational subsidiaries. The
Amended and Restated Credit Agreement, including revolving
credit facilityloans thereunder, will mature on
April 4, 2011,June 11, 2015. In connection with the Amended and
any outstanding term loans will mature on April 4, 2013. EachRestated Credit Agreement, the term loan
will amortize in equal quarterly installments equal to 0.25%under the original credit facility was terminated and we repaid the full $99 million outstanding under the term loan using cash on hand. The proceeds of the
amount of such term loan, beginning on April 3, 2009, withborrowings under the
balance payable on April 4, 2013.Amended and Restated Credit Agreement may be used to provide working capital and for other general corporate purposes.
Revolving loans
that are denominated in U.S. dollars
under the credit agreement will bear interest at
aeither the U.S. base rate
per annum based onor the
then applicable London Inter-Bank Offer Rate (“LIBOR”)
or the alternate base rate (“ABR”),
as defined in the credit agreement, in each case,at our election, plus
margins adjusteda margin determined according to our leverage ratio.
TermSwing line loans will bear interest at a
quoted rate
per annum based on either LIBOR plus 150 basis points or basedagreed upon by us and the swing line lender. In addition to interest, we are required to pay commitment fees on the
ABR, as defined in the credit agreement, plus 25 basis points. We pay an annual commitment fee of 75 basis points on the undrawnunused portion of the
term loan.revolving credit facility. The commitment fee
on the revolving facility fluctuatesrate is initially 0.50% per annum and is subject to adjustment thereafter based on our leverage ratio.
The
credit agreementAmended and Restated Credit Agreement contains certain restrictive covenants that are customary for similar credit arrangements, including covenants relating to limitations on liens, dispositions, issuance of debt, investments, payment of dividends, repurchases of capital stock, acquisitions and transactions with affiliates. There are also financial performance covenants that require us to maintain a maximum leverage ratio and a minimum interest coverage ratio. The
credit agreementAmended and Restated Credit Agreement also requires us to make certain mandatory prepayments of outstanding indebtedness using the net cash proceeds received from certain dispositions, events of loss and additional indebtedness that we
may incur from time to time.incur.
We are also party to an amended and restated receivables purchase agreement. The agreement withhas available financing of up to $90$80 million. The maturity date of the agreement expiresis September 21, 2012, however, the
38
agreement will terminate upon termination of the liquidity commitments obtained by the purchaser groups from third party liquidity providers.
Such commitments may be made available to the purchaser groups for364-day periods only (initial364-day period began on
OctoberSeptember 23,
2009. Under2009), and there can be no assurances that the
amended and restatedthird party liquidity providers will renew or extend their commitments under the receivables purchase agreement. If that is the case, the receivables purchase agreement
American Greetingswill terminate and
certainwe will not receive the benefit of
its subsidiaries sell accounts receivable to AGC Funding Corporation (“AGC Funding”), a wholly-owned, consolidated subsidiarythe entire three-year term of
American Greetings, which in turn sells undivided interests in eligible accounts receivable to third party financial institutions as part of a process that provides funding similar to a revolving credit facility. Funding under the
facility may be usedagreement. On September 22, 2010, the liquidity commitments were renewed for
working capital, general corporate purposes and the issuance of letters of credit.an additional364-day period.
The interest rate under the accounts receivable securitization facility is based on (i) commercial paper interest rates, (ii) LIBOR rates plus an applicable margin or (iii) a rate that is the higher of the prime rate as announced by the applicable purchaser financial institution or the federal funds rate plus 0.50%. AGC Funding pays an annual commitment fee of
2860 basis points on the unfunded portion of the accounts receivable securitization facility, together with customary administrative fees on outstanding letters of credit that have been issued and on outstanding amounts funded under the facility.
The amended and restated receivables purchase agreement contains representations, warranties, covenants and indemnities customary for facilities of this type, including
theour obligation
of American Greetings to maintain the same consolidated leverage ratio as it is required to maintain under its secured credit facility.
36
On May 24, 2006, we issued $200 million of 7.375% senior unsecured notes, due on June 1,
2016.2016 (the “Original Senior Notes”). The proceeds from this issuance were used for the repurchase of our 6.10% senior notes due on August 1, 2028 that were tendered in the tender offer and consent solicitation that was completed on May 25, 2006.
On February 24, 2009, we issued $22 million of additional 7.375% senior unsecured notes described above (“Additional Senior Notes”) and $32.7 million of new 7.375% unsecured notes due on June 1, 2016 (“New Notes”
, together with the Original Senior Notes, and the Additional Senior Notes, the “Notes”) in conjunction with the acquisition of RPG. The original issue discount from the issuance of these notes of $26.2 million was recorded as a reduction of the underlying debt issuances and is being amortized over the life of the debt using the effective interest method. Including the original issue discount, the New Notes and the Additional Senior Notes have an effective annualized interest rate of approximately 20.3%. Except as described below, the terms of the New Notes and the Additional Senior Notes are the same.
The
New Notes and the Additional Senior Notes will mature on June 1, 2016 and bear interest at a fixed rate of 7.375% per annum, commencing June 1, 2009. The
New Notes and the Additional Senior Notes constitute general, unsecured obligations of the Corporation. The
New Notes and the Additional Senior Notes rank equally with our other senior unsecured indebtedness and senior in right of payment to all of our obligations that are, by their terms, expressly subordinated in right of payment to the
New Notes or the Additional Senior Notes, as applicable. The
Original Senior Notes and the Additional Senior Notes are effectively subordinated to all of our secured indebtedness, including borrowings under our credit agreement, to the extent of the value of the assets securing such indebtedness. The New Notes are contractually subordinated to amounts outstanding under the credit agreement, and are effectively subordinated to any other secured indebtedness that we may issue from time to time to the extent of the value of the assets securing such indebtedness.
The New Notes and the Additional Senior Notes generally contain comparable covenants as described above for our credit agreement. The New Notes, however, also provide that if we incur more than an additional $10 million of indebtedness (other than indebtedness under the credit agreement or certain other permitted indebtedness), such indebtedness must be (a) pari passu in right of payment to the New Notes and expressly subordinated in right of payment to the credit agreement at least to the same extent as the New Notes, or (b) expressly subordinated in right of payment to the New Notes. Alternatively, we can redeem the New Notes in whole, but not in part, at a purchase price equal to 100% of the principal amount thereof plus accrued but unpaid interest, if any, or have the subordination provisions removed from the New Notes.
At February 28, 2011, we were in compliance with our financial covenants under the borrowing agreements described above.
39
The total fair value of
ourthe Corporation’s publicly traded debt, based on quoted market prices, was
$119.0$237.5 (at a carrying value of $232.7) and $224.7 (at a carrying value of $230.5) at February 28, 2011 and 2010, respectively. As of February 28, 2011, there were no balances outstanding under our revolving credit facility or receivables purchase agreements. The total fair value of our non-publicly traded debt, term loan and revolving credit facility, based on comparable publicly traded debt prices, was $99.3 million (at a carrying value of
$228.6$99.3 million) at February 28,
2009. The carrying amount of our publicly traded debt significantly exceeded its fair value at February 28, 2009 due to the tighter U.S. credit markets.2010.
Throughout fiscal
2010,2012, we will continue to consider all options for capital deployment including growth options, capital expenditures, the opportunity to repurchase our own shares,
reducing debt or,
by reducing debt. Toas appropriate, preserving cash. Consistent with this
end,ongoing objective, in March 2011 we announced that in fiscal 2012 we expect that we will begin to invest in the development of a world headquarters in the Northeast Ohio area. While the state of Ohio has committed to a number of tax credits, loans and other incentives to encourage us to remain in Ohio, we expect to spend tens of millions of dollars of our own funds on the project, the majority of which are expected to be incurred after fiscal 2012. In addition, as announced in January 2009,
we announced that our Board of Directors
has authorized the repurchase of up to $75 million of Class A common shares
($46.6 million remaining at February 28, 2011), that may be made through open market purchases or privately negotiated transactions as market conditions warrant, at prices
the Company deemswe deem appropriate, and subject to applicable legal requirements and other factors. There is no set expiration date for this program. We also may, from time to time, seek to retire or purchase our outstanding debt through cash purchases
and/or exchanges, in open market purchases, privately negotiated transactions or otherwise, including strategically repurchasing our 7.375% senior unsecured notes due in
2016 at a discount to par.2016. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Over the next five to seven years we expect to allocate resources, including capital, to refresh our information technology systems by modernizing our systems, redesigning and deploying new processes, and evolving new organization structures all intended to drive efficiencies within the business and add new capabilities. Due to the long-term nature of this project, together with the fact that we are in the early stages of this project, currently we cannot reasonably estimate amounts that we will spend over the life of this project; however, amounts could be material in any given fiscal year and over the life of the project. During fiscal 2012, we currently estimate that we will spend $13 million plus or minus 25%, including both expense and capital, on these system projects. In addition, as described in Notes 1 and 11 to the Consolidated Financial Statements included in Part I of this report, in connection with our sale of certain of the assets of our Retail Operations segment to Schurman, we remain subject to a number of Schurman’s retail store leases on a contingent basis through our subleases, and have provided Schurman credit support, including a $12 million guaranty of amounts that may from time to time be owed by Schurman to the lenders under its senior revolving credit facility, as well as the ability to borrow from us up to $10 million under a loan agreement we have with Schurman.
Our future operating cash flow and borrowing availability under our credit agreement and our accounts receivable securitization facility are expected to meet currently anticipated funding requirements. The seasonal nature of theour business results in peak working capital requirements that may be financed through short-term borrowings.borrowings when cash on hand is insufficient.
40
37
The following table presents our contractual obligations and commitments to make future payments as of February 28,
2009: | | | | | | | | | | | | | | | | | | | | | |
| | | Payment Due by Period as of February 28, 2009 |
| (In thousands) | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | Thereafter | | Total |
Long-term debt | | $ | 750 | | $ | 1,000 | | $ | 1,000 | | $ | 1,000 | | $ | 157,850 | | $ | 254,867 | | $ | 416,467 |
Operating leases | | | 24,664 | | | 18,988 | | | 13,689 | | | 9,859 | | | 6,989 | | | 18,422 | | | 92,611 |
Commitments under customer agreements | | | 55,877 | | | 21,358 | | | 540 | | | 125 | | | — | | | — | | | 77,900 |
Commitments under royalty agreements | | | 12,584 | | | 7,516 | | | 4,367 | | | 4,306 | | | 3,300 | | | 15,300 | | | 47,373 |
Interest payments | | | 25,371 | | | 25,175 | | | 22,236 | | | 21,910 | | | 19,080 | | | 42,421 | | | 156,193 |
Severance | | | 12,240 | | | 1,276 | | | 683 | | | 10 | | | — | | | — | | | 14,209 |
| | | | | | | | | | | | | | | | | | | | | |
| | $ | 131,486 | | $ | 75,313 | | $ | 42,515 | | $ | 37,210 | | $ | 187,219 | | $ | 331,010 | | $ | 804,753 |
| | | | | | | | | | | | | | | | | | | | | |
2011:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payment Due by Period as of February 28, 2011 | |
| (In thousands) | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | Thereafter | | | Total | |
| |
| Long-term debt | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 254,867 | | | $ | 254,867 | |
| Operating leases (1) | | | 16,195 | | | | 11,599 | | | | 8,075 | | | | 6,143 | | | | 4,831 | | | | 10,525 | | | | 57,368 | |
| Commitments under customer agreements | | | 64,116 | | | | 38,334 | | | | 31,234 | | | | 6,733 | | | | - | | | | - | | | | 140,417 | |
| Commitments under royalty agreements | | | 9,181 | | | | 10,208 | | | | 3,510 | | | | 3,400 | | | | 9,472 | | | | 2,300 | | | | 38,071 | |
| Interest payments | | | 21,139 | | | | 20,921 | | | | 20,649 | | | | 20,649 | | | | 19,320 | | | | 4,833 | | | | 107,511 | |
| Severance | | | 6,423 | | | | 1,159 | | | | 420 | | | | - | | | | - | | | | - | | | | 8,002 | |
| Commitments under purchase agreements | | | 4,500 | | | | 4,500 | | | | 4,500 | | | | 4,500 | | | | - | | | | - | | | | 18,000 | |
| | | |
| | | |
| | | $ | 121,554 | | | $ | 86,721 | | | $ | 68,388 | | | $ | 41,425 | | | $ | 33,623 | | | $ | 272,525 | | | $ | 624,236 | |
| | | |
| | | |
| | |
| (1) | | Approximately $36.1 million of the operating lease commitments in the table above relate to retail stores acquired by Schurman that are being subleased to Schurman. The failure of Schurman to operate the retail stores successfully could have a material adverse effect on the Corporation, because if Schurman is not able to comply with its obligations under the subleases, the Corporation remains contractually obligated, as primary lessee, under those leases. |
The interest payments in the above table are determined assuming the same level of debt outstanding in the future years as at February 28,
20092011 for the revolving credit
facility and the term loan facility at the current average interest rates for those facilities.
In addition to the contracts noted in the table, we issue purchase orders for products, materials and supplies used in the ordinary course of business. These purchase orders typically do not include long-term volume commitments, are based on pricing terms previously negotiated with vendors and are generally cancelable with the appropriate notice prior to receipt of the materials or supplies. Accordingly, the foregoing table excludes open purchase orders for such products, materials and supplies as of February 28,
2009.2011.
Although we do not anticipate that contributions will be required in
20102012 to the defined benefit pension plan that we assumed in connection with our acquisition of Gibson Greetings, Inc. in 2001, we may make contributions in excess of the legally required minimum contribution level. Refer to Note 12 to the Consolidated Financial Statements. We do anticipate that contributions will be required beginning in fiscal
2011,2014, but those amounts have not been determined as of February 28,
2009.2011.
Critical Accounting Policies Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Refer to Note 1 to the Consolidated Financial Statements. The following paragraphs include a discussion of the critical areas that required a higher degree of judgment or are considered complex.
Allowance for Doubtful Accounts We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a customer’s inability to meet its financial obligations, a specific allowance for bad debts against amounts due is recorded to reduce the receivable to the amount we reasonably expect will be
41
collected. In addition, we recognize allowances for bad debts based on estimates developed by using standard quantitative measures incorporating historical write-offs. The establishment of allowances requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Although we consider these balances adequate and proper, changes in economic conditions in the retail markets in which we operate could have a material effect on the required allowance balances.
38
We provide for estimated returns for products sold with the right of return, primarily seasonal cards
and certain other seasonal products,
and everyday cards at certain foreign locations, in the same period as the related revenues are recorded. These estimates are based upon historical sales returns, the amount of current year sales and other known factors. Estimated return rates utilized for establishing estimated returns reserves have approximated actual returns experience. However, actual returns may differ significantly, either favorably or unfavorably, from these estimates if factors such as the historical data we used to calculate these estimates do not properly reflect future returns or as a result of changes in economic conditions of the customer
and/or its market. We regularly monitor our actual performance to estimated rates and the adjustments attributable to any changes have historically not been material.
In the normal course of our business, we enter into agreements with certain customers for the supply of greeting cards and related products. We view such agreements as advantageous in developing and maintaining business with our retail customers. The customer
typically receivesmay receive a combination of cash payments, credits, discounts, allowances and other
incentive considerationsincentives to be earned as product is purchased from us over the stated term of the agreement or
the effective time period of the agreement to meet a minimum purchase volume commitment. These agreements are negotiated individually to meet competitive situations and therefore, while some aspects of the agreements may be similar, important contractual terms may vary. In addition, the agreements may or may not specify us as the sole supplier of social expression products to the customer.
Although risk is inherent in the granting of advances, we subject such customers to our normal credit review. We maintain
a generalan allowance for deferred costs based on estimates developed by using standard quantitative measures incorporating historical write-offs. In instances where we are aware of a particular customer’s inability to meet its performance obligation, we record a specific allowance to reduce the deferred cost asset to an estimate of its future value based upon expected recoverability. Losses attributed to these specific events have historically not been material.
For those contractual arrangements that are based upon a minimum purchase volume commitment, we periodically review the progress toward the volume commitment and estimate future sales expectations for each customer. Factors that can affect our estimate include store door openings and closings, retail industry consolidation, amendments to the agreements, consumer shopping trends, addition or deletion of participating products and product productivity. Based upon our review, we may modify the remaining amortization periods of individual agreements to reflect the changes in the estimates for the attainment of the minimum volume commitment in order to align amortization expense with the periods benefited. We do not make retroactive expense adjustments to prior fiscal years as amounts, if any, have historically not been material. The aggregate average remaining life of our contract base is 5.96.7 years.
The accuracy of our assessments of the performance-related value of a deferred cost asset related to a particular agreement and of the estimated time period of the completion of a volume commitment is based upon our ability to accurately predict certain key variables such as product demand at retail, product pricing, customer viability and other economic factors. Predicting these key variables involves uncertainty about future events; however, the assumptions used are consistent with our internal planning. If the deferred cost assets are assessed to be recoverable, they are amortized over the periods benefited. If the carrying value of these assets is considered to not be recoverable through performance, such assets are written down as appropriate.
Goodwill and Other Intangible Assets Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance with
SFAS No. 142, “GoodwillASC Topic 350 (“ASC 350”), “Intangibles — Goodwill and Other,
Intangible Assets,” goodwill and certain intangible assets are presumed to have indefinite useful lives and are
39
thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. We complete the annual goodwill impairment test during the fourth quarter. To test for goodwill impairment, we are required to estimate the fair market value of each of our reporting units. While we may use a variety of methods to estimate fair value for impairment testing, our primary methods are discounted cash flows and a market based analysis. We estimate future cash flows and allocations of certain assets using estimates for future growth rates and our judgment regarding the applicable discount rates. Changes to our judgments and estimates could result in a significantly different estimate of the fair market value of the reporting units, which could result in an impairment of goodwill.
Deferred income taxes are recognized at currently enacted tax rates for temporary differences between the financial reporting and income tax bases of assets and liabilities and operating loss and tax credit carryforwards. In assessing the realizability of deferred tax assets, we assess whether it is more likely than not
42
that a portion or all of the deferred tax assets will not be realized. We consider the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. The assumptions used in this assessment are consistent with our internal planning. A valuation allowance is recorded against those deferred tax assets determined to not be realizable based on our assessment. The amount of net deferred tax assets considered realizable could be increased or decreased in the future if our assessment of future taxable income or tax planning strategies change.
NewRecent Accounting PronouncementsIn September 2006,June 2009, the Financial Accounting Standards Board (the “FASB”) issued SFAS Accounting Standards Update (“ASU”)No. 1572009-17 (“SFAS 157”ASU2009-17”), “Fair Value Measurements, (Consolidations Topic 810), “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“VIE”).” which providesASU2009-17 requires an ongoing reassessment of determining whether a definitionvariable interest gives a company a controlling financial interest in a VIE. It also requires an entity to qualitatively, rather than quantitatively, determine whether a company is the primary beneficiary of fair value, establishes a frameworkVIE. Under the new standard, the primary beneficiary of a VIE is a party that has the controlling financial interest in the VIE and has both the power to direct the activities that most significantly impact the VIE’s economic success and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. ASU2009-17 is effective for measuring fair valueinterim and requires expanded disclosures about fair value measurements. In November 2007, the FASB deferred the effective date of SFAS 157 for non-financial assets and liabilities until fiscal years and interimannual reporting periods beginning after November 15, 2008. We adopted SFAS 157 for financial assets and liabilities2009. Our adoption of this standard on March 1, 2008. 2010 did not have a material effect on our financial statements.
In
October 2008,January 2010, the FASB issued
FASB Staff Position FAS 157-3ASUNo. 2010-06 (“
FSP 157-3”ASU2010-06”), “Determining the “Improving Disclosures about Fair Value
Measurements.” ASU2010-06 provides amendments to ASC Topic 820, “Fair Value Measurements and Disclosures,” that require separate disclosure of
a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the applicationsignificant transfers in and out of
SFAS 157 when the market for a financial asset is not activeLevel 1 and
provides an example to illustrate key considerations in determining theLevel 2 fair value
measurements in addition to the presentation of
a financial asset whenpurchases, sales, issuances, and settlements for Level 3 fair value measurements. ASU2010-06 also provides amendments to subtopic820-10 that clarify existing disclosures about the
market for that financial asset is not active. FSP 157-3 became effective upon issuance, including prior periods for which financial statements have not been issued.In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assetslevel of disaggregation, and Financial Liabilities.” SFAS 159 allows companies to choose to measure financial instrumentsinputs and certain other financial assets and financial liabilities at fair value. SFAS 159 also establishes presentation andvaluation techniques. The new disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 isare effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 on March 1, 2008interim and elected not to measure any additional financial instruments or other items at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”), “Business Combinations.” SFAS 141R provides revised guidance on the recognition and measurement of the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests and goodwill acquired in a business combination. SFAS 141R also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS 141R is effective, on a prospective basis, for fiscal yearsannual periods beginning after December 15, 2008. We do not expect the adoption of SFAS 141R to have a significant impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS 160 establishes accounting and reporting standards for noncontrolling interests (i.e. minority interests) in a subsidiary and2009, except for the deconsolidationdisclosures about purchases, sales, issuances, and settlements of a subsidiary.
40
Under the standard, noncontrolling interests are considered equityLevel 3 fair value measurements, which becomes effective for interim and should be clearly identified, presented and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. SFAS 160 is effective, on a prospective basis, for fiscal yearsannual periods beginning after December 15, 2008. However, presentation2010. On March 1, 2010, we adopted this standard, except for the requirement to separately disclose purchases, sales, issuances, and disclosure requirements must be retrospectively applied to comparative financial statements. We are currently evaluatingsettlements in the impact that SFAS 160 will have on our consolidated financial statements upon adoption.
In April 2008, the FASB issued FASB Staff Position FAS 142-3 (“FSP 142-3”), “Determination of the Useful Life of Intangible Assets.” FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under other U.S. generally accepted accounting principles (“GAAP”). FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The guidance for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. Certain disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.
In May 2008, the FASB issued SFAS No. 162 (“SFAS 162”), “The Hierarchy of Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 became effective on November 15, 2008. TheLevel 3 rollforward. Our adoption of SFAS 162this standard did not have a significant impactmaterial effect on our consolidated financial statements.
In December 2008, Also, we do not expect that the FASB issued FASB Staff Position FAS 132(R)-1 (“FSP 132R-1”), “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP 132R-1 provides guidance on an employer’sadoption of the enhanced disclosures about plan assets of a defined benefit pension or other postretirement plan. It requires disclosure of additional information about investment allocation, fair values of major categories of assets, the development offor Level 3 fair value measurements and concentrations of risk. FSP 132R-1 is effective for fiscal years ending after December 15, 2009; however, earlier application is permitted. The adoption of FSP 132R-1 in fiscal 2010 will have noa material effect on our consolidated financial position or results of operations.
statements.
Factors That May Affect Future Results Certain statements in this report may constitute forward-looking statements within the meaning of the Federal securities laws. These statements can be identified by the fact that they do not relate strictly to historic or current facts. They use such words as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,”
“believe”“believe,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These forward-looking statements are based on currently available information, but are subject to a variety of uncertainties, unknown risks and other factors concerning our operations and business environment, which are difficult to predict and may be beyond our control. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect our future financial performance, include, but are not limited to, the following:
| | |
| • | a weak retail environment and general economic conditions; |
|
| • | competitive terms of sale offered to customers; |
|
| • | Schurman’s ability to successfully operate its retail operations and satisfy its obligations to us; |
|
| • | retail consolidations, acquisitions and bankruptcies, including the possibility of resulting adverse changes to retail contract terms; |
|
| • | the ability to achieve the desired benefits associated with our cost reduction efforts; |
43
the ability to successfully integrate acquisitions, including the recent acquisitions of RPG and the Papyrus brand;
our ability to successfully complete the proposed sale of the Strawberry Shortcake and Care Bears properties;
our successful transition of the Retail Operations segment to its buyer, Schurman Fine Papers, and the ability to achieve the desired benefits associated with this and other dispositions;
41
retail consolidations, acquisitions and bankruptcies, including the possibility of resulting adverse changes to retail contract terms;
| | |
| • | the timing and impact of converting customers to a scan-based trading model; |
|
| • | our ability to successfully implement, or achieve the desired benefits associated with, any information systems refresh we may implement; |
|
| • | the timing and impact of investments in new retail or product strategies as well as new product introductions and achieving the desired benefits from those investments; |
|
| • | consumer acceptance of products as priced and marketed; |
|
| • | the impact of technology, including social media, on core product sales; |
|
| • | escalation in the cost of providing employee health care; |
|
| • | the ability to achieve the desired accretive effect from any share repurchase programs; |
|
| • | the ability to comply with our debt covenants; |
|
| • | fluctuations in the value of currencies in major areas where we operate, including the U.S. Dollar, Euro, U.K. Pound Sterling and Canadian Dollar; and |
|
| • | the outcome of any legal claims known or unknown. |
the ability to achieve the desired benefits associated with our cost reduction efforts;
competitive terms of sale offered to customers;
the ability to comply with our debt covenants;
the timing and impact of investments in new retail or product strategies as well as new product introductions and achieving the desired benefits from those investments;
consumer acceptance of products as priced and marketed;
the impact of technology on core product sales;
the timing and impact of converting customers to a scan-based trading model;
the escalation in the cost of providing employee health care;
the ability to successfully implement, or achieve the desired benefits associated with, any information systems refresh that we may implement;
the ability to achieve the desired accretive effect from any share repurchase programs;
fluctuations in the value of currencies in major areas where we operate, including the U.S. Dollar, Euro, U.K. Pound Sterling and Canadian Dollar; and
the outcome of any legal claims known or unknown.
Risks pertaining specifically to AG Interactive include the viability of online advertising, subscriptions as revenue generators, the public’s acceptance of online greetings and other social expression products, and the ability to gain a leadership position inadapt to rapidly changing social media and the digital photo sharing space.
The risks and uncertainties identified above are not the only risks we face. Additional risks and uncertainties not presently known to us or that we believe to be immaterial also may adversely affect us. Should any known or unknown risks or uncertainties develop into actual events, or underlying assumptions prove inaccurate, these developments could have material adverse effects on our business, financial condition and results of operations. For further information concerning the risks we face and issues that could materially affect our financial performance related to forward-looking statements, refer to the “Risk Factors” section included in Part I, Item 1A of this Annual Report on
Form 10-K.42
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Derivative Financial Instruments—During 2007, we entered into an interest rate derivative designed to offset the interest rate risk related to the forecasted issuance of $200 million of senior indebtedness. The interest rate derivative agreement expired during the year. – We
did not designate this agreement as a hedging instrument pursuant to the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Accordingly, the change in fair value of this agreement was recognized and included in “Interest expense” in the Consolidated Statement of Operations for the year ended February 28, 2007. We havehad no derivative financial instruments as of February 28,
2009.2011.
Interest Rate Exposure— – We manage interest rate exposure through a mix of fixed and floating rate debt. Currently, the majority of our debt is carried at fixed interest rates. Therefore, our overall interest rate exposure risk is minimal. Based on our interest rate exposure on our non-fixed rate debt as of and during the year ended February 28,
2009,2011, a hypothetical 10% movement in interest rates would not have had a material impact on interest expense. Under the terms of our current credit agreement, we have the ability to borrow significantly more floating rate debt, which, if incurred could have a material impact on interest expense in a fluctuating interest rate environment.
Foreign Currency Exposure— – Our international operations expose us to translation risk when the local currency financial statements are translated into U.S. dollars. As currency exchange rates fluctuate, translation of the statements of operations of international subsidiaries to U.S. dollars could affect comparability of results between years. Approximately 27%24%, 28%23% and 26%27% of our 2009, 20082011, 2010 and 20072009 total revenue from continuing operations, respectively, were generated from operations outside the United States. Operations in Australasia,Australia, New Zealand, Canada, Mexico, the European Union and the U.K. are denominated in currencies other than U.S. dollars. No assurance can be given that future results will not be affected by significant changes in foreign currency exchange rates.
44
43
| |
| Item 8. | Financial Statements and Supplementary Data |
| | | | |
| | Page
|
Index to Consolidated Financial Statements and Supplementary Financial Data | | Page
Number |
| |
| | 45 | 46 | |
| |
| |
46
| 47 | |
| |
| | 47 | 48 | |
| |
| |
48
| 49 | |
| |
| |
49
| 50 | |
| |
| |
50
| 51 | |
| |
Supplementary Financial Data: | | | | |
| |
| | 86 | 90 | |
45
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 28,
20092011 and February
29, 2008,28, 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended February 28,
2009.2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 28,
20092011 and February
29, 2008,28, 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 28,
2009,2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements,
in 2010 the Corporation
adopted the provisionschanged its method of
(i) FASB Interpretation No. 48,Accountingaccounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, in fiscal 2008; (ii) SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R), effective February 28, 2007; and (iii) SAB No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, applying the one-time special transition provisions, in fiscal 2007.business combinations.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), American Greetings Corporation’s internal control over financial reporting as of February 28,
2009,2011, based on criteria established in Internal
Control—Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April
28, 200929, 2011 expressed an unqualified opinion thereon.
April 28, 200929, 2011
46
45
CONSOLIDATED STATEMENT OF OPERATIONS Years ended February 28, 2009, February 29, 20082011, 2010 and February 28, 20072009
��
Thousands of dollars except share and per share amounts
| | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Net sales | | $1,646,399 | | | $1,730,784 | | | $1,744,798 | |
Other revenue | | 44,339 | | | 45,667 | | | 49,492 | |
| | | | | | | | | |
Total revenue | | 1,690,738 | | | 1,776,451 | | | 1,794,290 | |
| | | |
Material, labor and other production costs | | 809,956 | | | 780,771 | | | 826,791 | |
Selling, distribution and marketing expenses | | 618,899 | | | 621,478 | | | 627,940 | |
Administrative and general expenses | | 226,317 | | | 246,722 | | | 253,035 | |
Goodwill and other intangible assets impairment | | 290,166 | | | — | | | 2,196 | |
Other operating income—net | | (1,396 | ) | | (1,325 | ) | | (5,252 | ) |
| | | | | | | | | |
Operating (loss) income | | (253,204 | ) | | 128,805 | | | 89,580 | |
| | | |
Interest expense | | 22,854 | | | 20,006 | | | 34,986 | |
Interest income | | (3,282 | ) | | (7,758 | ) | | (8,135 | ) |
Other non-operating expense (income)—net | | 2,157 | | | (7,411 | ) | | (2,682 | ) |
| | | | | | | | | |
(Loss) income from continuing operations before income tax (benefit) expense | | (274,933 | ) | | 123,968 | | | 65,411 | |
Income tax (benefit) expense | | (47,174 | ) | | 40,648 | | | 25,473 | |
| | | | | | | | | |
(Loss) income from continuing operations | | (227,759 | ) | | 83,320 | | | 39,938 | |
| | | |
(Loss) income from discontinued operations, net of tax | | — | | | (317 | ) | | 2,440 | |
| | | | | | | | | |
Net (loss) income | | $ (227,759 | ) | | $ 83,003 | | | $ 42,378 | |
| | | | | | | | | |
(Loss) earnings per share—basic: | | | | | | | | | |
(Loss) income from continuing operations | | $ (4.89 | ) | | $ 1.54 | | | $ 0.69 | |
(Loss) income from discontinued operations | | — | | | (0.01 | ) | | 0.04 | |
| | | | | | | | | |
Net (loss) income | | $ (4.89 | ) | | $ 1.53 | | | $ 0.73 | |
| | | | | | | | | |
(Loss) earnings per share—assuming dilution: | | | | | | | | | |
(Loss) income from continuing operations | | $ (4.89 | ) | | $ 1.53 | | | $ 0.67 | |
(Loss) income from discontinued operations | | — | | | (0.01 | ) | | 0.04 | |
| | | | | | | | | |
Net (loss) income | | $ (4.89 | ) | | $ 1.52 | | | $ 0.71 | |
| | | | | | | | | |
Average number of shares outstanding | | 46,543,780 | | | 54,236,961 | | | 57,951,952 | |
| | | | | | | | | |
Average number of shares outstanding—assuming dilution | | 46,543,780 | | | 54,506,048 | | | 62,362,794 | |
| | | | | | | | | |
Dividends declared per share | | $ 0.60 | | | $ 0.40 | | | $ 0.32 | |
| | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Net sales | | $ | 1,560,213 | | | $ | 1,598,292 | | | $ | 1,646,399 | |
| Other revenue | | | 32,355 | | | | 37,566 | | | | 44,339 | |
| | | | | | | | | | | | | |
| Total revenue | | | 1,592,568 | | | | 1,635,858 | | | | 1,690,738 | |
| Material, labor and other production costs | | | 682,368 | | | | 713,075 | | | | 809,956 | |
| Selling, distribution and marketing expenses | | | 478,227 | | | | 507,960 | | | | 618,899 | |
| Administrative and general expenses | | | 260,476 | | | | 276,031 | | | | 226,317 | |
| Goodwill and other intangible asset impairments | | | – | | | | – | | | | 290,166 | |
| Other operating income – net | | | (3,205 | ) | | | (310 | ) | | | (1,396 | ) |
| | | | | | | | | | | | | |
| Operating income (loss) | | | 174,702 | | | | 139,102 | | | | (253,204 | ) |
| Interest expense | | | 25,389 | | | | 26,311 | | | | 22,854 | |
| Interest income | | | (853 | ) | | | (1,676 | ) | | | (3,282 | ) |
| Other non-operating (income) expense- net | | | (5,841 | ) | | | (6,487 | ) | | | 2,157 | |
| | | | | | | | | | | | | |
| Income (loss) before income tax expense (benefit) | | | 156,007 | | | | 120,954 | | | | (274,933 | ) |
| Income tax expense (benefit) | | | 68,989 | | | | 39,380 | | | | (47,174 | ) |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | 87,018 | | | $ | 81,574 | | | $ | (227,759 | ) |
| | | | | | | | | | | | | |
| Earnings (loss) per share – basic | | $ | 2.18 | | | $ | 2.07 | | | $ | (4.89 | ) |
| | | | | | | | | | | | | |
| Earnings (loss) per share – assuming dilution | | $ | 2.11 | | | $ | 2.03 | | | $ | (4.89 | ) |
| | | | | | | | | | | | | |
| Average number of shares outstanding | | | 39,982,784 | | | | 39,467,811 | | | | 46,543,780 | |
| | | | | | | | | | | | | |
| Average number of shares outstanding – assuming dilution | | | 41,244,903 | | | | 40,159,651 | | | | 46,543,780 | |
| | | | | | | | | | | | | |
| Dividends declared per share | | $ | 0.56 | | | $ | 0.36 | | | $ | 0.60 | |
| | | | | | | | | | | | | |
See notes to consolidated financial statements.
47
46
CONSOLIDATED STATEMENT OF FINANCIAL POSITION February 28, 20092011 and February 29, 20082010
Thousands of dollars except share and per share amounts
| | | | | | | | |
| | | 2009 | | | 2008 | |
ASSETS | | | | | | | | |
CURRENT ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 60,216 | | | $ | 123,500 | |
Trade accounts receivable, net | | | 63,281 | | | | 61,902 | |
Inventories | | | 203,873 | | | | 216,671 | |
Deferred and refundable income taxes | | | 71,850 | | | | 72,280 | |
Prepaid expenses and other | | | 162,175 | | | | 195,017 | |
| | | | | | | | |
Total current assets | | | 561,395 | | | | 669,370 | |
GOODWILL | | | 26,871 | | | | 285,072 | |
OTHER ASSETS | | | 368,958 | | | | 420,219 | |
DEFERRED AND REFUNDABLE INCOME TAXES | | | 178,785 | | | | 133,762 | |
PROPERTY, PLANT AND EQUIPMENT – NET | | | 297,779 | | | | 296,005 | |
| | | | | | | | |
| | $ | 1,433,788 | | | $ | 1,804,428 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | |
Debt due within one year | | $ | 750 | | | $ | 22,690 | |
Accounts payable | | | 117,504 | | | | 123,713 | |
Accrued liabilities | | | 75,673 | | | | 79,345 | |
Accrued compensation and benefits | | | 32,198 | | | | 68,669 | |
Income taxes payable | | | 11,743 | | | | 29,037 | |
Other current liabilities | | | 105,537 | | | | 108,867 | |
| | | | | | | | |
Total current liabilities | | | 343,405 | | | | 432,321 | |
LONG-TERM DEBT | | | 389,473 | | | | 220,618 | |
OTHER LIABILITIES | | | 149,820 | | | | 181,720 | |
DEFERRED INCOME TAXES AND NONCURRENT INCOME TAXES PAYABLE | | | 21,901 | | | | 26,358 | |
SHAREHOLDERS’ EQUITY | | | | | | | | |
Common shares – par value $1 per share: | | | | | | | | |
Class A – 80,548,353 shares issued less 43,505,203 treasury shares in 2009 and 80,522,153 shares issued less 35,198,300 treasury shares in 2008 | | | 37,043 | | | | 45,324 | |
Class B – 6,066,092 shares issued less 2,566,875 treasury shares in 2009 and 6,066,092 shares issued less 2,632,087 treasury shares in 2008 | | | 3,499 | | | | 3,434 | |
Capital in excess of par value | | | 449,085 | | | | 445,696 | |
Treasury stock | | | (938,086 | ) | | | (872,949 | ) |
Accumulated other comprehensive (loss) income | | | (67,278 | ) | | | 21,244 | |
Retained earnings | | | 1,044,926 | | | | 1,300,662 | |
| | | | | | | | |
Total shareholders’ equity | | | 529,189 | | | | 943,411 | |
| | | | | | | | |
| | $ | 1,433,788 | | | $ | 1,804,428 | |
| | | | | | | | |
| | | | | | | | | |
| | | 2011 | | | 2010 | |
| |
ASSETS |
| CURRENT ASSETS | | | | | | | | |
| Cash and cash equivalents | | $ | 215,838 | | | $ | 137,949 | |
| Trade accounts receivable, net | | | 119,779 | | | | 135,758 | |
| Inventories | | | 179,730 | | | | 163,956 | |
| Deferred and refundable income taxes | | | 50,051 | | | | 78,433 | |
| Assets held for sale | | | 7,154 | | | | 15,147 | |
| Prepaid expenses and other | | | 128,372 | | | | 148,048 | |
| | | | | | | | | |
| Total current assets | | | 700,924 | | | | 679,291 | |
| GOODWILL | | | 28,903 | | | | 31,106 | |
| OTHER ASSETS | | | 436,137 | | | | 428,161 | |
| DEFERRED AND REFUNDABLE INCOME TAXES | | | 124,789 | | | | 148,210 | |
| PROPERTY, PLANT AND EQUIPMENT – NET | | | 241,649 | | | | 242,883 | |
| | | | | | | | | |
| | | $ | 1,532,402 | | | $ | 1,529,651 | |
| | | | | | | | | |
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| CURRENT LIABILITIES | | | | | | | | |
| Debt due within one year | | $ | — | | | $ | 1,000 | |
| Accounts payable | | | 87,105 | | | | 95,434 | |
| Accrued liabilities | | | 69,824 | | | | 78,245 | |
| Accrued compensation and benefits | | | 72,379 | | | | 85,092 | |
| Income taxes payable | | | 10,951 | | | | 13,901 | |
| Other current liabilities | | | 102,286 | | | | 94,915 | |
| | | | | | | | | |
| Total current liabilities | | | 342,545 | | | | 368,587 | |
| LONG-TERM DEBT | | | 232,688 | | | | 328,723 | |
| OTHER LIABILITIES | | | 176,522 | | | | 168,098 | |
| DEFERRED INCOME TAXES AND NONCURRENT | | | | | | | | |
| INCOME TAXES PAYABLE | | | 31,736 | | | | 28,179 | |
| SHAREHOLDERS’ EQUITY | | | | | | | | |
| Common shares – par value $1 per share: | | | | | | | | |
| Class A – 82,181,659 shares issued less 44,711,736 treasury shares in 2011 and – 80,884,505 shares issued less 44,627,298 treasury shares in 2010 | | | 37,470 | | | | 36,257 | |
| Class B – 6,066,092 shares issued less 3,128,841 treasury shares in 2011 and 6,066,092 shares issued less 2,843,069 treasury shares in 2010 | | | 2,937 | | | | 3,223 | |
| Capital in excess of par value | | | 492,048 | | | | 461,076 | |
| Treasury stock | | | (952,206 | ) | | | (946,724 | ) |
| Accumulated other comprehensive loss | | | (2,346 | ) | | | (29,815 | ) |
| Retained earnings | | | 1,171,008 | | | | 1,112,047 | |
| | | | | | | | | |
| Total shareholders’ equity | | | 748,911 | | | | 636,064 | |
| | | | | | | | | |
| | | $ | 1,532,402 | | | $ | 1,529,651 | |
| | | | | | | | | |
See notes to consolidated financial statements.
48
47
CONSOLIDATED STATEMENT OF CASH FLOWS Years ended February 28, 2009, February 29, 20082011, 2010 and February 28, 20072009
Thousands of dollars
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net (loss) income | | $ | (227,759 | ) | | $ | 83,003 | | | $ | 42,378 | |
Loss (income) from discontinued operations | | | — | | | | 317 | | | | (2,440 | ) |
| | | | | | | | | | | | |
(Loss) income from continuing operations | | | (227,759 | ) | | | 83,320 | | | | 39,938 | |
Adjustments to reconcile (loss) income from continuing operations to cash flows from operating activities: | | | | | | | | | | | | |
Goodwill and other intangible assets impairment | | | 290,166 | | | | — | | | | 2,196 | |
Net loss on disposal of fixed assets | | | 1,215 | | | | 961 | | | | 1,726 | |
Loss on purchase of debt | | | — | | | | — | | | | 5,055 | |
Loss on disposal of product lines | | | — | | | | — | | | | 15,969 | |
Depreciation and intangible assets amortization | | | 50,016 | | | | 48,535 | | | | 49,412 | |
Deferred income taxes | | | (29,438 | ) | | | (7,562 | ) | | | (16,277 | ) |
Other non-cash charges | | | 13,735 | | | | 9,303 | | | | 13,891 | |
Changes in operating assets and liabilities, net of acquisitions and dispositions: | | | | | | | | | | | | |
Trade accounts receivable | | | (6,413 | ) | | | 41,758 | | | | 42,206 | |
Inventories | | | 924 | | | | (28,456 | ) | | | 22,227 | |
Other current assets | | | 17,986 | | | | 27,970 | | | | (36,082 | ) |
Deferred costs—net | | | 27,596 | | | | 53,438 | | | | 128,752 | |
Accounts payable and other liabilities | | | (67,542 | ) | | | 18,934 | | | | 553 | |
Other—net | | | 2,554 | | | | (4,664 | ) | | | (4,836 | ) |
| | | | | | | | | | | | |
Total Cash Flows From Operating Activities | | | 73,040 | | | | 243,537 | | | | 264,730 | |
INVESTING ACTIVITIES: | | | | | | | | | | | | |
Proceeds from sale of short-term investments | | | — | | | | 692,985 | | | | 1,026,280 | |
Purchases of short-term investments | | | — | | | | (692,985 | ) | | | (817,540 | ) |
Property, plant and equipment additions | | | (55,733 | ) | | | (56,623 | ) | | | (41,716 | ) |
Cash payments for business acquisitions, net of cash acquired | | | (37,882 | ) | | | (76,338 | ) | | | (13,122 | ) |
Cash receipts related to discontinued operations | | | — | | | | 4,283 | | | | 12,559 | |
Proceeds from sale of fixed assets | | | 433 | | | | 3,104 | | | | 4,847 | |
Other—net | | | (44,153 | ) | | | — | | | | 6,160 | |
| | | | | | | | | | | | |
Total Cash Flows From Investing Activities | | | (137,335 | ) | | | (125,574 | ) | | | 177,468 | |
FINANCING ACTIVITIES: | | | | | | | | | | | | |
Increase in long-term debt | | | 141,500 | | | | 20,100 | | | | 200,000 | |
Reduction of long-term debt | | | (22,509 | ) | | | — | | | | (440,588 | ) |
Sale of stock under benefit plans | | | 525 | | | | 27,156 | | | | 6,834 | |
Purchase of treasury shares | | | (73,983 | ) | | | (172,328 | ) | | | (257,817 | ) |
Dividends to shareholders | | | (22,566 | ) | | | (21,803 | ) | | | (18,418 | ) |
Debt issuance costs | | | — | | | | — | | | | (8,533 | ) |
| | | | | | | | | | | | |
Total Cash Flows From Financing Activities | | | 22,967 | | | | (146,875 | ) | | | (518,522 | ) |
DISCONTINUED OPERATIONS: | | | | | | | | | | | | |
Cash (used) provided by operating activities from discontinued operations | | | — | | | | (59 | ) | | | 1,283 | |
Cash provided by investing activities from discontinued operations | | | — | | | | — | | | | 1,634 | |
| | | | | | | | | | | | |
Total Cash Flows From Discontinued Operations | | | — | | | | (59 | ) | | | 2,917 | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | | (21,956 | ) | | | 7,758 | | | | 4,507 | |
| | | | | | | | | | | | |
DECREASE IN CASH AND CASH EQUIVALENTS | | | (63,284 | ) | | | (21,213 | ) | | | (68,900 | ) |
Cash and Cash Equivalents at Beginning of Year | | | 123,500 | | | | 144,713 | | | | 213,613 | |
| | | | | | | | | | | | |
Cash and Cash Equivalents at End of Year | | $ | 60,216 | | | $ | 123,500 | | | $ | 144,713 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| OPERATING ACTIVITIES: | | | | | | | | | | | | |
| Net income (loss) | | $ | 87,018 | | | $ | 81,574 | | | $ | (227,759 | ) |
| Adjustments to reconcile net income (loss) to cash flows from operating activities: | | | | | | | | | | | | |
| Goodwill and other intangible asset impairments | | | – | | | | – | | | | 290,166 | |
| Stock-based compensation | | | 13,017 | | | | 5,870 | | | | 4,506 | |
| Net gain on dispositions | | | (254 | ) | | | (6,507 | ) | | | – | |
| Net (gain) loss on disposal of fixed assets | | | (3,463 | ) | | | 59 | | | | 1,215 | |
| Depreciation and intangible assets amortization | | | 41,048 | | | | 45,165 | | | | 50,016 | |
| Deferred income taxes | | | 28,642 | | | | 25,268 | | | | (29,438 | ) |
| Fixed asset impairments | | | 119 | | | | 13,005 | | | | 5,465 | |
| Other non-cash charges | | | 3,663 | | | | 12,419 | | | | 3,764 | |
| Changes in operating assets and liabilities, net of acquisitions and dispositions: | | | | | | | | | | | | |
| Trade accounts receivable | | | 15,296 | | | | (56,105 | ) | | | (6,504 | ) |
| Inventories | | | (13,097 | ) | | | 14,923 | | | | 2,877 | |
| Other current assets | | | (1,922 | ) | | | 16,936 | | | | 17,309 | |
| Income taxes | | | 19,947 | | | | 18,863 | | | | (5,934 | ) |
| Deferred costs – net | | | 14,262 | | | | 18,405 | | | | 27,596 | |
| Accounts payable and other liabilities | | | (31,015 | ) | | | (633 | ) | | | (68,154 | ) |
| Other – net | | | 6,538 | | | | 8,248 | | | | 7,915 | |
| | | | | | | | | | | | | |
| Total Cash Flows From Operating Activities | | | 179,799 | | | | 197,490 | | | | 73,040 | |
| INVESTING ACTIVITIES: | | | | | | | | | | | | |
| Property, plant and equipment additions | | | (36,346 | ) | | | (26,550 | ) | | | (55,733 | ) |
| Cash payments for business acquisitions, net of cash acquired | | | (500 | ) | | | (19,300 | ) | | | (37,882 | ) |
| Proceeds from sale of fixed assets | | | 14,242 | | | | 1,124 | | | | 433 | |
| Proceeds from escrow related to party goods transaction | | | 25,151 | | | | – | | | | – | |
| Other – net | | | 5,663 | | | | 4,713 | | | | (44,153 | ) |
| | | | | | | | | | | | | |
| Total Cash Flows From Investing Activities | | | 8,210 | | | | (40,013 | ) | | | (137,335 | ) |
| FINANCING ACTIVITIES: | | | | | | | | | | | | |
| Net (decrease) increase in long-term debt | | | (98,250 | ) | | | (62,350 | ) | | | 118,991 | |
| Net decrease in short-term debt | | | (1,000 | ) | | | – | | | | – | |
| Sale of stock under benefit plans | | | 16,620 | | | | 6,557 | | | | 525 | |
| Excess tax benefit from share-based payment awards | | | 4,512 | | | | 148 | | | | – | |
| Purchase of treasury shares | | | (13,521 | ) | | | (11,848 | ) | | | (73,983 | ) |
| Dividends to shareholders | | | (22,354 | ) | | | (19,049 | ) | | | (22,566 | ) |
| Debt issuance costs | | | (3,199 | ) | | | – | | | | – | |
| | | | | | | | | | | | | |
| Total Cash Flows From Financing Activities | | | (117,192 | ) | | | (86,542 | ) | | | 22,967 | |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | | | 7,072 | | | | 6,798 | | | | (21,956 | ) |
| | | | | | | | | | | | | |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 77,889 | | | | 77,733 | | | | (63,284 | ) |
| Cash and Cash Equivalents at Beginning of Year | | | 137,949 | | | | 60,216 | | | | 123,500 | |
| | | | | | | | | | | | | |
| Cash and Cash Equivalents at End of Year | | $ | 215,838 | | | $ | 137,949 | | | $ | 60,216 | |
| | | | | | | | | | | | | |
See notes to consolidated financial statements.
49
48
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY Years ended February 28, 2009, February 29, 20082011, 2010 and February 28, 20072009
Thousands of dollars except per share amounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Shares | | | Capital in
Excess of
Par Value | | | Treasury
Stock | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Retained
Earnings | | | Total | |
| | | Class A | | | Class B | | | | | | |
BALANCE MARCH 1, 2006 | | $ | 56,130 | | | $ | 4,218 | | | $ | 398,505 | | | $ | (676,436 | ) | | $ | 9,823 | | | $ | 1,427,785 | | | $ | 1,220,025 | |
Cumulative effect adjustment, adoption of SAB 108 (net of tax of $1,808) | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,348 | | | | 3,348 | |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 42,378 | | | | 42,378 | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | 30,990 | | | | — | | | | 30,990 | |
Minimum pension liability (net of tax of $55) | | | — | | | | — | | | | — | | | | — | | | | 150 | | | | — | | | | 150 | |
Unrealized loss on available-for-sale securities (net of tax of $1) | | | — | | | | — | | | | — | | | | — | | | | (10 | ) | | | — | | | | (10 | ) |
Reclassification adjustment for amounts recognized in income (net of tax of $216) | | | — | | | | — | | | | — | | | | — | | | | 359 | | | | — | | | | 359 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 73,867 | |
Adjustment recognized upon adoption of SFAS 158 (net of tax of $32,909) | | | — | | | | — | | | | — | | | | — | | | | (42,325 | ) | | | — | | | | (42,325 | ) |
Cash dividends—$0.32 per share | | | — | | | | — | | | | — | | | | — | | | | — | | | | (18,418 | ) | | | (18,418 | ) |
Sale of shares under benefit plans, including tax benefits | | | 351 | | | | — | | | | 6,462 | | | | — | | | | — | | | | — | | | | 6,813 | |
Purchase of treasury shares | | | (11,149 | ) | | | (12 | ) | | | — | | | | (246,656 | ) | | | — | | | | — | | | | (257,817 | ) |
Debt conversion and settlement | | | 5,506 | | | | — | | | | 107 | | | | 210,726 | | | | — | | | | (200,680 | ) | | | 15,659 | |
Stock compensation expense | | | — | | | | — | | | | 7,559 | | | | — | | | | — | | | | — | | | | 7,559 | |
Stock grants and other | | | 1 | | | | 77 | | | | 2,226 | | | | 1,952 | | | | — | | | | (393 | ) | | | 3,863 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE FEBRUARY 28, 2007 | | | 50,839 | | | | 4,283 | | | | 414,859 | | | | (710,414 | ) | | | (1,013 | ) | | | 1,254,020 | | | | 1,012,574 | |
Cumulative effect adjustment, adoption of FIN 48 | | | — | | | | — | | | | — | | | | — | | | | — | | | | (14,017 | ) | | | (14,017 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 83,003 | | | | 83,003 | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | 18,691 | | | | — | | | | 18,691 | |
Pension and postretirement adjustments recognized in accordance with SFAS 158 (net of tax of $7,093) | | | — | | | | — | | | | — | | | | — | | | | 3,567 | | | | — | | | | 3,567 | |
Unrealized loss on available-for-sale securities (net of tax of $1) | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | — | | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 105,260 | |
Cash dividends—$0.40 per share | | | — | | | | — | | | | — | | | | — | | | | — | | | | (21,803 | ) | | | (21,803 | ) |
Sale of shares under benefit plans, including tax benefits | | | 1,220 | | | | 2 | | | | 25,533 | | | | 79 | | | | — | | | | (43 | ) | | | 26,791 | |
Purchase of treasury shares | | | (6,736 | ) | | | (928 | ) | | | — | | | | (164,664 | ) | | | — | | | | — | | | | (172,328 | ) |
Stock compensation expense | | | — | | | | — | | | | 6,547 | | | | — | | | | — | | | | — | | | | 6,547 | |
Stock grants and other | | | 1 | | | | 77 | | | | (1,243 | ) | | | 2,050 | | | | — | | | | (498 | ) | | | 387 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE FEBRUARY 29, 2008 | | | 45,324 | | | | 3,434 | | | | 445,696 | | | | (872,949 | ) | | | 21,244 | | | | 1,300,662 | | | | 943,411 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (227,759 | ) | | | (227,759 | ) |
Other comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | (80,845 | ) | | | — | | | | (80,845 | ) |
Pension and postretirement adjustments recognized in accordance with SFAS 158 (net of tax of $6,839) | | | — | | | | — | | | | — | | | | — | | | | (7,674 | ) | | | — | | | | (7,674 | ) |
Unrealized loss on available-for-sale securities (net of tax of $0) | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (316,281 | ) |
Cash dividends—$0.60 per share | | | — | | | | — | | | | — | | | | — | | | | — | | | | (27,491 | ) | | | (27,491 | ) |
Sale of shares under benefit plans, including tax benefits | | | 26 | | | | — | | | | 384 | | | | — | | | | — | | | | — | | | | 410 | |
Purchase of treasury shares | | | (8,311 | ) | | | (10 | ) | | | — | | | | (67,158 | ) | | | — | | | | — | | | | (75,479 | ) |
Stock compensation expense | | | — | | | | — | | | | 4,369 | | | | — | | | | — | | | | — | | | | 4,369 | |
Stock grants and other | | | 4 | | | | 75 | | | | (1,364 | ) | | | 2,021 | | | | — | | | | (486 | ) | | | 250 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE FEBRUARY 28, 2009 | | $ | 37,043 | | | $ | 3,499 | | | $ | 449,085 | | | $ | (938,086 | ) | | $ | (67,278 | ) | | $ | 1,044,926 | | | $ | 529,189 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | | | | | | | | Capital in
| | | | | | Other
| | | | | | | |
| | | Common Shares | | | Excess of
| | | Treasury
| | | Comprehensive
| | | Retained
| | | | |
| | | Class A | | | Class B | | | Par Value | | | Stock | | | Income (Loss) | | | Earnings | | | Total | |
| |
| BALANCE MARCH 1, 2008 | | $ | 45,324 | | | $ | 3,434 | | | $ | 445,696 | | | $ | (872,949 | ) | | $ | 21,244 | | | $ | 1,300,662 | | | $ | 943,411 | |
| Net loss | | | – | | | | – | | | | – | | | | – | | | | – | | | | (227,759 | ) | | | (227,759 | ) |
| Other comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | | – | | | | – | | | | – | | | | – | | | | (80,845 | ) | | | – | | | | (80,845 | ) |
| Pension and postretirement adjustments recognized in accordance with ASC 715 (net of tax of $6,839) | | | – | | | | – | | | | – | | | | – | | | | (7,674 | ) | | | – | | | | (7,674 | ) |
Unrealized loss onavailable-for-sale securities (net of tax of $0) | | | – | | | | – | | | | – | | | | – | | | | (3 | ) | | | – | | | | (3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (316,281 | ) |
| Cash dividends – $0.60 per share | | | – | | | | – | | | | – | | | | – | | | | – | | | | (27,491 | ) | | | (27,491 | ) |
| Sale of shares under benefit plans, including tax benefits | | | 26 | | | | – | | | | 384 | | | | – | | | | – | | | | – | | | | 410 | |
| Purchase of treasury shares | | | (8,311 | ) | | | (10 | ) | | | – | | | | (67,158 | ) | | | – | | | | – | | | | (75,479 | ) |
| Stock compensation expense | | | – | | | | – | | | | 4,369 | | | | – | | | | – | | | | – | | | | 4,369 | |
| Stock grants and other | | | 4 | | | | 75 | | | | (1,364 | ) | | | 2,021 | | | | – | | | | (486 | ) | | | 250 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE FEBRUARY 28, 2009 | | | 37,043 | | | | 3,499 | | | | 449,085 | | | | (938,086 | ) | | | (67,278 | ) | | | 1,044,926 | | | | 529,189 | |
| Net income | | | – | | | | – | | | | – | | | | – | | | | – | | | | 81,574 | | | | 81,574 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | | – | | | | – | | | | – | | | | – | | | | 22,467 | | | | – | | | | 22,467 | |
| Reclassification of currency translation adjustment for amounts recognized in income (net of tax of $0) | | | – | | | | – | | | | – | | | | – | | | | 8,627 | | | | – | | | | 8,627 | |
| Pension and postretirement adjustments recognized in accordance with ASC 715 (net of tax of $5,837) | | | – | | | | – | | | | – | | | | – | | | | 6,366 | | | | – | | | | 6,366 | |
Unrealized gain onavailable-for-sale securities (net of tax of $0) | | | – | | | | – | | | | – | | | | – | | | | 3 | | | | – | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 119,037 | |
| Cash dividends – $0.36 per share | | | – | | | | – | | | | – | | | | – | | | | – | | | | (14,124 | ) | | | (14,124 | ) |
| Sale of shares under benefit plans, including tax benefits | | | 336 | | | | – | | | | 6,172 | | | | – | | | | – | | | | – | | | | 6,508 | |
| Purchase of treasury shares | | | (1,125 | ) | | | (292 | ) | | | – | | | | (9,111 | ) | | | – | | | | – | | | | (10,528 | ) |
| Stock compensation expense | | | – | | | | – | | | | 5,819 | | | | – | | | | – | | | | – | | | | 5,819 | |
| Stock grants and other | | | 3 | | | | 16 | | | | – | | | | 473 | | | | – | | | | (329 | ) | | | 163 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE FEBRUARY 28, 2010 | | | 36,257 | | | | 3,223 | | | | 461,076 | | | | (946,724 | ) | | | (29,815 | ) | | | 1,112,047 | | | | 636,064 | |
| Net income | | | – | | | | – | | | | – | | | | – | | | | – | | | | 87,018 | | | | 87,018 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | | – | | | | – | | | | – | | | | – | | | | 15,165 | | | | – | | | | 15,165 | |
| Pension and postretirement adjustments recognized in accordance with ASC 715 (net of tax of $8,083) | | | – | | | | – | | | | – | | | | – | | | | 12,303 | | | | – | | | | 12,303 | |
Unrealized gain onavailable-for-sale securities (net of tax of $0) | | | – | | | | – | | | | – | | | | – | | | | 1 | | | | – | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 114,487 | |
| Cash dividends – $0.56 per share | | | – | | | | – | | | | – | | | | – | | | | – | | | | (22,354 | ) | | | (22,354 | ) |
| Sale of shares under benefit plans, including tax benefits | | | 1,213 | | | | 257 | | | | 17,951 | | | | 7,366 | | | | – | | | | (5,652 | ) | | | 21,135 | |
| Purchase of treasury shares | | | – | | | | (547 | ) | | | – | | | | (12,974 | ) | | | – | | | | – | | | | (13,521 | ) |
| Stock compensation expense | | | – | | | | – | | | | 13,017 | | | | – | | | | – | | | | – | | | | 13,017 | |
| Stock grants and other | | | – | | | | 4 | | | | 4 | | | | 126 | | | | – | | | | (51 | ) | | | 83 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE FEBRUARY 28, 2011 | | $ | 37,470 | | | $ | 2,937 | | | $ | 492,048 | | | $ | (952,206 | ) | | $ | (2,346 | ) | | $ | 1,171,008 | | | $ | 748,911 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
50
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended February 28, 2009, February 29, 20082011, 2010 and February 28, 20072009
Thousands of dollars except per share amounts
NOTE 1—SIGNIFICANT ACCOUNTING POLICIES
| |
| NOTE 1 – | SIGNIFICANT ACCOUNTING POLICIES |
ConsolidationConsolidation:: The consolidated financial statements include the accounts of American Greetings Corporation and its subsidiaries (“American Greetings” or the “Corporation”). All significant intercompany accounts and transactions are eliminated. The Corporation’s fiscal year ends on February 28 or 29. References to a particular year refer to the fiscal year ending in February of that year. For example,
20092011 refers to the year ended February 28,
2009.2011.
The Corporation’s investments in less than majority-owned companies in which it has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method except when they qualify as variable interest entities (“VIE”) and the Corporation is the primary beneficiary, in which case the investments are consolidated in accordance with Financial Accounting Standards BoardCodification (“FASB”ASC”) Interpretation No. 46 (revised December 2003)Topic 810, “Consolidation.” Investments that do not meet the above criteria are accounted for under the cost method.
The Corporation holds an approximately 15% equity interest in Schurman Fine Papers (“Schurman”), “Consolidationwhich is a VIE as defined in ASC Topic 810, “Consolidation.” Schurman owns and operates approximately 430 specialty card and gift retail stores in the United States and Canada. The stores are primarily located in malls and strip shopping centers. During the current period, the Corporation assessed the variable interests in Schurman and determined that a third party holder of Variable Interest Entities.”variable interests has the controlling financial interest in the VIE and thus, the third party, not the Corporation, is the primary beneficiary. In completing this assessment, the Corporation identified the activities that it considers most significant to the future economic success of the VIE and determined that it does not have the power to direct those activities. As such, Schurman is not consolidated in the Corporation’s results. The Corporation’s maximum exposure to loss as it relates to Schurman as of February 28, 2011 includes:
| |
| • | the investment in the equity of Schurman of $1,935; |
|
| • | the Liquidity Guaranty of Schurman’s indebtedness of $12,000 and the Bridge Guaranty of Schurman’s indebtedness of $12,000, see Note 11 for further information; |
|
| • | normal course of business trade accounts receivable due from Schurman, the balance of which fluctuates throughout the year due to the seasonal nature of the business; |
|
| • | the operating leases currently subleased to Schurman, the aggregate lease payments for the remaining life of which was $35,985 and $50,854 as of February 28, 2011 and 2010, respectively. |
The Corporation and Schurman are also party to a Subordinated Credit Facility that provides Schurman with up to $10,000 of subordinated financing for an initial term of nineteen months, subject to up to three automatic one-year renewal periods (or partial-year, in the case of the last renewal), unless either party provides the appropriate written notice prior to the expiration of the applicable term. Schurman can only borrow under the facility if it does not have other sources of financing available, and borrowings under the Subordinated Credit Facility may only be used for specified purposes. Borrowings under the Subordinated Credit Facility are subordinate to borrowings under the Senior Credit Facility, and the Subordinated Credit Facility includes affirmative and negative covenants and events of default customary for such financings. In addition, availability under the Subordinated Credit Facility is limited as long as the Bridge Guaranty is in place to the difference between $10,000 and the current maximum amount of the Bridge Guaranty. Because the Bridge Guaranty remained at $12,000 as of February 28, 2011, there were no loans outstanding, or available under the Subordinated Credit Facility, as of February 28, 2011.
In accordance with its terms, on April 1, 2011, the Bridge Guaranty was terminated. As a result of the termination of the Bridge Guaranty, beginning on April 2, 2011, Schurman may now borrow up to $10,000 under the Subordinated Credit Facility. Because the Liquidity Guaranty described above remains in place but Schurman is now able to borrow under the Subordinated Credit Facility, the Corporation’s net exposure under
51
guaranties and available financing to Schurman decreased by $2,000 due to the termination of the Bridge Guaranty.
In addition to the investment in the equity of Schurman, the Corporation holds an investment in the common stock of AAH Holdings Corporation (“AAH”). These two investments, totaling $12,546, are accounted for under the cost method. The Corporation is not aware of any events or changes in circumstances that had occurred during 2011 that the Corporation believes are reasonably likely to have had a significant adverse effect on the carrying amount of these investments. See Note 2 for further information.
ReclassificationsReclassifications:: Certain amounts in the prior year financial statements have been reclassified to conform to the
20092011 presentation.
Use of EstimatesEstimates:: 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. On an ongoing basis, management reviews its estimates, including those related to sales returns, allowance for doubtful accounts, customer allowances and discounts, recoverability of intangibles and other long-lived assets, deferred tax asset valuation allowances, deferred costs and various other
operating allowances and accruals, based on currently available information. Changes in facts and circumstances may alter such estimates and affect
the results of operations and
the financial position in future periods.
Cash EquivalentsEquivalents:: The Corporation considers all highly liquid instruments purchased with an original maturity of less than three months to be cash equivalents.
Short-term Investments: In prior years, the Corporation invested in auction rate securities, which are variable-rate debt securities associated with bond offerings. While the underlying security has a long-term nominal maturity, the interest rate is reset through Dutch auctions that are typically held every 7, 28 or 35 days, creating short-term liquidity for the Corporation. The securities trade at par and are callable at par on any interest payment date at the option of the issuer. Interest is paid at the end of each auction period. The investments were classified as available-for-sale and were recorded at cost, which approximated market value. There were no short-term investments as of February 28, 2009 or February 29, 2008.
Allowance for Doubtful AccountsAccounts:: The Corporation evaluates the collectibility of its accounts receivable based on a combination of factors. In circumstances where the Corporation is aware of a customer’s inability to meet its financial obligations, a specific allowance for bad debts against amounts due is recorded to reduce the receivable to the amount the Corporation reasonably expects will be collected. In addition, the Corporation recognizes allowances for bad debts based on estimates developed by using standard quantitative measures incorporating historical write-offs. See Note 6 for further information.
Customer Allowances and DiscountsDiscounts:: The Corporation offers certain of its customers allowances and discounts including cooperative advertising, rebates, marketing allowances and various other allowances and discounts. These amounts are recorded as reductions of gross accounts receivable
or included in accrued liabilities and are recognized as reductions of net sales when earned. These amounts are earned by the customer as product is purchased from the Corporation and are recorded based on the terms of individual customer contracts. See Note 6 for further information.
50
Concentration of Credit RisksRisks:: The Corporation sells primarily to customers in the retail trade, including those in the mass merchandise, drug store,
discount retailer, supermarket and other channels of distribution. These customers are located throughout the United States, Canada, the United Kingdom, Australia, New Zealand and Mexico. Net sales
from continuing operations to the Corporation’s five largest customers accounted for approximately
36%42%,
37%39% and 36% of total revenue in
2009, 20082011, 2010 and
2007,2009, respectively. Net sales to Wal-Mart Stores, Inc. and its subsidiaries accounted for approximately 15%,
16%14% and
16%15% of total revenue
from continuing operations in
2011, 2010 and 2009,
2008respectively. Net sales to Target Corporation accounted for approximately 14% and
2007, respectively.13% of total revenue in 2011 and 2010, respectively, and less than 10% in 2009.
The Corporation conducts business based on periodic evaluations of its customers’ financial condition and generally does not require collateral to secure their obligation to the Corporation. While the competitiveness of the retail industry presents an inherent uncertainty, the Corporation does not believe a significant risk of loss exists from a concentration of credit.
InventoriesInventories:: Finished products, work in process and raw materials inventories are carried at the lower of cost or market. Thelast-in, first-out (LIFO)(“LIFO”) cost method is used for certain domestic inventories, which approximate 75% and 70%80% of the total pre-LIFO consolidated inventories at February 28, 20092011 and February 29, 2008,2010, respectively. ForeignInternational inventories and the remaining domestic inventories principally use thefirst-in, first-out (FIFO)(“FIFO”) method except for display material and factory supplies which are carried at average cost. The Corporation
52
allocates fixed production overhead to inventory based on the normal capacity of the production facilities. Abnormal amounts of idle facility expense, freight, handling costs and wasted material are treated as a current period expense. See Note 7 for further information.
Deferred CostsCosts:: In the normal course of its business, the Corporation enters into agreements with certain customers for the supply of greeting cards and related products. The Corporation classifies the total contractual amount of the incentive consideration committed to the customer but not yet earned as a deferred cost asset at the inception of an agreement, or any future amendments. Deferred costs estimated to be earned by the customer and charged to operations during the next twelve months are classified as “Prepaid expenses and other”
inon the Consolidated Statement of Financial Position and the remaining amounts to be charged beyond the next twelve months are classified as “Other assets.” Such costs are capitalized as assets reflecting the probable future economic benefits obtained as a result of the transactions. Future economic benefit is further defined as cash inflow to the Corporation. The Corporation, by incurring these costs, is ensuring the probability of future cash flows through sales to customers. The amortization of such deferred costs
over the stated term of the agreement or the minimum purchase volume commitment properly matches the cost of obtaining business over the periods to be benefited. The
periods of amortization are continually evaluated to determine if later circumstances warrant revisions of the estimated amortization periods. The Corporation maintains
a generalan allowance for deferred costs based on estimates developed using standard quantitative measures incorporating historical write-offs. In instances where the Corporation is aware of a particular customer’s inability to meet its performance obligation, a specific allowance is recorded to reduce the deferred cost asset to an estimate of its future value based upon expected recoverability. See Note 10 for further discussion.
Deferred Film Production CostsCosts:: The Corporation is engaged in the production of film-based entertainment, which is generally exploited in the DVD, theatrical release or broadcast format. This entertainment is related to Strawberry Shortcake, Care Bears and other properties developed by the Corporation and is used to support the Corporation’s merchandise licensing strategy.
Film production costs are accounted for pursuant to
American Institute of Certified Public Accountants Statement of Position 00-2ASC Topic 926 (“
SOP 00-2”ASC 926”),
“Accounting by Producers or Distributors of“Entertainment – Films,” and are stated at the lower of cost or net realizable value based on anticipated total revenue (ultimate revenue). Film production costs are generally capitalized. These costs are then
recognized ratably
recognized based on the ratio of the current period’s revenue to estimated remaining ultimate revenues. Ultimate revenues are calculated in accordance with
SOP 00-2ASC 926 and require estimates and the exercise of judgment. Accordingly, these estimates are periodically updated to include the actual results achieved or new information as to anticipated revenue performance of each title.
51
During 2009, production
Production expense totaled
$19,945$4,736 and
included $8,856$4,360 in 2011 and 2010, respectively, with no significant amounts related to changes in ultimate revenue estimates.
During 2008,These production
expense totaled $8,560costs are included in “Material, labor and
other production costs” on the Consolidated Statement of Operations. Amortization of production costs totaling $3,380, $2,209 and $10,513 in 2011, 2010 and 2009, respectively, are included
amounts related to changes in
ultimate revenue estimates“Other – net” on the Consolidated Statement of
approximately $4,035.Cash Flows. The balance of deferred film production costs was
$10,290$9,246 and
$12,899$11,479 at February 28,
20092011 and
February 29, 2008, respectively.2010, respectively, and are included in “Other assets” on the Consolidated Statement of Financial Position. The Corporation expects to recognize
amortization of approximately
$3,600$2,000 of production costs during the next twelve months.
Investment in Life InsuranceInsurance:: The Corporation’s investment in corporate-owned life insurance policies is recorded in “Other assets” net of policy
loans.loans and related interest payable on the Consolidated Statement of Financial Position. The net balance was $21,760 and $18,330 as of February 28, 2011 and 2010, respectively. The net life insurance expense, including interest expense, is included in “Administrative and general expenses”
inon the Consolidated Statement of Operations. The related interest expense, which approximates amounts paid, was
$12,122, $12,207 and $11,101
$10,779in 2011, 2010 and
$10,938 in 2009,
2008 and 2007, respectively.
Goodwill and Other Intangible AssetsAssets:: Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations and is not amortized in accordance with Statement of Financial Accounting StandardsASC Topic 350 (“SFAS”) No. 142 (“SFAS 142”ASC 350”), “Goodwill“Intangibles – Goodwill and Other Intangible Assets.Other.” This statementtopic addresses the amortization of intangible assets with defined lives and addresses the impairment testing and recognition for goodwill and indefinite-lived intangible assets. The Corporation is required to evaluate the carrying value of its goodwill and indefinite-lived intangible assets for potential impairment on an annual basis or more frequently if indicators arise.
53
While the Corporation may use a variety of methods to estimate fair value for impairment testing, its primary methods are discounted cash flows and a market based analysis. The required annual
goodwill impairment
test istests are completed during the fourth quarter. Intangible assets with defined lives are amortized over their estimated lives. See Note 9 for further discussion.
Property and DepreciationDepreciation:: Property, plant and equipment are carried at cost. Depreciation and amortization of buildings, equipment and fixtures are 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; computer hardware and software over 3 to 7 years; machinery and equipment over 3 to 15 years; and furniture and fixtures over 8 to 20 years. Leasehold improvements are amortized over the lesser of the lease term or the estimated life of the leasehold improvement. Property, plant and equipment are reviewed for impairment in accordance with
SFAS No. 144ASC Topic 360 (“
SFAS 144”ASC 360”),
“Accounting for the Impairment or Disposal of Long-Lived Assets.“Property, Plant and Equipment.”
SFAS 144ASC 360 also provides a single accounting model for the disposal of long-lived assets. In accordance with
SFAS 144,ASC 360, assets held for sale are stated at the lower of their fair values
less cost to sell or carrying amounts and depreciation is no longer recognized. See Note 8 for further information.
Operating Leases: Rent expense for operating leases, which may have escalating rentals over the term of the lease, is recorded on a straight-line basis over the initial lease term. The initial lease term includes the “build-out” period of leases, where no rent payments are typically due under the terms of the lease. The difference between rent expense and rent paid is recorded as deferred rent. Construction allowances received from landlords are recorded as a deferred rent credit and amortized to rent expense over the initial term of the lease.
The Corporation records lease rent expense net of any related sublease income. See Note 13 for further information.
Pension and Other Postretirement BenefitsBenefits:: The Corporation has several defined benefit pension plans and a defined benefit health care plan that provides postretirement medical benefits to full-time United States employees who meet certain requirements. In
September 2006,accordance with ASC Topic 715 (“ASC 715”), “Compensation-Retirement Benefits,” the
FASB issued SFAS No. 158 (“SFAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS 158 requires an employer to recognize a plan’sCorporation recognizes the plans’ funded status in its statement of financial position,
measure a plan’smeasures the plans’ assets and obligations as of the end of
the employer’sits fiscal year and
recognizerecognizes the changes in a defined benefit postretirement plan’s funded status in comprehensive income in the year in which the changes occur.
SFAS 158’s requirement to recognize the funded status of a benefit plan and new disclosure requirements were adopted by the Corporation effective February 28, 2007. See Note
12.12 for further information.
Revenue RecognitionRecognition:: Sales
of seasonal product to unrelated, third party retailers are recognized
atwhen title and the
approximate date the product is received by the customer, commonly referred to in the industry as the ship-to-arrive date (“STA”). The Corporation maintains STA data duerisk of loss have been transferred to the
large volume of seasonal product52
shipment activity and the lead time required to achieve customer-requested delivery dates. customer.
Seasonal cards
and certain other seasonal products
and everyday cards at certain foreign locations are generally sold with the right of return on unsold merchandise.
In addition, theThe Corporation provides for estimated returns of these products when those sales
to unrelated, third party retailers are recognized. These estimates are based on historical sales returns, the amount of current year sales and other known factors. Accrual rates utilized for establishing estimated returns reserves have approximated actual returns experience.
Except for products
Products sold
withwithout a right of return
and retailers with a scan-based trading (“SBT”) arrangement,may be subject to sales
are generally recognized by the Corporation upon shipment of products to unrelated, third party retailers and upon the sale of products to the consumer at Corporation-owned retail locations. Sales of these products are generally sold without the right of return and sales credits arecredit issued at the Corporation’s discretion for damaged, obsolete and outdated products.
The Corporation maintains an estimated reserve for these sales credits based on historical information.
For retailers with an SBTa scan-based trading (“SBT”) arrangement, the Corporation owns the product delivered to its retail customers until the product is sold by the retailer to the ultimate consumer, at which time the Corporation recognizes revenue for both everyday and seasonal products. When a retailer commits to convert to an SBT arrangement with a retailer is finalized, the Corporation reverses previous sales transactions.transactions based on retailer inventory turn rates and the estimated timing of the store conversions. Legal ownership of the inventory at the retailer’s stores reverts back to the Corporation at the time of conversion. The timingthe conversion and the amount of the sales reversal dependsis finalized based on retailerthe actual inventory turn rates andat the estimated timingtime of conversion.
Prior to April 17, 2009, sales at the store conversions.Corporation owned retail locations were recognized upon the sale of product to the consumer.
54
Subscription revenue, primarily for the AG Interactive segment, represents fees paid by customers for access to particular services for the term of the subscription. Subscription revenue is generally billed in advance and is recognized ratably over the subscription periods.
The Corporation has agreements for licensing the Care Bears and Strawberry Shortcake characters and other intellectual property. These license agreements provide for royalty revenue to the Corporation based on a percentage of net sales and are subject to certain guaranteed minimum royalties.
These license agreements may include the receipt of upfront advances, which are recorded as deferred revenue and earned during the period of the agreement. Certain of these agreements are managed by outside agents. All payments flow through the agents prior to being remitted to the Corporation. Typically, the Corporation receives quarterly payments from the agents. Royalty revenue is generally recognized upon receipt and recorded in “Other
revenue” and expensesrevenue.” Expenses associated with the servicing of these agreements are
primarily recordedsummarized as
“Selling, distribution and marketing expenses.”follows:
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Material, labor and other production costs | | $ | 11,806 | | | $ | 9,410 | | | $ | 24,615 | |
| Selling, distribution and marketing expenses | | | 14,046 | | | | 17,970 | | | | 29,146 | |
| Administrative and general expenses | | | 1,697 | | | | 2,050 | | | | 2,421 | |
| | | | | | | | | | | | | |
| | | $ | 27,549 | | | $ | 29,430 | | | $ | 56,182 | |
| | | | | | | | | | | | | |
Deferred revenue, included in “Other current
liabilities” and “Other liabilities” on the Consolidated Statement of Financial Position, totaled
$37,751$39,396 and
$37,895$40,156 at February 28,
20092011 and
February 29, 2008,2010, respectively. The amounts relate primarily to
subscription revenue in the Corporation’s AG Interactive segment and the licensing activities included in non-reportable segments.
Sales Taxes: Sales taxes are not included in net sales as the Corporation is a conduit for collecting and remitting taxes to the appropriate taxing authorities.
Translation of Foreign CurrenciesCurrencies:: Asset and liability accounts are translated into United States dollars using exchange rates in effect at the date of the Consolidated Statement of Financial Position; revenue and expense accounts are translated at average exchange rates during the related period. Translation adjustments are reflected as a component of shareholders’
equity.equity within other comprehensive income. Upon sale, or upon complete or substantially complete liquidation of an investment in a foreign entity, that component of shareholders’ equity is reclassified as part of the gain or loss on sale or liquidation of the investment. Gains and losses resulting from foreign currency transactions, including intercompany transactions that are not considered permanent investments, are included in
net incomeother non-operating expense (income) as incurred.
Shipping and Handling FeesFees:: The Corporation classifies shipping and handling fees as part of “Selling, distribution and marketing expenses.” Shipping and handling costs were
$119,391, $119,989 and $130,271
$128,177in 2011, 2010 and
$126,880 in 2009,
2008 and 2007, respectively.
Advertising ExpenseExpenses:: Advertising costs are expensed as incurred. Advertising
expense was $30,392, $45,099expenses were $17,434, $16,985 and
$43,314$19,784 in
2011, 2010 and 2009,
2008 and 2007, respectively.
53
Income TaxesTaxes:: Income tax expense includes both current and deferred taxes. Current tax expense represents the amount of income taxes paid or payable (or refundable) for the year, including interest and penalties. Deferred income taxes, net of appropriate valuation allowances, are
providedrecognized for
the estimated future tax effects attributable to tax carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts
usedrealized for income tax purposes.
See Note 17 for further discussion.In July 2006,The effect of a change to the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an Interpretationdeferred tax assets or liabilities as a result of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainnew tax positionslaw, including tax rate changes, is recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” including what criteria must be met prior to recognition of the financial statement benefit of a position taken or expected to be taken in aperiod that the tax return. FIN 48 requires a company to include additional qualitative and quantitative disclosures within its financial statements. The disclosures include potentiallaw is enacted. Valuation allowances are recorded against deferred tax benefits from positions taken for tax return purposes that have not been recognized for financial reporting purposes and a tabular presentation of significant changes during each annual period. The disclosures also include a discussion of the nature of uncertainties, factors that could cause a change and an estimated range of reasonably possible changes in tax uncertainties. FIN 48 requires a company to recognize a financial statement benefit for a position taken for tax return purposesassets when it is more likely than not that such assets will not be realized. When an uncertain tax position meets the more likely than not recognition threshold, the position will be sustained. The cumulative effectis measured to determine the amount of adopting FIN 48 is recorded as an adjustmentbenefit to the opening balance of retained earningsrecognize in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation adopted FIN 48 on March 1, 2007.financial statements. See Note 17 for further discussion.
55
StaffRecent Accounting Bulletin Pronouncements
In June 2009, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)No. 108: In 2007,2009-17 (“ASU2009-17”), (Consolidations Topic 810), “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU2009-17 requires an ongoing reassessment of determining whether a variable interest gives a company a controlling financial interest in a VIE. It also requires an entity to qualitatively, rather than quantitatively, determine whether a company is the
Corporation determinedprimary beneficiary of a VIE. Under the new standard, the primary beneficiary of a VIE is a party that
has the
reported February 28, 2006 “Trade accounts receivable, net” was understated by $5,156 ($3,348 after-tax) as a result of an accounting error in which the allowance for rebates was overstated. The Corporation assessed the error amounts considering Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,” as well as SEC SAB No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” The error was not deemed to be material to any prior period reported consolidatedcontrolling financial
statements, but was deemed materialinterest in the
current year. Accordingly,VIE and has both the
Corporation recordedpower to direct the
correction ofactivities that most significantly impact the
overstatement ofVIE’s economic success and the
allowance for rebates (correspondingly, an understatement of net income of prior periods) as an adjustmentobligation to
beginning retained earnings pursuantabsorb losses or the right to receive benefits that could potentially be significant to the
special transition provision detailed in SAB No. 108.VIE. ASU2009-17Recent Accounting Pronouncements: In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements,” which provides a definition of fair value, establishes a framework is effective for measuring fair valueinterim and requires expanded disclosures about fair value measurements. In November 2007, the FASB deferred the effective date of SFAS 157 for non-financial assets and liabilities until fiscal years and interimannual reporting periods beginning after November 15, 2008.2009. The Corporation adopted SFAS 157 for financial assets and liabilitiesCorporation’s adoption of this standard on March 1, 2008. 2010 did not have a material effect on its financial statements. See Note 2 for further information.
In
October 2008,January 2010, the FASB issued
FASB Staff Position FAS 157-3ASUNo. 2010-06 (“
FSP 157-3”ASU2010-06”), “Determining the “Improving Disclosures about Fair Value
Measurements.” ASU2010-06 provides amendments to ASC Topic 820, “Fair Value Measurements and Disclosures,” that require separate disclosure of
a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the applicationsignificant transfers in and out of
SFAS 157 when the market for a financial asset is not activeLevel 1 and
provides an example to illustrate key considerations in determining theLevel 2 fair value
measurements in addition to the presentation of
a financial asset whenpurchases, sales, issuances, and settlements for Level 3 fair value measurements. ASU2010-06 also provides amendments to subtopic820-10 that clarify existing disclosures about the
market for that financial asset is not active. FSP 157-3 became effective upon issuance, including prior periods for which financial statements have not been issued. See Note 14.In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assetslevel of disaggregation, and Financial Liabilities.” SFAS 159 allows companies to choose to measure financial instrumentsinputs and certain other financial assets and financial liabilities at fair value. SFAS 159 also establishes presentation andvaluation techniques. The new disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 isare effective for fiscal years beginning after November 15, 2007. The Corporation adopted SFAS 159 on March 1, 2008interim and elected not to measure any additional financial instruments or other items at fair value.
54
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”), “Business Combinations.” SFAS 141R provides revised guidance on the recognition and measurement of the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests and goodwill acquired in a business combination. SFAS 141R also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS 141R is effective, on a prospective basis, for fiscal yearsannual periods beginning after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS 160 establishes accounting and reporting standards for noncontrolling interests (i.e. minority interests) in a subsidiary and2009, except for the deconsolidationdisclosures about purchases, sales, issuances, and settlements of a subsidiary. Under the standard, noncontrolling interests are considered equityLevel 3 fair value measurements, which becomes effective for interim and should be clearly identified, presented and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. SFAS 160 is effective, on a prospective basis, for fiscal yearsannual periods beginning after December 15, 2008. However, presentation2010. On March 1, 2010, the Corporation adopted this standard, except for the requirement to separately disclose purchases, sales, issuances, and disclosure requirements must be retrospectively applied to comparativesettlements in the Level 3 rollforward, which becomes effective in 2012. The Corporation’s adoption of this standard did not have a material effect on its financial statements. Also, the Corporation does not expect that the adoption of the enhanced disclosures for Level 3 fair value measurements will have a material effect on its financial statements. See Note 14 for further information.
| |
| NOTE 2 – | ACQUISITIONS AND DISPOSITIONS |
Papyrus Brand & Wholesale Business Acquisition / Retail Operations Disposition
Continuing the strategy of focusing on growing its core greeting card business, on April 17, 2009, the Corporation sold all rights, title and interest in certain of the assets of the Corporation’s Retail Operations segment to Schurman for $6,000 in cash and Schurman’s assumption of certain liabilities related to the Retail Operations segment. The Corporation
is currently evaluatingsold all 341 of its card and gift retail store assets to Schurman, which operates stores under the
impact that SFAS 160 will have on its consolidated financial statements upon adoption.In April 2008,American Greetings, Carlton Cards and Papyrus brands. Under the FASB issued FASB Staff Position FAS 142-3 (“FSP 142-3”), “Determinationterms of the Useful Lifetransaction, the Corporation remains subject to certain of Intangible Assets.” FSP 142-3 amendsits store leases on a contingent basis by subleasing the factors that should be consideredstores to Schurman. See Note 13 for further information. Pursuant to the terms of the agreement, the Corporation also purchased from Schurman its Papyrus trademark and its wholesale business division, which supplies Papyrus brand greeting cards primarily to leading specialty, mass merchandise, grocery and drug store channels, in developing renewal or extension assumptions usedexchange for $18,065 in cash and the Corporation’s assumption of certain liabilities related to determineSchurman’s wholesale business. In addition, the useful lifeCorporation agreed to provide Schurman limited credit support through the provision of a recognized intangible assetlimited guaranty (“Liquidity Guaranty”) and a limited bridge guaranty (“Bridge Guaranty”) in favor of the lenders under SFAS 142.Schurman’s senior revolving credit facility (the “Senior Credit Facility”). See Note 11 for further information. The intentCorporation also purchased shares representing approximately 15% of FSP 142-3the issued and outstanding equity interests in Schurman for $1,935, which is included in “Other assets” on the Consolidated Statement of Financial Position. The net cash paid of $14,000 related to improvethis transaction, which has been accounted for in accordance with ASC 805, is included in “Cash payments for business acquisitions, net of cash acquired” on the consistency betweenConsolidated Statement of Cash Flows.
56
The purchase accounting for this acquisition was completed during the
useful lifefourth quarter of
a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the2010. The fair value of the
asset under other U.S. generally accepted accounting principles (“GAAP”). FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The guidance for determiningconsideration given has been allocated to the
useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired
afterand the
effective date. Certain disclosure requirements shall be applied prospectively to all intangible assets recognized asliabilities assumed based upon their fair values at the date of
and subsequent to,acquisition. The following represents the
effective date.In May 2008, the FASB issued SFAS No. 162 (“SFAS 162”), “The Hierarchyfinal purchase price allocation:
| | | | | |
| Purchase price (in millions): | | | | |
| Cash paid | | $ | 20.0 | |
| Fair value of Retail Operations | | | 6.0 | |
| Cash acquired | | | (6.0 | ) |
| | | | | |
| | | $ | 20.0 | |
| | | | | |
| Allocation (in millions): | | | | |
| Current assets | | $ | 9.9 | |
| Property, plant and equipment | | | 0.1 | |
| Other assets | | | 5.4 | |
| Intangible assets | | | 4.7 | |
| Goodwill | | | 0.8 | |
| Liabilities assumed | | | (0.9 | ) |
| | | | | |
| | | $ | 20.0 | |
| | | | | |
The financial results of
Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework for selecting accounting principles to be usedthis acquisition are included in
preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 became effective on November 15, 2008. The adoption of SFAS 162 did not have a significant impact on the Corporation’s consolidated
financial statements.In December 2008,results from the FASB issued FASB Staff Position FAS 132(R)-1 (“FSP 132R-1”), “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP 132R-1 provides guidance on an employer’s disclosures about plan assetsdate of a defined benefit pension or other postretirement plan. It requires disclosure of additional information about investment allocation, fair values of major categories of assets, the development of fair value measurements and concentrations of risk. FSP 132R-1 is effective for fiscal years ending after December 15, 2009; however, earlier application is permitted. The adoption of FSP 132R-1 in fiscal 2010 will have no effect on the Corporation’s consolidated financial position oracquisition. Pro forma results of operations.
operations have not been presented because the effect of this acquisition was not deemed material.
NOTE 2—ACQUISITIONSRecycled Paper Greetings AcquisitionDuring the second quarter of 2009, the Corporation paid $44,153 to acquire, at a substantial discount, the first lien debt securities of Recycled Paper Greetings, Inc.
, now known as Papyrus-Recycled Greetings, Inc. The principal amount of the securities was $67,100. The cash paid for this investment is included in
“Other-net”“Other-net” investing activities on the Consolidated Statement of Cash Flows. This investment was written down to fair market value during the fourth
quarter.quarter of 2009. A loss of $2,740 was recorded as a result.
During the fourth quarter of 2009, the Corporation acquired all of the issued and outstanding capital stock of RPG Holdings, Inc. and its subsidiary, Recycled Paper Greetings, Inc. (together “RPG”). RPG is a Chicago-based creator and designer of humorous and alternative greeting cards. RPG’s cards are distributed primarily
55
through mass retail partners,merchandise retailers, drug stores and specialty retail stores. The acquisition was completed pursuant to a petition and pre-packaged plan of reorganization filed on January 2, 2009, by RPG under the U.S. Bankruptcy Code and an agreement dated December 30, 2008, between the Corporation and RPG.
On February 24, 2009, the Corporation acquired all of the issued and outstanding capital stock of RPG in exchange for: (a) approximately
$18,000$17,700 in cash, which includes
up to $3,200$4,500 of
unpaidU.S. Bankruptcy Court approved professional fees and other amounts owed by RPG that
the Corporation anticipates paying upon approval of these amountswere paid by the
U.S. Bankruptcy Court;Corporation; (b) the $67,100 in principal amount of first lien debt securities held by American Greetings; (c) approximately $22,000 in aggregate principal amount of American Greetings’ 7.375% senior notes due June 1, 2016, issued under American Greetings’ existing senior notes indenture; and (d) approximately $32,700 in aggregate principal amount of American Greetings’ 7.375% notes due June 1, 2016, issued under American Greetings’ new indenture. Also in connection with the acquisition, approximately $6,500 of
debtor-in-possession financing (the “DIP”) owed by RPG to American Greetings under the
debtor-in-possession credit agreement put in place in the fourth quarter of 2009 was extinguished. The Corporation also incurred approximately
$3,500$4,000 in transaction costs associated with this acquisition.
The total costpurchase accounting for the RPG acquisition was completed during the third quarter of 2010. The fair value of the acquisitionconsideration given has been allocated to the assets acquired and the liabilities assumed based
57
upon their
estimated fair values at the date of the acquisition. The
estimated purchase price allocation is preliminary and subject to revision as valuation work is still being conducted. The following represents the
preliminaryfinal purchase price allocation:
| | | | |
Purchase price (in millions): | | | | |
Cash paid (including transaction costs and the DIP) | | $ | 22.9 | |
Purchase price payable (including transaction costs) | | | 4.8 | |
Fair market value of first lien debt securities | | | 41.4 | |
Fair market value of long-term debt issued | | | 28.4 | |
Cash acquired | | | (0.6 | ) |
| | | | |
| | $ | 96.9 | |
| | | | |
Allocation (in millions): | | | | |
Current assets | | $ | 17.1 | |
Property, plant and equipment | | | 3.9 | |
Other assets (including deferred tax assets) | | | 18.8 | |
Intangible assets | | | 41.5 | |
Goodwill | | | 22.5 | |
Liabilities assumed | | | (6.9 | ) |
| | | | |
| | $ | 96.9 | |
| | | | |
| | | | | |
| Purchase price (in millions): | | | | |
| Cash paid in 2009 | | $ | 22.9 | |
| Cash paid in 2010 | | | 5.3 | |
| Fair market value of first lien debt securities | | | 41.4 | |
| Fair market value of long-term debt issued | | | 28.4 | |
| Cash acquired | | | (0.6 | ) |
| | | | | |
| | | $ | 97.4 | |
| | | | | |
| Allocation (in millions): | | | | |
| Current assets | | $ | 17.6 | |
| Property, plant and equipment | | | 1.5 | |
| Other assets (including deferred tax assets) | | | 24.2 | |
| Intangible assets | | | 36.4 | |
| Goodwill | | | 28.2 | |
| Liabilities assumed | | | (10.5 | ) |
| | | | | |
| | | $ | 97.4 | |
| | | | | |
Included in the liabilities assumed in the table above is $4,258 of accrued severance based on a management-approved detailed integration plan including the shutdown of RPG’s manufacturing and distribution facility as well as the elimination of certain redundant back office operations. The financial results of this acquisition are included in the Corporation’s consolidated results from the date of acquisition. Pro forma results
At the date of
acquisition, there were two components of tax-deductible goodwill specifically related to the operations
have not been completedof RPG. The first component of tax-deductible goodwill of approximately $28,170 is related to goodwill for financial reporting purposes, and this asset will generate deferred income taxes in the future as the
acquisition closed within daysasset is amortized for income tax purposes. The second component of
tax-deductible goodwill of approximately $89,806 is the
Corporation’s year-end. Pro forma resultsamount of tax deductible goodwill in excess of goodwill for financial reporting purposes. In accordance with ASC 740, the tax benefits associated with this excess will be
completedapplied to first reduce the amount of goodwill, and
filed with the SEC on Form 8-K within seventy-five days of the closing of the acquisition.In addition, the Corporation is currentlythen other intangible assets for financial reporting purposes in the process of reviewing the RPG operationsfuture, if and when such tax benefits are realized for rationalization opportunities, particularly in the areas of supply chain, manufacturing, distribution and corporate functions. Once this review has been completed and a detailed plan of action is approved,income tax purposes. See Note 9 for additional liabilities may be required in the allocation of the purchase price. These actions, if any, will be accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No. 95-3, “Recognition of Liabilities ininformation.
Card Connection with a Purchase Business Combination.”Acquisition
In March 2008, the Corporation acquired a card publisher and franchised distributor of greeting cards in the United Kingdom (“U.K.”). Cash paid, net of cash acquired, was approximately $15,600 and is reflected in
56
investing activities inon the Consolidated Statement of Cash Flows. In connection with this acquisition, intangible assets and goodwill of $5,800 and $6,100, respectively, were recorded. Approximately $8,400 of current assets and fixed assets were recorded and liabilities of approximately $4,700 were assumed. The purchase agreement providesprovided for a contingent payment of up to 2 million U.K. Pounds Sterling to be paid based on the company’s operating results over aan accumulated three-year period from the date of acquisition. The right to receive the contingent payment has subsequently been terminated with no additional payment required by the Corporation. The financial results of this acquisition are included in the Corporation’s consolidated results from the date of acquisition. Pro forma results of operations have not been presented because the effect of this acquisition was not deemed material.
Carlton Mexico Shutdown
On September 3, 2009, the Corporation made the determination to wind down the operations of Carlton México, S.A. de C.V. (“Carlton Mexico”), its subsidiary that distributes and merchandises greeting cards, gift wrap and related products for retail customers throughout Mexico. Going forward, the Corporation will
58
continue to make products available to its Mexican customers by selling to a third party distributor. The wind down resulted in the closure of Carlton Mexico’s facility in Mexico City, Mexico, and the elimination of approximately 170 positions.
In connection with the closure of this facility, the North American Social Expression Products segment recorded charges of $6,935, including asset impairments, severance charges and other shut-down costs. Additionally, during 2010, in accordance with ASC 830, “Foreign Currency Matters,” the Corporation recognized foreign currency translation adjustments totaling $11,300 in “Other operating income – net” on the Consolidated Statement of Operations. This amount represents foreign currency adjustments attributable to Carlton Mexico that, prior to the liquidation, had been accumulated in the foreign currency translation adjustment component of equity.
Party Goods Transaction
On December 21, 2009, the Corporation entered into an Asset Purchase Agreement under which it sold certain assets, equipment and processes used in the manufacture and distribution of party goods to Amscan Holdings, Inc. (“Amscan”) for a purchase price of $24,880 (the “Party Goods Transaction”). Amscan is a leading designer, manufacturer and distributor of party goods, and owns or franchises party good stores throughout the United States. Amscan and certain of its subsidiaries have historically purchased party goods, greeting cards and other social expression products from the Corporation. Under the terms of the Party Goods Transaction, the Corporation will no longer manufacture party goods, but will purchase party goods from Amscan. As a result of the Party Goods Transaction, on December 22, 2009, the Corporation announced its intention to wind down and close its party goods manufacturing and distribution facility in Kalamazoo, Michigan (“Kalamazoo facility”). The phase-out of manufacturing at the Kalamazoo facility, which commenced in early March 2010, was completed by May 2010 and the distribution activities at the Kalamazoo facility concluded as of December 2010.
In connection with the Party Goods Transaction, the Corporation also entered into various other agreements with Amscanand/or its affiliates, including a supply and distribution agreement dated December 21, 2009, with a purchase commitment of $22,500 equally spread over five years. During 2011, the Corporation purchased party goods of $6,435 under this agreement. As a result of entering into the supply and distribution agreement and agreeing that Amscan will no longer be required to purchase party goods from the Corporation, the Corporation also received a warrant valued at $16,274 to purchase 740.74 shares of the common stock of AAH, Amscan’s ultimate parent corporation at one cent per share. On December 2, 2010, the Corporation received a cash distribution from AAH totaling $6,963, which was in part a return of capital that reduced the investment by $5,663 to $10,611. On February 10, 2011, the Corporation exercised the warrant and now owns 740.74 shares of AAH. The investment in AAH is included in “Other assets” on the Consolidated Statement of Financial Position.
Through this relationship, each company will sell both DesignWare and Amscan branded party goods. The Corporation will purchase its party goods products from Amscan and will continue to distribute party goods to various channels, including to its mass merchandise, drug, grocery and specialty retail customers. Amscan will have exclusive rights to manufacture and distribute party goods into various channels, including the party store channel.
During the second halffourth quarter of 2008,2010, the Corporation acquired Webshotsrecorded a gain on the Party Goods Transaction of $34,178, which is included in “Other operating income – net” on the Consolidated Statement of Operations. See Note 3 for further information. In addition, the Corporation recorded $13,005 of asset impairment charges related to the Kalamazoo facility closure and PhotoWorks, Inc. (“PhotoWorks”)incurred $2,798 in employee termination costs.
59
During 2010, the above transactions and activities generated significant gains, losses and expenses and are reflected on the Consolidated Statement of Operations as follows:
| | | | | | | | | | | | | | | | | |
| | | Party Goods
| | | Mexico
| | | Retail
| | | | |
| (In millions) | | Transaction | | | Shutdown | | | Disposition | | | Total | |
| |
| Net sales | | $ | – | | | $ | 0.7 | | | $ | – | | | $ | 0.7 | |
| Material, labor and other production costs | | | 15.6 | | | | 4.4 | | | | 1.0 | | | | 21.0 | |
| Selling, distribution and marketing expenses | | | 0.2 | | | | 1.0 | | | | – | | | | 1.2 | |
| Administrative and general expenses | | | – | | | | 0.6 | | | | – | | | | 0.6 | |
| Other operating (income) expense – net | | | (34.2 | ) | | | 11.5 | | | | 28.2 | | | | 5.5 | |
| | | | | | | | | | | | | | | | | |
| | | $ | (18.4 | ) | | $ | 18.2 | | | $ | 29.2 | | | $ | 29.0 | |
| | | | | | | | | | | | | | | | | |
These gains, losses and expenses are reflected in the Corporation’s reportable segments as follows:
| | | | | |
| (In millions) | | | |
| |
| North American Social Expression Products | | $ | (0.2 | ) |
| Retail Operations | | | 29.2 | |
| | | | | |
| | | $ | 29.0 | |
| | | | | |
| |
| NOTE 3 – | OTHER INCOME AND EXPENSE |
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Loss on disposition of retail stores | | $ | – | | | $ | 28,333 | | | $ | – | |
| Gain on disposition of calendar product lines | | | – | | | | (547 | ) | | | – | |
| Gain on disposition of candy product lines | | | – | | | | (115 | ) | | | – | |
| Gain on disposition of party goods product lines | | | (254 | ) | | | (34,178 | ) | | | – | |
| Loss on recognition of foreign currency translation adjustments | | | – | | | | 8,627 | | | | – | |
| Miscellaneous | | | (2,951 | ) | | | (2,430 | ) | | | (1,396 | ) |
| | | | | | | | | | | | | |
| Other operating income – net | | $ | (3,205 | ) | | $ | (310 | ) | | $ | (1,396 | ) |
| | | | | | | | | | | | | |
In April 2009, the Corporation sold the rights, title and interest in certain of the assets of its retail store operations to Schurman and recognized a loss on disposition of $28,333. See Note 2 for $45,200further information.
The Corporation sold its calendar product lines in July 2009 and
$26,484,its candy product lines in October 2009, which resulted in gains totaling $547 and $115, respectively.
The financial resultsProceeds received from the sales of
these acquisitionsthe calendar and candy product lines of $3,063 and $1,650, respectively, are included in
the Corporation’s consolidated results from their respective dates of acquisition. Pro forma results of operations have not been presented as the effects of these acquisitions were not deemed material.Webshots is an online digital photography business. The $45,200 cash payment is reflected in“Other-net” investing activities inon the Consolidated Statement of Cash Flows. Intangible
Pursuant to the Party Goods Transaction, in December 2009, the Corporation sold certain assets,
equipment and
goodwill of $9,300 and $41,600, respectively, were recorded. Liabilities of approximately $5,500 were also assumed as partprocesses of the
acquisition.PhotoWorks isparty goods product lines and recorded a leading online photo sharinggain of $34,178. An additional gain of $254 was recorded in 2011 as amounts previously estimated were finalized. Cash proceeds of $24,880, which were held in escrow and personal publishing company that allows consumersrecorded as a receivable at February 28, 2010, were received in 2011 and are included in “Proceeds from escrow related to use their digital images to create high quality photo-personalized products like greeting cards, calendars, online photo albums and photo books. In accordance with the terms of its agreement with PhotoWorks,party goods transaction” on December 13, 2007, the Corporation commenced a cash tender offer to acquire all outstanding common stock of PhotoWorks at a price of 59.5 cents per share. Cash paid, net of cash acquired, was $25,082 and is reflected in investing activities in the Consolidated Statement of Cash Flows. IntangibleSee Note 2 for further information.
During the fourth quarter of 2010, it was determined that the wind down of Carlton Mexico was substantially complete. In accordance with ASC 830, the currency translation adjustments were removed from the foreign currency translation adjustment component of equity and a loss was recognized totaling $11,300. The Corporation also recorded a loss totaling $601 and a gain of $3,274 for foreign currency translation adjustments realized in relation to two other entities determined to be liquidated in accordance with ASC 830.
60
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Foreign exchange loss (gain) | | $ | 224 | | | $ | (4,746 | ) | | $ | 483 | |
| Rental income | | | (1,232 | ) | | | (1,194 | ) | | | (1,432 | ) |
| (Gain) loss on asset disposal | | | (3,463 | ) | | | 59 | | | | 1,215 | |
| Miscellaneous | | | (1,370 | ) | | | (606 | ) | | | 1,891 | |
| | | | | | | | | | | | | |
| Other non-operating (income) expense – net | | $ | (5,841 | ) | | $ | (6,487 | ) | | $ | 2,157 | |
| | | | | | | | | | | | | |
The Corporation sold the land and building associated with its Mexican operation within the North American Social Expression Products segment in August 2010 and a manufacturing facility within the International Social Expression Products segment in January 2011, and recorded gains upon disposal of approximately $1,000 and $2,819, respectively. Both assets were previously included in “Assets held for sale” at net book values on the Consolidated Statement of Financial Position as of February 28, 2010. The cash proceeds received from the sale of the Mexican assets and
goodwill totaling approximately $4,870the manufacturing facility of $2,000 and
$15,500,$9,952, respectively,
were recorded. A deferred tax assetare included in “Proceeds from sale of
approximately $10,000 was recorded in connection with a net operating loss carryforward that was acquired in the transaction and liabilities of approximately $5,000 were also assumed as part of the acquisition.During the second quarter of 2007, the Corporation acquired an online greeting card business for approximately $21,000. Approximately $15,000 was paid in the second quarter of 2007 and approximately $6,000 was paid in the first quarter of 2008. Cash paid, net of cash acquired, was $11,154 in 2007 and $6,056 in 2008 and is reflected in investing activities infixed assets” on the Consolidated Statement of Cash Flows. In connection with this acquisition, intangible assets and goodwill of $11,200 and $12,500, respectively, were recorded. The financial results of this acquisition are included in the Corporation’s consolidated results from the date of acquisition. The pro forma results of operations have not been presented because the effect of this acquisition was not deemed material.
During the fourth quarter of 2005, the Corporation acquired 100% of the equity interests of Collage Designs Limited (“Collage”). Collage is a European manufacturer of gift wrap products. The Corporation acquired the net assets of Collage valued at approximately $300 and recorded goodwill of approximately $6,000. Approximately $2,700 was paid at the closing and $1,300 was paid in 2006. The remainder, totaling $1,968, was paid in February 2007. The financial results of this acquisition are included in the Corporation’s consolidated results from the date of acquisition. Pro forma results of operations have not been presented because the effect of this acquisition was not deemed material.
The goodwill and certain intangible assets related to the acquisitions completed in 2008, 2007 and 2005 disclosed above were impaired in 2009. See Note 9 for further information.
57
NOTE 3—OTHER INCOME AND EXPENSE
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Gain on contract terminations | | $ | — | | | $ | — | | | $ | (20,004 | ) |
Loss on disposal of candle product lines | | | — | | | | — | | | | 15,969 | |
Miscellaneous | | | (1,396 | ) | | | (1,325 | ) | | | (1,217 | ) |
| | | | | | | | | | | | |
Other operating income—net | | $ | (1,396 | ) | | $ | (1,325 | ) | | $ | (5,252 | ) |
| | | | | | | | | | | | |
During 2007, the $20,004 gain on contract terminations was a result of retailer consolidations, wherein, multiple long-term supply agreements were terminated and a new agreement was negotiated with a new legal entity with substantially different terms and sales commitments. Also, in 2007, the Corporation sold substantially all of the assets associated with its candle product lines and recorded a loss of $15,969. The proceeds of $6,160 received from the sale of the candle product lines in 2007 are included in “Other—net” investing activities in the Consolidated Statement of Cash Flows.
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Foreign exchange loss (gain) | | $ | 483 | | | $ | (7,206 | ) | | $ | (2,733 | ) |
Rental income | | | (1,432 | ) | | | (1,225 | ) | | | (1,326 | ) |
Miscellaneous | | | 3,106 | | | | 1,020 | | | | 1,377 | |
| | | | | | | | | | | | |
Other non-operating expense (income)—net | | $ | 2,157 | | | $ | (7,411 | ) | | $ | (2,682 | ) |
| | | | | | | | | | | | |
“Miscellaneous” includes, among other things,
gains and losses on asset disposals and income/loss from debt and equity securities.
In 2011, miscellaneous included $1,300 of dividend income related to the Corporation’s investment in AAH. In 2009, miscellaneous included a loss of $2,740 related to the Corporation’s investment in the first lien debt securities of RPG prior to the acquisition of the capital stock of RPG in February 2009. See Note 2 for further information.
NOTE 4—(LOSS) EARNINGS PER SHARE
| |
| NOTE 4 – | EARNINGS (LOSS) PER SHARE |
The following table sets forth the computation of earnings (loss) earnings per share and earnings (loss) per share-assuming dilution:
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Numerator (thousands): | | | | | | | | | | | | |
| Net income (loss) | | $ | 87,018 | | | $ | 81,574 | | | $ | (227,759 | ) |
| | | | | | | | | | | | | |
| Denominator (thousands): | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 39,983 | | | | 39,468 | | | | 46,544 | |
| Effect of dilutive securities: | | | | | | | | | | | | |
| Stock options and other | | | 1,262 | | | | 692 | | | | – | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding – assuming dilution | | | 41,245 | | | | 40,160 | | | | 46,544 | |
| | | | | | | | | | | | | |
| Earnings (loss) per share | | $ | 2.18 | | | $ | 2.07 | | | $ | (4.89 | ) |
| | | | | | | | | | | | | |
| Earnings (loss) per share — assuming dilution | | $ | 2.11 | | | $ | 2.03 | | | $ | (4.89 | ) |
| | | | | | | | | | | | | |
Approximately 3.1 million and 5.7 million stock options, in 2011 and 2010, respectively, were excluded from the computation of earnings per share-assuming
dilution: | | | | | | | | | | |
| | | 2009 | | | 2008 | | 2007 |
Numerator: | | | | | | | | | | |
(Loss) income from continuing operations | | $ | (227,759 | ) | | $ | 83,320 | | $ | 39,938 |
Add-back—interest on convertible subordinated notes, net of tax | | | — | | | | — | | | 1,967 |
| | | | | | | | | | |
(Loss) income from continuing operations—assuming dilution | | $ | (227,759 | ) | | $ | 83,320 | | $ | 41,905 |
| | | | | | | | | | |
Denominator (thousands): | | | | | | | | | | |
Weighted average shares outstanding | | | 46,544 | | | | 54,237 | | | 57,952 |
Effect of dilutive securities: | | | | | | | | | | |
Convertible debt | | | — | | | | — | | | 4,015 |
Stock options and other | | | — | | | | 269 | | | 396 |
| | | | | | | | | | |
Weighted average shares outstanding—assuming dilution | | | 46,544 | | | | 54,506 | | | 62,363 |
| | | | | | | | | | |
(Loss) income from continuing operations per share | | $ | (4.89 | ) | | $ | 1.54 | | $ | 0.69 |
| | | | | | | | | | |
(Loss) income from continuing operations per share—assuming dilution | | $ | (4.89 | ) | | $ | 1.53 | | $ | 0.67 |
| | | | | | | | | | |
dilution because the options’ exercise prices were greater than the average market price of the common shares during the respective years. For 2009, all options outstanding (totaling approximately 6.7 million) were excluded from the computation of earnings per share-assuming dilution, as the effect would have been antidilutive due to the net loss in the period. Had the Corporation reported income for the year, approximately 6.0 million stock options outstanding during
58
the period would have been excluded from the computation of earnings per share-assuming dilution because the options’ exercise prices were greater than the average market price of the common shares during the year. Approximately 1.7 million and 3.2 million stock options, in 2008 and 2007, respectively, were excluded from the computation of earnings per share-assuming dilution because the options’ exercise prices were greater than the average market price of the common shares during the respective years.
61
NOTE 5—ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
| |
| NOTE 5 – | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The balance of accumulated other comprehensive
(loss) income consisted of the following components:
| | | | | | | | |
| | | February 28, 2009 | | | February 29, 2008 | |
Foreign currency translation adjustments | | $ | (20,238 | ) | | $ | 60,607 | |
Pension and postretirement benefits adjustments, net of tax (See Note 12) | | | (47,038 | ) | | | (39,364 | ) |
Unrealized investment (loss) gain, net of tax | | | (2 | ) | | | 1 | |
| | | | | | | | |
| | $ | (67,278 | ) | | $ | 21,244 | |
| | | | | | | | |
NOTE 6—TRADE ACCOUNTS RECEIVABLE, NET
| | | | | | | | | |
| | | February 28, 2011 | | | February 28, 2010 | |
| |
| Foreign currency translation adjustments | | $ | 26,021 | | | $ | 10,856 | |
| Pension and postretirement benefits adjustments, net of tax (See Note 12) | | | (28,369 | ) | | | (40,672 | ) |
| Unrealized investment gain, net of tax | | | 2 | | | | 1 | |
| | | | | | | | | |
| | | $ | (2,346 | ) | | $ | (29,815 | ) |
| | | | | | | | | |
| |
| NOTE 6 – | CUSTOMER ALLOWANCES AND DISCOUNTS |
Trade accounts receivable are reported net of certain allowances and discounts. The most significant of these are as follows:
| | | | | | |
| | | February 28, 2009 | | February 29, 2008 |
Allowance for seasonal sales returns | | $ | 47,121 | | $ | 57,126 |
Allowance for outdated products | | | 11,486 | | | 21,435 |
Allowance for doubtful accounts | | | 5,011 | | | 3,778 |
Allowance for cooperative advertising and marketing funds | | | 25,048 | | | 33,662 |
Allowance for rebates | | | 45,774 | | | 43,935 |
| | | | | | |
| | $ | 134,440 | | $ | 159,936 |
| | | | | | |
NOTE 7—INVENTORIES
| | | | | | |
| | | February 28, 2009 | | February 29, 2008 |
Raw materials | | $ | 21,425 | | $ | 17,701 |
Work in process | | | 7,068 | | | 10,516 |
Finished products | | | 232,893 | | | 244,379 |
| | | | | | |
| | | 261,386 | | | 272,596 |
Less LIFO reserve | | | 86,025 | | | 82,085 |
| | | | | | |
| | | 175,361 | | | 190,511 |
Display material and factory supplies | | | 28,512 | | | 26,160 |
| | | | | | |
| | $ | 203,873 | | $ | 216,671 |
| | | | | | |
| | | | | | | | | |
| | | February 28, 2011 | | | February 28, 2010 | |
| |
| Allowance for seasonal sales returns | | $ | 34,058 | | | $ | 36,443 | |
| Allowance for outdated products | | | 8,264 | | | | 10,438 | |
| Allowance for doubtful accounts | | | 5,374 | | | | 2,963 | |
| Allowance for cooperative advertising and marketing funds | | | 25,631 | | | | 24,061 | |
| Allowance for rebates | | | 24,920 | | | | 29,338 | |
| | | | | | | | | |
| | | $ | 98,247 | | | $ | 103,243 | |
| | | | | | | | | |
Certain customer allowances and discounts are settled in cash. These accounts, primarily rebates, which are classified as “Accrued liabilities” on the Consolidated Statement of Financial Position, totaled $11,913 and $15,326 as of February 28, 2011 and 2010, respectively.
| | | | | | | | | |
| | | February 28, 2011 | | | February 28, 2010 | |
| |
| Raw materials | | $ | 21,248 | | | $ | 18,609 | |
| Work in process | | | 6,476 | | | | 6,622 | |
| Finished products | | | 212,056 | | | | 194,283 | |
| | | | | | | | | |
| | | | 239,780 | | | | 219,514 | |
| Less LIFO reserve | | | 78,358 | | | | 75,491 | |
| | | | | | | | | |
| | | | 161,422 | | | | 144,023 | |
| Display material and factory supplies | | | 18,308 | | | | 19,933 | |
| | | | | | | | | |
| | | $ | 179,730 | | | $ | 163,956 | |
| | | | | | | | | |
There were no material LIFO liquidations in 2009, 2008 or 2007.2011 and 2009. During 2010, inventory quantities declined resulting in the liquidation of LIFO inventory layers carried at lower costs compared with current year purchases. The income statement effect of such liquidation on material, labor and other production costs was approximately $13,000. Inventory held on location for retailers with SBT arrangements, which is included in finished products, totaled approximately $34,000$42,000 and $32,000$38,000 as of February 28, 20092011 and February 29, 2008,2010, respectively.
62
59
NOTE 8—PROPERTY, PLANT AND EQUIPMENT
| | | | | | |
| | | February 28, 2009 | | February 29, 2008 |
Land | | $ | 15,048 | | $ | 16,568 |
Buildings | | | 243,395 | | | 263,682 |
Equipment and fixtures | | | 699,637 | | | 693,823 |
| | | | | | |
| | | 958,080 | | | 974,073 |
Less accumulated depreciation | | | 660,301 | | | 678,068 |
| | | | | | |
| | $ | 297,779 | | $ | 296,005 |
| | | | | | |
| |
| NOTE 8 – | PROPERTY, PLANT AND EQUIPMENT |
| | | | | | | | | |
| | | February 28, 2011 | | | February 28, 2010 | |
| |
| Land | | $ | 10,552 | | | $ | 10,147 | |
| Buildings | | | 176,879 | | | | 175,086 | |
| Equipment and fixtures | | | 662,121 | | | | 651,012 | |
| | | | | | | | | |
| | | | 849,552 | | | | 836,245 | |
| Less accumulated depreciation | | | 607,903 | | | | 593,362 | |
| | | | | | | | | |
| | | $ | 241,649 | | | $ | 242,883 | |
| | | | | | | | | |
During 2009,2011, the Corporation disposed of approximately $43,000$27,000 of property, plant and equipment that included accumulated depreciation of approximately $41,000 compared to disposals in 2008$24,000. During 2010, the Corporation disposed of approximately $38,000$118,000 with accumulated depreciation of approximately $34,000. Continued operating losses and negative cash flows led to testing for impairment$102,000, including the fixed assets that were part of long-lived assets in the Retail Operations segment in accordance with SFAS 144. As a result, fixed assetand the party goods product lines, which were sold during 2010.
During the fourth quarter of 2010, primarily due to the sale of the party goods product lines, impairment charges of
$5,465, $1,436 and $1,760$12,206 were recorded in
“Selling, distribution“Material, labor and
marketing expenses”other production costs” on the Consolidated Statement of
Operations for 2009, 2008 and 2007, respectively. The charges represent the difference between the carrying values of the assets and the future net discounted cash flows estimated to be generated by those assets.Operations.
Depreciation expense totaled
$36,465, $39,640 and $42,843
$43,903in 2011, 2010 and
$47,006 in 2009,
2008 and 2007, respectively.
NOTE 9—GOODWILL AND OTHER INTANGIBLE ASSETS
| |
| NOTE 9 – | GOODWILL AND OTHER INTANGIBLE ASSETS |
In accordance with SFAS 142,ASC 350, the Corporation is required to evaluate the carrying value of its goodwill for potential impairment on an annual basis or an interim basis if there are indicators of potential impairment. Due toDuring 2011 and 2010, the recent deteriorationCorporation completed the required annual impairment test of goodwill in the global economic environmentfourth quarter and resulting significant decrease inbased on the Corporation’s market capitalization, combined with significant decreases in reported market valuesresults of comparable, unrelated companies,the testing, no impairment charges were recorded.
During the third quarter of 2009, indicators emerged within the AG Interactive segment
which is also the reporting unit for SFAS 142 purposes, and one reporting unit located in the United Kingdom within the International Social Expression Products segment (the “UK Reporting Unit”) that led the
CorporationCorporation’s management to conclude that a
SFAS 142goodwill impairment test was required to be performed during the third
quarter of 2009 for goodwill in these reporting units.quarter. Within the AG Interactive segment, there were the following three primary indicators: (1) a substantial decline in advertising revenues; (2) thee-commerce businesses not growing as anticipated; and (3) the Corporation’s belief that the segment’s current long-term cash flow forecasts may now be unattainable based on the lengthening and deepening economic deterioration.
The following three primary indicators emerged within the UK Reporting Unit: (1) the recent bankruptcy of a major customer; (2) a major customer implementing buying freezes, including on the Corporation’s everyday products; and (3) the Corporation’s belief that current long-term cash flow forecasts may now be unattainable based on the lengthening and deepening economic deterioration.
Under
SFAS 142,ASC 350, the test for, and measurement of, impairment of goodwill consists of two steps. In the first step, the initial test for potential impairment, the Corporation compares the fair value of each reporting unit to its carrying amount. Fair values were determined using a combination of an income approach and a market based approach which were validated by a market capitalization reconciliation. Based on this evaluation, it was determined that the fair values of the AG Interactive segment and UK Reporting Unit were less than their carrying values, thus indicating potential impairment. In the second step, the measurement of the impairment, the Corporation hypothetically applies purchase accounting to the reporting units using the fair values from the first step. As a result, the Corporation recorded goodwill charges of $150,208, which
includesincluded all the goodwill for the
60
AG Interactive segment, and $82,110, which includesincluded all of the goodwill for the UK Reporting Unit. The amounts recorded in the third quarter were estimates. The AG Interactive segment impairment was adjusted down by $655 in the fourth quarter due to final purchase accounting adjustments for a final impairment total of $149,553.
The required annual impairment test of goodwill was completed early inas of the beginning of the fourth quarter of 2009 and based on the results of the testing, no additional impairment charges were recorded.
63
However, based on the continued significant deterioration of the global economic environment during the fourth quarter of 2009 and the closing share price of the Corporation’s Class A common shares at February 28, 2009, that resulted in the Corporation’s fair value of equity being below the carrying value of equity, an additional interim impairment analysis was performed at the end of the fourth quarter following the same steps as described above. Based on this analysis, it was determined that the fair values of the North American Greeting Card Division (“NAGCD”) and the Corporation’s fixtures business, which are both also the reporting units for
SFAS 142ASC 350 purposes, were less than their carrying values. As a result, the Corporation recorded goodwill impairment charges of $47,850, which
includesincluded all the goodwill for NAGCD, and $82, which
includesincluded all the goodwill for the Corporation’s fixtures business. NAGCD is included in the North American Social Expression Products segment and the fixtures business is included in non-reportable segments.
In 2008, the Corporation completed the required annual impairment test of goodwill in the fourth quarter and based on the results of the testing, no impairment charges were recorded.
In 2007, the required annual goodwill impairment test resulted in an impairment charge of $2,196 for the Corporation’s entertainment development and production joint venture, which is included in the non-reportable segments. This charge represented all of the goodwill of this entity. A discounted cash flow method was used for testing purposes.
A summary of the changes in the carrying amount of the Corporation’s goodwill during the years ended February 28,
20092011 and
February 29, 20082010 by segment, is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | North
American
Social
Expression
Products | | | International
Social
Expression
Products | | | AG
Interactive | | | Non-
Reportable
Segments | | | Total | |
Balance at February 28, 2007 | | $ | 47,843 | | | $ | 86,041 | | | $ | 90,139 | | | $ | 82 | | | $ | 224,105 | |
Acquisition related | | | — | | | | — | | | | 56,349 | | | | — | | | | 56,349 | |
Currency translation | | | 19 | | | | 1,009 | | | | 3,590 | | | | — | | | | 4,618 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at February 29, 2008 | | | 47,862 | | | | 87,050 | | | | 150,078 | | | | 82 | | | | 285,072 | |
Acquisition related | | | 22,465 | | | | 6,096 | | | | 794 | | | | — | | | | 29,355 | |
Impairment | | | (47,850 | ) | | | (82,110 | ) | | | (149,553 | ) | | | (82 | ) | | | (279,595 | ) |
Currency translation | | | (12 | ) | | | (6,630 | ) | | | (1,319 | ) | | | — | | | | (7,961 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at February 28, 2009 | | $ | 22,465 | | | $ | 4,406 | | | $ | — | | | $ | — | | | $ | 26,871 | |
| | | | | | | | | | | | | | | | | | | | |
61
| | | | | | | | | | | | | |
| | | | | | International
| | | | |
| | | North American
| | | Social
| | | | |
| | | Social Expression
| | | Expression
| | | | |
| | | Products | | | Products | | | Total | |
| |
| Balance at February 28, 2009 | | $ | 22,465 | | | $ | 4,406 | | | $ | 26,871 | |
| Acquisition related | | | 6,510 | | | | – | | | | 6,510 | |
| Adjustment related to income taxes | | | (2,501 | ) | | | – | | | | (2,501 | ) |
| Currency translation | | | – | | | | 226 | | | | 226 | |
| | | | | | | | | | | | | |
| Balance at February 28, 2010 | | | 26,474 | | | | 4,632 | | | | 31,106 | |
| Adjustment related to income taxes | | | (2,509 | ) | | | – | | | | (2,509 | ) |
| Currency translation | | | – | | | | 306 | | | | 306 | |
| | | | | | | | | | | | | |
| Balance at February 28, 2011 | | $ | 23,965 | | | $ | 4,938 | | | $ | 28,903 | |
| | | | | | | | | | | | | |
The above adjustment related to income taxes for 2011 is a $2,509 reduction related to second component goodwill, as defined by ASC 740, which results in a reduction of goodwill for financial reporting purposes when amortized for tax purposes. See Note 2 for further discussion.
At February 28, 20092011 and February 29, 2008,2010, intangible assets, net of accumulated amortization, were $43,049 and impairment charges, were $50,593 and $27,438,$45,828, respectively. The following table presents information about these intangible assets, which are included in “Other assets” on the Consolidated Statement of Financial Position:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | February 28, 2011 | | | February 28, 2010 | |
| | | Gross
| | | | | | Net
| | | Gross
| | | | | | Net
| |
| | | Carrying
| | | Accumulated
| | | Carrying
| | | Carrying
| | | Accumulated
| | | Carrying
| |
| | | Amount | | | Amortization | | | Amount | | | Amount | | | Amortization | | | Amount | |
| |
| Intangible assets with indefinite useful lives: | | | | | | | | | | | | | | | | | | | | | | | | |
| Tradenames | | $ | 6,200 | | | $ | – | | | $ | 6,200 | | | $ | 6,200 | | | $ | – | | | $ | 6,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Subtotal | | | 6,200 | | | | – | | | | 6,200 | | | | 6,200 | | | | – | | | | 6,200 | |
| Intangible assets with finite useful lives: | | | | | | | | | | | | | | | | | | | | | | | | |
| Patents | | | 4,616 | | | | (3,558 | ) | | | 1,058 | | | | 4,194 | | | | (3,417 | ) | | | 777 | |
| Trademarks | | | 10,901 | | | | (9,097 | ) | | | 1,804 | | | | 10,071 | | | | (8,496 | ) | | | 1,575 | |
| Artist relationships | | | 19,230 | | | | (3,201 | ) | | | 16,029 | | | | 19,180 | | | | (1,598 | ) | | | 17,582 | |
| Customer relationships | | | 24,886 | | | | (11,672 | ) | | | 13,214 | | | | 24,669 | | | | (10,544 | ) | | | 14,125 | |
| Other | | | 18,586 | | | | (13,842 | ) | | | 4,744 | | | | 17,633 | | | | (12,064 | ) | | | 5,569 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Subtotal | | | 78,219 | | | | (41,370 | ) | | | 36,849 | | | | 75,747 | | | | (36,119 | ) | | | 39,628 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 84,419 | | | $ | (41,370 | ) | | $ | 43,049 | | | $ | 81,947 | | | $ | (36,119 | ) | | $ | 45,828 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
64
| | | | | | | | | | | | | | | | | | | | |
| | | February 28, 2009 | | February 29, 2008 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | | Net
Carrying
Amount |
Intangible assets with indefinite lives | | $ | 10,000 | | $ | — | | | $ | 10,000 | | $ | — | | $ | — | | | $ | — |
Patents | | | 3,910 | | | (3,303 | ) | | | 607 | | | 3,686 | | | (3,207 | ) | | | 479 |
Trademarks | | | 9,547 | | | (7,949 | ) | | | 1,598 | | | 10,236 | | | (5,211 | ) | | | 5,025 |
Artist relationships | | | 15,750 | | | — | | | | 15,750 | | | — | | | — | | | | — |
Customer relationships | | | 26,105 | | | (9,476 | ) | | | 16,629 | | | 10,342 | | | (1,534 | ) | | | 8,808 |
Leasehold interest | | | — | | | — | | | | — | | | 4,824 | | | (4,824 | ) | | | — |
Other | | | 15,526 | | | (9,517 | ) | | | 6,009 | | | 17,334 | | | (4,208 | ) | | | 13,126 |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 80,838 | | $ | (30,245 | ) | | $ | 50,593 | | $ | 46,422 | | $ | (18,984 | ) | | $ | 27,438 |
| | | | | | | | | | | | | | | | | | | | |
The
majorityCorporation completed the required annual impairment test of indefinite-lived intangible assets in the fourth quarter of 2011 and 2010 and based on the results of the
increase in intangible assets relates to assets acquired in connection with the acquisition of RPG, estimated at approximately $41,500. The U.K. acquisition in 2009 also added approximately $5,800 of intangible assets. The intangible asset with an indefinite life is the RPG trade name. Other intangible assets acquired primarily include customer and artist relationships and franchise networks. The weighted average amortization periodtesting, no impairment charges were recorded for
the intangible assets acquired in 2009 is approximately 9 years. See Note 2 for further information.continuing operations.
In conjunction with the goodwill impairment analysis performed in the third quarter of 2009 for the AG Interactive segment and the UK Reporting Unit discussed above, intangible assets were also tested for impairment in accordance with
SFAS 144.ASC 360. Based on this testing, the Corporation recorded an impairment charge of $10,571 in the AG Interactive segment. The impairment charge was determined using a discounted cash flows analysis and related primarily to customer relationships, developed technology and trademarks.
Amortization expense for intangible assets totaled
$4,583, $5,533 and $7,173
$4,632in 2011, 2010 and
$2,406 in 2009,
2008 and 2007, respectively. Estimated annual amortization expense for the next five years will approximate
$6,629 in 2010, $5,080 in 2011, $4,941$4,748 in 2012,
$4,885$4,681 in 2013,
$4,007 in 2014, $3,121 in 2015 and
$4,420$2,845 in
2014. The weighted average remaining amortization period is approximately 8 years.NOTE 10—DEFERRED COSTS
2016.
In the normal course of its business, the Corporation enters into agreements with certain customers for the supply of greeting cards and related products. Under these agreements, the customer
typically receivesmay receive from the Corporation a combination of cash payments, credits, discounts, allowances and other incentive considerations to be earned by the customer as product is purchased from the Corporation over the stated term of the agreement or the
effective time period of the agreement to meet a minimum purchase volume commitment. In the event
a contractan agreement is not completed because a minimum purchase volume commitment is not met, in most instances, the Corporation has a claim for unearned advances under the agreement. The
Corporation periodically reviews the progress toward the commitment and adjusts the estimated amortization period accordingly to match the costs with the revenue associated with the agreement. The agreements may or may not specify the Corporation as the sole supplier of social expression products to the customer.
A portion of the total consideration may
not be
payablepaid by the Corporation at the time the agreement is consummated. All future payment commitments are classified as liabilities at inception until paid. The payments that are expected to be made in the next twelve months are classified as “Other current liabilities”
inon the Consolidated Statement of Financial Position and the remaining payment commitments beyond the next twelve
62
months are classified as “Other liabilities.” The Corporation maintains an allowance for deferred costs related to supply agreements of $30,897$10,700 and $29,700$12,400 at February 28, 20092011 and February 29, 2008,2010, respectively. This allowance is included in “Other assets” inon the Consolidated Statement of Financial Position.
Deferred costs and future payment commitments were as follows:
| | | | | | | | | |
| | | February 28, 2011 | | | February 28, 2010 | |
| |
| Prepaid expenses and other | | $ | 88,352 | | | $ | 82,914 | |
| Other assets | | | 327,311 | | | | 310,555 | |
| | | | | | | | | |
| Deferred cost assets | | | 415,663 | | | | 393,469 | |
| Other current liabilities | | | (64,116 | ) | | | (53,701 | ) |
| Other liabilities | | | (76,301 | ) | | | (51,803 | ) |
| | | | | | | | | |
| Deferred cost liabilities | | | (140,417 | ) | | | (105,504 | ) |
| | | | | | | | | |
| Net deferred costs | | $ | 275,246 | | | $ | 287,965 | |
| | | | | | | | | |
65
| | | | | | | | |
| | | February 28, 2009 | | | February 29, 2008 | |
Prepaid expenses and other | | $ | 107,596 | | | $ | 119,069 | |
Other assets | | | 273,311 | | | | 338,003 | |
| | | | | | | | |
Deferred cost assets | | | 380,907 | | | | 457,072 | |
Other current liabilities | | | (55,877 | ) | | | (68,457 | ) |
Other liabilities | | | (22,023 | ) | | | (50,491 | ) |
| | | | | | | | |
Deferred cost liabilities | | | (77,900 | ) | | | (118,948 | ) |
| | | | | | | | |
Net deferred costs | | $ | 303,007 | | | $ | 338,124 | |
| | | | | | | | |
A summary of the changes in the carrying amount of the Corporation’s net deferred costs during the years ended February 28,
2009, February 29, 20082011, 2010 and
February 28, 20072009 is as follows:
| | | | |
Balance at February 28, 2006 | | $ | 515,642 | |
Payments | | | 102,265 | |
Net contract termination | | | (76,438 | ) |
Amortization | | | (154,579 | ) |
Currency translation and other | | | 2,857 | |
| | | | |
Balance at February 28, 2007 | | | 389,747 | |
Payments | | | 104,705 | |
Net contract termination | | | (14,920 | ) |
Amortization | | | (143,223 | ) |
Currency translation and other | | | 1,815 | |
| | | | |
Balance at February 29, 2008 | | | 338,124 | |
Payments | | | 105,952 | |
Amortization | | | (133,548 | ) |
Currency translation and other | | | (7,521 | ) |
| | | | |
Balance at February 28, 2009 | | $ | 303,007 | |
| | | | |
| | | | | |
| Balance at February 29, 2008 | | $ | 338,124 | |
| Payments | | | 105,952 | |
| Amortization | | | (133,548 | ) |
| Currency translation and other | | | (7,521 | ) |
| | | | | |
| Balance at February 28, 2009 | | | 303,007 | |
| Payments | | | 84,345 | |
| Amortization | | | (102,750 | ) |
| Currency translation and other | | | 3,363 | |
| | | | | |
| Balance at February 28, 2010 | | | 287,965 | |
| Payments | | | 83,919 | |
| Amortization | | | (98,181 | ) |
| Currency translation and other | | | 1,543 | |
| | | | | |
| Balance at February 28, 2011 | | $ | 275,246 | |
| | | | | |
| |
| NOTE 11 – | LONG AND SHORT-TERM DEBT |
NOTE 11—LONG AND SHORT-TERM DEBT7.375% NotesOn June 29, 2001, the Corporation issued $175,000 of 7.00% convertible subordinated notes, due on July 15, 2006. The notes were convertible at the option of the holders into Class A common shares of the Corporation at any time before the close of business on July 15, 2006, at a conversion rate of 71.9466 common shares per $1 principal amount of notes.
On May 26, 2006, $159,122 of the 7.00% convertible subordinated notes were exchanged (modified) for a new series of 7.00% convertible subordinated notes due on July 15, 2006. The Corporation paid an exchange fee of $796 that was deferred at May 26, 2006 and amortized over the remaining term of the new convertible subordinated notes. The terms of the new notes were substantially the same as the old notes except that upon conversion, the new notes were settled in cash and Class A common shares. Upon conversion, the old notes could only be settled in Class A common shares. During 2007, the Corporation issued 1,126,026 Class A common shares upon conversion of $15,651 of the old series of 7.00% convertible subordinated notes. Upon settlement of the new series of 7.00% convertible subordinated notes, the Corporation paid $159,122 in cash and issued
63
4,379,339 Class A common shares. The 5,505,365 Class A common shares issued upon conversion of the convertible notes were issued from the Corporation’s treasury shares. This issuance resulted in a treasury stock loss of approximately $200,000, which was recorded against retained earnings.
On May 24, 2006, the Corporation issued $200,000 of 7.375% senior unsecured notes, due on June 1,
2016.2016 (the “Original Senior Notes”). The proceeds from this issuance were used
for theto repurchase
a portion of the Corporation’s 6.10% senior notes, due on August 1, 2028,
thatof which $277,310 were tendered in the Corporation’s tender offer and consent solicitation, that was completed on May 25, 2006.
On May 25, 2006, the Corporation repurchased $277,310 of its 6.10% senior notes due on August 1, 2028 and recorded a charge of $5,055 for the consent payment and other fees associated with the notes repurchased, as well as for the write-off of related deferred financing costs. In conjunction with the tender, the indenture governing the 6.10% senior notes was amended to eliminate certain restrictive covenants and events of default. The balance of the 6.10% senior notes was reclassified to current during the second quarter of 2008 as these notes could be put back to the Corporation on August 1, 2008, at the option of the holders, at 100% of the principal amount provided the holders exercised this option between July 1, 2008 and August 1, 2008. During the second quarter of 2009, $22,509 of these notes were repaid upon exercise of the put option. The balance of the 6.10% senior notes was reclassified to long-term.
On February 24, 2009, the Corporation issued $22,000 of additional 7.375% senior unsecured notes described above (“Additional Senior Notes”) and $32,686 of new 7.375% unsecured notes due on June 1, 2016 (“New Notes”
, together with the Original Senior Notes, and the Additional Senior Notes, the “Notes”) in conjunction with the acquisition of RPG. The original issue discount from the issuance of these notes of $26,249 was recorded as a reduction of the underlying debt issuances and is being amortized over the life of the debt using the effective interest method. Including the original issue discount, the New Notes and the Additional Senior Notes have an effective annualized interest rate of approximately 20.3%. See Note 2 for further information on the acquisition of RPG. Except as described below, the terms of the New Notes and the Additional Senior Notes are the same.
The
New Notes and the Additional Senior Notes will mature on June 1, 2016 and bear interest at a fixed rate of 7.375% per annum, commencing June 1, 2009. The
New Notes and the Additional Senior Notes constitute general, unsecured obligations of the Corporation. The
New Notes and the Additional Senior Notes rank equally with the Corporation’s other senior unsecured indebtedness and senior in right of payment to all of the Corporation’s obligations that are, by their terms, expressly subordinated in right of payment to the
New Notes or the Additional Senior Notes, as applicable. The
Original Senior Notes and the Additional Senior Notes are effectively subordinated to all of the Corporation’s secured indebtedness, including borrowings under its
revolving credit
agreement,facility described below, to the extent of the value of the assets securing such indebtedness. The New Notes are contractually subordinated to amounts outstanding under the credit agreement, and are effectively subordinated to any other secured indebtedness that the Corporation may issue from time to time to the extent of the value of the assets securing such indebtedness.
The New Notes and the Additional Senior Notes generally contain comparable covenants as described below for the Corporation’s credit agreement. The New Notes, however, also provide that if the Corporation incurs more than an additional $10,000 of indebtedness (other than indebtedness under the revolving credit agreementfacility described below or certain other permitted indebtedness), such indebtedness must be (a) pari passu in right of payment to the New Notes and expressly subordinated in right of payment to the credit agreement at least to the same extent as the New Notes, or (b) expressly subordinated in right of payment to the New Notes. Alternatively, the Corporation can
66
redeem the New Notes in whole, but not in part, at a purchase price equal to 100% of the principal amount thereof plus accrued but unpaid interest, if any, or have the subordination provisions removed from the New Notes.
The total fair value of the Corporation’s publicly traded debt, based on quoted market prices, was
$118,966$237,453 (at a carrying value of
$228,618)$232,688) and
$220,406$224,709 (at a carrying value of
$222,690)$230,468) at February 28,
20092011 and
February 29, 2008,2010, respectively.
The carrying amount of the Corporation’s publicly traded debt significantly exceeded its fair value at February 28, 2009 due to the tighter U.S. credit markets.64
Credit Facility
On April 4, 2006, the Corporation entered into a
new $650,000 secured credit
agreement.agreement (the “Original Credit Agreement”). The
new credit agreement included a $350,000 revolving credit facility and a $300,000 delay draw term loan. The Corporation could request one or more term loans until April 4, 2007.
In connection with the execution of this new agreement, the Corporation’s amended and restated credit agreement dated May 11, 2004 was terminated and deferred financing fees of $1,013 were written off. The obligations under the new credit agreement are guaranteed by the Corporation’s material domestic subsidiaries and are secured by substantially all of the personal property of American Greetings Corporation and each of its material domestic subsidiaries, including a pledge of all of the capital stock in substantially all of the Corporation’s domestic subsidiaries and 65% of the capital stock of the Corporation’s first tier foreign subsidiaries. The revolving credit facility
willwas scheduled to mature on April 4, 2011 and any outstanding term loans
willwere scheduled to mature on April 4, 2013. Each term loan
willwas to amortize in equal quarterly installments equal to 0.25% of the amount of such term loan, beginning on April 4, 2007, with the balance payable on April 4, 2013.
Revolving loans denominated in U.S. dollars under the new credit agreement will bear interest at a rate per annum based on the then applicable London Inter-Bank Offer Rate (“LIBOR”) or the alternate base rate (“ABR”), as defined in the credit agreement, in each case, plus margins adjusted according to the Corporation’s leverage ratio. Term loans will bear interest at a rate per annum based on either LIBOR plus 150 basis points or based on the ABR, as defined in the credit agreement, plus 25 basis points. The Corporation pays an annual commitment fee of 25 basis points on the undrawn portion of the revolving credit facility and 62.5 basis points on the undrawn portion of the term loan. Commencing on November 30, 2006, in accordance with the terms of the new credit agreement, the commitment fee on the revolving facility fluctuates based on the Corporation’s leverage ratio.
On February 26, 2007, the credit agreement dated April 4, 2006 was amended. The amendment decreased the size of the term loan facility to $100,000 and extended the period during which the Corporation may borrow on the term
loan until April 4, 2008. In connection with the reduction of the term loan facility, deferred financing fees of $1,128 were written off. Further, it extended the commitment fee on the term loan through April 4, 2008 and increased the fee to 75 basis points on the undrawn portion of the loan.
The start of the amortization period was also changed from April 4, 2007 to April 4, 2008.On March 28, 2008, the aforementioned credit agreement was further amended. The amendment extended the period during which the Corporation may borrow on the term loan until April 3, 2009 and changes the start of the amortization period from April 4, 2008 until April 3, 2009.
On February 23, 2009, the Corporation drew down $100,000 in principal amount under the term loan.
On June 11, 2010, the Corporation further amended and restated its Original Credit Agreement by entering into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”). Pursuant to the terms of the Amended and Restated Credit Agreement, the Corporation may continue to borrow, repay and re-borrow up to $350,000 under the revolving credit facility, with the ability to increase the size of the facility to up to $400,000, subject to customary conditions. The Amended and Restated Credit Agreement also continues to provide for a $25,000sub-limit for the issuance of swing line loans and a $100,000sub-limit for the issuance of letters of credit. The proceeds of the term loan willborrowings under the Amended and Restated Credit Agreement may be used to provide working capital and for other general corporate purposes.
The obligations under the Amended and Restated Credit Agreement are guaranteed by the Corporation’s ability to draw down term loans expires on April 3, 2009. Accordingly, in lightmaterial domestic subsidiaries and are secured by substantially all of current market conditions,the personal property of the Corporation drewand each of its material domestic subsidiaries, including a pledge of all of the capital stock in substantially all of the Corporation’s domestic subsidiaries and 65% of the capital stock of the Corporation’s material first tier international subsidiaries. The Amended and Restated Credit Agreement, including revolving loans thereunder, will mature on June 11, 2015. In connection with the Amended and Restated Credit Agreement, the term loan was terminated and the Corporation repaid the full $99,000 outstanding under the term loan using cash on hand.
Revolving loans that are denominated in U.S. dollars will bear interest at either the U.S. base rate or the London Inter-Bank Offer Rate (“LIBOR”), at the Corporation’s election, plus a margin determined according to the Corporation’s leverage ratio. Swing line loans will bear interest at a quoted rate agreed upon by the Corporation and the swing line lender. In addition to interest, the Corporation is required to pay commitment fees on the facilityunused portion of the revolving credit facility. The commitment fee rate is initially 0.50% per annum and is subject to provide it with greater financial flexibilityadjustment thereafter based on the Corporation’s leverage ratio.
The Amended and
to enhance liquidity for the long term.The credit agreementRestated Credit Agreement contains certain restrictive covenants that are customary for similar credit arrangements, including covenants relating to limitations on liens, dispositions, issuance of debt, investments, payment of dividends, repurchases of capital stock, acquisitions and transactions with affiliates. There are also financial performance covenants that require the Corporation to maintain a maximum leverage ratio and a minimum interest coverage ratio. The credit agreement also requires the Corporation to make certain mandatory prepayments of outstanding indebtedness using the net cash proceeds received from certain dispositions, events of loss and additional indebtedness that the Corporation may incur from time to time.
67
On September 23, 2008, the credit agreement was further amended as follows: (1) to permit the Corporation to sell its Strawberry Shortcake, Care Bears and Sushi Pack properties; (2) to increase the permitted level of acquisitions that the Corporation may make from $200,000 to $325,000; (3) to authorize the Corporation to further amend its accounts receivable facility described below to allow its wholly-owned, consolidated accounts receivable subsidiary, AGC Funding Corporation (“AGC Funding”), to enter into insurance and other
65
transactions that may mitigate credit risks associated with the collection of accounts receivable; and (4) to permit the Corporation to grant certain liens to third parties engaged in connection with the production, marketing and exploitation of the Corporation’s entertainment properties.
Receivables Purchase Agreement
The Corporation is also party to an amended and restated receivables purchase agreement that
originally had available financing of up to $150,000. The agreement
expireswas set to expire on October 23, 2009. Under the amended and restated receivables purchase agreement, the Corporation and certain of its subsidiaries sell accounts receivable to AGC Funding, which in turn sells undivided interests in eligible accounts receivable to third party financial institutions as part of a process that provides funding to the Corporation similar to a revolving credit facility. Funding under the facility may be used for working capital, general corporate purposes and the issuance of letters of credit. This arrangement is accounted for as a financing transaction.
On March 28, 2008, the amended and restated receivables purchase agreement was amended to decrease the amount of available financing from $150,000 to $90,000.
On September 23, 2009, the amended and restated receivables purchase agreement was further amended. The amendment decreased the amount of available financing under the agreement from $90,000 to $80,000 and allows certain receivables to be excluded from the program in connection with the exercise of rights under insurance and other products that may be obtained from time to time by the Corporation or other originators that are designed to mitigate credit risks associated with the collection of accounts receivable. The amendment also extended the maturity date to September 21, 2012; provided, however, that in addition to customary termination provisions, the receivables purchase agreement will terminate upon termination of the liquidity commitments obtained by the purchaser groups from third party liquidity providers. Such commitments may be made available to the purchaser groups for364-day periods only (initial364-day period began on September 23, 2009), and there can be no assurances that the third party liquidity providers will renew or extend their commitments under the receivables purchase agreement. If that is the case, the receivables purchase agreement will terminate and the Corporation will not receive the benefit of the entire three-year term of the agreement. On September 22, 2010, the liquidity commitments were renewed for an additional364-day period.
The interest rate under the accounts receivable securitization facility is based on (i) commercial paper interest rates, (ii) LIBOR rates plus an applicable margin or (iii) a rate that is the higher of the prime rate as announced by the applicable purchaser financial institution or the federal funds rate plus 0.50%. AGC Funding pays an annual commitment fee of
2860 basis points on the unfunded portion of the accounts receivable securitization facility, together with customary administrative fees on outstanding letters of credit that have been issued and on outstanding amounts funded under the facility.
The amended and restated receivables purchase agreement contains representations, warranties, covenants and indemnities customary for facilities of this type, including the obligation of the Corporation to maintain the same consolidated leverage ratio as it is required to maintain under its secured credit facility.
On March 28, 2008, the amended and restated receivables purchase agreement was further amended. The amendment decreased the amount of available financing from $150,000 to $90,000.
There were no balances outstanding under the amended and restated receivables purchase agreement as of February 28,
20092011 or
February 29, 2008.2010.
At February 28,
2009,2011, the Corporation was in compliance with its financial covenants under the borrowing agreements described above.
As of February 28, 2011, there were no balances outstanding under the Corporation’s revolving credit facility or receivables purchase agreement, neither of which is publicly traded debt. The total fair value of the Corporation’s non-publicly traded debt, term loan and revolving credit facility, based on comparable publicly traded debt prices, was $99,250 (at a carrying value of $99,250) at February 28, 2010.
There was no debt due within one year as of February 28, 2011. Debt due within one year as of February 28, 2010 was as follows:$1,000.
68
| | | | | | |
| | | February 28, 2009 | | February 29, 2008 |
6.10% senior notes, due 2028 | | $ | — | | $ | 22,690 |
Term loan facility | | | 750 | | | — |
| | | | | | |
| | $ | 750 | | $ | 22,690 |
| | | | | | |
Long-term debt and their related calendar year due dates, net of unamortized discounts, were as follows:
| | | | | | |
| | | February 28, 2009 | | February 29, 2008 |
7.375% senior notes, due 2016 | | $ | 211,440 | | $ | 200,000 |
7.375% notes, due 2016 | | | 16,997 | | | — |
Term loan facility, due 2013 | | | 99,250 | | | — |
Revolving credit facility, due 2011 | | | 61,600 | | | 20,100 |
6.10% senior notes, due 2028 | | | 181 | | | — |
Other | | | 5 | | | 518 |
| | | | | | |
| | $ | 389,473 | | $ | 220,618 |
| | | | | | |
66
At February 28, 2009, the balances outstanding on the revolving credit facility and term loan facility bear interest at a rate of approximately 2.4% and 3.2%, respectively. In addition to the balances outstanding under the aforementioned agreement, the
| | | | | | | | | |
| | | February 28, 2011 | | | February 28, 2010 | |
| |
| 7.375% senior notes, due 2016 | | $ | 213,077 | | | $ | 212,184 | |
| 7.375% notes, due 2016 | | | 19,430 | | | | 18,103 | |
| Term loan facility | | | - | | | | 98,250 | |
| 6.10% senior notes, due 2028 | | | 181 | | | | 181 | |
| Other | | | - | | | | 5 | |
| | | | | | | | | |
| | | $ | 232,688 | | | $ | 328,723 | |
| | | | | | | | | |
The Corporation
also provides financing for certain transactions with some of its vendors, which includes a combination of various
guaranteesguaranties and letters of credit. At February 28,
2009,2011, the Corporation had credit arrangements to support the letters of credit in the amount of
$113,605$134,014 with
$26,168$44,730 of credit outstanding.
Aggregate maturities of long-term debt,
by fiscal year, are as follows:
| | | |
2010 | | $ | 750 |
2011 | | | 1,000 |
2012 | | | 1,000 |
2013 | | | 1,000 |
2014 | | | 157,850 |
Thereafter | | | 254,867 |
| | | |
| | $ | 416,467 |
| | | |
| | | | | |
| 2012 | | $ | - | |
| 2013 | | | - | |
| 2014 | | | - | |
| 2015 | | | - | |
| 2016 | | | - | |
| Thereafter | | | 254,867 | |
| | | | | |
| | | $ | 254,867 | |
| | | | | |
Interest paid in cash on short-term and long-term debt was $21,637 in 2011, $23,294 in 2010 and $21,721 in 2009.
Guaranties
In April 2009, $18,512the Corporation sold certain of the assets of its Retail Operations segment to Schurman and purchased from Schurman its Papyrus trademark and its Papyrus wholesale business division. As part of the transaction, the Corporation agreed to provide Schurman limited credit support through the provision of a Liquidity Guaranty and a Bridge Guaranty in 2008 and $32,410 in 2007. In 2007, interest expense included $5,055 relatedfavor of the lenders under Schurman’s Senior Credit Facility.
Pursuant to the early retirementterms of substantially allthe Liquidity Guaranty, the Corporation has guaranteed the repayment of our 6.10% senior notes includingup to $12,000 of Schurman’s borrowings under the consent payment, fees paidSenior Credit Facility to help ensure that Schurman has sufficient borrowing availability under this facility. The Liquidity Guaranty is required to be backed by a letter of credit for the term of the Liquidity Guaranty, which is currently anticipated to end in January 2014. Pursuant to the terms of the Bridge Guaranty, the Corporation has guaranteed the repayment of up to $12,000 of Schurman’s borrowings under the Senior Credit Facility until Schurman is able to include the inventory and other assets of the acquired retail stores in its borrowing base. The Bridge Guaranty is required to be backed by a letter of credit. The letters of credit required to back both guaranties are included within the $44,730 outstanding letters of credit mentioned above. The Bridge Guaranty is scheduled to expire in January 2014; however, upon the Corporation’s request, the Bridge Guaranty may be reduced as Schurman is able to include such inventory and other assets in its borrowing base. Pursuant to such a request, on April 1, 2011, the Bridge Guaranty was terminated and the write-offassociated letter of deferred financing costs. Deferred financing costscredit was released. See Note 1 for further information. The Corporation’s obligations under the Liquidity Guaranty and the Bridge Guaranty generally may not be triggered unless Schurman’s lenders under its Senior Credit Facility have substantially completed the liquidation of $1,013the collateral under Schurman’s Senior Credit Facility, or 91 days after the liquidation is started, whichever is earlier, and $1,128 associatedwill be limited to the deficiency, if any, between the amount owed and the amount collected in connection with the terminationliquidation. There was no triggering event or liquidation of collateral as of February 28, 2011 requiring the use of the credit facility in April 2006 and the amendment of the term loan facility in February 2007, respectively, were also written off during the year. These amounts were partially offset by $2,390 for the net gain recognized on an interest rate derivative entered into and settled during 2007.guaranties.
69
NOTE 12—RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
| |
| NOTE 12 – | RETIREMENT AND POSTRETIREMENT BENEFIT PLANS |
The Corporation has a
non-contributorydiscretionary profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. Corporate contributions to the profit-sharing plan were
$5,184$9,759 and
$6,751$9,338 for
20082011 and
2007,2010, respectively. In addition, the Corporation
at its discretion, matches a portion of 401(k) employee contributions. The Corporation’s matching contributions were
$4,521$4,875 and
$4,545$4,787 for
20082011 and
2007,2010, respectively. Based on the 2009 operating results, the Corporation elected not to make profit-sharing or 401(k) matching contributions for 2009.
Employees of certain foreign subsidiaries are covered by local pension or retirement plans. Annual expense and accumulated benefits of these foreign plans were not material to the consolidated financial statements.
The Corporation also participates in a multi-employer pension plan covering certain domestic employees who are part of a collective bargaining agreement. Total pension expense for the multi-employer plan, representing contributions to the plan, was
$467, $417 and $511
$554in 2011, 2010 and
$753 in 2009,
2008 and 2007, respectively.
The Corporation has
nonqualified deferred compensation plans that provide certain officers and directors with the opportunity to defer receipt of compensation and director fees, respectively, including compensation received in the form of the Corporation’s common shares. The Corporation funds these deferred compensation liabilities by making contributions to a rabbi trust. In accordance with
EITF Issue No. 97-14, “Accounting forASC Topic710-10-25, “Compensation – Recognition – Deferred Compensation
Arrangements Where Amounts Earned Are Held in a– Rabbi Trust,
and Invested,” both the trust assets and the related obligation associated with deferrals of the Corporation’s common shares are recorded in equity at cost and offset each other. There were approximately
0.30.2 million common shares in the trust at February 28,
20092011 with a cost of
$5,133$3,368 compared to approximately 0.2 million common shares with a cost of
$3,571$2,856 at February
29, 2008.67
28, 2010.
In 2001, in connection with its acquisition of Gibson Greetings, Inc. (“Gibson”), the Corporation assumed the obligations and assets of Gibson’s defined benefit pension plan (the “Gibson Retirement Plan”) that covered substantially all Gibson employees who met certain eligibility requirements. Benefits earned under the Gibson Retirement Plan have been frozen and participants no longer accrue benefits after December 31, 2000. The Gibson Retirement Plan has a measurement date of February 28 or 29. No contributions were made to the plan in either
20092011 or
2008.2010. The Gibson Retirement Plan was under-funded at February 28,
20092011 and
fully funded at February 29, 2008.2010.
The Corporation also has an unfunded
nonqualified defined benefit pension plan (the “Supplemental Executive Retirement Plan”) covering certain management employees. The Supplemental Executive Retirement Plan has a measurement date of February 28 or 29.
The Supplemental Executive Retirement Plan was amended in 2005 to change the twenty-year cliff-vesting period with no minimum plan service requirements to a ten-year cliff-vesting period with a requirement that at least five years of that service must be as a plan participant. The plan was amended in 2008 to authorize the Corporation to make a one-time offer to each participant who is no longer employed by American Greetings, but is either currently receiving payments under the plan or has a deferred vested benefit under the plan to receive a lump sum cash payment in 2008 in satisfaction of all future benefit payments under the Supplemental Executive Retirement Plan. As a result, a settlement expense of $105 was recorded during 2008.The Corporation also has several defined benefit pension plans at its Canadian subsidiary. These include a defined benefit pension plan covering most Canadian salaried employees, which was closed to new participants effective January 1, 2006, but eligible members continue to accrue benefits and an hourly plan in which benefits earned have been frozen and participants no longer accrue benefits after March 1, 2000. There are also two unfunded plans, one that covers a supplemental executive retirement pension relating to an employment agreement and one that pays supplemental pensions to certain former hourly employees pursuant to a prior collective bargaining agreement. All plans have a measurement date of February 28 or 29. During
2008,2010, the Corporation settled a portion of its obligation under
one of the
defined benefit pension plans at its Canadian
subsidiary. Forhourly plan. The Corporation made a contribution to the plan, which was used to purchase annuities for the affected
participants, the plan was converted to a defined contribution plan.participants. As a result, a settlement expense of
$1,067$126 was recorded.
The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits to full-time United States employees who meet certain age, service and other requirements. The plan is contributory;contributory, with retiree contributions adjusted periodically, and contains other cost-sharing features such as deductibles and coinsurance. The plan has a measurement date of February 28 or 29. The Corporation made significant changes to its retiree health care plan in 2002 by imposing dollar maximums on the per capita cost paid by the Corporation for future years. The plan was amended in 2004 and 2005 to further limit the Corporation’s contributions at certain locations. The Corporation maintains a trust for the payment of retiree health care benefits. This trust is funded at the discretion of management. The plan has a measurement date of February 28 or 29. The Corporation made changes to its postretirement health care plan in the current year by reducing the employer subsidy by the Corporation for certain groups as well as removing the death coverage for the spouses of active employees and removing the disability coverage for disabled employees unless the employee was already eligible for retiree medical coverage at the time of death or disability, respectively.
70
68
The following table sets forth summarized information on the defined benefit pension plans and postretirement benefits plan:
| | | | | | | | | | | | | | | | |
| | | Pension Plans | | | Postretirement Benefits | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Change in benefit obligation: | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 152,565 | | | $ | 162,434 | | | $ | 139,665 | | | $ | 143,803 | |
Service cost | | | 954 | | | | 987 | | | | 3,495 | | | | 3,885 | |
Interest cost | | | 9,128 | | | | 8,919 | | | | 8,682 | | | | 8,229 | |
Participant contributions | | | 46 | | | | 54 | | | | 4,546 | | | | 4,618 | |
Retiree drug subsidy payments | | | — | | | | — | | | | 2,898 | | | | — | |
Plan amendments | | | — | | | | 90 | | | | — | | | | — | |
Actuarial gain | | | (6,311 | ) | | | (7,147 | ) | | | (31,191 | ) | | | (12,255 | ) |
Benefit payments | | | (10,081 | ) | | | (10,502 | ) | | | (7,982 | ) | | | (8,615 | ) |
Settlements | | | — | | | | (7,280 | ) | | | — | | | | — | |
Currency exchange rate changes | | | (6,185 | ) | | | 5,010 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Benefit obligation at end of year | | | 140,116 | | | | 152,565 | | | | 120,113 | | | | 139,665 | |
| | | | |
Change in plan assets: | | | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | | 126,023 | | | | 135,526 | | | | 76,686 | | | | 77,114 | |
Actual return on plan assets | | | (26,002 | ) | | | 500 | | | | (11,352 | ) | | | 3,761 | |
Employer contributions | | | 1,776 | | | | 3,134 | | | | — | | | | (192 | ) |
Participant contributions | | | 46 | | | | 54 | | | | 4,546 | | | | 4,618 | |
Benefit payments | | | (10,081 | ) | | | (10,502 | ) | | | (7,982 | ) | | | (8,615 | ) |
Settlements | | | — | | | | (7,280 | ) | | | — | | | | — | |
Currency exchange rate changes | | | (5,273 | ) | | | 4,591 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Fair value of plan assets at end of year | | | 86,489 | | | | 126,023 | | | | 61,898 | | | | 76,686 | |
| | | | | | | | | | | | | | | | |
Funded status at end of year | | $ | (53,627 | ) | | $ | (26,542 | ) | | $ | (58,215 | ) | | $ | (62,979 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Pension Plans | | | Postretirement Benefits | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| |
| Change in benefit obligation: | | | | | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 162,845 | | | $ | 140,116 | | | $ | 110,921 | | | $ | 120,113 | |
| Service cost | | | 957 | | | | 730 | | | | 2,290 | | | | 2,365 | |
| Interest cost | | | 8,757 | | | | 9,279 | | | | 6,014 | | | | 7,359 | |
| Participant contributions | | | 28 | | | | 32 | | | | 4,165 | | | | 4,591 | |
| Retiree drug subsidy payments | | | - | | | | - | | | | 1,670 | | | | - | |
| Plan amendments | | | 198 | | | | 53 | | | | (7,263 | ) | | | - | |
| Actuarial loss (gain) | | | 5,825 | | | | 22,034 | | | | (18,639 | ) | | | (14,649 | ) |
| Benefit payments | | | (10,567 | ) | | | (10,080 | ) | | | (8,123 | ) | | | (8,858 | ) |
| Settlements | | | 52 | | | | (3,512 | ) | | | - | | | | - | |
| Currency exchange rate changes | | | 2,065 | | | | 4,193 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Benefit obligation at end of year | | | 170,160 | | | | 162,845 | | | | 91,035 | | | | 110,921 | |
| Change in plan assets: | | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | | 102,092 | | | | 86,489 | | | | 66,928 | | | | 61,898 | |
| Actual return on plan assets | | | 11,311 | | | | 21,691 | | | | 7,130 | | | | 11,180 | |
| Employer contributions | | | 3,187 | | | | 4,001 | | | | (3,165 | ) | | | (1,883 | ) |
| Participant contributions | | | 28 | | | | 32 | | | | 4,165 | | | | 4,591 | |
| Benefit payments | | | (10,567 | ) | | | (10,080 | ) | | | (8,123 | ) | | | (8,858 | ) |
| Settlements | | | 52 | | | | (3,512 | ) | | | - | | | | - | |
| Currency exchange rate changes | | | 1,778 | | | | 3,471 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Fair value of plan assets at end of year | | | 107,881 | | | | 102,092 | | | | 66,935 | | | | 66,928 | |
| | | | | | | | | | | | | | | | | |
| Funded status at end of year | | $ | (62,279 | ) | | $ | (60,753 | ) | | $ | (24,100 | ) | | $ | (43,993 | ) |
| | | | | | | | | | | | | | | | | |
Amounts recognized inon the Consolidated Statement of Financial Position consist of the following:
| | | | | | | | | | | | | | | | | |
| | | Pension Plans | | | Postretirement Benefits | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| |
| Accrued compensation and benefits | | $ | (2,347 | ) | | $ | (2,335 | ) | | $ | - | | | $ | - | |
| Other liabilities | | | (59,932 | ) | | | (58,418 | ) | | | (24,101 | ) | | | (43,993 | ) |
| | | | | | | | | | | | | | | | | |
| Net amount recognized | | $ | (62,279 | ) | | $ | (60,753 | ) | | $ | (24,101 | ) | | $ | (43,993 | ) |
| | | | | | | | | | | | | | | | | |
| Amounts recognized in accumulated other comprehensive income: | | | | | | | | | | | | | | | | |
| Net actuarial loss | | $ | 56,938 | | | $ | 55,275 | | | $ | 1,268 | | | $ | 23,611 | |
| Net prior service cost (credit) | | | 847 | | | | 828 | | | | (11,316 | ) | | | (11,766 | ) |
| Net transition obligation | | | 43 | | | | 46 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive income | | $ | 57,828 | | | $ | 56,149 | | | $ | (10,048 | ) | | $ | 11,845 | |
| | | | | | | | | | | | | | | | | |
71
| | | | | | | | | | | | | | | | |
| | | Pension Plans | | | Postretirement Benefits | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Other assets | | $ | 623 | | | $ | 7,861 | | | $ | — | | | $ | — | |
Accrued compensation and benefits | | | (2,076 | ) | | | (2,018 | ) | | | — | | | | — | |
Other liabilities | | | (52,174 | ) | | | (32,385 | ) | | | (58,215 | ) | | | (62,979 | ) |
| | | | | | | | | | | | | | | | |
Net amount recognized | | $ | (53,627 | ) | | $ | (26,542 | ) | | $ | (58,215 | ) | | $ | (62,979 | ) |
| | | | | | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive income: | | | | | | | | | | | | | | | | |
Net actuarial loss | | $ | 50,277 | | | $ | 24,345 | | | $ | 47,720 | | | $ | 66,683 | |
Net prior service cost (credit) | | | 1,036 | | | | 1,296 | | | | (19,184 | ) | | | (26,602 | ) |
Net transition obligation | | | 43 | | | | 63 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Accumulated other comprehensive income | | $ | 51,356 | | | $ | 25,704 | | | $ | 28,536 | | | $ | 40,081 | |
| | | | | | | | | | | | | | | | |
For the defined benefit pension plans, the estimated net loss, prior service cost and transition obligation that will be amortized from accumulated other comprehensive income into periodic benefit cost over the next fiscal year are approximately
$1,806, $258,$2,392, $180 and
$5,$6, respectively. For the postretirement benefit plan, the estimated net loss and prior service credit that will be amortized from accumulated other comprehensive income into periodic benefit cost over the next fiscal year are approximately
$3,000$0 and ($
7,400)2,500), respectively.
69
The following table presents significant weighted-average assumptions to determine benefit obligations and net periodic benefit cost:
| | | | | | | | | | |
| | | Pension Plans | | Postretirement Benefits | |
| | 2009 | | 2008 | | 2009 | | | 2008 | |
Weighted average discount rate used to determine: | | | | | | | | | | |
Benefit obligations at measurement date | | | | | | | | | | |
US | | 6.75% | | 6.50% | | 6.75 | % | | 6.50 | % |
International | | 7.50% | | 5.75% | | N/A | | | N/A | |
Net periodic benefit cost | | | | | | | | | | |
US | | 6.50% | | 5.75% | | 6.50 | % | | 5.75 | % |
International | | 5.75% | | 5.25% | | N/A | | | N/A | |
Expected long-term return on plan assets: | | | | | | | | | | |
US | | 7.00% | | 7.00% | | 7.00 | % | | 7.00 | % |
International | | 6.00% | | 6.00% | | N/A | | | N/A | |
Rate of compensation increase: | | | | | | | | | | |
US | | Up to 6.50% | | Up to 6.50% | | N/A | | | N/A | |
International | | Up to 3.50% | | 3.50-4.00% | | N/A | | | N/A | |
Health care cost trend rates: | | | | | | | | | | |
For year ending February 28 or 29 | | N/A | | N/A | | 9.00 | % | | 9.50 | % |
For year following February 28 or 29 | | N/A | | N/A | | 9.00 | % | | 9.00 | % |
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate) | | N/A | | N/A | | 5.00 | % | | 6.00 | % |
Year the rate reaches the ultimate trend rate | | N/A | | N/A | | 2017 | | | 2014 | |
| | | | | | | | | |
| | | Pension Plans | | Postretirement Benefits |
| | | 2011 | | 2010 | | 2011 | | 2010 |
| |
| Weighted average discount rate used to determine: | | | | | | | | |
| Benefit obligations at measurement date | | | | | | | | |
| US | | 5.25% | | 5.50-5.75% | | 5.50% | | 5.75% |
| International | | 5.15% | | 5.50% | | N/A | | N/A |
| Net periodic benefit cost | | | | | | | | |
| US | | 5.50-5.75% | | 6.75% | | 5.75% | | 6.75% |
| International | | 5.50% | | 7.50% | | N/A | | N/A |
| Expected long-term return on plan assets: | | | | | | | | |
| US | | 7.00% | | 7.00% | | 7.00% | | 7.00% |
| International | | 5.50% | | 6.00% | | N/A | | N/A |
| Rate of compensation increase: | | | | | | | | |
| US | | Up to 6.50% | | Up to 6.50% | | N/A | | N/A |
| International | | Up to 3.00% | | Up to 3.50% | | N/A | | N/A |
| Health care cost trend rates: | | | | | | | | |
| For year ending February 28 or 29 | | N/A | | N/A | | 8.50% | | 9.00% |
| For year following February 28 or 29 | | N/A | | N/A | | 10.00% | | 8.50% |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | N/A | | N/A | | 5.00% | | 5.00% |
| Year the rate reaches the ultimate trend rate | | N/A | | N/A | | 2021 | | 2017 |
For 2009,2011, the net periodic pension cost for the pension plans was based on long-term asset rates of return as noted above. In developing these expected long-term rate of return assumptions, consideration was given to expected returns based on the current investment policy and historical return for the asset classes.
72
For
2009,2011, the Corporation assumed a long-term asset rate of return of 7% to calculate the expected return for the postretirement benefit plan. In developing the 7% expected long-term rate of return assumption, consideration was given to various factors, including a review of asset class return expectations based on historical
15-year compounded returns for such asset classes.
This rate is also consistent with actual compounded returns earned by the plan over several years. | | | | | | | | |
| | | 2009 | | | 2008 | |
Effect of a 1% increase in health care cost trend rate on: | | | | | | | | |
Service cost plus interest cost | | $ | 1,429 | | | $ | 1,105 | |
Accumulated postretirement benefit obligation | | | 11,298 | | | | 10,311 | |
| | |
Effect of a 1% decrease in health care cost trend rate on: | | | | | | | | |
Service cost plus interest cost | | | (1,155 | ) | | | (935 | ) |
Accumulated postretirement benefit obligation | | | (9,362 | ) | | | (8,883 | ) |
| | | | | | | | | |
| | | 2011 | | | 2010 | |
| |
| Effect of a 1% increase in health care cost trend rate on: | | | | | | | | |
| Service cost plus interest cost | | $ | 915 | | | $ | 1,036 | |
| Accumulated postretirement benefit obligation | | | 7,571 | | | | 10,262 | |
| Effect of a 1% decrease in health care cost trend rate on: | | | | | | | | |
| Service cost plus interest cost | | | (739 | ) | | | (841 | ) |
| Accumulated postretirement benefit obligation | | | (6,030 | ) | | | (8,373 | ) |
The following table presents selected pension plan information:
| | | | | | |
| | | 2009 | | 2008 |
For all pension plans: | | | | | | |
Accumulated benefit obligation | | $ | 136,595 | | $ | 149,054 |
| | |
For pension plans that are not fully funded: | | | | | | |
Projected benefit obligation | | | 126,386 | | | 37,798 |
Accumulated benefit obligation | | | 122,923 | | | 34,374 |
Fair value of plan assets | | | 72,136 | | | 3,395 |
70
| | | | | | | | | |
| | | 2011 | | | 2010 | |
| |
| For all pension plans: | | | | | | | | |
| Accumulated benefit obligation | | $ | 164,823 | | | $ | 158,351 | |
| For pension plans that are not fully funded: | | | | | | | | |
| Projected benefit obligation | | | 170,160 | | | | 162,845 | |
| Accumulated benefit obligation | | | 164,823 | | | | 158,351 | |
| Fair value of plan assets | | | 107,881 | | | | 102,092 | |
A summary of the components of net periodic benefit cost for the pension plans is as follows:
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Components of net periodic benefit cost: | | | | | | | | | | | | |
| Service cost | | $ | 957 | | | $ | 730 | | | $ | 954 | |
| Interest cost | | | 8,757 | | | | 9,279 | | | | 9,128 | |
| Expected return on plan assets | | | (6,588 | ) | | | (5,637 | ) | | | (8,049 | ) |
| Amortization of transition obligation | | | 6 | | | | 6 | | | | 6 | |
| Amortization of prior service cost | | | 178 | | | | 261 | | | | 260 | |
| Amortization of actuarial loss | | | 133 | | | | 1,942 | | | | 459 | |
| Settlements | | | (3 | ) | | | 126 | | | | - | |
| | | | | | | | | | | | | |
| Net periodic benefit cost | | | 3,440 | | | | 6,707 | | | | 2,758 | |
| Other changes in plan assets and benefit obligations recognized in other comprehensive income: | | | | | | | | | | | | |
| Actuarial loss | | | 1,175 | | | | 6,069 | | | | 27,681 | |
| Prior service cost | | | 198 | | | | 53 | | | | - | |
| Amortization of prior service cost | | | (178 | ) | | | (261 | ) | | | (260 | ) |
| Amortization of actuarial loss | | | (133 | ) | | | (1,942 | ) | | | (459 | ) |
| Amortization of transition obligation | | | (6 | ) | | | (6 | ) | | | (6 | ) |
| Settlements | | | 3 | | | | (126 | ) | | | - | |
| | | | | | | | | | | | | |
| Total recognized in net periodic benefit cost and other comprehensive income | | $ | 4,499 | | | $ | 10,494 | | | $ | 29,714 | |
| | | | | | | | | | | | | |
73
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Components of net periodic benefit cost: | | | | | | | | | | | | |
Service cost | | $ | 954 | | | $ | 987 | | | $ | 924 | |
Interest cost | | | 9,128 | | | | 8,919 | | | | 8,668 | |
Expected return on plan assets | | | (8,049 | ) | | | (8,761 | ) | | | (8,524 | ) |
Amortization of transition obligation | | | 6 | | | | 6 | | | | 6 | |
Amortization of prior service cost | | | 260 | | | | 260 | | | | 254 | |
Amortization of actuarial loss | | | 459 | | | | 1,454 | | | | 2,218 | |
Settlements | | | — | | | | 1,172 | | | | — | |
| | | | | | | | | | | | |
Net periodic benefit cost | | | 2,758 | | | | 4,037 | | | | 3,546 | |
| | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive income: | | | | | | | | | | | | |
Actuarial loss | | | 27,681 | | | | 1,047 | | | | 24,991 | |
Prior service cost | | | — | | | | 90 | | | | 1,465 | |
Transition obligation | | | — | | | | — | | | | 59 | |
Amortization of prior service cost | | | (260 | ) | | | (260 | ) | | | — | |
Amortization of actuarial loss | | | (459 | ) | | | (1,454 | ) | | | — | |
Amortization of transition obligation | | | (6 | ) | | | (6 | ) | | | — | |
Settlements | | | — | | | | (1,172 | ) | | | — | |
| | | | | | | | | | | | |
Total recognized in net periodic benefit cost and other comprehensive income | | $ | 29,714 | | | $ | 2,282 | | | $ | 30,061 | |
| | | | | | | | | | | | |
A summary of the components of net periodic benefit cost for the postretirement benefit plan is as follows:
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Components of net periodic benefit cost: | | | | | | | | | | | | |
Service cost | | $ | 3,495 | | | $ | 3,885 | | | $ | 3,681 | |
Interest cost | | | 8,682 | | | | 8,229 | | | | 7,733 | |
Expected return on plan assets | | | (5,100 | ) | | | (5,097 | ) | | | (5,098 | ) |
Amortization of prior service credit | | | (7,418 | ) | | | (7,418 | ) | | | (7,418 | ) |
Amortization of actuarial loss | | | 4,224 | | | | 6,042 | | | | 7,022 | |
| | | | | | | | | | | | |
Net periodic benefit cost | | | 3,883 | | | | 5,641 | | | | 5,920 | |
| | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive income: | | | | | | | | | | | | |
Actuarial (gain) loss | | | (14,739 | ) | | | (10,919 | ) | | | 83,644 | |
Prior service credit | | | — | | | | — | | | | (34,020 | ) |
Amortization of actuarial loss | | | (4,224 | ) | | | (6,042 | ) | | | — | |
Amortization of prior service credit | | | 7,418 | | | | 7,418 | | | | — | |
| | | | | | | | | | | | |
Total recognized in net periodic benefit cost and other comprehensive income | | $ | (7,662 | ) | | $ | (3,902 | ) | | $ | 55,544 | |
| | | | | | | | | | | | |
71
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Components of net periodic benefit cost: | | | | | | | | | | | | |
| Service cost | | $ | 2,290 | | | $ | 2,365 | | | $ | 3,495 | |
| Interest cost | | | 6,014 | | | | 7,359 | | | | 8,682 | |
| Expected return on plan assets | | | (4,503 | ) | | | (4,107 | ) | | | (5,100 | ) |
| Amortization of prior service credit | | | (7,712 | ) | | | (7,418 | ) | | | (7,418 | ) |
| Amortization of actuarial loss | | | 1,078 | | | | 2,386 | | | | 4,224 | |
| | | | | | | | | | | | | |
| Net periodic benefit cost | | | (2,833 | ) | | | 585 | | | | 3,883 | |
| Other changes in plan assets and benefit obligations recognized in other comprehensive income: | | | | | | | | | | | | |
| Actuarial gain | | | (21,265 | ) | | | (21,723 | ) | | | (14,739 | ) |
| Prior service credit added during the year | | | (7,263 | ) | | | - | | | | - | |
| Amortization of actuarial loss | | | (1,078 | ) | | | (2,386 | ) | | | (4,224 | ) |
| Amortization of prior service credit | | | 7,712 | | | | 7,418 | | | | 7,418 | |
| | | | | | | | | | | | | |
| Total recognized in net periodic benefit cost and other comprehensive income | | $ | (24,727 | ) | | $ | (16,106 | ) | | $ | (7,662 | ) |
| | | | | | | | | | | | | |
At February 28,
20092011 and
February 29, 2008,2010, the assets of the plans are held in trust and allocated as follows:
| | | | | | | | | | |
| | | Pension Plans | | Postretirement Benefits |
| | 2009 | | 2008 | | 2009 | | 2008 | | Target Allocation |
Equity securities: | | | | | | | | | | |
US | | 39% | | 53% | | 24% | | 35% | | 15% – 35% |
International | | 24% | | 23% | | N/A | | N/A | | N/A |
Debt securities: | | | | | | | | | | |
US | | 60% | | 46% | | 68% | | 60% | | 55% – 75% |
International | | 59% | | 64% | | N/A | | N/A | | N/A |
Cash and cash equivalents: | | | | | | | | | | |
US | | 1% | | 1% | | 8% | | 5% | | 0% – 20% |
International | | 17% | | 13% | | N/A | | N/A | | N/A |
| | | | | | | | | | | | | | | |
| | | Pension Plans | | | Postretirement Benefits |
| | | 2011 | | | 2010 | | | 2011 | | 2010 | | Target Allocation |
| |
| Equity securities: | | | | | | | | | | | | | | |
| US | | | 51 | % | | | 46 | % | | 43% | | 37% | | 15% - 35% |
| International | | | 31 | % | | | 31 | % | | N/A | | N/A | | N/A |
| Debt securities: | | | | | | | | | | | | | | |
| US | | | 48 | % | | | 53 | % | | 54% | | 59% | | 55% - 75% |
| International | | | 67 | % | | | 67 | % | | N/A | | N/A | | N/A |
| Cash and cash equivalents: | | | | | | | | | | | | | | |
| US | | | 1 | % | | | 1 | % | | 3% | | 4% | | 0% - 20% |
| International | | | 2 | % | | | 2 | % | | N/A | | N/A | | N/A |
As of February 28,
2009,2011, the investment policy for the U.S. pension plans
targettargets an approximately even distribution between equity securities and debt securities with a minimal level of cash maintained in order to meet obligations as they come due. The investment policy for the international pension plans
targettargets an approximately
20/30/60/10 distribution between equity securities, debt securities and cash and cash equivalents.
The investment policy for the postretirement benefit plan targets a distribution among equity securities, debt securities and cash and cash equivalents as noted above. All investments are actively managed, with debt securities averaging 2.5 years to maturity with a credit rating of ‘A’ or better. This policy is subject to review and change.
74
The following table summarizes the fair value of the defined benefit pension plan assets at February 28, 2011:
| | | | | | | | | | | | | |
| | | | | | Quoted prices in
| | | | |
| | | | | | active markets for
| | | Significant other
| |
| | | Fair value at
| | | identical assets
| | | observable inputs
| |
| | | February 28, 2011 | | | (Level 1) | | | (Level 2) | |
| |
| U.S. plans: | | | | | | | | | | | | |
| Short-term investments | | $ | 689 | | | $ | 689 | | | $ | - | |
| Equity securities | | | 42,776 | | | | - | | | | 42,776 | |
| Fixed-income funds | | | 40,717 | | | | - | | | | 40,717 | |
| International plans: | | | | | | | | | | | | |
| Short-term investments | | | 639 | | | | 639 | | | | - | |
| Equity securities | | | 7,191 | | | | - | | | | 7,191 | |
| Fixed-income funds | | | 15,869 | | | | - | | | | 15,869 | |
| | | | | | | | | | | | | |
| Total: | | $ | 107,881 | | | $ | 1,328 | | | $ | 106,553 | |
| | | | | | | | | | | | | |
The following table summarizes the fair value of the defined benefit pension plan assets at February 28, 2010:
| | | | | | | | | | | | | |
| | | | | | Quoted prices in
| | | | |
| | | | | | active markets for
| | | Significant other
| |
| | | Fair value at
| | | identical assets
| | | observable inputs
| |
| | | February 28, 2010 | | | (Level 1) | | | (Level 2) | |
| |
| U.S. plans: | | | | | | | | | | | | |
| Short-term investments | | $ | 683 | | | $ | 683 | | | $ | - | |
| Equity securities | | | 38,079 | | | | - | | | | 38,079 | |
| Fixed-income funds | | | 43,073 | | | | - | | | | 43,073 | |
| International plans: | | | | | | | | | | | | |
| Short-term investments | | | 241 | | | | 241 | | | | - | |
| Equity securities | | | 6,487 | | | | - | | | | 6,487 | |
| Fixed-income funds | | | 13,529 | | | | - | | | | 13,529 | |
| | | | | | | | | | | | | |
| Total: | | $ | 102,092 | | | $ | 924 | | | $ | 101,168 | |
| | | | | | | | | | | | | |
The following table summarizes the fair value of the postretirement benefit plan assets at February 28, 2011:
| | | | | | | | | | | | | |
| | | | | | Quoted prices in
| | | | |
| | | | | | active markets for
| | | Significant other
| |
| | | Fair value at
| | | identical assets
| | | observable inputs
| |
| | | February 28, 2011 | | | (Level 1) | | | (Level 2) | |
| |
| Short-term investments | | $ | 1,176 | | | $ | 1,176 | | | $ | - | |
| Equity securities | | | 29,229 | | | | 29,229 | | | | - | |
| Fixed-income funds | | | 36,530 | | | | - | | | | 36,530 | |
| | | | | | | | | | | | | |
| Total: | | $ | 66,935 | | | $ | 30,405 | | | $ | 36,530 | |
| | | | | | | | | | | | | |
75
The following table summarizes the fair value of the postretirement benefit plan assets at February 28, 2010:
| | | | | | | | | | | | | |
| | | | | | Quoted prices in
| | | | |
| | | | | | active markets for
| | | Significant other
| |
| | | Fair value at
| | | identical assets
| | | observable inputs
| |
| | | February 28, 2010 | | | (Level 1) | | | (Level 2) | |
| |
| Short-term investments | | $ | 2,565 | | | $ | 2,565 | | | $ | - | |
| Equity securities | | | 25,035 | | | | 25,035 | | | | - | |
| Fixed-income funds | | | 39,328 | | | | - | | | | 39,328 | |
| | | | | | | | | | | | | |
| Total: | | $ | 66,928 | | | $ | 27,600 | | | $ | 39,328 | |
| | | | | | | | | | | | | |
Short-term investments: Short-term investments are valued at the closing price on the active market based on exchange rate to the United States dollar.
Equity securities: The fair value of common / collective trust funds are determined based on the quoted prices of the underlying investments. Common stock is valued at the closing price reported on the active market on which the individual securities are traded.
Fixed-income funds: The fair value of common / collective trust funds are determined based on the quoted prices of the underlying investments. Fixed income funds, which primarily consist of corporate and government bonds, are valued using evaluated prices, such as dealer quotes, available trade information, spreads, bids and offers, prepayment speeds, U.S. Treasury curves and interest rate movements, provided by a pricing vendor.
Although the Corporation does not anticipate that contributions to the Gibson Retirement Plan will be required in
2010,2012, it may make contributions in excess of the legally required minimum contribution level. Any voluntary contributions by the Corporation are not expected to exceed deductible limits in accordance with Internal Revenue Service (“IRS”) regulations.
Based on historic patterns and currently scheduled benefit payments, the Corporation expects to contribute
$1,940$2,196 to the Supplemental Executive Retirement Plan in
2010.2012. The plan is a
non-qualifiednonqualified and unfunded plan, and annual contributions, which are equal to benefit payments, are made from the Corporation’s general funds.
In addition, the Corporation does not anticipate contributing to the postretirement benefit plan in
2010.2012.
The benefits expected to be paid out are as follows:
| | | | | | | | | | | | | |
| | | | | | Postretirement Benefits | |
| | | Pension
| | | Excluding Effect of
| | | Including Effect of
| |
| | | Plans | | | Medicare Part D Subsidy | | | Medicare Part D Subsidy | |
| |
| 2012 | | $ | 11,131 | | | $ | 5,289 | | | $ | 4,529 | |
| 2013 | | | 11,334 | | | | 5,609 | | | | 4,792 | |
| 2014 | | | 11,392 | | | | 5,826 | | | | 4,874 | |
| 2015 | | | 11,317 | | | | 6,085 | | | | 5,030 | |
| 2016 | | | 11,784 | | | | 6,305 | | | | 6,059 | |
| 2017 – 2021 | | | 57,969 | | | | 33,717 | | | | 32,433 | |
76
| | | | | | | | | |
| | | Pension
Plans | | Postretirement Benefits |
| | | Excluding Effect of
Medicare Part D Subsidy | | Including Effect of
Medicare Part D Subsidy |
2010 | | $ | 10,197 | | $ | 6,718 | | $ | 5,772 |
2011 | | | 10,224 | | | 7,064 | | | 6,010 |
2012 | | | 10,219 | | | 7,579 | | | 6,630 |
2013 | | | 10,351 | | | 7,791 | | | 6,741 |
2014 | | | 10,461 | | | 7,909 | | | 6,787 |
2015 – 2019 | | | 54,720 | | | 47,408 | | | 44,926 |
72
NOTE 13—LONG-TERM LEASES AND COMMITMENTS
| |
| NOTE 13 – | 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
2510 years. Rental expense under operating leases for the years ended February 28,
2011, 2010 and 2009
February 29, 2008 and February 28, 2007 areis as follows:
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Gross rentals | | $ | 48,332 | | | $ | 47,536 | | | $ | 55,537 | |
Sublease rentals | | | (460 | ) | | | (241 | ) | | | (235 | ) |
| | | | | | | | | | | | |
Net rental expense | | $ | 47,872 | | | $ | 47,295 | | | $ | 55,302 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Gross rentals | | $ | 33,452 | | | $ | 47,473 | | | $ | 48,332 | |
| Sublease rentals | | | (16,387 | ) | | | (24,891 | ) | | | (460 | ) |
| | | | | | | | | | | | | |
| Net rental expense | | $ | 17,065 | | | $ | 22,582 | | | $ | 47,872 | |
| | | | | | | | | | | | | |
At February 28,
2009,2011, future minimum rental payments for noncancelable operating leases, net of aggregate future minimum noncancelable sublease rentals, are as follows:
| | | | |
Gross rentals: | | | | |
2010 | | $ | 24,664 | |
2011 | | | 18,988 | |
2012 | | | 13,689 | |
2013 | | | 9,859 | |
2014 | | | 6,989 | |
Later years | | | 18,422 | |
| | | | |
| | | 92,611 | |
Sublease rentals | | | (503 | ) |
| | | | |
Net rentals | | $ | 92,108 | |
| | | | |
NOTE 14—FAIR VALUE MEASUREMENTS
SFAS 157 outlines a valuation framework, which requires use
| | | | | |
| Gross rentals: | | | | |
| 2012 | | $ | 16,195 | |
| 2013 | | | 11,599 | |
| 2014 | | | 8,075 | |
| 2015 | | | 6,143 | |
| 2016 | | | 4,831 | |
| Later years | | | 10,525 | |
| | | | | |
| | | | 57,368 | |
| Sublease rentals | | | (36,052 | ) |
| | | | | |
| Net rentals | | $ | 21,316 | |
| | | | | |
The majority of the market approach, income approach and/or cost approach when measuringsublease rentals in the table above are being paid by Schurman. These amounts relate to retail stores acquired by Schurman that are being subleased to Schurman. See Note 2 for additional information. The failure of Schurman to operate the retail stores successfully could have a material adverse effect on the Corporation, because if Schurman is not able to comply with its obligations under the subleases, the Corporation remains contractually obligated, as primary lessee, under those leases.
| |
| NOTE 14 – | FAIR VALUE MEASUREMENTS |
Assets and liabilities measured at fair value
and creates aare classified using the fair value hierarchy
in order to increase the consistency and comparability of fair value measurements and the related disclosures. SFAS 157 also expands disclosure requirements to include the methods and assumptions used to measure fair value.The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability 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:
| | |
| • | Level 1 – Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities. |
|
| • | 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. |
|
| • | Level 3 – Valuation is based upon unobservable inputs that are significant to the fair value measurement. |
77
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.
Level 3 – Valuation is based upon unobservable inputs that are significant to the fair value measurement.
73
The following table summarizes the financial assets measured at fair value
on a recurring basis as of the measurement date, February 28,
2009,2011, and the basis for that measurement, by level within the fair value hierarchy:
| | | | | | |
| | | Balance as of
February 28, 2009 | | Quoted prices in
active markets for
identical assets
(Level 1) |
Financial assets | | | | | | |
Active employees’ medical plan trust assets | | $ | 21,491 | | $ | 21,491 |
Deferred compensation plan assets(1) | | | 4,769 | | | 4,769 |
| | | | | | |
Total | | $ | 26,260 | | $ | 26,260 |
| | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | Quoted prices
| | | Quoted prices
| | | | |
| | | | | | in active
| | | in active
| | | | |
| | | Balance
| | | markets for
| | | markets for
| | | Significant
| |
| | | as of
| | | identical assets
| | | similar assets
| | | unobservable
| |
| | | February 28,
| | | and liabilities
| | | and liabilities
| | | inputs
| |
| | | 2011 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| |
| Assets measured on a recurring basis: | | | | | | | | | | | | | | | | |
| Active employees’ medical plan trust assets | | $ | 3,223 | | | $ | 3,223 | | | $ | - | | | $ | - | |
| Deferred compensation plan assets(1) | | | 6,871 | | | | 6,871 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 10,094 | | | $ | 10,094 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Assets measured on a non-recurring basis: | | | | | | | | | | | | | | | | |
| Assets held for sale | | $ | 5,282 | | | $ | - | | | $ | 5,282 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 5,282 | | | $ | - | | | $ | 5,282 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
The following table summarizes the financial assets measured at fair value as of the measurement date, February 28, 2010, and the basis for that measurement, by level within the fair value hierarchy:
| | | | | | | | | | | | | | | | | |
| | | | | | Quoted prices
| | | Quoted prices
| | | | |
| | | | | | in active
| | | in active
| | | | |
| | | Balance
| | | markets for
| | | markets for
| | | Significant
| |
| | | as of
| | | identical assets
| | | similar assets
| | | unobservable
| |
| | | February 28,
| | | and liabilities
| | | and liabilities
| | | inputs
| |
| | | 2010 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| |
| Assets measured on a recurring basis: | | | | | | | | | | | | | | | | |
| Active employees’ medical plan trust assets | | $ | 4,087 | | | $ | 4,087 | | | $ | - | | | $ | - | |
| Deferred compensation plan assets(1) | | | 4,785 | | | | 4,785 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 8,872 | | | $ | 8,872 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Assets measured on a non-recurring basis: | | | | | | | | | | | | | | | | |
| Assets held for sale | | $ | 5,557 | | | $ | - | | | $ | 5,557 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 5,557 | | | $ | - | | | $ | 5,557 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| | |
| (1) | | There is an offsetting liability for the obligation to its employees on the Corporation’s books. |
The fair value of the investments in the active employees’ medical plan trust was considered a Level 1 valuation as it is based on the quoted market value per share of each individual security investment in an active market.
The deferred compensation plan is comprised of mutual fund assets and the Corporation’s common shares. The fair value of the mutual fund assets in the deferred compensation plan was considered a Level 1 valuation as it is based on each fund’s quoted market value per share in an active market. The fair value of the Corporation’s common shares was considered a Level 1 valuation as it is based on the quoted market value per share of the Class A common shares in an active market. Although the Corporation is under no obligation to fund employees’ nonqualified accounts, the fair value of the related non-qualified deferred compensation liability is based on the fair value of the mutual fund assets.assets and the Corporation’s common shares.
Certain assets are measured at fair value on a nonrecurring basis and are subject to fair value adjustments only in certain circumstances. In accordance with ASC 360, during the fourth quarter of 2010, assets held for sale relating to the Corporation’s party goods product lines with a carrying value of $13,936 were written down to
78
NOTE 15—COMMON SHARES AND STOCK OPTIONS
fair value of $5,875, less cost to sell of $318, or $5,557. This resulted in an impairment charge of $8,379, which was recorded in “Material, labor and other production costs” on the Consolidated Statement of Operations. The assets held for sale included land and buildings related to the Kalamazoo facility within the North American Social Expression Products segment. During the fourth quarter of 2011, these assets were subsequently re-measured, at fair value less cost to sell, and an additional impairment charge of $275 was recorded. The fair value of the assets held for sale was considered a Level 2 valuation as it was based on observable selling prices for similar assets that were sold within the past twelve to eighteen months. In addition, land, buildings and certain equipment associated with a distribution facility in the International Social Expression Products segment have been reclassified to “Assets held for sale” on the Consolidated Statement of Financial Position, for all periods presented, as the location met the criteria to be classified as such during 2011. Bids from third parties for the purchase of these assets exceed current book value, therefore no adjustments to the carrying values were required in 2011. The assets included in “Assets held for sale” are expected to sell within one year.
| |
| NOTE 15 – | COMMON SHARES AND STOCK BASED COMPENSATION |
At February 28,
20092011 and
February 29, 2008,2010, common shares authorized consisted of 187,600,000 Class A and 15,832,968 Class B common shares.
Class A common shares have one vote per share and Class B common 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 and Restated 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.
IfWhile it is the Corporation’s general policy to repurchase Class B common shares whenever they are offered by a holder, 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.transfer, other than to a permitted transferee.
Total stock-based compensation expense, recognized in “Administrative and general expenses” on the Consolidated Statement of Operations, was
$4,369$13,017 ($
2,73810,204 net of tax), which reduced earnings per share and earnings per share – assuming dilution by
$0.06$0.26 and
$0.06$0.25 per share, respectively, during the year ended February 28,
2009.2011. During
2008,2010, total stock-based compensation expense was
$6,547$5,819 ($
4,1143,648 net of tax), which reduced
both earnings per share and earnings per share – assuming dilution by
$0.08 and $0.08$0.09 per
share, respectively.share. During
2007,2009, total stock-based compensation expense was
$7,559$4,369 ($
4,6042,738 net of tax), which reduced
both earnings per share and earnings per share – assuming dilution by
$0.08 and $0.07$0.06 per
share, respectively.share.
Under the Corporation’s stock option plans, options to purchase common shares are granted to directors, officers and other key employees at the then-current market price. In general, subject to continuing service, options become exercisable commencing twelve months after the date of grant in annual installments and expire over a period of not more than ten years from the date of grant. The Corporation generally issues new shares when options to purchase Class A common shares are exercised and treasury shares when options to purchase Class B common shares are exercised.
79
74
Stock option transactions and prices are summarized as follows:
| | | | | | | | | | | |
| | | Number of
Class A
Options | | | Weighted-
Average
Exercise Price | | Weighted-Average
Remaining Contractual
Term (in years) | | Aggregate
Intrinsic Value
(in thousands) |
Outstanding at February 29, 2008 | | 4,930,779 | | | $ | 22.81 | | | | $ | 2,629 |
Granted | | 1,080,500 | | | | 17.90 | | | | | |
Exercised | | (26,200 | ) | | | 18.40 | | | | | |
Cancelled | | (292,260 | ) | | | 26.19 | | | | | |
| | | | | | | | | | | |
Outstanding at February 28, 2009 | | 5,692,819 | | | $ | 21.72 | | 6.0 | | | — |
| | | | | | | | | | | |
Exercisable at February 28, 2009 | | 4,161,246 | | | $ | 22.25 | | 5.3 | | | — |
| | | | |
| | | Number of
Class B
Options | | | Weighted-
Average
Exercise Price | | Weighted-Average
Remaining Contractual
Term (in years) | | Aggregate
Intrinsic Value
(in thousands) |
Outstanding at February 29, 2008 | | 824,520 | | | $ | 23.59 | | | | | — |
Granted | | 193,000 | | | | 18.12 | | | | | |
| | | | | | | | | | | |
Outstanding at February 28, 2009 | | 1,017,520 | | | $ | 22.55 | | 6.9 | | | — |
| | | | | | | | | | | |
Exercisable at February 28, 2009 | | 641,687 | | | $ | 23.29 | | 6.4 | | | — |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Weighted-Average
| | | | |
| | | Number of
| | | Weighted-
| | | Remaining
| | | Aggregate Intrinsic
| |
| | | Class A
| | | Average
| | | Contractual
| | | Value
| |
| | | Options | | | Exercise Price | | | Term (in years) | | | (in thousands) | |
| |
| Outstanding at February 28, 2010 | | | 5,305,132 | | | $ | 19.00 | | | | | | | | | |
| Granted | | | 587,394 | | | | 24.52 | | | | | | | | | |
| Exercised | | | (1,010,493 | ) | | | 23.92 | | | | | | | | | |
| Cancelled | | | (348,102 | ) | | | 21.70 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Outstanding at February 28, 2011 | | | 4,533,931 | | | $ | 16.01 | | | | 6.0 | | | $ | 14,260 | |
| | | | | | | | | | | | | | | | | |
| Exercisable at February 28, 2011 | | | 3,557,127 | | | $ | 20.96 | | | | 5.5 | | | $ | 8,291 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Weighted-Average
| | | | |
| | | Number of
| | | Weighted-
| | | Remaining
| | | Aggregate
| |
| | | Class B
| | | Average
| | | Contractual
| | | Intrinsic Value
| |
| | | Options | | | Exercise Price | | | Term (in years) | | | (in thousands) | |
| |
| Outstanding at February 28, 2010 | | | 1,210,520 | | | $ | 20.19 | | | | | | | | | |
| Granted | | | 118,375 | | | | 24.69 | | | | | | | | | |
| Exercised | | | (162,500 | ) | | | 24.91 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Outstanding at February 28, 2011 | | | 1,166,395 | | | $ | 19.96 | | | | 5.7 | | | $ | 2,578 | |
| | | | | | | | | | | | | | | | | |
| Exercisable at February 28, 2011 | | | 865,187 | | | $ | 22.96 | | | | 5.2 | | | $ | 639 | |
The fair value of the options granted is
the estimated
present value at the grant date using the Black-Scholes option-pricing model with the following assumptions:
| | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Risk-free interest rate | | 2.5 | % | | 4.6 | % | | 5.0 | % |
Dividend yield | | 2.7 | % | | 1.25 | % | | 1.41 | % |
Expected stock volatility | | 0.31 | | | 0.25 | | | 0.24 | |
Expected life in years | | 2.4 | | | 2.3 | | | 2.2 | |
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Risk-free interest rate | | | 1.4 | % | | | 1.3 | % | | | 2.5 | % |
| Dividend yield | | | 2.3 | % | | | 6.0 | % | | | 2.7 | % |
| Expected stock volatility | | | 0.81 | | | | 0.71 | | | | 0.31 | |
| Expected life in years | | | 2.3 | | | | 2.4 | | | | 2.4 | |
The weighted average fair value per share of options granted during
2011, 2010 and 2009
2008was $10.43, $2.83 and
2007 was $3.13,
$4.44 and $3.81, respectively. The total intrinsic value of options exercised was
$9,377, $1,985 and $116
$8,937in 2011, 2010 and
$2,192 in 2009,
2008 and 2007, respectively.
During 2006, approximately 180,000 performance shares were awarded to certain executive officers under the American Greetings 1997 Equity and Performance Incentive Plan. The performance shares represented the right to receive Class B common shares, at no cost to the officer, upon achievement of management objectives over a five-year performance period. The performance shares were in lieu of a portion of the officer’s annual cash bonus. The number of performance shares actually earned was based on the percentage of the officer’s target incentive award, if any, that the officer achieved during the performance period under the Corporation’s Key Management Annual Incentive Plan. The Corporation recognized compensation expense related to performance shares ratably over the estimated vesting period. All 180,000 performance shares were earned by the executives as of February 29, 2008.
During 2009, approximately 60,000 performance shares were awarded to certain executive officers under the American Greetings 2007 Omnibus Incentive Compensation Plan.Plan (the “Plan”). The performance shares represent the right to receive Class B common shares, at no cost to the officer, upon achievement of management objectives over a two-year performance period.period of up to two years. The number of performance shares actually earned will beis based on the percentage of the officer’s target incentive award, if any, that the officer achieves during the performance period under the Corporation’s Key Management Annual Incentive Plan. The Corporation recognizes compensation expense related to performance shares ratably over the estimated vesting period.period during which the shares could be earned. During 2009, the target incentive awards were not earned as operating targets were not reached and thus, no compensation expense related to the performance shares was recognized. During 2010, the management objectives were met and the executives earned all 59,864 performance shares.
In 2010, the shareholders approved an amendment to the Plan reserving an additional 1,600,000 Class A common shares and 400,000 Class B common shares for issuance under the Plan. In connection with this amendment, in April 2009, performance shares were awarded to certain of the Corporation’s employees, including executive officers under the Plan. The performance shares represent the right to receive Class A common shares or Class B common shares, at no cost to the employee, upon achievement of management objectives over up to three annual performance periods and the satisfaction of a service-based vesting period.
80
75
The number of performance shares actually credited to a participant is based on achieving a corporate consolidated earnings before interest and taxes (“EBIT”) goal at the end of each of the three annual performance periods. Each of the three annual performance periods are subject to the same EBIT goals, which were established as of the date of grant. At the end of each performance period, provided that the performance objectives are met, the shares are then subject to a vesting requirement of two years of continuing service. The Corporation recognizes compensation expense related to performance shares ratably over the estimated combined performance and vesting period. During 2010, the required performance objectives for the first year performance period were satisfied and 709,000 performance shares were credited to participants. During 2011, the required performance objectives for the second year performance period were satisfied and 742,000 performance shares were credited to participants.
The following table summarizes the activity related to performance shares during 2011:
| | | | | | | | | | | | | |
| | | Number of
| | Weighted-Average
| | |
| | | Class A
| | Remaining
| | Aggregate
|
| | | Performance
| | Contractual
| | Intrinsic Value
|
| | | Shares | | Term (in years) | | (in thousands) |
| |
| Unvested at February 28, 2010 | | | 615,000 | | | | | | | | | |
| Credited | | | 648,000 | | | | | | | | | |
| Vested | | | (286,483 | ) | | | | | | | | |
| Forfeited | | | (227,017 | ) | | | | | | | | |
| | | | | | | | | | | | | |
| Unvested at February 28, 2011 | | | 749,500 | | | | 1.3 | | | $ | 16,227 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Number of
| | | | |
| | | Class B
| | | | |
| | | Performance
| | | | |
| | | Shares | | | | |
| |
| Unvested at February 28, 2010 | | | 153,864 | | | | | | | | | |
| Credited | | | 94,000 | | | | | | | | | |
| Vested | | | (106,864 | ) | | | | | | | | |
| Forfeited | | | - | | | | | | | | | |
| | | | | | | | | | | | | |
| Unvested at February 28, 2011 | | | 141,000 | | | | 1.3 | | | $ | 3,053 | |
| | | | | | | | | | | | | |
The fair value of the performance shares is
the estimated
present value at March 1 of each respective fiscal year using the Black-Scholes option-pricing model with the following assumptions:
| | | | | | |
| | | 2008 | | | 2007 | |
Risk-free interest rate | | 4.95 | % | | 4.74 | % |
Dividend yield | | 1.38 | % | | 1.52 | % |
Expected stock volatility | | 0.25 | | | 0.24 | |
Expected life in years | | 1.0 | | | 1.0 | |
| | | | | | | | | |
| | | 2011 | | 2010 |
| |
| Risk-free interest rate | | | 1.62 | % | | | 1.54 | % |
| Dividend yield | | | 4.38 | % | | | 4.48 | % |
| Expected stock volatility | | | 0.76 | | | | 0.78 | |
| Expected life in years | | | 2.5 | | | | 2.3 | |
The fair value per share of the performance shares in 20082011 and 20072010 was $22.79$10.20 and $20.73,$9.67, respectively. Compensation costs recognized for approximately 60,000 performance
During 2011, the Company awarded restricted share units to officers and other key employees. The restricted share units represent the right to receive Class A common shares vesting in each of 2008 and 2007 were approximately $1,400 (included in the $6,547 stock compensation expense disclosed above) and $1,200 (included in the $7,559 stock compensation expense disclosed above), respectively. Approximately 60,000or Class B common shares, were issued in eachat no cost to the employee, upon the satisfaction of 2009, 2008 and 2007a two-year continuous service-based vesting period. The Corporation recognizes compensation expense related to restricted share units ratably over the performance shares earnedvesting period.
81
The following table summarizes the activity related to restricted stock units during 2011:
| | | | | | | | | | | | | |
| | | Number of
| | Weighted-Average
| | |
| | | Class A
| | Remaining
| | Aggregate
|
| | | Restricted Stock
| | Contractual Term
| | Intrinsic Value
|
| | | Units | | (in years) | | (in thousands) |
| |
| Unvested at February 28, 2010 | | | - | | | | | | | | | |
| Granted | | | 124,920 | | | | | | | | | |
| Vested | | | - | | | | | | | | | |
| Forfeited | | | (13,921 | ) | | | | | | | | |
| | | | | | | | | | | | | |
| Unvested at February 28, 2011 | | | 110,999 | | | | 0.7 | | | $ | 2,403 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Number of
| | | | |
| | | Class B
| | | | |
| | | Restricted Stock
| | | | |
| | | Units | | | | |
| |
| Unvested at February 28, 2010 | | | - | | | | | | | | | |
| Granted | | | 29,675 | | | | | | | | | |
| Vested | | | - | | | | | | | | | |
| Forfeited | | | - | | | | | | | | | |
| | | | | | | | | | | | | |
| Unvested at February 28, 2011 | | | 29,675 | | | | 1.1 | | | $ | 642 | |
| | | | | | | | | | | | | |
The fair value of the restricted stock units is estimated using the Black-Scholes option-pricing model with the following assumptions:
| | | | |
| | 2011 |
|
| Risk-free interest rate | | | 1.09 | % |
| Dividend yield | | | 2.3 | % |
| Expected stock volatility | | | 0.90 | |
| Expected life in years | | | 1.6 | |
The fair value per share of the restricted share units in 2011 was $23.65 at the date of the grant.
The risk-free interest rate was based upon the U.S. Treasury yield curve at the time of the grant. Dividend yield was estimated using the Corporation’s annual dividend in the year when the award was granted. Historical information was the primary basis for the estimates of expected stock volatility and
vested in 2008, 2007 and 2006, respectively.expected life of the award.
As of February 28, 2009,2011, the Corporation had unrecognized compensation expense of approximately $2,000,$3,157, $4,659, and $1,326 before taxes, related to stock options. options, performance shares and restricted stock units, respectively.
The unrecognized compensation expense is expected to be recognized over an average period of approximately one year.
Cash received from stock options exercised for the years ended February 28, 2011, 2010 and 2009, was $18,842, $5,834, and $366, respectively. The actual tax benefit realized from the exercise of share-based payment arrangements totaled $6,510, $762, and $45 for the years ended February 28, 2011, 2010 and 2009, respectively.
The number of shares available for future grant at February 28,
20092011 is
1,700,736924,164 Class A common shares and
282,363134,054 Class B common shares.
NOTE 16—BUSINESS SEGMENT INFORMATION
| |
| NOTE 16 – | BUSINESS SEGMENT INFORMATION |
The Corporation is organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution.
82
The North American Social Expression Products and International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through various channels of distribution with mass
merchandise retailers as the primary channel. As permitted under
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,ASC Topic 280, “Segment Reporting,” certain operating divisions have been aggregated into both the North American Social Expression Products and International Social Expression Products segments. The aggregated operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. Approximately
55%54%, 51% and 54% of the North American Social Expression Products segment’s revenue in
2011, 2010 and 2009,
2008 and 2007respectively, is attributable to its top five customers. Approximately
40%44%, 45% and 39% of the International Social Expression Products segment’s revenue in
2011, 2010 and 2009,
2008 and 2007respectively, is attributable to its top three customers.
At February 28, 2009, the Corporation owned and operated 341 card and gift retail stores in the United States and Canada through its Retail Operations segment. The stores
arewere primarily located in malls and strip shopping centers. The stores
sellsold products purchased from the North American Social Expression Products segment as well as products purchased from other vendors.
During the first quarter of 2010, the Corporation sold all of its card and gift retail store assets to Schurman, which operates stores under the American Greetings, Carlton Cards and Papyrus brands. See Note 2 for further information.
AG Interactive distributes social expression products, including electronic greetings, personalized printable greeting cards and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices.
The two acquisitions in 2008, which are included in this segment, provide the Corporation entry into the online photo sharing space and a platform to provide consumers the ability to use their own photos to create unique, high quality physical products, including greeting cards, calendars, photo albums and photo books.The Corporation’s non-reportable operating segments primarily include licensing activities and the design, manufacture and sale of display fixtures.
76
The Corporation’s senior management evaluates segment performance based on earnings before foreign currency exchange gains or losses, interest income, interest expense, centrally-managed costs and income taxes. The accounting policies of the reportable segments are the same as those described in Note 1 – Significant Accounting Policies, except those that are related to LIFO or applicable to only corporate items.
Intersegment
Prior to the sale of the Retail Operations segment, intersegment sales from the North American Social Expression Products segment to the Retail Operations segment
arewere recorded at estimated arm’s-length prices. Intersegment sales and profits
arewere eliminated in consolidation. All inventories resulting from intersegment sales
arewere carried at cost. Accordingly, the Retail Operations segment
recordsrecorded full profit upon its sales to consumers.
The reporting and evaluation of segment assets include net accounts receivable, inventory on a FIFO basis, display materials and factory supplies, prepaid expenses, other assets and net property, plant and equipment.
Unallocated and intersegment items include primarily cash, taxes and LIFO.
Segment results are internally 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.
Centrally incurred and managed costs are not allocated back to the operating segments. The unallocated items include interest expense on centrally-incurred debt, domestic profit-sharing expense, settlement charges and stock-based compensation expense. In addition, the costs associated with corporate operations including the senior management, corporate finance, legal and human resource functions, among other costs, are included in the unallocated items. In 2010, unallocated items included the negotiated settlement of a lawsuit totaling $24,000, all of which was paid as of February 28, 2010.
83
Operating Segment Information
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Revenue | | | Segment Earnings (Loss) | |
| | | 2011 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2009 | |
| |
| North American Social Expression Products | | $ | 1,173,599 | | | $ | 1,231,624 | | | $ | 1,139,203 | | | $ | 210,154 | | | $ | 236,125 | | | $ | 106,311 | |
| Intersegment items | | | – | | | | (5,104 | ) | | | (52,805 | ) | | | – | | | | (3,511 | ) | | | (38,899 | ) |
| Exchange rate adjustment | | | 17,884 | | | | 8,659 | | | | 9,050 | | | | 8,170 | | | | 3,800 | | | | 2,539 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | | 1,191,483 | | | | 1,235,179 | | | | 1,095,448 | | | | 218,324 | | | | 236,414 | | | | 69,951 | |
| International Social Expression Products | | | 256,507 | | | | 250,026 | | | | 245,331 | | | | 19,536 | | | | 16,693 | | | | (68,545 | ) |
| Exchange rate adjustment | | | 5,205 | | | | 4,006 | | | | 25,396 | | | | 36 | | | | 153 | | | | (9,124 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | | 261,712 | | | | 254,032 | | | | 270,727 | | | | 19,572 | | | | 16,846 | | | | (77,669 | ) |
| Retail Operations | | | – | | | | 11,727 | | | | 170,066 | | | | – | | | | (34,830 | ) | | | (19,727 | ) |
| Exchange rate adjustment | | | – | | | | 112 | | | | 8,746 | | | | – | | | | (285 | ) | | | 496 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | | – | | | | 11,839 | | | | 178,812 | | | | – | | | | (35,115 | ) | | | (19,231 | ) |
| AG Interactive | | | 78,407 | | | | 80,320 | | | | 82,623 | | | | 14,103 | | | | 11,319 | | | | (159,670 | ) |
| Exchange rate adjustment | | | (201 | ) | | | 126 | | | | 790 | | | | (112 | ) | | | 100 | | | | (2,021 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | | 78,206 | | | | 80,446 | | | | 83,413 | | | | 13,991 | | | | 11,419 | | | | (161,691 | ) |
| Non-reportable segments | | | 61,167 | | | | 53,975 | | | | 62,338 | | | | 9,477 | | | | 7,634 | | | | (7,627 | ) |
| Unallocated | | | – | | | | 387 | | | | – | | | | (106,259 | ) | | | (116,476 | ) | | | (80,193 | ) |
| Exchange rate adjustment | | | – | | | | – | | | | – | | | | 902 | | | | 232 | | | | 1,527 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | | – | | | | 387 | | | | – | | | | (105,357 | ) | | | (116,244 | ) | | | (78,666 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 1,592,568 | | | $ | 1,635,858 | | | $ | 1,690,738 | | | $ | 156,007 | | | $ | 120,954 | | | $ | (274,933 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Depreciation and Amortization | | | Capital Expenditures | |
| | | 2011 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2009 | |
| |
| North American Social Expression Products | | $ | 30,045 | | | $ | 32,504 | | | $ | 28,174 | | | $ | 28,880 | | | $ | 22,144 | | | $ | 43,460 | |
| Exchange rate adjustment | | | 20 | | | | 11 | | | | 22 | | | | - | | | | 8 | | | | 52 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | | 30,065 | | | | 32,515 | | | | 28,196 | | | | 28,880 | | | | 22,152 | | | | 43,512 | |
| International Social Expression Products | | | 4,409 | | | | 4,585 | | | | 5,120 | | | | 3,495 | | | | 1,273 | | | | 1,226 | |
| Exchange rate adjustment | | | 22 | | | | 74 | | | | 578 | | | | 7 | | | | 20 | | | | 107 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | | 4,431 | | | | 4,659 | | | | 5,698 | | | | 3,502 | | | | 1,293 | | | | 1,333 | |
| Retail Operations | | | - | | | | 395 | | | | 4,653 | | | | - | | | | 29 | | | | 4,330 | |
| Exchange rate adjustment | | | - | | | | 18 | | | | 268 | | | | - | | | | (2 | ) | | | 228 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | | - | | | | 413 | | | | 4,921 | | | | - | | | | 27 | | | | 4,558 | |
| AG Interactive | | | 4,150 | | | | 5,105 | | | | 8,633 | | | | 2,762 | | | | 2,610 | | | | 3,916 | |
| Exchange rate adjustment | | | (7 | ) | | | 17 | | | | 330 | | | | - | | | | 1 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | | 4,143 | | | | 5,122 | | | | 8,963 | | | | 2,762 | | | | 2,611 | | | | 3,918 | |
| Non-reportable segments | | | 1,701 | | | | 1,820 | | | | 1,628 | | | | 1,130 | | | | 260 | | | | 2,218 | |
| Unallocated | | | 708 | | | | 636 | | | | 610 | | | | 72 | | | | 207 | | | | 194 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 41,048 | | | $ | 45,165 | | | $ | 50,016 | | | $ | 36,346 | | | $ | 26,550 | | | $ | 55,733 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
84
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Revenue | | | Segment (Loss) Earnings | |
| | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | |
North American Social Expression Products | | $ | 1,159,162 | | | $ | 1,187,520 | | | $ | 1,216,588 | | | $ | 114,395 | | | $ | 220,285 | | | $ | 208,826 | |
Intersegment items | | | (57,547 | ) | | | (57,210 | ) | | | (62,348 | ) | | | (42,535 | ) | | | (42,953 | ) | | | (44,545 | ) |
Exchange rate adjustment | | | (6,167 | ) | | | (668 | ) | | | (7,939 | ) | | | (1,909 | ) | | | (104 | ) | | | (3,006 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net | | | 1,095,448 | | | | 1,129,642 | | | | 1,146,301 | | | | 69,951 | | | | 177,228 | | | | 161,275 | |
| | | | | | |
International Social Expression Products | | | 299,830 | | | | 307,959 | | | | 302,022 | | | | (81,616 | ) | | | 24,223 | | | | 10,433 | |
Exchange rate adjustment | | | (29,103 | ) | | | 3,367 | | | | (20,292 | ) | | | 3,947 | | | | 513 | | | | (740 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net | | | 270,727 | | | | 311,326 | | | | 281,730 | | | | (77,669 | ) | | | 24,736 | | | | 9,693 | |
| | | | | | |
Retail Operations | | | 183,913 | | | | 198,271 | | | | 215,439 | | | | (19,123 | ) | | | (3,772 | ) | | | (16,526 | ) |
Exchange rate adjustment | | | (5,101 | ) | | | (922 | ) | | | (8,253 | ) | | | (108 | ) | | | 119 | | | | 89 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net | | | 178,812 | | | | 197,349 | | | | 207,186 | | | | (19,231 | ) | | | (3,653 | ) | | | (16,437 | ) |
| | | | | | |
AG Interactive | | | 84,254 | | | | 78,652 | | | | 85,856 | | | | (161,503 | ) | | | 6,755 | | | | 5,616 | |
Exchange rate adjustment | | | (841 | ) | | | 63 | | | | (408 | ) | | | (188 | ) | | | (300 | ) | | | 158 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net | | | 83,413 | | | | 78,715 | | | | 85,448 | | | | (161,691 | ) | | | 6,455 | | | | 5,774 | |
| | | | | | |
Non-reportable segments | | | 62,338 | | | | 59,356 | | | | 73,441 | | | | (7,627 | ) | | | 3,779 | | | | 11,852 | |
| | | | | | |
Unallocated | | | — | | | | 63 | | | | 184 | | | | (76,590 | ) | | | (84,183 | ) | | | (105,036 | ) |
Exchange rate adjustment | | | — | | | | — | | | | — | | | | (2,076 | ) | | | (394 | ) | | | (1,710 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net | | | — | | | | 63 | | | | 184 | | | | (78,666 | ) | | | (84,577 | ) | | | (106,746 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 1,690,738 | | | $ | 1,776,451 | | | $ | 1,794,290 | | | $ | (274,933 | ) | | $ | 123,968 | | | $ | 65,411 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
77
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Depreciation and Amortization | | | Capital Expenditures | |
| | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | |
North American Social Expression Products | | $ | 28,207 | | | $ | 29,313 | | | $ | 31,841 | | | $ | 43,537 | | | $ | 43,390 | | | $ | 27,713 | |
Exchange rate adjustment | | | (11 | ) | | | (1 | ) | | | (11 | ) | | | (25 | ) | | | (2 | ) | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net | | | 28,196 | | | | 29,312 | | | | 31,830 | | | | 43,512 | | | | 43,388 | | | | 27,711 | |
| | | | | | |
International Social Expression Products | | | 6,336 | | | | 4,989 | | | | 5,666 | | | | 1,449 | | | | 914 | | | | 5,746 | |
Exchange rate adjustment | | | (638 | ) | | | 57 | | | | (365 | ) | | | (116 | ) | | | 20 | | | | (359 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net | | | 5,698 | | | | 5,046 | | | | 5,301 | | | | 1,333 | | | | 934 | | | | 5,387 | |
| | | | | | |
Retail Operations | | | 5,077 | | | | 5,650 | | | | 6,581 | | | | 4,691 | | | | 6,486 | | | | 3,567 | |
Exchange rate adjustment | | | (156 | ) | | | (25 | ) | | | (235 | ) | | | (133 | ) | | | (38 | ) | | | (137 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net | | | 4,921 | | | | 5,625 | | | | 6,346 | | | | 4,558 | | | | 6,448 | | | | 3,430 | |
| | | | | | |
AG Interactive | | | 9,328 | | | | 6,496 | | | | 4,047 | | | | 3,918 | | | | 3,326 | | | | 3,757 | |
Exchange rate adjustment | | | (365 | ) | | | 28 | | | | (75 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net | | | 8,963 | | | | 6,524 | | | | 3,972 | | | | 3,918 | | | | 3,326 | | | | 3,757 | |
| | | | | | |
Non-reportable segments | | | 1,628 | | | | 1,425 | | | | 1,375 | | | | 2,218 | | | | 2,492 | | | | 1,428 | |
| | | | | | |
Unallocated | | | 610 | | | | 603 | | | | 588 | | | | 194 | | | | 35 | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 50,016 | | | $ | 48,535 | | | $ | 49,412 | | | $ | 55,733 | | | $ | 56,623 | | | $ | 41,716 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | Assets |
| | 2009 | | | 2008 |
North American Social Expression Products | | $ | 930,028 | | | $ | 914,835 |
Exchange rate adjustment | | | (6,769 | ) | | | 367 |
| | | | | | | |
Net | | | 923,259 | | | | 915,202 |
| | |
International Social Expression Products | | | 170,196 | | | | 260,848 |
Exchange rate adjustment | | | (46,715 | ) | | | 2,396 |
| | | | | | | |
Net | | | 123,481 | | | | 263,244 |
| | |
Retail Operations | | | 38,414 | | | | 55,867 |
Exchange rate adjustment | | | (3,486 | ) | | | 1,088 |
| | | | | | | |
Net | | | 34,928 | | | | 56,955 |
| | |
AG Interactive | | | 24,847 | | | | 193,226 |
Exchange rate adjustment | | | (1,239 | ) | | | 909 |
| | | | | | | |
Net | | | 23,608 | | | | 194,135 |
| | |
Non-reportable segments | | | 39,281 | | | | 45,615 |
| | |
Unallocated and intersegment items | | | 310,461 | | | | 324,539 |
Exchange rate adjustment | | | (21,230 | ) | | | 4,738 |
| | | | | | | |
Net | | | 289,231 | | | | 329,277 |
| | | | | | | |
| | $ | 1,433,788 | | | $ | 1,804,428 |
| | | | | | | |
78
| | | | | | | | | |
| | | Assets | |
| | | 2011 | | | 2010 | |
| |
| North American Social Expression Products | | $ | 956,169 | | | $ | 961,057 | |
| Exchange rate adjustment | | | 4,876 | | | | 2,273 | |
| | | | | | | | | |
| Net | | | 961,045 | | | | 963,330 | |
| International Social Expression Products | | | 117,928 | | | | 136,551 | |
| Exchange rate adjustment | | | 6,934 | | | | (1,539 | ) |
| | | | | | | | | |
| Net | | | 124,862 | | | | 135,012 | |
| Retail Operations | | | 2,080 | | | | 1,738 | |
| Exchange rate adjustment | | | - | | | | - | |
| | | | | | | | | |
| Net | | | 2,080 | | | | 1,738 | |
| AG Interactive | | | 17,983 | | | | 20,352 | |
| Exchange rate adjustment | | | 56 | | | | (77 | ) |
| | | | | | | | | |
| Net | | | 18,039 | | | | 20,275 | |
| Non-reportable segments | | | 39,204 | | | | 39,026 | |
| Unallocated and intersegment items | | | 371,971 | | | | 363,353 | |
| Exchange rate adjustment | | | 15,201 | | | | 6,917 | |
| | | | | | | | | |
| Net | | | 387,172 | | | | 370,270 | |
| | | | | | | | | |
| | | $ | 1,532,402 | | | $ | 1,529,651 | |
| | | | | | | | | |
Geographical Information
| | | | | | | | | | | | | | | | | | | | | |
| | | Total Revenue | | | Fixed Assets - Net | |
| | | 2011 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | |
| |
| United States | | $ | 1,205,915 | | | $ | 1,266,876 | | | $ | 1,235,828 | | | $ | 218,354 | | | $ | 220,626 | |
| United Kingdom | | | 216,309 | | | | 209,059 | | | | 222,918 | | | | 21,099 | | | | 20,041 | |
| Other international | | | 170,344 | | | | 159,923 | | | | 231,992 | | | | 2,196 | | | | 2,216 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 1,592,568 | | | $ | 1,635,858 | | | $ | 1,690,738 | | | $ | 241,649 | | | $ | 242,883 | |
| | | | | | | | | | | | | | | | | | | | | |
Product Information
| | | | | | | | | | | | | |
| | | Total Revenue | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Everyday greeting cards | | $ | 753,027 | | | $ | 764,199 | | | $ | 704,380 | |
| Seasonal greeting cards | | | 377,282 | | | | 368,781 | | | | 356,762 | |
| Gift packaging | | | 222,541 | | | | 221,167 | | | | 240,452 | |
| Other revenue | | | 32,355 | | | | 37,566 | | | | 44,339 | |
| All other products | | | 207,363 | | | | 244,145 | | | | 344,805 | |
| | | | | | | | | | | | | |
| | | $ | 1,592,568 | | | $ | 1,635,858 | | | $ | 1,690,738 | |
| | | | | | | | | | | | | |
The “All other products” classification includes, among other things, giftware, party goods, calendars, custom display fixtures, stickers, online greeting cards and other digital products.
85
Geographical Information
| | | | | | | | | | | | | | | |
| | | Total Revenue | | Fixed Assets – Net |
| | 2009 | | 2008 | | 2007 | | 2009 | | 2008 |
United States | | $ | 1,235,828 | | $ | 1,286,213 | | $ | 1,336,241 | | $ | 260,251 | | $ | 244,405 |
United Kingdom | | | 222,918 | | | 260,288 | | | 228,779 | | | 22,632 | | | 30,785 |
Other foreign | | | 231,992 | | | 229,950 | | | 229,270 | | | 14,896 | | | 20,815 |
| | | | | | | | | | | | | | | |
| | $ | 1,690,738 | | $ | 1,776,451 | | $ | 1,794,290 | | $ | 297,779 | | $ | 296,005 |
| | | | | | | | | | | | | | | |
Product Information
| | | | | | | | | |
| | | Total Revenue |
| | 2009 | | 2008 | | 2007 |
Everyday greeting cards | | $ | 704,380 | | $ | 709,824 | | $ | 656,906 |
Seasonal greeting cards | | | 356,762 | | | 379,603 | | | 363,793 |
Gift packaging | | | 240,452 | | | 264,040 | | | 278,140 |
Other revenue | | | 44,339 | | | 45,667 | | | 49,492 |
All other products | | | 344,805 | | | 377,317 | | | 445,959 |
| | | | | | | | | |
| | $ | 1,690,738 | | $ | 1,776,451 | | $ | 1,794,290 |
| | | | | | | | | |
Termination Benefits and Facility Closings Termination benefits are primarily considered part of an ongoing benefit arrangement, accounted for in accordance with
SFAS No. 112, “Employers’ Accounting forASC Topic 712, “Compensation – Nonretirement Postemployment Benefits,” and are recorded when payment of the benefits is probable and can be reasonably estimated.
The Corporation recorded severance charges of $6,944, $10,814 and $15,688 $6,288in 2011, 2010 and $10,347 in 2009, 2008 and 2007, respectively, related to certain headcount reductions and facility closures including manufacturing facilitiesat several locations. During 2010, severance charges totaling $1,397 and $2,798 were recorded in the North American Social Expression Products segment related to the planned facility closures in 2008Mexico City, Mexico and a manufacturing facility in the International Social Expression Products segment in 2007.Kalamazoo, Michigan, respectively. See Note 2 for further information. The expense of $15,688 recorded in 2009 included enhanced benefits provided to certain domestic employees that were severed in connection with the headcount reductions announced in the fourth quarter of 2009. These one-time termination benefits were accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with ExitASC Topic 420, “Exit or Disposal Activities.Cost Obligations.”
The following table summarizes the severance charges by segment:
| | | | | | | | | |
| | | 2009 | | 2008 | | 2007 |
North American Social Expression Products | | $ | 6,247 | | $ | 4,902 | | $ | 5,486 |
International Social Expression Products | | | 4,119 | | | 71 | | | 3,199 |
Retail Operations | | | 1,787 | | | 74 | | | 362 |
AG Interactive | | | 1,626 | | | 22 | | | 1,020 |
Non-reportable | | | 1,108 | | | 27 | | | — |
Unallocated | | | 801 | | | 1,192 | | | 280 |
| | | | | | | | | |
Total | | $ | 15,688 | | $ | 6,288 | | $ | 10,347 |
| | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| North American Social Expression Products | | $ | 4,737 | | | $ | 8,517 | | | $ | 6,247 | |
| International Social Expression Products | | | 773 | | | | 263 | | | | 4,119 | |
| Retail Operations | | | - | | | | 618 | | | | 1,787 | |
| AG Interactive | | | 900 | | | | 802 | | | | 1,626 | |
| Non-reportable | | | 37 | | | | 232 | | | | 1,108 | |
| Unallocated | | | 497 | | | | 382 | | | | 801 | |
| | | | | | | | | | | | | |
| Total | | $ | 6,944 | | | $ | 10,814 | | | $ | 15,688 | |
| | | | | | | | | | | | | |
The remaining balance of the severance accrual was $14,209$8,002 and $9,648$14,030 at February 28, 20092011 and February 29, 2008,2010, respectively. The payments expected within the next twelve months are included in “Accrued liabilities” while the remaining payments beyond the next twelve months are included in “Other liabilities” on the Consolidated Statement of Financial Position.
86
79
NOTE 17—INCOME TAXES
(Loss) income
Income (loss) from continuing operations before income taxes:
| | | | | | | | | | |
| | | 2009 | | | 2008 | | 2007 |
United States | | $ | (136,523 | ) | | $ | 89,409 | | $ | 49,766 |
Foreign | | | (138,410 | ) | | | 34,559 | | | 15,645 |
| | | | | | | | | | |
| | $ | (274,933 | ) | | $ | 123,968 | | $ | 65,411 |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| United States | | $ | 135,859 | | | $ | 129,115 | | | $ | (136,523 | ) |
| International | | | 20,148 | | | | (8,161 | ) | | | (138,410 | ) |
| | | | | | | | | | | | | |
| | | $ | 156,007 | | | $ | 120,954 | | | $ | (274,933 | ) |
| | | | | | | | | | | | | |
Income tax
expense (benefit)
expense from the Corporation’s continuing operations has been provided as follows:
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Current: | | | | | | | | | | | | |
Federal | | $ | (21,530 | ) | | $ | 21,849 | | | $ | 27,703 | |
Foreign | | | 2,918 | | | | 18,496 | | | | 8,313 | |
State and local | | | 876 | | | | 8,075 | | | | 1,719 | |
| | | | | | | | | | | | |
| | | (17,736 | ) | | | 48,420 | | | | 37,735 | |
Deferred | | | (29,438 | ) | | | (7,772 | ) | | | (12,262 | ) |
| | | | | | | | | | | | |
| | $ | (47,174 | ) | | $ | 40,648 | | | $ | 25,473 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Current: | | | | | | | | | | | | |
| Federal | | $ | 23,263 | | | $ | 7,730 | | | $ | (21,530 | ) |
| International | | | 8,980 | | | | 2,079 | | | | 2,918 | |
| State and local | | | 8,104 | | | | 4,303 | | | | 876 | |
| | | | | | | | | | | | | |
| | | | 40,347 | | | | 14,112 | | | | (17,736 | ) |
| Deferred | | | 28,642 | | | | 25,268 | | | | (29,438 | ) |
| | | | | | | | | | | | | |
| | | $ | 68,989 | | | $ | 39,380 | | | $ | (47,174 | ) |
| | | | | | | | | | | | | |
Reconciliation of the Corporation’s income tax
expense (benefit)
expense from continuing operations from the U.S. statutory rate to the actual effective income tax rate is as follows:
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Income tax expense at statutory rate | | $ | (96,227 | ) | | $ | 43,389 | | | $ | 22,894 | |
State and local income taxes, net of federal tax benefit | | | (1,128 | ) | | | 3,744 | | | | (1,825 | ) |
Canadian income tax audit assessment | | | — | | | | — | | | | 5,133 | |
Tax-exempt interest | | | (6 | ) | | | (548 | ) | | | (1,396 | ) |
Nondeductible goodwill | | | 61,445 | | | | — | | | | — | |
Foreign items, net of foreign tax credits | | | (7,613 | ) | | | (6,770 | ) | | | (1,609 | ) |
Worthless stock deduction on foreign subsidiary | | | (9,460 | ) | | | — | | | | — | |
Charitable contribution carryforward expiration | | | 2,434 | | | | — | | | | — | |
Valuation allowance | | | (2,000 | ) | | | (752 | ) | | | 2,707 | |
Accruals and settlements | | | 486 | | | | 3,491 | | | | 2,585 | |
Other | | | 4,895 | | | | (1,906 | ) | | | (3,016 | ) |
| | | | | | | | | | | | |
Income tax at effective tax rate | | $ | (47,174 | ) | | $ | 40,648 | | | $ | 25,473 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Income tax expense (benefit) at statutory rate | | $ | 54,602 | | | $ | 42,334 | | | $ | (96,227 | ) |
| State and local income taxes, net of federal tax benefit | | | 5,568 | | | | 1,431 | | | | (1,128 | ) |
| Corporate-owned life insurance | | | (1,909 | ) | | | (4,688 | ) | | | (633 | ) |
| Nondeductible goodwill | | | - | | | | - | | | | 61,445 | |
| International items, net of foreign tax credits | | | 697 | | | | (2,490 | ) | | | (7,613 | ) |
| Worthless stock deduction on international subsidiary | | | (53 | ) | | | (6,043 | ) | | | (9,460 | ) |
| Charitable contributions carryforward expiration | | | - | | | | - | | | | 2,434 | |
| Exchange loss of international liquidation | | | - | | | | 2,562 | | | | - | |
| Valuation allowance | | | (1,067 | ) | | | 302 | | | | (2,000 | ) |
| Accruals and settlements | | | 8,866 | | | | 6,313 | | | | 486 | |
| Other | | | 2,285 | | | | (341 | ) | | | 5,522 | |
| | | | | | | | | | | | | |
| Income tax at effective tax rate | | $ | 68,989 | | | $ | 39,380 | | | $ | (47,174 | ) |
| | | | | | | | | | | | | |
During 2011, estimated accruals and settlements increased because the Corporation received new information associated with anticipated settlements related to open years which are currently under examination.
During 2010, the Corporation determined it was eligible for a worthless stock deduction related to one of its international subsidiaries, which resulted in the recording of a benefit of $6,043.
During 2009, of the $290,166 of goodwill and other intangible assets impairment charge, $175,558 had no tax basis, and therefore, is permanently nondeductible. As a result, the
currentprior year tax benefit was reduced by $61,445. Also, in 2009, $2,434 of a prior year net charitable contribution carryforward expired. Prior to 2009, the Corporation’s taxable income projections for 2009 supported the utilization of that carryforward in
the current year.2009. During 2009, the Corporation determined it was eligible for a worthless stock deduction related to one of its
foreigninternational subsidiaries, which resulted in the recording of a benefit of $9,460.
Income taxes paid from continuing operations were $23,519 in 2011, $12,881 in 2010 and $19,555 in 2009, $40,205 in 2008 and $30,375 in 2007.2009.
87
80
Significant components of the Corporation’s deferred tax assets and liabilities are as follows:
| | | | | | | | |
| | | February 28, 2009 | | | February 29, 2008 | |
Deferred tax assets: | | | | | | | | |
Employee benefit and incentive plans | | $ | 63,423 | | | $ | 44,775 | |
Net operating loss carryforwards | | | 33,725 | | | | 39,116 | |
Deferred capital loss | | | 8,291 | | | | 9,071 | |
Reserves not currently deductible | | | 44,001 | | | | 65,178 | |
Charitable contributions carryforward | | | 2,580 | | | | 2,434 | |
Foreign tax credit carryforward | | | 33,682 | | | | 25,101 | |
Goodwill and other intangible assets | | | 60,263 | | | | — | |
Other | | | 5,540 | | | | 7,751 | |
| | | | | | | | |
| | | 251,505 | | | | 193,426 | |
Valuation allowance | | | (24,807 | ) | | | (26,296 | ) |
| | | | | | | | |
Total deferred tax assets | | | 226,698 | | | | 167,130 | |
| | |
Deferred tax liabilities: | | | | | | | | |
Goodwill and other intangible assets | | | — | | | | 4,153 | |
Property, plant and equipment | | | 22,846 | | | | 17,892 | |
Other | | | 2,896 | | | | 2,216 | |
| | | | | | | | |
Total deferred tax liabilities | | | 25,742 | | | | 24,261 | |
| | | | | | | | |
Net deferred tax assets | | $ | 200,956 | | | $ | 142,869 | |
| | | | | | | | |
| | | | | | | | | |
| | | February 28, 2011 | | | February 28, 2010 | |
| |
| Deferred tax assets: | | | | | | | | |
| Employee benefit and incentive plans | | $ | 54,186 | | | $ | 59,859 | |
| Net operating loss carryforwards | | | 29,850 | | | | 37,722 | |
| Deferred capital loss | | | 8,490 | | | | 8,379 | |
| Deferred revenue | | | 13,327 | | | | 9,539 | |
| Net reserves not currently deductible | | | 22,689 | | | | 26,079 | |
| Charitable contributions carryforward | | | 1,271 | | | | 2,094 | |
| Foreign tax credit carryforward | | | 26,638 | | | | 35,948 | |
| Goodwill and other intangible assets | | | 50,371 | | | | 58,104 | |
| Other | | | 9,242 | | | | 2,959 | |
| | | | | | | | | |
| | | | 216,064 | | | | 240,683 | |
| Valuation allowance | | | (24,042 | ) | | | (25,109 | ) |
| | | | | | | | | |
| Total deferred tax assets | | | 192,022 | | | | 215,574 | |
| Deferred tax liabilities: | | | | | | | | |
| Property, plant and equipment | | | 18,132 | | | | 20,647 | |
| Other | | | 6,340 | | | | 1,057 | |
| | | | | | | | | |
| Total deferred tax liabilities | | | 24,472 | | | | 21,704 | |
| | | | | | | | | |
| Net deferred tax assets | | $ | 167,550 | | | $ | 193,870 | |
| | | | | | | | | |
Net deferred tax assets are included
inon the Consolidated Statement of Financial Position in the following captions:
| | | | | | | | |
| | | February 28, 2009 | | | February 29, 2008 | |
Deferred and refundable income taxes (current) | | $ | 54,929 | | | $ | 70,923 | |
Deferred and refundable income taxes (noncurrent) | | | 147,857 | | | | 78,363 | |
Deferred income taxes and noncurrent income taxes payable | | | (1,830 | ) | | | (6,417 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | 200,956 | | | $ | 142,869 | |
| | | | | | | | |
| | | | | | | | | |
| | | February 28, 2011 | | | February 28, 2010 | |
| |
| Deferred and refundable income taxes (current) | | $ | 46,628 | | | $ | 51,929 | |
| Deferred and refundable income taxes (noncurrent) | | | 121,806 | | | | 143,770 | |
| Deferred income taxes and noncurrent income taxes payable | | | (884 | ) | | | (1,829 | ) |
| | | | | | | | | |
| Net deferred tax assets | | $ | 167,550 | | | $ | 193,870 | |
| | | | | | | | | |
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases as well as from net operating loss and tax credit carryforwards, and are stated at tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce income tax payments in future years.
The Corporation periodically reviews the need for valuation allowances against deferred tax assets and recognizes these deferred tax assets to the extent that realization is more likely than not. Based upon a review of earnings history and trends, forecasted earnings and the relevant expiration of carryforwards, the Corporation believes that the valuation allowances provided are appropriate. At February 28,
2009,2011, the valuation allowance of
$24,807$24,042 related principally to certain
foreigninternational and domestic net operating loss carryforwards and deferred capital losses.
At February 28, 2009,2011, the Corporation had deferred tax assets of approximately $6,869$8,961 for foreigninternational net operating loss carryforwards, of which $3,874$4,710 has no expiration dates and $2,995$4,251 has expiration dates ranging from 20102014 through 2018.2020. In addition, the Corporation had deferred tax assets related to domestic net operating loss, state net operating loss, charitable contribution and foreign tax credit (“FTC”) carryforwards of approximately $17,075, $9,781, $2,580$15,231, $8,612, $1,271 and $33,682,$26,638, respectively. The federal net operating loss carryforward hascarryforwards have expiration dates ranging from 2019 to 2027. The state net operating loss carryforwards have expiration
88
dates ranging from
20102012 to
2029.2031. The charitable contribution carryforward has an expiration date of 2014. The FTC carryforwards have expiration dates ranging from
20132015 to 2020.
81
Deferred taxes have not been provided on approximately
$65,856$81,256 of undistributed earnings of
foreigninternational 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.
Effective March 1, 2007, the Corporation adopted FIN 48, including the provisions of FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48.” In connection with the adoption of FIN 48, the Corporation recorded a decrease to retained earnings of $14,017 to recognize an increase in its liability (or decrease to its refundable) for unrecognized tax benefits, interest and penalties under the recognition and measurement criteria of FIN 48. A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows:
| | | | | | | | |
| | | 2009 | | | 2008 | |
Balance at beginning of year | | $ | 27,523 | | | $ | 24,722 | |
Additions based on tax positions related to the current year | | | 229 | | | | 1,401 | |
Reductions based on tax positions related to the current year | | | (408 | ) | | | — | |
Additions for tax positions of prior years | | | 18,744 | | | | 9,339 | |
Reductions for tax positions of prior years | | | (6,581 | ) | | | (7,939 | ) |
Settlements | | | (4,747 | ) | | | — | |
| | | | | | | | |
Balance at end of year | | $ | 34,760 | | | $ | 27,523 | |
| | | | | | | | |
At February 28,
2009,2011, the Corporation had unrecognized tax benefits of
$34,760$43,323 that, if recognized, would have a favorable effect on the Corporation’s income tax expense of
$23,433,$32,811, compared to unrecognized tax benefits of
$27,523$45,661 that, if recognized, would have a favorable effect on the Corporation’s income tax expense of
$21,003$33,765 at February
29, 2008.28, 2010. It is reasonably possible that the Corporation’s unrecognized tax positions as of February 28,
20092011 could decrease approximately
$10,000$9,498 during
20102012 due to anticipated settlements and resulting cash payments related to open years after
1999,1996, which are currently under examination.
The following chart reconciles the Company’s total gross unrecognized tax benefits for the years ended February 28, 2011, 2010 and 2009:
| | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| |
| Balance at beginning of year | | $ | 45,661 | | | $ | 34,760 | | | $ | 27,523 | |
| Additions based on tax positions related to the current year | | | 2,177 | | | | 12,673 | | | | 229 | |
| Reductions based on tax positions related to the current year | | | - | | | | - | | | | (408 | ) |
| Additions for tax positions of prior years | | | 1,239 | | | | 4,656 | | | | 18,744 | |
| Reductions for tax positions of prior years | | | (2,405 | ) | | | (6,345 | ) | | | (6,581 | ) |
| Settlements | | | (2,972 | ) | | | (83 | ) | | | (4,747 | ) |
| Statute lapse | | | (377 | ) | | | - | | | | - | |
| | | | | | | | | | | | | |
| Balance at end of year | | $ | 43,323 | | | $ | 45,661 | | | $ | 34,760 | |
| | | | | | | | | | | | | |
The Corporation recognizes interest and penalties accrued on unrecognized tax benefits and
refundable income taxes as a component of income tax expense. During the year ended February 28,
2009,2011, the Corporation recognized a net
creditexpense of
$5,341$16,621 for interest and penalties on unrecognized tax benefits and
refundable income taxes. As of February 28,
2009,2011, the total amount of gross accrued interest and penalties related to unrecognized tax benefits and
refundable income taxes netted to a
refundablepayable of
$1,538.$16,312. During the year ended February
29, 2008,28, 2010, the Corporation recognized
$1,061a net benefit of
net$812 for interest expense and penalties related to unrecognized tax benefits and refundable income taxes. As of February
29, 2008,28, 2010, the total amount of gross accrued interest and penalties included
inon the Consolidated Statement of Financial Position related to unrecognized tax benefits and refundable income taxes
wasnetted to a
payablerefundable of
$6,516.$1,042.
The Corporation is subject to examination by the IRS and various U.S. state and local jurisdictions for tax years 1996 to the present. The Corporation is also subject to tax examination in various
foreigninternational tax jurisdictions, including Canada, the United Kingdom, Australia,
France, Italy, Mexico and New Zealand for tax years
20042006 to the present.
NOTE 18—DISCONTINUED OPERATIONS
Discontinued operations include
| |
| NOTE 18 – | SUBSEQUENT EVENTS |
Continuing the strategy of focusing on growing its core greeting card business, on March 1, 2011, the Corporation’s
educational products business, its South African business unitEuropean subsidiary, UK Greetings Ltd., acquired Watermark Publishing Limited and its
nonprescription reading glasses business. Learning Horizons, Maginivisionwholly owned subsidiary Watermark Packaging Limited (“Watermark”). Watermark is a privately held company located in Corby, England, and
the South African business units each meet the definition ofis considered a
“component of an entity” and have been accounted for as discontinued operations under SFAS 144. Accordingly, the Corporation’s consolidated financial statements and related notes have been presented to reflect all three as discontinued operations for all periods presented. Learning Horizons and Magnivision were previously included within the Corporation’s “non-reportable segments” and the South African business unit was included within the former “Social Expression Products” segment.82
The following summarizes the results of discontinued operations for the periods presented:
| | | | | | | | |
| | | 2008 | | | 2007 | |
Total revenue | | $ | 299 | | | $ | 14,457 | |
| | |
Pre-tax loss from operations | | | (47 | ) | | | (5,553 | ) |
Gain on sale | | | 34 | | | | 5,784 | |
| | | | | | | | |
| | | (13 | ) | | | 231 | |
Income tax expense (benefit) | | | 304 | | | | (2,209 | ) |
| | | | | | | | |
(Loss) income from discontinued operations, net of tax | | $ | (317 | ) | | $ | 2,440 | |
| | | | | | | | |
In February 2007, the Corporation entered into an agreement to sell its educational products subsidiary, Learning Horizons. The sale reflects the Corporation’s strategy to focus its resources on business units closely related to its core social expression business. The sale closed in March 2007 and the Corporation received cash proceeds of $2,183, which is included in “Cash receipts related to discontinued operations”leader in the Consolidated Statement of Cash Flows. The pre-tax loss from operations in 2007 included $108 of fixed asset impairment charges in accordance with SFAS 144 and $640 of goodwill impairment charges in accordance with SFAS 142, representing all the goodwill of the reporting unit. Additional charges of $3,472 were recorded for other inventory and receivable reductions. The charges and impairments were primarily recorded as a result of the intention to sell Learning Horizons, and therefore, present the operation at its estimated fair value.
In February 2006, the Corporation committed to a plan to sell its South African business unit. It had been determined that the business unit was no longer a strategic fit for the Corporation. The sale closedUnited Kingdom in the second quarterinnovation and design of 2007 during which the Corporation recorded a pre-tax gain of $703. Immediately prior to, but in conjunction with, the sale of the South African business, approximately 50% of the shares owned by the Corporation were sold back to the South African business for approximately $4,000. The remaining outstanding shares owned by the Corporation were sold to a third party for proceeds of approximately $5,500. The total of approximately $9,500 is included in “Cash receipts related to discontinued operations” in the Consolidated Statement of Cash Flows.
On July 30, 2004, the Corporation announced it had signed a letter of agreement to sell its Magnivision nonprescription reading glasses business. The sale reflected the Corporation’s strategy to focus its resources on business units closely related to its core social expression business. The sale of Magnivision closed in the third quarter of 2005. In 2007, the Corporation recorded a pre-tax gain of $5,100 based on the final closing balance sheet adjustments for the sale of Magnivision. Proceeds of $2,100 and $3,000 are included in “Cash receipts related to discontinued operations” in the Consolidated Statement of Cash Flows in 2008 and 2007, respectively.
NOTE 19—SUBSEQUENT EVENTS
Sale of Strawberry Shortcake and Care Bears Properties
On July 20, 2008, the Corporation entered into a binding letter agreement to sell the Strawberry Shortcake and Care Bears properties and the Corporation’s rights in the Sushi Pack property to Cookie Jar Entertainment Inc. (“Cookie Jar”) for $195,000 in cash. The transaction was expected to close by September 30, 2008; however, with the disruptions in the financial markets, the transaction did not close. As a result, under the terms of the agreement, the Corporation had the right to solicit offers from third parties to purchase the properties until March 31, 2009. During the period of time between September 30, 2008 and March 31, 2009, Cookie Jar could match any third party offer up to a pre-established threshold.
On March 24, 2009, the Corporation entered into a binding term sheet with MoonScoop S.A.S. (“MoonScoop”) providing for the sale to MoonScoop of the Strawberry Shortcake and Care Bears properties owned by the Corporation, as well as all rights in those properties owned by Cookie Jar and its affiliates. Under the terms of the
83
agreement, MoonScoop agrees to pay approximately $95,000 for the properties and assume all contracts and related obligations related to the properties. The Corporation and Cookie Jar will be entitled to receive approximately $76,000 and $19,000, respectively, as consideration for their rights to the properties.
The term sheet provides that MoonScoop’s acquisition of the Strawberry Shortcake and Care Bears properties is subject to Cookie Jar’s right, pursuant to the binding letter agreement discussed above, to match the terms of the transaction set forth in the term sheet and acquire the properties. On March 30, 2009, Cookie Jar delivered notice to the Corporation that it had elected to acquire the Strawberry Shortcake and Care Bears properties pursuant to its matching right for aggregate consideration payable to the Corporation of approximately $76,000. Cookie Jar must close on the acquisition no later than April 30, 2009, unless the Corporation and Cookie Jar mutually agree on an extension. If Cookie Jar fails to close, the acquisition of the properties by MoonScoop is expected to close in June 2009. If Cookie Jar acquires the properties, MoonScoop will be entitled to a break-up fee of approximately $2,850. Closure of either the Cookie Jar or MoonScoop transaction is subject to the acquiring party obtaining financing as well as certain limited other terms and conditions.
In connection with the acquisition of the Strawberry Shortcake and Care Bears properties, both MoonScoop and Cookie Jar have agreed to grant the Corporation ten-year exclusive licensing agreements for the properties for certain categories of social expression products that are developed, manufactured and sold in connection with the Corporation’s core social expressions business.
Sale of American Greetings Retail Stores and Purchase of Papyrus Brand
On April 17, 2009, the Corporation entered into an agreement with Schurman Fine Papers and one of its subsidiaries (collectively, “Schurman”) to sell all rights, title and interest in the assets of the Corporation’s Retail Operations segment for approximately $6,000 in cash and Schurman’s assumption of certain liabilities related to the Retail Operations segment. The Corporation sold all 341 of its card and gift retail store assets to Schurman, which will operate stores under the American Greetings, Carlton Cards and Papyrus brands.greeting cards. Under the terms of the transaction, the Corporation anticipates remaining subject to certain of its store leases on a contingent basis by subleasing the stores to Schurman.
Pursuant to the termsacquired 100% of the agreement, the Corporation also purchased from Schurman its Papyrus trademark and its wholesale business division, which supplies Papyrus brand greeting cards primarily to leading specialty, mass, grocery and drug store channels,equity interests of Watermark in exchange forof approximately $18,000$17,069 in cash, and the Corporation’s assumption of certain liabilities related to Schurman’s wholesale business. In addition, the Corporation agreed to provide Schurman limited credit support through the provision of a limited guarantee (“Liquidity Guarantee”) and a limited bridge guarantee (“Bridge Guarantee”)which was held in favor of the lenders under Schurman’s senior revolving credit facility (the “Senior Credit Facility”). The Corporation also purchased shares representing approximately 15% of the issued and outstanding equity interests in Schurman for approximately $2,000.
Pursuant to the terms of the Liquidity Guarantee, the Corporation has guaranteed the repayment of up to $12,000 of Schurman’s borrowings under the Senior Credit Facility to help ensure that Schurman has sufficient borrowing availability under this facility. The Liquidity Guarantee is required to be backed by a letter of credit for the term of the Liquidity Guarantee, which is currently anticipated to end in January 2014. Pursuant to the terms of the Bridge Guarantee, the Corporation has guaranteed the repayment of up to $12,000 of Schurman’s borrowings under the Senior Credit Facility until Schurman is able to include the inventory and other assets of the Retail Operations segment in its borrowing base. The Bridge Guarantee is required to be backed by a letter of credit and generally will be reduced as Schurman is able to include such inventory and other assets in its borrowing base. The Corporation’s obligations under the Liquidity Guarantee and the Bridge Guarantee generally will not be triggered unless Schurman’s lenders under its Senior Credit Facility have substantially completed the liquidation of the collateral under Schurman’s Senior Credit Facility, or 91 days after the liquidation is started, whichever is earlier, and will be limited to the deficiency, if any, between the amount owed and the amount collected in connection with the liquidation.
84
The Corporation and Schurman also entered into a loan agreement, datedan escrow account as of the closing date, pursuant to which the Corporation is providing Schurman with up to $10,000 of subordinated financing (“Subordinated Credit Facility”) for an initial term of nineteen months, subject to up to three automatic one-year renewal periods (or partial-year, in the case of the last renewal), unless either party provides the appropriate written notice prior to the expiration of the applicable term. Schurman can only borrow under the facility if it does not have other sources of financing available, and borrowings under the Subordinated Credit Facility may only be used for specified purposes. In addition, availability under the Subordinated Credit Facility will be limited as long as the Bridge Guarantee is in place to the difference between $10,000 and the current maximum amount of the Bridge Guarantee. Borrowings under the Subordinated Credit Facility will be subordinate to borrowings under the Senior Credit Facility. The Subordinated Credit Facility provides affirmative and negative covenants and events of default customary for such financings.February 28, 2011.
89
In connection with the agreement, the Corporation and Schurman have also entered into several other ancillary agreements, including an inventory supply agreement, a marketing services agreement, a transition services agreement and a trademark licensing agreement.
85
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Thousands of dollars except per share amounts
The following is a summary of the unaudited quarterly results of operations for the years ended February 28,
20092011 and
February 29, 2008: | | | | | | | | | | | | | | |
| | | Quarter Ended | |
| | | May 30 | | Aug 29 | | Nov 28 | | | Feb 28 | |
Fiscal 2009 | | | | | | | | | | | | | | |
Net sales | | $ | 425,463 | | $ | 372,942 | | $ | 444,527 | | | $ | 403,467 | |
Total revenue | | | 428,300 | | | 385,835 | | | 454,084 | | | | 422,519 | |
Gross profit | | | 232,121 | | | 202,830 | | | 221,313 | | | | 180,179 | |
Net income (loss) | | | 13,333 | | | 2,297 | | | (193,311 | ) | | | (50,078 | ) |
| | | | |
Earnings (loss) per share | | $ | 0.27 | | $ | 0.05 | | $ | (4.25 | ) | | $ | (1.13 | ) |
Earnings (loss) per share—assuming dilution | | | 0.27 | | | 0.05 | | | (4.25 | ) | | | (1.13 | ) |
| | | | |
Dividends declared per share | | | 0.12 | | | 0.12 | | | 0.12 | | | | 0.24 | |
2010:
| | | | | | | | | | | | | | | | | |
| | | Quarter Ended | |
| Fiscal 2011 | | May 28 | | | Aug 27 | | | Nov 26 | | | Feb 28 | |
| |
| Net sales | | $ | 392,105 | | | $ | 333,339 | | | $ | 421,990 | | | $ | 412,779 | |
| Total revenue | | | 396,308 | | | | 342,819 | | | | 430,138 | | | | 423,303 | |
| Gross profit | | | 234,092 | | | | 187,626 | | | | 222,813 | | | | 233,314 | |
| Net income | | | 30,839 | | | | 8,532 | | | | 32,163 | | | | 15,484 | |
| Earnings per share | | $ | 0.78 | | | $ | 0.21 | | | $ | 0.80 | | | $ | 0.39 | |
| Earnings per share — assuming dilution | | | 0.75 | | | | 0.21 | | | | 0.78 | | | | 0.37 | |
| Dividends declared per share | | | 0.14 | | | | 0.14 | | | | 0.14 | | | | 0.14 | |
The thirdfourth quarter of 2011 included pre-tax goodwill impairment chargesa pretax charge of $82,110 for$5,503 related to scan-based trading implementations in the UK Reporting Unit and $150,208 for the AG Interactive segment,North American Social Expression Products segment.
| | | | | | | | | | | | | | | | | |
| | | Quarter Ended | |
| Fiscal 2010 | | May 29 | | | Aug 28 | | | Nov 27 | | | Feb 28 | |
| |
| Net sales | | $ | 409,277 | | | $ | 348,639 | | | $ | 431,512 | | | $ | 408,864 | |
| Total revenue | | | 412,922 | | | | 356,350 | | | | 440,166 | | | | 426,420 | |
| Gross profit | | | 242,108 | | | | 195,391 | | | | 226,515 | | | | 221,203 | |
| Net income | | | 9,961 | | | | 23,122 | | | | 29,695 | | | | 18,796 | |
| Earnings per share | | $ | 0.25 | | | $ | 0.59 | | | $ | 0.75 | | | $ | 0.48 | |
| Earnings per share — assuming dilution | | | 0.25 | | | | 0.59 | | | | 0.75 | | | | 0.46 | |
| Dividends declared per share | | | - | | | | 0.12 | | | | 0.12 | | | | 0.12 | |
The first quarter of 2010 included a pre-tax
other intangible assets impairment chargeloss on disposition of
$10,571, pre-tax severance expense of $7,160 and a pre-tax fixed asset impairment charge of $3,937$28,333 in the Retail Operations segment.
Partially offsetting theseA pre-tax benefit of $6,993 was recorded during the second quarter due to higher than average death benefit income reported by our third party administrators, in relation to our corporate-owned life insurance programs. During the third quarter of 2010, the shut down of Carlton Mexico operations within the North American Social Expression Products segment resulted in pre-tax charges
was a reduction in variable compensation expense of $11,050.totaling $5,901.
The fourth quarter
of 2010 included a pre-tax
fixed asset impairment charge
totaling $13,005, a pre-tax gain of
$1,528 in$34,178 related to the
Retail Operations segmentParty Goods Transaction, and a pre-tax severance charge of
$7,506. The fourth quarter$6,555 in the North American Social Expression Products segment. Currency translation reclassification adjustments for amounts recognized in income were also
included goodwill impairment charges of $47,850 for NAGCD and $82 for the Corporation’s fixtures business. The estimated goodwill impairment charge recorded in the
thirdfourth quarter
forwithin the
North American Social Expression Products segment and AG Interactive segment
was reduced $655 in the fourth quarter. The fourth quarter also included a loss of $2,740 on the investment in first lien debt securities of RPG.Quarterly earnings per share amounts do not add to the full year primarily due to share repurchases during the periods and the anti-dilutive impact of potentially dilutive securities in periods in which the Corporation recorded a net loss.
| | | | | | | | | | | | | | |
| | | Quarter Ended |
| | | May 25 | | | Aug 24 | | Nov 23 | | | Feb 29 |
Fiscal 2008 | | | | | | | | | | | | | | |
Net sales | | $ | 418,016 | | | $ | 365,878 | | $ | 475,015 | | | $ | 471,875 |
Total revenue | | | 419,967 | | | | 377,485 | | | 485,766 | | | | 493,233 |
Gross profit | | | 256,888 | | | | 202,826 | | | 251,686 | | | | 238,613 |
Income from continuing operations | | | 30,263 | | | | 8,375 | | | 29,120 | | | | 15,562 |
Loss from discontinued operations, net of tax | | | (213 | ) | | | — | | | (104 | ) | | | — |
Net income | | | 30,050 | | | | 8,375 | | | 29,016 | | | | 15,562 |
Earnings per share: | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.54 | | | $ | 0.15 | | $ | 0.53 | | | $ | 0.31 |
Net income | | | 0.54 | | | | 0.15 | | | 0.53 | | | | 0.31 |
Earnings per share—assuming dilution: | | | | | | | | | | | | | | |
Continuing operations | | | 0.54 | | | | 0.15 | | | 0.52 | | | | 0.31 |
Net income | | | 0.54 | | | | 0.15 | | | 0.52 | | | | 0.31 |
Dividends declared per share | | | 0.10 | | | | 0.10 | | | 0.10 | | | | 0.10 |
The fourth quarter included atotaling pre-tax fixed asset impairment charge of $1,436 in the Retail Operations segment$11,300 and a pre-tax severance chargebenefit of $4,331.$3,274, respectively. The fourth quarter also included a pre-tax charge of $13,500 associated with the Canadian dual-priced products, primarily temporary promotional activities.
$19,000 in relation to a legal settlement.
Quarterly earnings per share amounts do not add to the full year primarily due to share repurchases during the periods.
90
86
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
There were no disagreements with our independent registered public accounting firm on accounting or financial disclosure matters within the three year period ended February 28,
2009,2011, or in any period subsequent to such date.
| |
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. American Greetings maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
American Greetings carries out a variety of on-going procedures, under the supervision and with the participation of the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of American Greetings concluded that the Corporation’s disclosure controls and procedures were effective as of February 28,
2009.2011.
Changes in Internal Controls. There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Management on Internal Control Over Financial Reporting. The management of American Greetings is responsible for establishing and maintaining adequate internal control over financial reporting for the Corporation. American Greetings’ internal control system was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. American Greetings’ management assessed the effectiveness of the Corporation’s internal control over financial reporting as of February 28,
2009.2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As permitted by the Securities and Exchange Commission, management’s February 28, 2009 assessment on internal control over financial reporting did not include an assessment of and conclusion on the effectiveness of internal control over financial reporting of Recycled Paper Greetings, which we acquired on February 24, 2009 and which is included in the Corporation’s consolidated financial statements as of February 28, 2009. The assets of Recycled Paper Greetings constituted approximately 7% of the Corporation’s total assets as of February 28, 2009. In addition, because we acquired Recycled Paper Greetings on February 24, 2009, its results of operations were not material to our consolidated financial results.
Based on management’s assessment under COSO’s “Internal Control-Integrated Framework,” management believes that as of February 28,
2009,2011, American Greetings’ internal control over financial reporting is effective.
Ernst & Young LLP, independent registered public accounting firm, has issued an audit report on the effectiveness of internal control over financial reporting. This attestation report is set forth below.
91
87
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Shareholders
American Greetings Corporation
We have audited American Greetings Corporation’s internal control over financial reporting as of February 28,
2009,2011, based on criteria established in Internal
Control—Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). American Greetings Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Report of Management on Internal Control Over Financial Reporting, the Corporation completed the acquisition of Recycled Paper Greetings, Inc. on February 24, 2009. As permitted by the Securities and Exchange Commission, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Recycled Paper Greetings, Inc., which is included in the 2009 consolidated financial statements of American Greetings Corporation and constituted approximately seven percent of total assets at February 28, 2009. In addition, as Recycled Paper Greetings, Inc. was acquired on February 24, 2009, its results of operations were not material to the consolidated results. Our audit of internal control over financial reporting of American Greetings Corporation also did not include an evaluation of the internal control over financial reporting of Recycled Paper Greetings, Inc.
In our opinion, American Greetings Corporation maintained, in all material respects, effective internal control over financial reporting as of February 28,
2009,2011, based on the COSO criteria.
88
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of American Greetings Corporation as of February 28,
20092011 and February
29, 2008,28, 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended February 28,
20092011 of American Greetings Corporation and our report dated April
28, 200929, 2011 expressed an unqualified audit opinion thereon.
April 28, 200929, 2011
92
89
| |
| Item 9B. | Other Information |
| |
| Item 10. | Directors, and Executive Officers of the Registrantand Corporate Governance |
We hereby incorporate by reference the information called for by this Item 10 from the information contained in (i) our Proxy Statement in connection with our Annual Meeting of Shareholders to be held on June
26, 200924, 2011 under the headings “Proposal
One—One – Election of Directors,” “Security
Ownership—Ownership – Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” and (ii) for information regarding executive officers, Part I of this Annual Report on
Form 10-K. | |
| Item 11. | Executive Compensation |
We hereby incorporate by reference the information called for by this Item 11 from the information contained in our Proxy Statement in connection with our Annual Meeting of Shareholders to be held on June
26, 200924, 2011 under the headings “Compensation Discussion and Analysis,”
“Information“Fiscal 2011 Information Concerning Executive Officers,” “Director
Compensation”Compensation,” “Risks Related to Compensation Policies and Practices,” and “Compensation Committee Report.”
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
We hereby incorporate by reference the information called for by this Item 12 from the information contained in our Proxy Statement in connection with our Annual Meeting of Shareholders to be held on June
26, 200924, 2011 under the heading “Security Ownership.”
EQUITY COMPENSATION PLAN INFORMATION The following table provides information about our common shares that may be issued under our equity compensation plans as of February 28,
2009. | | | | | | | |
Plan Category | | Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights | | Weighted-average
exercise price of
outstanding
options, warrants
and rights | | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) |
| | | (a) | | (b) | | (c) |
Equity compensation plans approved by security holders(1) | | 7,019,431 | | $ | 21.84 | | 1,983,099 |
Equity compensation plans not approved by security holders | | — | | | N/A | | — |
| | | | | | | |
Total | | 7,019,431 | | $ | 21.84 | | 1,983,099 |
| | | | | | | |
| | | | | | | | | | | | | |
| | | Number of
| | | | | | Number of securities
| |
| | | securities to be
| | | | | | remaining available for
| |
| | | issued upon
| | | Weighted-average
| | | future issuance under
| |
| | | exercise of
| | | exercise price of
| | | equity compensation
| |
| | | outstanding
| | | outstanding
| | | plans (excluding
| |
| | | options, warrants
| | | options,
| | | securities
| |
Plan Category | | and rights | | | warrants and rights | | | reflected in column (a)) | |
| | | (a) | | | (b) | | | (c) | |
| |
| Equity compensation plans approved by security holders(1) | | | 6,902,178 | | | $ | 16.82 | | | | 1,129,006 | |
| Equity compensation plans not approved by security holders | | | - | | | | N/A | | | | - | |
| | | | | | | | | | | | | |
| Total | | | 6,902,178 | | | $ | 16.82 | | | | 1,129,006 | |
| | | | | | | | | | | | | |
| | |
| (1) | | Column (a) includes 5,692,8194,533,931 Class A common shares and 1,017,5201,166,395 Class B common shares that may be issued in connection with the exercise of outstanding stock options. The amount in column (a) also includes 59,864749,500 Class A common shares and 141,000 Class B common shares that may be issued upon the settlement of outstanding performance shares that have been awarded under the Corporation’s equity compensation plans, assuming the maximum performance or other criteria have been achieved. In addition, the amount in column (a) includes 110,999 Class A common shares and 29,675 Class B common shares related to restricted stock units that may be issued upon the satisfaction of service-based vesting period. The amount in column (a) also includes 3,75430,115 Class A |
90
| common shares and 245,474140,563 Class B common |
93
| | |
| | shares representing share equivalents that have been credited to the account of certain officers or directors who have deferred receipt of shares earned and vested under our 1997 Equity and Performance Incentive Plan or our 2007 Omnibus Incentive Compensation Plan or that were to be paid in lieu of cash directors fees under the 1995 Director Stock Plan, which will be issued under these plans upon the expiration of the deferral period. |
|
| | Column (b) is the weighted-average exercise price of outstanding stock options; excludes restricted stock units, performance shares and deferred compensation share equivalents. |
|
| | Column (c) includes 924,164 Class A common shares and 134,054 Class B common shares, which shares may generally be issued under the Corporation’s equity compensation plans upon the exercise of stock options or stock appreciation rights and/or vesting of awards of deferred shares, performance shares or restricted stock units. |
Column (b) is the weighted-average exercise price of outstanding stock options; excludes restricted stock, performance shares and deferred compensation share equivalents.
Column (c) includes 1,700,736 Class A common shares and 282,363 Class B common shares, which shares may generally be issued under the Corporation’s equity compensation plans upon the exercise of stock options or stock appreciation rights and/or awards of deferred shares, performance shares or restricted stock.
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
We hereby incorporate by reference the information called for by this Item 13 from the information contained in our Proxy Statement in connection with our Annual Meeting of Shareholders to be held on June
26, 200924, 2011 under the headings “Certain Relationships and Related Transactions” and “Corporate Governance.”
| |
| Item 14. | Principal Accounting Fees and Services |
We hereby incorporate by reference the information called for by this Item 14 from the information contained in our Proxy Statement in connection with our Annual Meeting of Shareholders to be held on June
26, 200924, 2011 under the heading “Independent Registered Public Accounting Firm.”
| |
| Item 15. | Exhibits, Financial Statement Schedules |
(a) The following documents are filed as part of this Annual Report on
Form 10-K | | | |
| | Report of Independent Registered Public Accounting Firm | | 45 | 46 | |
| |
Consolidated Statement of Operations—Operations — Years ended February 28, 2009, February 29, 20082011, 2010 and February 28, 2007 2009 | | 46 | 47 | |
| |
Consolidated Statement of Financial Position—Position — February 28, 20092011 and February 29, 2008 2010 | | 47 | 48 | |
| |
Consolidated Statement of Cash Flows—Flows — Years ended February 28, 2009, February 29, 20082011, 2010 and February 28, 2007 2009 | | 48 | 49 | |
| |
Consolidated Statement of Shareholders’ Equity—Equity — Years ended February 28, 2009, February 29, 20082011, 2010 and February 28, 2007 2009 | | 49 | 50 | |
| |
Notes to Consolidated Financial Statements—Statements — Years ended February 28, 2009, February 29, 20082011, 2010 and February 28, 2007 2009 | | 50 | 51 | |
| |
Quarterly Results of Operations (Unaudited) | | 86 | 90 | |
| | | | | | | |
| 2. | | Financial Statement Schedules |
| | | | | | | |
| 3. | | Exhibits required by Item 601 ofRegulation S-K |
91
| | | | |
Item | | | | Description |
|
| 2 | | Plan of acquisition, reorganization, arrangement, liquidation or succession. |
| | |
| | (i) | | |
| | 2.1 | | Binding Letter Agreement, dated July 20, 2008, between Cookie Jar Entertainment Inc. and the Corporation. |
| | |
| | | | This Exhibit is filed herewith. |
| | |
| | (ii) | | Agreement, dated December 30, 2008, among the Corporation, Lakeshore Trading Company, RPG Holdings, Inc., and Recycled Paper Greetings, Inc. |
| | |
| | | | This Exhibit is filed herewith. |
| | |
| | (iii) | | Recycled Paper Greetings’ Debtors’ Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated January 2, 2009. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to Amendment No. 1 to Form T-3, with respect to the Corporation’s 7Annual Report on 3Form 10-K/8% Senior Notes due 2016, filed by for the Corporation with the Securities and Exchange Commission on January 7,fiscal year ended February 28, 2009, and is incorporated herein by reference. |
94
| | | | |
Item | | | | Description |
|
| | 2.2 | | Settlement Agreement, dated as of May 7, 2010, by and among the Corporation, Those Characters From Cleveland, Inc., Cookie Jar Entertainment, Inc., Cookie Jar Entertainment (USA), Inc. and Cookie Jar Entertainment Holdings (USA) Inc., amending that certain Binding Letter Agreement, dated July 20, 2008, between Cookie Jar Entertainment Inc. and the Corporation (confidential treatment requested as to certain portions which are omitted and filed separately with the SEC). |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the fiscal quarter ended May 28, 2010, and is incorporated herein by reference. |
| | 2.3 | | Binding Term Sheet between MoonScoop SAS and the Corporation, dated March 24, 2009. |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended May 29, 2009. |
| | 2.4 | | Asset Purchase Agreement by and among the Corporation and Amscan Holdings, Inc., dated December 21, 2009. |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2010, and is incorporated herein by reference. |
| 3 | | Articles of Incorporation and By-laws. |
| | |
| | (i)3.1 | | Amended and Restated Articles of Incorporation of the Corporation.
This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report onForm 8-K, dated July 1, 2008, and is incorporated herein by reference. |
| | |
| | 3.2 | | Amended and Restated Code of Regulations of the Corporation. |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report onForm 8-K, dated July 1, 2008, and is incorporated herein by reference. |
| | |
| | (ii) | | Amended and Restated Code of Regulations of the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report on Form 8-K, dated July 1, 2008, and is incorporated herein by reference. |
| |
| 4 | | Instruments defining the rights of security holders, including indentures. |
| | |
| | (i)4.1 | | Trust Indenture, dated as of July 27, 1998. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 1999, and is incorporated herein by reference. |
| | |
| | (ii)4.2 | | First Supplemental Indenture, dated May 25, 2006, to the Indenture dated July 27, 1998, with respect to the Corporation’s 6.10% Senior Notes due April 1, 2028, between the Corporation, as issuer, and JP Morgan Trust Company, National Association, as Trustee. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report onForm 8-K, dated May 26, 2006, and is incorporated herein by reference. |
| | (iii)4.3 | | Form of Trust Indenture, dated May 24, 2006, between the Corporation, as Issuer, and The Bank of Nova Scotia Trust Company of New York, as Trustee, with respect to the Corporation’s 73/8% Senior Notes due June 1, 2016. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report onForm 8-K, dated May 22, 2006, and is incorporated herein by reference. |
| | |
| | (iv)4.4 | | Form of Global Note for the 73/8% Senior Notes due June 1, 2016. |
| | |
| | | | This Exhibit is included in the Form of Trust Indenture between the Corporation, as Issuer, and The Bank of Nova Scotia Trust Company of New York, as Trustee, which has been previously filed as an Exhibit to the Corporation’s Current Report onForm 8-K, dated May 22, 2006, and is incorporated herein by reference. |
92
| | | | |
Item
| | Description
|
| 4.5 | | (v) | | First Supplemental Indenture, dated February 24, 2009, between the Corporation, as Issuer, and The Bank of Nova Scotia Trust Company of New York, as Trustee, with respect to the Corporation’s 73/8% Senior Notes due June 1, 2016. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2009, and is filed herewith.incorporated herein by reference. |
95
| | |
| | (vi) | | |
Item | | | | Description |
|
| | 4.6 | | Trust Indenture, dated February 24, 2009, between the Corporation, as Issuer, and The Bank of Nova Scotia Trust Company of New York, as Trustee, with respect to the Corporation’s 73/8% Notes due June 1, 2016. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2009, and is filed herewith.incorporated herein by reference. |
| | |
| | (vii)4.7 | | Form of Global Note for the 73/8% Notes due June 1, 2016. |
| | |
| | | | This Exhibit is included in the Trust Indenture, dated February 24, 2009, between the Corporation, as Issuer, and The Bank of Nova Scotia Trust Company of New York, as Trustee, with respect to the Corporation’s 73/8% Notes due June 1, 2016, which is filed as Exhibit (vi) herewith. |
| |
10 | | Material Contracts |
| | |
| | (i) | | Credit Agreement, dated April 4, 2006, among the Corporation, various lending institutions party thereto, National City Bank, as the global agent, joint lead arranger, joint bookrunner, Swing Line Lender, LC Issuer and collateral agent, UBS Securities LLC, as joint lead arranger, joint bookrunner and syndication agent, and KeyBank National Association, JPMorgan Chase Bank, N.A., and LaSalle Bank National Association, as documentation agents (the “Credit Agreement”). |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report on Form 8-K, dated April 4, 2006, and is incorporated herein by reference. |
| | |
| | (ii) | | Amendment No. 1 to Credit Agreement, dated as of July 3, 2006. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2007,2009, and is incorporated herein by reference. |
| | |
| 10 | | (iii)Material Contracts |
| | Amendment No. 2 to10.1 | | Amended and Restated Credit Agreement, dated as of February 26, 2007.June 11, 2010, among the Corporation, various lending institutions party thereto, PNC Bank, National Association, as the Global Administrative Agent, as the Swing Line Lender, a LC Issuer and the Collateral Agent, JPMorgan Chase Bank, N.A. and Bank of America, N.A., as Co-Syndication Agents, KeyBank National Association and The Bank of Nova Scotia as Co-Documentation Agents, and PNC Capital Markets LLC, as the Lead Arranger and Sole Bookrunner. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 28, 2007, and is incorporated herein by reference. |
| | |
| | (iv) | | Amendment No. 3 to Credit Agreement, dated as of April 16, 2007. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 28, 2007, and is incorporated herein by reference. |
| | |
| | (v) | | Amendment No. 4 to Credit Agreement, dated as of March 28, 2008. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008, and is incorporated herein by reference. |
| | |
| | (vi) | | Amendment No. 5 to Credit Agreement, dated as of September 23, 2008. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended August 29, 2008,May 28, 2010, and is incorporated herein by reference. |
93
| | | | |
Item
| | Description
|
| 10.2 | | (vii) | | Amended and Restated Pledge and Security Agreement, dated as of April 4, 2006,June 11, 2010, by and among the Corporation, each of the domestic subsidiaries of American Greetingsthe Corporation identified therein and PNC Bank, National City Bank,Association, as collateral agent.Collateral Agent. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s CurrentQuarterly Report onForm 8-K, dated April 4, 2006,10-Q for the quarter ended May 28, 2010, and is incorporated herein by reference. |
| | |
| | (viii)10.3 | | Amended and restated Guaranty of Payment of Debt, dated as of June 11, 2010, by and among each of the domestic subsidiaries of the Corporation identified therein, and PNC Bank, National Association as global administrative agent. |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended May 28, 2010, and is incorporated herein by reference. |
| | 10.4 | | Amended and Restated Receivables Purchase Agreement, dated as of October 24, 2006, among AGC Funding Corporation, the Corporation, as Servicer, members of the various Purchaser Groups from time to time party thereto and PNC Bank, National Association, as Administrator and as issuer of Letters of Credit (the “Receivables Purchase Agreement”). |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report onForm 8-K, dated October 26, 2006, and is incorporated herein by reference. |
| | |
| | (ix)10.5 | | First Amendment to Receivables Purchase Agreement, dated January 12, 2007. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2007, and is incorporated herein by reference. |
| | |
| | (x)10.6 | | Omnibus Amendment to Receivables Sale Agreement, Sale and Contribution Agreement and Receivables Purchase Agreement, dated as of February 28, 2007, among AGC Funding Corporation, the Corporation, Gibson Greetings, Inc., Plus Mark, Inc., members of the various Purchaser Groups from time to time party thereto, and PNC Bank, National Association, as Administrator and as issuer of Letters of Credit. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2007, and is incorporated herein by reference. |
96
| | |
| | (xi) | | |
| Item | | | | Description |
|
| | 10.7 | | Third Amendment to Receivables Purchase Agreement, dated March 28, 2008. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 29, 2008, and is incorporated herein by reference. |
| | 10.8 | | Fourth Amendment to Receivables Purchase Agreement, dated as of September 23, 2009.
This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report onForm 8-K, dated September 24, 2009, and is incorporated herein by reference. |
| | 10.9 | | Omnibus Amendment and Consent to Receivables Sale Agreement, Sale and Contribution Agreement and Receivables Purchase Agreement, dated as of March 1, 2011, among AGC Funding Corporation, the Corporation, Gibson Greetings, Inc., Plus Mark, Inc., members of the various Purchaser Groups from time to time party thereto, and PNC Bank, National Association, as Administrator and as Issuer of Letters of Credit. |
| | | | This Exhibit is filed herewith. |
| | 10.10 | | Loan Agreement by and between Schurman Fine Papers, d/b/a Papyrus, as Borrower, and the Corporation, as Lender, dated as of April 17, 2009.
This Exhibit is filed herewith. |
| | 10.11 | | Limited Guaranty, issued by the Corporation to Wells Fargo Retail Finance, LLC, dated April 17, 2009.
This Exhibit is filed herewith. |
| | *(xii)10.12 | | Form of Employment Contract with Specified Officers.
This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2007, and is incorporated herein by reference. |
| | |
| | *10.13 | | Amendment to Form of Employment Contract with Specified Officers.
This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2009, and is incorporated herein by reference. |
| | *10.14 | | American Greetings Severance Benefits Plan (Officers) – Summary Plan Description. This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2009, and is incorporated herein by reference. |
| | *10.15 | | Amendment to American Greetings Severance Benefits Plan (Officers). |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2007,2009, and is incorporated herein by reference. |
| | |
| | *(xiii) | | Amendment to Form of Employment Contract with Specified Officers. |
| | |
| | | | This Exhibit is filed herewith. |
| | |
| | *(xiv) | | American Greetings Severance Benefits Plan (Officers)—Summary Plan Description. |
| | |
| | | | This Exhibit is filed herewith. |
| | |
| | *(xv) | | Amendment to American Greetings Severance Benefits Plan (Officers). |
| | |
| | | | This Exhibit is filed herewith. |
| | |
| | *(xvi)10.16 | | American Greetings Corporation Executive Deferred Compensation Plan. This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended August 31, 2005, and is incorporated herein by reference. |
| | |
| | *10.17 | | Amendment One to American Greetings Corporation Executive Deferred Compensation Plan. |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended August 31, 2005, and is incorporated herein by reference. |
94
| | | | |
Item
| | Description
|
| | *(xvii)10.18 | | Amendment OneTwo to American Greetings Corporation Executive Deferred Compensation Plan. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended August 31, 2005, and is incorporated herein by reference. |
| | |
| | *(xviii)10.19 | | Amendment TwoNumber Three to American Greetings Corporation Executive Deferred Compensation Plan – American Greetings Corporation Executive Third Party Option Plan. |
97
| | |
| | | | |
Item | | | | Description |
|
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended August 31, 2005, and is incorporated herein by reference. |
| | |
| | *(xix) | | Amendment Number Three to American Greetings Corporation Executive Deferred Compensation Plan—American Greetings Corporation Executive Third Party Option Plan. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2005, and is incorporated herein by reference. |
| | |
| | *(xx)10.20 | | Amendment Number Four to American Greetings Corporation Executive Deferred Compensation Plan and Amendment Number One to the American Greetings Corporation Executive Third Party Option Plan. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report onForm 8-K, dated December 14, 2005, and is incorporated herein by reference. |
| | |
| | *(xxi)10.21 | | Forms of Agreement forAmendment Number Five to American Greetings Corporation Executive Deferred Compensation Benefits (Officer form).Plan. |
| | |
| | | | This Exhibit has been previouslyis filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008, and is incorporated herein by reference.herewith. |
| | |
| | *(xxii)10.22 | | Form of Agreement under American Greetings Corporation Executive Deferred Compensation Plan Executive Third Party Option Plan. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended August 31, 2005, and is incorporated herein by reference. |
| | |
| | *(xxiii)10.23 | | American Greetings Corporation Outside Directors’ Deferred Compensation Plan. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report onForm 8-K, dated December 14, 2005, and is incorporated herein by reference. |
| | |
| | *(xxiv) | | Form of Deferral Agreement under the American Greetings Corporation Outside Directors’ Deferred Compensation Plan. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008, and is incorporated herein by reference. |
| | |
| | *(xxv)10.24 | | 1992 Stock Option Plan. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Registration Statement onForm S-8 (RegistrationNo. 33-58582), dated February 22, 1993, and is incorporated herein by reference. |
95
| | | | |
Item
| | Description
|
| | *(xxvi)10.25 | | 1995 Director Stock Plan. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Registration Statement onForm S-8 (RegistrationNo. 33-61037), dated July 14, 1995, and is incorporated herein by reference. |
| | |
| | *(xxvii)10.26 | | 1996 Employee Stock Option Plan. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Registration Statement onForm S-8 (RegistrationNo. 333-08123), dated July 15, 1996, and is incorporated herein by reference. |
| | |
| | *(xxviii)10.27 | | 1997 Equity and Performance Incentive Plan (as amended on June 25, 2004). |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Registration Statement onForm S-8 (RegistrationNo. 333-121982), dated January 12, 2005, and is incorporated herein by reference. |
| | |
| | *(xxix)10.28 | | American Greetings Corporation 2007 Omnibus Incentive Compensation Plan.Plan, as Amended April 27, 2009. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report onForm 8-K, dated June 22, 2007,26, 2009, and is incorporated herein by reference. |
| | |
| | *(xxx)10.29 | | Description of Compensation Payable to Non-Employee Directors.Directors (Fiscal 2010; 2011). |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s CurrentQuarterly Report onForm 8-K, dated July 14, 2006,10-Q for the quarter ended May 29, 2009, and is incorporated herein by reference. |
| | |
| | *(xxxi)10.30 | | Description of Compensation Payable to Non-Employee Directors (Fiscal 2011; 2012). |
| | | | This Exhibit is filed herewith. |
| | *10.31 | | American Greetings Corporation Second Amended and Restated Supplemental Executive Retirement Plan (Effective October 31, 2007). |
98
| | |
| | | | |
Item | | | | Description |
|
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended November 23, 2007, and is incorporated herein by reference. |
| | |
| | *(xxxii) | | Employment Agreement, dated as of March 1, 2001, between William R. Mason and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report on Form 8-K, dated December 14, 2005, and is incorporated herein by reference. |
| | |
| | *(xxxiii)10.32 | | Severance Agreement, dated as of July 15, 2008,February 28, 2011, between William R. MasonRobert Swellie and the Corporation. |
| | |
| | | | This Exhibit has been previouslyis filed as an Exhibit to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended August 29, 2008, and is incorporated herein by reference.herewith. |
| | |
| | *(xxxiv)10.33 | | Employment Agreement, dated as of October 17, 2002, between Michael Goulder and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2003, and is incorporated herein by reference. |
| | |
| | *(xxxv)10.34 | | Amendment to Employment Agreement, effective as of January 1, 2009, between Michael Goulder and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2009, and is filed herewith. |
96
| | | | incorporated herein by reference. |
Item
| | Description
|
| | *(xxxvi)10.35 | | Employment Agreement, dated as of May 6, 2002, between Erwin Weiss and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2003, and is incorporated herein by reference. |
| | |
| | *(xxxvii)10.36 | | Amendment to Employment Agreement, effective as of January 1, 2009, between Erwin Weiss and the Corporation. |
| | |
| | | | This Exhibit is filed herewith. |
| | |
| | *(xxxviii) | | Employment Agreement, dated as of September 9, 2002, between Steven Willensky and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2003,2009, and is incorporated herein by reference. |
| | |
| | *(xxxix) | | Retirement Agreement, dated as of March 31, 2008, between Steven Willensky and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008, and is incorporated herein by reference. |
| | |
| | *(xl)10.37 | | Employment Agreement, dated as of August 22, 2003, between Catherine M. Kilbane and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 29, 2004, and is incorporated herein by reference. |
| | |
| | *(xli)10.38 | | Employment Agreement, dated as of March 4, 2004, between Thomas H. Johnston and the Corporation, as amended on March 11, 2004. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2005, and is incorporated herein by reference. |
| | |
| | *(xlii)10.39 | | Employment Agreement, dated as of June 1, 1991, between Jeffrey M. Weiss and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 29, 2004, and is incorporated herein by reference. |
| | |
| | *(xliii)10.40 | | Employment Agreement, dated as of May 1, 1997, between Zev Weiss and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 29, 2004, and is incorporated herein by reference. |
| | |
| | *(xliv)10.41 | | Executive Service Contract,Employment Agreement, dated May 8, 1998,April 14, 2003, between Stephen J. Smith and the Corporation and John S.N. Charlton.Corporation. |
99
| | |
| | | | |
Item | | | | Description |
|
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2006, and is incorporated herein by reference. |
97
| | | | |
Item
| | Description
|
| | *(xlv) | | Employment Agreement, dated April 14, 2003, between Stephen J. Smith and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 28, 2007, and is incorporated herein by reference. |
| | |
| | *(xlvi) | | Employment Agreement, dated February 4, 2000, between Josef A. Mandelbaum and AG Interactive, Inc. (fka AmericanGreetings.com, Inc.). |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 28, 2007, and is incorporated herein by reference. |
| | |
| | *(xlvii) | | Amendment to Employment Agreement, effective as of January 1, 2009, between Josef Mandelbaum and AG Interactive, Inc. |
| | |
| | | | This Exhibit is filed herewith. |
| | |
| | *(xlviii)10.42 | | Executive Employment Agreement, dated as of June 12, 2008, between John W. Beeder and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended May 30, 2008, and is incorporated herein by reference. |
| | |
| | *(xlix)
10.43 | | Amendment to Employment Agreement, effective January 1, 2009, between John W. Beeder and the Corporation. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2009, and is filed herewith.incorporated herein by reference. |
| | |
| | *(l)10.44 | | Key Management Annual Incentive Plan (fiscal year 20092010 Description). |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended May 30, 2008,29, 2009, and is incorporated herein by reference. |
| | |
| | *(li)10.45 | | Key Management Annual Incentive Plan (fiscal year 2011 Description). |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended May 28, 2010, and is incorporated herein by reference. |
| | *10.46 | | Form of Employee Stock Option Agreement under 1997 Equity and Performance Incentive Plan (as amended on June 25, 2004). |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2005, and is incorporated herein by reference. |
| | |
| | *(lii) | | Form of Director Stock Option Agreement under 1997 Equity and Performance Incentive Plan (as amended on June 25, 2004). |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 28, 2005, and is incorporated herein by reference. |
| | |
| | *(liii)10.47 | | Form of Employee Stock Option Agreement (Revised) under 1997 Equity and Performance Incentive Plan (as amended on June 25, 2004) for grants on or after May 1, 2007. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2007, and is incorporated herein by reference. |
| | |
| | *(liv)10.48 | | Form of Director Stock Option Agreement under 1997 Equity and Performance Incentive Plan (as amended on June 25, 2004). |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2005, and is incorporated herein by reference. |
| | *10.49 | | Form of Director Stock Option Agreement (Revised) under 1997 Equity and Performance Incentive Plan (as amended on June 25, 2004) for grants on or after May 1, 2007. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2007, and is incorporated herein by reference. |
98
| | | | |
Item
| | Description
|
| | *(lv)10.50 | | Form of Employee Stock Option Agreement under 2007 Omnibus Incentive Compensation Plan. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended May 25, 2007, and is incorporated herein by reference. |
| | |
| | *(lvi)10.51 | | Form of Director Stock Option Agreement under 2007 Omnibus Incentive Compensation Plan. |
100
| | |
| | | | |
Item | | | | Description |
|
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report onForm 10-Q for the quarter ended August 24, 2007, and is incorporated herein by reference. |
| | |
| | *(lvii)10.52 | | Form of Restricted Shares Grant Agreement. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2005, and is incorporated herein by reference. |
| | |
| | *(lviii) | | Performance Share Grant Agreement, dated August 2, 2005, between the Corporation and Zev Weiss. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2005, and is incorporated herein by reference. |
| | |
| | *(lix) | | Performance Share Grant Agreement, dated August 2, 2005, between the Corporation and Jeffrey Weiss. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2005, and is incorporated herein by reference. |
| | |
| | *(lx) | | Performance Share Grant Agreement, dated April 22, 2008, between the Corporation and Zev Weiss. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008, and is incorporated herein by reference. |
| | |
| | *(lxi) | | Performance Share Grant Agreement, dated April 22, 2008, between the Corporation and Jeffrey Weiss. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008, and is incorporated herein by reference. |
| | |
| | *(lxii) | | Independent Contractor Agreement, dated December 14, 2005, between American Greetings and Joseph S. Hardin, Jr. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Current Report on Form 8-K, dated December 14, 2005, and is incorporated herein by reference. |
| | |
| | *(lxiii)10.53 | | Split-Dollar Agreement, dated May 7, 2001, between American Greetings and the Morry Weiss and Judith S. Weiss 2001 Irrevocable Insurance Trust, dated March 1, 2001, Gary Weiss, Jeffrey Weiss, Zev Weiss and Elie Weiss, co-trustees. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2009, and is filed herewith. |
99
| | | | incorporated herein by reference. |
Item
| | Description
|
| | *(lxiv)10.54 | | Agreement to Terminate Split-Dollar Agreement, dated February 16, 2009, between American Greetings and the Morry Weiss and Judith S. Weiss 2001 Irrevocable Insurance Trust, dated March 1, 2001, Gary Weiss, Jeffrey Weiss, Zev Weiss and Elie Weiss, co-trustees. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2009, and is filed herewith.incorporated herein by reference. |
| | |
| | *(lxv)10.55 | | Agreement dated February 16, 2009, between American Greetings Corporation and Morry Weiss in connection with Termination of the Split-Dollar Agreement.Agreement, dated February 16, 2009. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2009, and is filed herewith.incorporated herein by reference. |
| | |
| | *(lxvi)10.56 | | Form of Performance Share Award Agreement. |
| | |
| | | | This Exhibit has been previously filed as an Exhibit to the Corporation’s Annual Report onForm 10-K for the fiscal year ended February 28, 2009, and is filed herewithincorporated herein by reference. |
| | |
21 | | *10.57 | | SubsidiariesForm of the Corporation.Employee Restricted Stock Unit Agreement. |
| | |
| | | | This Exhibit is filed herewith. |
| | *10.58 | | Form of Director Restricted Stock Unit Agreement. |
| | | | This Exhibit is filed herewith. |
| 21 | | | | Subsidiaries of the Corporation. |
| | | | This Exhibit is filed herewith.. |
| 23 | | | | Consent of Independent Registered Public Accounting Firm. |
| | |
| | | | This Exhibit is filed herewith. |
| | herewith.. |
| (31)a | | | | Certification of Principal Executive Officer Pursuant toRule 13a-14(a) of the Securities Exchange Act of 1934. |
| | |
| | | | This Exhibit is filed herewith. |
| | herewith.. |
| (31)b | | | | Certification of Principal Financial Officer Pursuant toRule 13a-14(a) of the Securities Exchange Act of 1934. |
| | |
| | | | This Exhibit is filed herewith. |
| | herewith.. |
| 32 | | | | Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. |
| | |
| | | | This Exhibit is filed herewith. |
101
| | | | |
Item | | | | Description |
|
| 101 | | | | The following materials from the Corporation’s Annual Report onForm 10-K for the year ended February 28, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Operations for the years ended February 28, 2011, 2010 and 2009, (ii) Consolidated Statement of Financial Position at February 28, 2011 and 2010, (iii) Consolidated Statement of Cash Flows for the years ended February 28, 2011, 2010 and 2009, and (iv) Notes to Consolidated Financial Statements for the year ended February 28, 2011. |
| | | | In accordance with Rule 406T ofRegulation S-T, the XBRL related information in Exhibit 101 to this Annual Report onForm 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
| | |
| * | | Management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto pursuant to Item 601 ofRegulation S-K. |
(b) | Exhibits listed in Item 15 (a) 3. are included herein or incorporated herein by reference. |
(c) | Financial Statement Schedules |
(b) Exhibits listed in Item 15 (a) 3. are included herein or incorporated herein by reference.
(c) Financial Statement Schedules
The response to this portion of Item 15 is submitted below.
3. | Financial Statement Schedules Included in Part IV of the report: |
3. Financial Statement Schedules included in Part IV of the report:
Schedule
II—II – Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable, and therefore have been omitted.
102
100
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | |
| | | |
| | AMERICAN GREETINGS CORPORATION (Registrant). |
| | | | (Registrant) |
| | |
Date: April 29, 20092011 | | By: | | /S/ CATHERINE M. KILBANE
|
| | | | s/ Catherine M. Kilbane |
| | | | Catherine M. Kilbane, Senior Vice President, General Counsel and Secretary |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| | | | | | |
SIGNATURE
| | TITLE
| | | | DATE
| | | | |
| SIGNATURE | | TITLE | | | | DATE |
|
| | | | | | |
/ S/ MORRY WEISS s/ Morry Weiss
Morry Weiss | | Chairman of the Board; Director | | )
)
)
. | | |
/S/ ZEV WEISS
Zev Weiss
| | | | | | |
/s/ Zev Weiss
Zev Weiss | | Chief Executive Officer (principal executive officer); Director | | )
)
)
. | | |
| | | | | | |
/ S/ JEFFREY WEISS s/ Jeffrey Weiss
Jeffrey Weiss | | President and Chief Operating Officer; Director | | )
)
)
. | | |
| | | | | | |
/ S/ SCOTT S. COWEN s/ Scott S. Cowen
Scott S. Cowen | | Director | | )
)
)
. | | |
| | | | | | |
/ S/ JEFFREY D. DUNN s/ Jeffrey D. Dunn
Jeffrey D. Dunn | | Director | | )
)
)
| | April 29, 2011 |
| | | | | | |
/ S/ JOSEPH S. HARDIN, JR. Joseph S. Hardin, Jr.
s/ William E. MacDonald, III
William E. MacDonald, III | | Director | | )
)
)
. | | April 29, 2009 |
| | | | | | |
/ S/ WILLIAM E. MACDONALD, III William E. MacDonald, III
s/ Michael J. Merriman, Jr.
Michael J. Merriman, Jr. | | Director | | )
)
)
. | | |
| | | | | | |
/ S/ MICHAEL J. MERRIMAN, JR. Michael J. Merriman, Jr.
s/ Charles A. Ratner
Charles A. Ratner | | Director | | )
)
)
. | | |
| | | | | | |
/ S/ CHARLES A. RATNER Charles A. Ratner
s/ Jerry Sue Thornton
Jerry Sue Thornton | | Director | | )
)
)
. | | |
/S/ JERRY SUE THORNTON
Jerry Sue Thornton
| | Director | | )
)
)
| | |
/ S/ STEPHEN J. SMITH s/ Stephen J. Smith
Stephen J. Smith
| | Senior Vice President and Chief Financial Officer (principal financial officer) | | )
)
). | | |
| | | | | | |
/ S/ JOSEPH B. CIPOLLONE s/ Joseph B. Cipollone
Joseph B. Cipollone | | Vice President and Corporate Controller; Chief Accounting Officer (principal accounting officer) | | )
)
)
| | |
103
101
Schedule
SCHEDULE II—II – VALUATION AND QUALIFYING ACCOUNTS
AMERICAN GREETINGS CORPORATION AND SUBSIDIARIES
(In thousands of dollars)
| | | | | | | | | | | | | | | | | | | | |
COLUMN A | | COLUMN B | | | COLUMN C | | | COLUMN D | | | COLUMN E | |
| | | | | | ADDITIONS | | | | | | | |
Description | | Balance at
Beginning of
Period | | | (1)
Charged to Costs
and Expenses | | | (2)
Charged (Credited)
to Other
Accounts-Describe | | | Deductions-
Describe | | | Balance at
End of
Period | |
Year ended February 28, 2009: | | | | | | | | | | | | | | | | | | | | |
Deduction from asset account: | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 3,778 | | | $ | 4,871 | | | $ | (18 | )(B)(F) | | $ | 3,620 | (C) | | $ | 5,011 | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for seasonal sales returns | | $ | 57,126 | (A) | | $ | 223,095 | | | $ | (3,068 | )(B)(F) | | $ | 230,032 | (D) | | $ | 47,121 | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for other assets | | $ | 29,700 | | | $ | 4,547 | | | $ | — | | | $ | 3,350 | (E) | | $ | 30,897 | |
| | | | | | | | | | | | | | | | | | | | |
Year ended February 29, 2008: | | | | | | | | | | | | | | | | | | | | |
Deduction from asset account: | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 6,350 | | | $ | (205 | ) | | $ | 271 | (B) | | $ | 2,638 | (C) | | $ | 3,778 | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for seasonal sales returns | | $ | 57,584 | | | $ | 220,596 | (A) | | $ | 1,539 | (B) | | $ | 222,593 | (D) | | $ | 57,126 | (A) |
| | | | | | | | | | | | | | | | | | | | |
Allowance for other assets | | $ | 28,000 | | | $ | 5,300 | | | $ | — | | | $ | 3,600 | (E) | | $ | 29,700 | |
| | | | | | | | | | | | | | | | | | | | |
Year ended February 28, 2007: | | | | | | | | | | | | | | | | | | | | |
Deduction from asset account: | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 8,075 | | | $ | 2,905 | | | $ | 137 | (B) | | $ | 4,767 | (C) | | $ | 6,350 | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for seasonal sales returns | | $ | 67,159 | | | $ | 227,496 | | | $ | 1,064 | (B) | | $ | 238,135 | (D) | | $ | 57,584 | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for other assets | | $ | 30,600 | | | $ | — | | | $ | — | | | $ | 2,600 | (E) | | $ | 28,000 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| COLUMN A | | COLUMN B | | | COLUMN C | | | COLUMN D | | | COLUMN E | |
| | | | | | ADDITIONS | | | | | | | |
| | | | | | (1)
| | | (2)
| | | | | | | |
| | | Balance
| | | Charged to
| | | Charged (Credited)
| | | | | | Balance
| |
| | | at Beginning
| | | Costs
| | | to Other
| | | Deductions-
| | | at End
| |
| Description | | of Period | | | and Expenses | | | Accounts-Describe | | | Describe | | | of Period | |
| |
| Year ended February 28, 2011: | | | | | | | | | | | | | | | | | | | | |
| Deduction from asset account: | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 2,963 | | | $ | 3,834 | | | $ | (47 | )(A) | | $ | 1,376 | (B) | | $ | 5,374 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for seasonal sales returns | | $ | 36,443 | | | $ | 164,389 | | | $ | 896 | (A) | | $ | 167,670 | (C) | | $ | 34,058 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for other assets | | $ | 12,400 | | | $ | (455 | ) | | $ | - | | | $ | 1,245 | (D) | | $ | 10,700 . | |
| | | | | | | | | | | | | | | | | | | | | |
| Year ended February 28, 2010:. | | | | | | | | | | | | | | | | | | | | |
| Deduction from asset account: | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 5,006 | | | $ | 478 | | | $ | 264 | (A) | | $ | 2,785 | (B) | | $ | 2,963 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for seasonal sales returns | | $ | 47,121 | | | $ | 179,109 | | | $ | 1,854 | (A) | | $ | 191,641 | (C) | | $ | 36,443 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for other assets | | $ | 30,897 | | | $ | (3,786 | ) | | $ | - | | | $ | 14,711 | (D) | | $ | 12,400 . | |
| | | | | | | | | | | | | | | | | | | | | |
| Year ended February 28, 2009:. | | | | | | | | | | | | | | | | | | | | |
| Deduction from asset account: | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 3,768 | | | $ | 4,869 | | | $ | (18 | )(A) (E) | | $ | 3,613 | (B) | | $ | 5,006 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for seasonal sales returns | | $ | 57,126 | | | $ | 223,095 | | | $ | (3,068 | )(A) (E) | | $ | 230,032 | (C) | | $ | 47,121 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for other assets | | $ | 29,700 | | | $ | 4,547 | | | $ | - | | | $ | 3,350 | (D) | | $ | 30,897 | |
| | | | | | | | | | | | | | | | | | | | | |
Note A: Translation adjustment on foreign subsidiary balances.
Note B: Accounts charged off, less recoveries.
Note C: Sales returns charged to the allowance account for actual returns.
Note D: Deferred contract costs charged to the allowance account.
Note A: | Amount changed from prior year due to a reclassification entry. |
Note B: | Translation adjustment on foreign subsidiary balances. |
Note C: | Accounts charged off, less recoveries. |
Note D: | Sales returns charged to the allowance account for actual returns. |
| Note E: | Deferred contract costs charged to the allowance account and reduction to the account. |
Note F: | Includes additions of $577 for the allowance for doubtful accounts and $2,348 for the allowance for seasonal sales returns due to business acquisitions during 2009. |
S-1
S -1
