Edgar Filing: AMERICAN GREETINGS CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 28, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-13859

American Greetings Corporation

(Exact name of registrant as specified in its charter)


Ohio		34-0065325
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One American Road, Cleveland, Ohio		44144
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (216) 252-7300

Securities registered pursuant to Section 12(b) of the Act:

None.

Securities registered pursuant to Section 12(g) of the Act:

None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES x NO ¨

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ¨ NO x

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 x NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate 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:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) YES ¨ NO x

State 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: All of the outstanding capital stock of the registrant is held by Century Intermediate Holding Company and, as such, there is no market for the capital stock of the registrant. As of June 2, 2014 and August 30, 2013, 100 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

AMERICAN GREETINGS CORPORATION


			Page Number

PART I

	Item 1.	Business		1

	Item 1A.	Risk Factors		7

	Item 1B.	Unresolved Staff Comments		17

	Item 2.	Properties		18

	Item 3.	Legal Proceedings		19

	Item 4.	Mine Safety Disclosures		19

PART II

	Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20

	Item 6.	Selected Financial Data		22

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		43

	Item 8.	Financial Statements and Supplementary Data		45

	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		91

	Item 9A.	Controls and Procedures		91

	Item 9B.	Other Information		92

PART III

	Item 10.	Directors, Executive Officers and Corporate Governance		93

	Item 11.	Executive Compensation		98

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		136

	Item 13.	Certain Relationships and Related Transactions, and Director Independence		137

	Item 14.	Principal Accounting Fees and Services		142

PART IV

	Item 15.	Exhibits, Financial Statement Schedules		143

	SIGNATURES			154

PART I

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.

Item 1.

Business

Overview

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. We manufacture or sell greeting cards, gift packaging, party goods, stationery and giftware in North America, primarily in the United States and Canada, 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 and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals and electronic mobile devices. We also engage in design and character licensing and manufacture custom display fixtures for our products and products of others and operate approximately 400 card and gift retail stores throughout the United Kingdom. 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, 2014 refers to the year ended February 28, 2014. The Corporation’s Retail Operations segment is consolidated on a one-month lag corresponding with its fiscal year end of February 2, 2014.

2013 Going Private Transaction

On September 26, 2012, American Greetings announced that its Board of Directors received a non-binding proposal from Zev Weiss, the Corporation’s then Chief Executive Officer, and Jeffrey Weiss, the Corporation’s then President and Chief Operating Officer, on behalf of themselves and certain other members of the Weiss family and related parties to acquire all of the outstanding Class A common shares and Class B common shares of American Greetings not currently owned by them (the “Going Private Proposal”). In connection with the Going Private Proposal, on March 29, 2013, American Greetings signed an agreement and plan of merger (as amended on July 3, 2013, the “Merger Agreement”), among the Corporation, Century Intermediate Holding Company, a Delaware corporation (“CIHC”), and Century Merger Company, an Ohio corporation (“Merger Sub”). At a special meeting of shareholders held on August 7, 2013, the shareholders of American Greetings voted to adopt the Merger Agreement, and the merger contemplated thereby (the “Merger”). On August 9, 2013, the Corporation completed the Merger. As a result of the Merger, American Greetings became wholly owned by CIHC, which in turn is indirectly wholly-owned by Morry Weiss, the Chairman of the Board, Zev Weiss, a director and Co-Chief Executive Officer, Jeffrey Weiss, a director and Co-Chief Executive Officer, Elie Weiss, a director and President of Real Estate, and Gary Weiss, a director and a Vice President of the Corporation, and certain other members of the Weiss family and related entities (the “Family Shareholders”). At the effective time of the Merger, each issued and outstanding share of the Corporation (other than shares owned by American Greetings, CIHC (which at the effective time of the Merger included all shares previously held by the Family Shareholders) or Merger Sub) was converted into the right to receive $19.00 per share in cash. All other shares of American Greetings were cancelled without consideration. Further details of the Merger are provided in Note 2 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

In connection with the financing of the Merger, CIHC issued $245 million in aggregate stated value of non-voting preferred stock to AG Investment, LLC (“Koch Investment”), which was redeemed on February 10, 2014 with part of the net proceeds of the $285 million aggregate principal amount of 9.750%/10.500% Senior PIK Toggle Notes issued by an indirect parent of CIHC, as well as borrowings under American Greetings’ revolving credit facility described below. Furthermore, American Greetings entered into a $600 million secured credit agreement, which provides for a $350 million term loan facility and a $250 million revolving credit facility. The term loan facility was fully drawn on August 9, 2013, the closing date of the Merger. Further details of the Merger are provided in Note 2 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

New World Headquarters

During May 2011, American Greetings announced that it plans to relocate its world headquarters to the Crocker Park mixed use development in Westlake, Ohio, which offers a vibrant urban setting, with retail stores and restaurants, offices and apartments. After putting the project on hold pending the outcome of the Going Private Proposal, the Corporation announced plans in October 2013 to resume the project and on March 26, 2014, we purchased the land on which the new world headquarters will be built. The Corporation intends to lease the real property to H L & L Property Company, a Delaware corporation and indirect affiliate of American Greetings (“H L & L”), that will build the new world headquarters on the site. We expect to enter into an operating lease with H L & L for the use of the new world headquarters building, which we expect to be ready for occupancy in approximately two years. Further details of the relocation undertaking are provided in Part III, Item 13 of this Annual Report, under “Related Persons Transactions – World headquarters relocation.”

Products

American Greetings creates, manufactures and/or distributes social expression products including greeting cards, gift packaging, party goods, giftware 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. Our other domestic products include AGI In-Store display fixtures, as well as other paper product offerings such as DesignWare party goods and Plus Mark gift wrap and boxed 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 and Cardstore.com. 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 of this Annual Report.

Business Segments

At February 28, 2014, we operated in five 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 19 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

Concentration of Credit Risks

Net sales to our five largest customers, which include mass merchandisers, accounted for approximately 39% of total revenue in each of 2014 and 2013, and approximately 42% of total revenue in 2012. Net sales to Wal-Mart Stores, Inc. and its subsidiaries accounted for approximately 14% of total revenue in each of 2014, 2013 and 2012. Net sales to Target Corporation accounted for approximately 13% of total revenue in each of 2014 and 2013, and 14% of total revenue in 2012. No other customer accounted for 10% or more of our consolidated total revenue in 2014, 2013 or 2012. Approximately 58% of the North American Social Expression Products segment’s revenue in 2014, and approximately 55% of the North American Social Expression Products segment’s revenue in each of 2013 and 2012 was attributable to its top five customers. Approximately 50% of the International Social Expression Products segment’s revenue in 2014, and 48% of the International Social Expression Products segment’s revenue in 2013 and 2012, excluding sales to the Retail Operations segment, was attributable to its top 3 customers.

Consumers

We believe that over 80% of American adults purchase greeting cards each year for multiple occasions including birthdays, holidays, weddings, anniversaries and others. We also believe that women purchase the majority of all greeting cards sold and that the average age of our consumer is in the mid to late forties.

Competition

The greeting card and gift packaging 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 a large number of 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 greeting 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, mobile and electronic media 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 packaging industries and limited information as to our competitors, we believe that we are one of the two largest greeting card companies in the industry.

Production and Distribution

In 2014, our channels of distribution continued to be primarily through mass retail, which is comprised of three distinct channels: mass merchandisers; chain drug stores; and supermarkets. In addition, we sell our products through a variety of other distribution channels, including card and gift shops, department stores, military post exchanges, variety stores and combo stores (stores combining food, general merchandise and drug items). We also sell our products through the approximately 400 card and gift retail stores that we operate in the United Kingdom through our Retail Operations segment. In addition, we sell greeting cards through our Cardstore.com Web site, which provides consumers the ability to purchase physical greeting cards, including custom cards that incorporate their own photos and sentiments, as well as to have us send the unique greeting card that they select directly to the recipient. From time to time, we also sell our products to independent, third-party distributors. Our AG Interactive segment provides social expression content, including electronic greeting cards, through the Internet and mobile 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 printing, have a quick changeover and utilize direct-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. Additional information by geographic area is included in Note 19 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

Production of our products is generally on a level basis throughout the year, with the exception of gift packaging 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 are 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, 2014, three of our five largest customers conduct business with us under an SBT model. 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. American Greetings and many of its competitors sell seasonal greeting cards and other seasonal products 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 of this Annual Report.

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. We 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.

Employees

At February 28, 2014, we employed approximately 7,200 full-time employees and approximately 22,100 part-time employees which, when jointly considered, equate to approximately 18,250 full-time equivalent employees. Approximately 800 of our employees are unionized and covered by collective bargaining agreements.

The following table sets forth by location the unions representing our 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	Contract Expiration Date
Unite the Union (Dewsbury)	Leeds, England	N/A

Unite the Union (Corby)	Derby, England	N/A

International Brotherhood of Teamsters	Bardstown, Kentucky	March 25, 2017

International Brotherhood of Teamsters	Cleveland, Ohio	March 31, 2018

Workers United	Greeneville, Tennessee	October 19, 2014

Supply Agreements

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 may receive a combination of cash payments, credits, discounts, allowances and other incentive considerations to be earned by the customer as product is purchased from us over the stated term of the agreement or the 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 may 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. These advances are accounted for as deferred costs. 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. Losses attributed to these specific events have historically not been material. See Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report, and the discussion under the “Deferred Costs” heading in the “Critical Accounting Policies” in Part II, Item 7 of this Annual Report 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 had 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:

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The CAN-SPAM Act of 2003 and similar laws adopted by a number of states. These laws are intended to regulate unsolicited commercial e-mails, create criminal penalties for unmarked sexually-oriented material and e-mails containing fraudulent headers and control other abusive online marketing practices.

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The Communications Decency Act, which gives statutory protection to online service providers who distribute third-party content.

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The Digital Millennium Copyright Act, which is intended to reduce the liability of online service providers for listing or linking to third-party Web sites that include materials that infringe copyrights or other rights of others.

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The Children’s Online Privacy Protection Act and the Prosecutorial Remedies and Other Tools to End Exploitation of Children Today Act of 2003, and similar laws adopted by a number of states. These laws 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.

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Federal Trade Commission Act, Title 5 - Unfair & Deceptive Acts & Practices and similar laws adopted by a number of states. These laws generally prohibit businesses from engaging in unfair or deceptive acts or practices, including by misrepresenting data privacy and security. Federal Trade Commission and state rules and guidelines also may impact online conduct, including privacy, data security and marketing.

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The federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”), which was signed into law May 22, 2009, includes new provisions governing the use of gift cards, including specific disclosure requirements and a prohibition or limitation on the use of expiration dates and fees. Furthermore, a recent statute adopted by the State of New Jersey would enforce escheat of the entire remaining gift card balance when the card is redeemable only for goods and services and would apply to all gift cards sold after January 1, 2003.

Data privacy and security with respect to the collection use, storage, transfer and disposal of personally identifiable consumer information continues to be a focus of worldwide legislation and compliance review. Most states, as well as many regulators, have requirements for the disclosure of certain breaches of security impacting personal data, or other disclosures of personal data. The requirements currently vary by jurisdiction, and are subject to frequent changes.

In addition, many foreign jurisdictions, including those in which we do business, currently have significant limitations on the collection, use, storage, transfer and disposal of personal data of consumers and employees, and are considering additional protections that that could have an impact on our business, including, for example, the European Union’s 1995 Data Protection Directive and the proposed General Data Protection Regulation.

To resolve some of the remaining legal uncertainty, we expect new United States and foreign laws and regulations to be adopted over time that will be directly or indirectly applicable to the Internet and to our activities. The foregoing and other existing or new legislation, laws, rules, directives, guidelines, regulations or other authority applicable to us could expose us to government investigations or audits, prosecution for violations of applicable laws and/or substantial liability, including penalties, damages, significant attorneys’ fees, expenses necessary to comply with such laws, rules, directives, guidelines, regulations or other authority or the need to modify our business practices.

We post on our Web sites 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 and non-U.S. 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.

Available Information

We make available, free of charge, on or through the Investors section of our Web site at www.corporate.americangreetings.com 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 SEC. Such filings are available to the public from the SEC’s Web site at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room in Washington D.C. located at 100 F Street, N.E., Washington D.C. 20549. You may also obtain copies of any document filed by us at prescribed rates by writing to the Public Reference Section of the SEC at that address. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our Code of Business Conduct and Ethics is available on or through the Investors section of our Web site at www.corporate.americangreetings.com. Information contained on our Web site shall not be deemed incorporated into, or be part of, this report.

Item 1A.

Risk Factors

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 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report.

Risks Related to Our Business

There are factors outside of our control that may decrease the demand for our products and services, which may adversely affect our 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 business conditions, interest rates, the availability of consumer credit, taxation, weather, fuel prices and consumer confidence in future economic conditions, all of which are beyond our control. 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. A prolonged economic downturn or slow economic recovery may also lead to restructuring actions and associated expenses.

Providing new and compelling products is critical to our future profitability and cash flow.

One of our key business strategies has been to gain profitable market position through product leadership, providing relevant, compelling and superior product offerings. 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. At times, the amount and timing of such expenditures and investments depends on the success of a product offering as well as the schedules of our retail partners. We cannot assure you that this strategy will increase either our revenue or profitability. For example, we may not be able to anticipate or respond in a timely manner to changing customer demands and preferences for greeting cards or shifts in consumer shopping behavior. If we misjudge the market, we may significantly sell or overstock unpopular products and be forced to grant significant credits, accept significant returns or write-off a significant amount of inventory, which would have a negative impact on our results of operations and cash flow. Conversely, shortages of popular items could materially and adversely impact our results of operations and financial condition.

We may experience volatility in our cash flow as a result of investments we may make over the next several years.

We have focused and expect to continue to focus our resources on our core greeting card business, developing new, and growing existing business, including by expanding Internet and other channels of electronic distribution to make American Greetings the natural and preferred social expressions solution, as well as by capturing any shifts in consumer demand. In addition, to the extent we are successful in expanding distribution and revenue in connection with expanding our market leadership, additional capital may be deployed as we may incur incremental costs associated with this expanded distribution, including upfront costs prior to any incremental revenue being generated. If incurred, these costs may be material. We also have been allocating, and expect to continue to allocate over roughly the next five or six years, resources, including capital, to refresh our information technology systems by modernizing our systems, redesigning and deploying new processes, and evolving new organization structures, all of which are intended to drive efficiencies within the business and add new capabilities. The timing of when we spend these amounts may vary from year to year depending on the pacing of the project, but the amounts that we spend could be material in any fiscal year. We currently expect to spend at least an additional $150 million, the majority of which we expect will be capital expenditures, over the remaining life of the project. We believe these investments are important to our business, helping us drive further efficiencies and add new capabilities; however, there can be no assurance that we will not spend more or less than $150 million over the remaining life of the project, or that we will achieve the anticipated efficiencies or any cost savings.

Consumers shifting to value shopping may negatively impact our profitability.

Over the past several years, consumer shopping patterns have continued to evolve and that shift is impacting us. As consumers have been gradually shifting to value shopping, this shift is resulting in a change in mix of product sold to a higher proportion of value line cards that lowers the average price sold of our greeting cards and has an unfavorable impact on our gross margin percentage. We expect this trend to continue, which will put continued downward pressure on our historical gross margin percentage. Although we believe that we can mitigate some of the impact this trend may have on our operating margin percentage by continuing to focus on efficiency and cost reduction within all areas of the Corporation, we cannot assure you that we will be successful or that our gross margin percentage will not decrease.

We rely on a few customers for a significant portion of our sales.

A few of our customers are material to our business and operations. Net sales to our five largest customers, which include mass merchandisers, accounted for approximately 39% of total revenue for 2014 and 2013, and approximately 42% of total revenue for 2012. Approximately 58% of the North American Social Expression Products segment’s revenue in 2014, and 55% of the North American Social Expression Products segment’s revenue in each of 2013 and 2012 was attributable to its top five customers, and approximately 50% of the International Social Expression Products segment’s revenue in 2014 and 48% of the International Social Expression Products segment’s revenue in each of 2013 and 2012, excluding sales to the Retail Operations segment, was attributable to its top three customers. Net sales to Wal-Mart Stores, Inc. and its subsidiaries accounted for approximately 14% of total revenue in each of 2014, 2013 and 2012, and net sales to Target Corporation accounted for approximately 13% of total revenue in each of 2014 and 2013, and 14% of total revenue in 2012. 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.

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 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 condition.

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 continue to 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 momentum in, the activities of one or more 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 add to the breadth and depth of our products 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 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 then existing retail operations segment, including all 341 of our card and gift retail store assets, to Schurman Fine Papers (“Schurman”), which now operates stores under a number of brands, including 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 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:

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we remain subject to certain 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, 2014, Schurman’s aggregate commitments to us under these subleases was approximately $7 million);

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we are the predominant supplier of greeting cards and other social expression products to the retail stores operated by Schurman; and

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we have provided credit support to Schurman, including a guaranty of up to $10 million in favor of the lenders under Schurman’s senior revolving credit facility as described in Note 1 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, or (3) we become obligated under our guaranty of its indebtedness. Accordingly, we may decide in the future to provide Schurman with additional financial or operational support to assist Schurman in successfully operating 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 of this Annual Report. If it is determined that we have a controlling financial interest in Schurman, we will be required to consolidate Schurman’s operations into our results, which could materially affect our reported results of operations and financial position as we would be required to include a portion of Schurman’s income or losses and assets and liabilities into our financial statements.

We may not be successful in operating a direct retail business in a foreign country.

In connection with our June 2012 acquisition of assets from Clinton Cards and certain of its subsidiaries, we acquired approximately 400 retail stores together with related inventory and overhead, as well as the Clinton Cards and related brands. We face a number of challenges in expanding into the operations of a retail business in a foreign country. For example, we have no recent experience in operating retail stores, particularly outside of North America. Although we have engaged a team of advisors to operate the Clinton Cards stores that has extensive specialty retail channel experience, the team consists of employees of Schurman, which has limited operating experience in the United Kingdom. In addition, although Schurman continues to be an important customer, this arrangement may be temporary, in which case we would need to establish a new long-term management team to operate the Clinton Cards stores. Additionally, we have been and may continue to be required to make capital and other investments in these stores, which could adversely affect their profitability. There are also many factors outside of our control that could adversely affect our ability to operate the Clinton Cards retail stores profitably, including factors that may affect consumer spending on our products, such as negative consumer perception resulting from a United States company owning the Clinton Cards stores, unfavorable economic conditions in the United Kingdom, availability of consumer credit, taxation levels, adverse weather, high fuel prices and low consumer confidence.

Our business, results of operations and financial condition may be adversely affected by retail consolidations.

With continued retail trade 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, less favorable contractual terms and 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 merchandiser retailers. The mass merchandiser retail channel has experienced significant shifts in market share among competitors in recent years. In addition, the worldwide downturn in the economy and decreasing consumer demand over the past several years has put pressure on the retail industry in general, as well as specialty retailers specifically, including certain of the card and gift shops that we supply. 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, will seek additional credit from 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 our larger retail customers were to cease doing business as a result of bankruptcy, or significantly reduce the number of stores they operate.

We rely on foreign sources of production and face a variety of risks associated with doing business in foreign markets.

We rely 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:

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political instability, civil unrest and labor shortages;

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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;

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lack of effective product quality control procedures by foreign manufacturers and suppliers;

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currency and foreign exchange risks; and

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potential delays or disruptions in transportation as well as potential border delays or disruptions.

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 customs regulations and other international trade regulations, the UK Bribery Act, 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.

We have foreign currency translation and transaction risks that may materially and adversely affect our operating results.

The financial position and results of operations of our international subsidiaries are initially recorded in various foreign currencies and then translated into United States dollars at the applicable exchange rate for inclusion in our financial statements. The strengthening of the United States dollar against these foreign currencies ordinarily has a negative impact on our reported sales and operating income (and conversely, the weakening of the United States dollar against these foreign currencies has a positive impact). For the year ended February 28, 2014, foreign currency translation unfavorably affected revenues by $16.6 million and unfavorably affected income from continuing operations before income taxes by $3.8 million compared to the year ended February 28, 2013. Certain transactions, particularly in foreign locations, are denominated in other than that location’s local currency. Changes in the exchange rates between the two currencies from the original transaction date to the settlement date will result in a currency transaction gain or loss that directly impacts our reported earnings. For the year ended February 28, 2014, the impact of currency movements on these transactions favorably affected non-operating income by $0.3 million. The volatility of currency exchange rates may materially and adversely affect our results of operations.

The greeting card and gift packaging industries are extremely competitive, and our business, results of operations and financial condition will suffer if we are unable to compete effectively.

We operate in highly competitive industries. There are a large number of 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 greeting 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, mobile and electronic media 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., as well as other companies with which we may compete, 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. Certain of these competitors may also have longstanding relationships with certain large customers to which they may offer products that we do not provide, putting us at a competitive disadvantage. As a result, our competitors may be able to:

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adapt to changes in customer requirements or consumer preferences more quickly;

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take advantage of acquisitions and other opportunities more readily;

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devote greater resources to the marketing and sale of their products, including sales directly to consumers through the Internet; and

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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, it 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 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 restricted in how we manage our business and deploy capital, including by limiting our ability to make acquisitions and dispositions and pay dividends. In addition, if we are 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.

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” of this Annual Report, 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. Any estimates of loss regarding pending litigation disclosed from time to time would be based on information that is then available to us and may not reflect any particular final outcome. The results of rulings, judgments or settlements of such litigation may result in financial liability that is materially higher than what management estimated at the 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.

We have been and may in the future be the subject of actions by third parties alleging infringement of proprietary rights, especially with respect to our Internet and wireless businesses.

We may be involved in various legal matters arising from the normal course of business activities. These include claims, suits and other proceedings involving alleged infringement of third-party patents and other intellectual property rights. In particular, the industry in which our Internet and wireless businesses operate is characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have received in the past and may receive in the future communications from third parties, including practicing entities and non-practicing entities, claiming that we have infringed their intellectual property rights.

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 the 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 period the assessments are made or resolved, which may impact our effective tax rate and/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 asset or liability balances, with either favorable or unfavorable impacts on our effective tax rate. Our deferred tax assets may also be impacted by new legislation or regulation.

We may not be able to acquire or maintain advantageous content licenses from third parties to produce products.

To provide an assortment of relevant, compelling and superior product offerings, an important part of our 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 maintain advantageous licenses, we may not be able to meet changing customer demands and preferences for greeting cards and our 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.

The agreements under which we license popular brands, celebrities, character properties, design, content and other material owned by third parties usually require that we pay an advance and/or provide a minimum royalty guarantee that may be substantial. 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.

Our inability to protect or defend our intellectual property rights could reduce the value 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 could 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 position and grow our business 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 meet these challenges successfully 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 flow and therefore our ability to meet our obligations with respect to our debt and other financial commitments. Seasonal fluctuations also affect our inventory levels, because 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.

Increases in raw material and energy costs may materially raise our costs 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, 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.

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 large number of our employees. In particular, approximately 800 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 results of operations, financial condition or cash flows. In addition, federal healthcare legislation may 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 of this Annual Report.

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, these laws and regulations may give rise to claims, uncertainties or possible loss contingencies for future environmental remediation liabilities for which we are unable to predict the ultimate cost, which may be significant, or the effect on our operations. 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 had and are not expected to have a material adverse effect on our financial condition, cash flows or operating results. 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 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 result in additional liabilities and costs in the future. Additionally, some state governments (for instance Washington, California and Vermont) are increasingly introducing legislation to require consumer product manufacturers to annually report whether their products contain certain chemicals which the state has determined to be of concern to the health and safety of its residents. Several of the chemicals already subject to such regulation are contained in our products and we believe we are in substantial compliance with current applicable state regulations, but we are unable to predict how many other states will implement such legislation, whether it will apply to our products, and the testing and administrative costs of compliance.

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 foreign laws and regulations governing product safety including, but not limited to, those regulations enforced by the U.S. Consumer Product Safety Commission, Health Canada, UK local authority trading standards departments, UK Health and Safety Executive, and Australia’s Consumer Affairs unit of the Department of Justice. 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 fines and/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 and e-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 and e-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 and e-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 or e-commerce. Those laws that do reference the Internet are only beginning to be interpreted by the courts and their applicability 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 Web sites 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 online 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. The Federal Trade Commission Act, Title 5 – Unfair & Deceptive Acts & Practices prohibits businesses from engaging in unfair or deceptive acts or practices, including by misrepresenting data privacy and security. 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. In addition, many foreign jurisdictions, including those in which we do business, currently have significant limitations on the collection, use, storage, transfer and disposal of personal data of consumers and employees, and are considering the European Union’s 1995 Data Protection Directive. 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.

Failure to protect confidential information of our customers and our network against security breaches or failure to comply with privacy and security laws and regulations could damage our reputation and brands and substantially harm our business and results of operations.

A significant challenge to e-commerce and communications is the secure transmission of confidential information over public networks. Our failure to prevent security breaches could damage our reputation and brands and harm our business and results of operations. In transactions conducted over the Internet, maintaining complete security for the transmission of confidential information on our Web sites, such as customers’ credit card numbers and expiration dates, personal information and billing addresses, is essential to maintain consumer confidence. We have limited influence over the security measures of third-party online payment service providers. In addition, we hold certain private information about our customers, such as their names, addresses, phone numbers and purchasing records.

We may not be able to prevent third parties from stealing information provided by our customers to us through our Web sites. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. Any compromise of our security could damage our reputation and brands and expose us to a risk of loss or litigation and possible liability, which could substantially harm our business and results of operations. In addition, we may need to devote significant resources to protect against security breaches or to address problems caused by breaches.

Even if we are successful in adapting to and preventing new security breaches, any perception by the public that e-commerce and other online transactions, or the privacy of user information, are becoming increasingly unsafe or vulnerable to attack could inhibit the growth of our businesses.

In addition, any failure or perceived failure by us to comply with our privacy policies or privacy-related obligations to customers or other third parties may result in Federal or state governmental enforcement actions, litigation, or negative public attention and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

Information technology infrastructure failures could significantly affect our business.

We depend heavily on our information technology infrastructure in order to achieve our business objectives. Portions of our information technology 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 information technology application, or an intentional disruption of our information technology systems. In addition, our information technology systems could 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 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.

Over the next five or six 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 of which are intended to drive efficiencies within the business and add new capabilities. Such an implementation is expensive and carries substantial operational 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.

The project to relocate our world headquarters could result in cost overruns and disruptions to our operations.

Although our project to construct and relocate to a new world headquarters was put on hold in connection with the Going Private Proposal, now that the Merger has closed, we have resumed the project. Based on preliminary estimates, the gross costs associated with the new world headquarters building, before any tax credits, loans or other incentives, will be between approximately $150 million and $200 million over a number of years. Although the majority of the cost of construction of the new world headquarters is expected to be financed through H L & L, due to the inherent difficulty in estimating costs associated with projects of this scale and nature, the costs associated with this project may be higher than expected and we may have to dedicate additional funds to the project, including providing additional funds to H L & L or its direct or indirect parents. Furthermore, we may be unable to qualify for state and local incentives offered to assist in the development of the new world headquarters. In addition, the process of moving our world headquarters is inherently complex and not part of our day to day operations. Thus, that process could cause significant disruption to our operations and cause the temporary diversion of management resources, all of which 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.

We are indirectly owned and controlled by members of the Weiss family, and their interests as equity holders may conflict with the interest of holders of American Greetings’ debt.

We are indirectly owned and controlled by the Weiss family, some of whom are executive officers and directors of American Greetings and its subsidiaries, and who have the ability to control our policy and operations. The interests of members of the Weiss family may not in all cases be aligned with interests of the holders of our debt. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of members of the Weiss family might conflict with the interests of holders of our debt. In addition, members of the Weiss family may have an interest in pursuing acquisitions, divestitures, financing or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve heightened risks to holders of our debt.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

As of February 28, 2014, we owned or leased approximately 8.8 million square feet of plant, warehouse and office space throughout the world, of which approximately 512,600 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, 2014, 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, although we sold our Retail Operations segment in April 2009, we remain subject to certain of the Retail Operations store leases on a contingent basis through our subleasing of stores to Schurman, which operates these retail stores throughout North America. See Note 13 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report. In addition, as a result of the bankruptcy administration of a former customer, Clinton Cards, and the related acquisition of certain of its assets in June 2012, we operate approximately 400 card and gift retail stores throughout the United Kingdom, all of which operate in premises that we lease from third parties.

*	—Indicates calendar year


	Approximate Square Feet Occupied			Expiration Date of Material Leases*
Location	Owned		Leased	Expiration Date of Material Leases*	Principal Activity
Cleveland, ^{(1) (3) (5)} Ohio		1,700,000			World Headquarters: General offices of North American Greeting Card Division; Plus Mark LLC; AG Interactive, Inc.; Cardstore, Inc.; AGC, LLC; Those Characters From Cleveland, Inc.; and Cloudco, Inc.; creation and design of greeting cards, gift packaging, party goods, stationery and giftware; marketing of electronic greetings; design licensing; character licensing

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)

Forest City,⁽⁵⁾ 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,⁽⁵⁾ North Carolina			290,000	2014	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 and Papyrus-Recycled Greetings Canada Ltd.


	Approximate Square Feet Occupied			Expiration Date of Material Leases*
Location	Owned		Leased	Expiration Date of Material Leases*	Principal Activity

Mulgrave,⁽²⁾ Australia			30,000	2021	General offices of John Sands companies

Dewsbury,⁽²⁾ England (Two Locations)		430,000			General offices of UK Greetings Ltd. and manufacture and distribution of greeting cards and related products

Corby, England ⁽²⁾		136,000			Distribution of greeting cards and related products

London, England ⁽⁴⁾			75,601	2014	General offices of and warehousing for Clinton Cards

¹	North American Social Expression Products

²	International Social Expression Products

³	AG Interactive

⁴	Retail Operations

⁵	Non-reportable

Item 3.

Legal Proceedings

We are involved in various judicial, administrative, regulatory and arbitration proceedings concerning matters arising in the ordinary course of business operations, including, but not limited to, employment, commercial disputes and other contractual matters. We, however, do not believe that any of the 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.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Prior to the Merger, our Class A common shares were listed on the New York Stock Exchange under the symbol AM. As a result of the Merger, we no longer have a class of equity that is publicly traded; rather, all of our common shares are held by CIHC. Prior to the Merger, the high and low sales prices of our Class A common shares, as reported in the New York Stock Exchange listing for the year ended February 28, 2013 and the period from March 1, 2013 through August 9, 2013, were as follows:


	Year Ended February 28, 2013				Year Ended February 28, 2014
	High		Low		High		Low
1^st Quarter	$	16.55	$	13.96	$	18.50	$	15.96
2^nd Quarter (through August 9, 2013)	$	15.16	$	12.53	$	19.20	$	16.95
3^rd Quarter	$	17.44	$	13.98		—		—
4^th Quarter	$	17.49	$	15.06		—		—

As of August 9, 2013, as a result of the Merger, the Corporation had one shareholder, CIHC, which held 100 common shares of the Corporation.

Dividends. Prior to the closing of the Merger, we paid quarterly dividends of $0.15 per Class A common share and Class B common share during fiscal 2013 and during the first two quarters of fiscal 2014. Following the closing of the Merger, we stopped paying a quarterly dividend, but paid one dividend in the total aggregate amount of $18,194,951.06 to our sole shareholder on September 30, 2013, paid a second dividend in the total aggregate amount of $7,225,246.10 to our sole shareholder on January 2, 2014, and paid a third dividend in the total aggregate amount of $50,000,000 to our sole shareholder on February 10, 2014.

Our borrowing arrangements, including our senior secured credit facility and the indenture governing our 7.375% senior notes due 2021, 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. In addition, our credit facility includes covenants that limit our ability to incur additional debt, declare or pay dividends, make distributions on or repurchase or redeem capital stock, make certain investments, enter into transactions with affiliates, grant or permit liens, sell assets, enter in sale and leaseback transactions, and consolidate, merge or sell all or substantially all of our assets. There are also financial covenants that require us to maintain a maximum leverage ratio (consolidated indebtedness minus unrestricted cash over consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“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 on our ability to pay dividends that are imposed by our borrowing arrangements, see the discussion in Part II, Item 7, under the heading “Liquidity and Capital Resources” of this Annual Report, and Note 11 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

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.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

We did not purchase any equity securities in the three months ended February 28, 2014.

Item 6.

Selected Financial Data

Thousands of dollars


	2014 (1)			2013 (2)			2012 (3)			2011			2010 (4)
Summary of Operations
Net sales	$	1,941,809		$	1,842,544		$	1,663,281		$	1,565,539		$	1,603,285
Total revenue		1,969,666			1,868,739			1,695,144			1,597,894			1,640,851
Goodwill impairment		733			—			27,154			—			—
Interest expense		27,363			17,896			53,073			25,389			26,311
Net income		50,522			49,918			57,198			87,018			81,574

Financial Position
Inventories		254,761			242,447			208,945			179,730			163,956
Working capital		194,447			293,310			331,679			380,555			331,803
Total assets		1,602,443			1,583,463			1,549,464			1,547,249			1,544,498
Property, plant and equipment additions		54,097			114,149			78,207			39,762			29,065
Long-term debt		539,114			286,381			225,181			232,688			328,723
Shareholder’s equity		327,447			681,877			727,458			763,758			650,911
Net return on average shareholder’s equity from continuing operations		10.0	%		7.1	%		7.7	%		12.3	%		13.7	%

(1)

During 2014, the Corporation incurred costs associated with Merger, which included transaction costs and incremental compensation expense related to the settlement of stock options and modification and cancellation of outstanding restricted stock units and performance shares of $28.1 million. See Note 2 to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report.

(2)

During 2013, the Corporation incurred charges of $35.7 million associated with the Clinton Cards acquisition, which includes a contract asset impairment charge, bad debt expense, legal and advisory fees and impairment of debt purchased. See Note 3 to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report. The Corporation also incurred expenses of $6.9 million related to the Going Private Proposal.

(3)	During 2012, the Corporation recorded a loss of $30.8 million, which is included in “Interest expense,” related to the extinguishment of its 7.375% senior notes and 7.375% notes due 2016. See Note 11 to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report.

(4)

During 2010, the Corporation incurred a loss of $29.3 million on the disposition of its then existing 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 expense 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.

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.

OVERVIEW

Founded in 1906, we operate predominantly in a single industry: the design, manufacture, distribution and sale of everyday and seasonal greeting cards and other social expression products. Headquartered in Cleveland, Ohio, as of February 28, 2014, we employed approximately 29,300 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. Our other domestic products include DesignWare party goods, Plus Mark gift wrap and boxed cards, 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 and Cardstore.com.

Our international operations include wholly-owned subsidiaries in the United Kingdom (also referred to herein as “UK”), Canada, Australia and New Zealand as well as licensees in approximately 50 other countries. As of February 28, 2014, we also operated 396 card and gift retail stores throughout the UK.

Operating Results

Total revenue for 2014 was $1.97 billion, up $101 million from the prior year. This 5.4% increase was primarily related to the purchase of Clinton Cards retail operations during the prior year second quarter. The current year period includes twelve months of sales through Clinton Cards retail stores, while the prior year period includes sales for slightly less than eight months. In total, revenue related to Clinton Cards for 2014 increased approximately $91 million compared to the prior year period. Also contributing to the increase in revenue during 2014 were higher sales in our fixtures business of approximately $35 million, of which approximately $26 million was related to a significant contract with a large consumer electronics company that was obtained and completed during the year. In addition, total revenue increased due to higher sales of gift packaging and party goods. Partially offsetting these increases were reduced sales of greeting cards, lower other ancillary product sales and the unfavorable impact of scan-based trading (“SBT”) implementations. Foreign currency translation had an unfavorable impact on sales of approximately $17 million.

Operating income for 2014 was $136.9 million compared to $94.2 million in the prior year, an improvement of approximately $42.7 million. The current year was favorably impacted primarily by the North American Social Expression Products segment due to lower spending on marketing and the information systems refresh project, the fixtures business due to higher sales, the International Social Expression Products segment due to favorable product mix and lower supply chain and scrap expense, lower legal expenses and a gain of approximately $5 million related to the Clinton’s acquisition. The current year was unfavorably impacted by approximately $28 million of costs related to the Merger, the operating results of the Retail Operations segment, and variable compensation expense. The current year operating income was also unfavorably impacted by approximately $13 million related to SBT implementations, which was approximately $5 million higher than the prior year.

Operating income in the prior year period included costs of $35.7 million related to the Clinton Cards acquisition, including approximately $17 million of bad debt expense, approximately $8 million impairment of the Clintons secured debt, approximately $7 million of legal and advisory fees, and approximately $4 million impairment for the deferred costs related to our supply agreement associated with the Clinton Cards’ Birthdays branded stores that were closed as part of the Clinton Cards bankruptcy administration process. The prior year also included approximately $7 million of costs related to the Merger.

Capital expenditures during the current year were approximately $54 million, a decrease of approximately $60 million from the prior period. This decrease was primarily related to lower spending on our information systems refresh project and lower spending on manufacturing equipment. We expect that capital expenditures will be generally higher than historic levels as we continue to execute our multi-year information systems refresh and other strategic projects.

RESULTS OF OPERATIONS

Comparison of the years ended February 28, 2014 and 2013

In 2014, net income was $50.5 million compared to $49.9 million in 2013.

Our results for 2014 and 2013 are summarized below:


(Dollars in thousands)	2014			% Total Revenue			2013			% Total Revenue
Net sales	$	1,941,809			98.6	%	$	1,842,544			98.6	%
Other revenue		27,857			1.4	%		26,195			1.4	%

Total revenue		1,969,666			100.0	%		1,868,739			100.0	%

Material, labor and other production costs		857,227			43.5	%		817,740			43.8	%
Selling, distribution and marketing expenses		685,088			34.8	%		653,935			35.0	%
Administrative and general expenses		297,443			15.1	%		298,569			16.0	%
Goodwill impairment		733			0.0	%		—			0.0	%
Other operating (income) expense – net		(7,718	)		(0.4	%)		4,330			0.2	%


Operating income		136,893			7.0	%		94,165			5.0	%

Interest expense		27,363			1.4	%		17,896			0.9	%
Interest income		(400	)		(0.0	%)		(471	)		(0.0	%)
Other non-operating income		(3,296	)		(0.2	%)		(9,174	)		(0.5	%)


Income before income tax expense		113,226			5.8	%		85,914			4.6	%
Income tax expense		62,704			3.2	%		35,996			1.9	%


Net income	$	50,522			2.6	%	$	49,918			2.7	%

Revenue Overview

During 2014, consolidated net sales were $1.94 billion, up from $1.84 billion in the prior year. This 5.4%, or $99.3 million, increase was primarily related to the purchase of Clinton Cards retail operations during the prior year second quarter. The current year period includes twelve months of sales through Clinton Cards retail stores, while the prior year period includes sales for slightly less than eight months. In total, net sales related to Clinton Cards for 2014 increased approximately $91 million compared to the prior year period. Also contributing to the increase in net sales in 2014 were higher sales in our fixtures business of approximately $35 million, of which approximately $26 million was related to a large contract obtained in the current year first quarter, as mentioned in the overview section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. The remaining year-over-year improvement was due to higher sales of gift packaging and party goods of approximately $6 million and the prior year impairment of deferred costs of approximately $4 million related to the supply agreement associated with Clinton Cards’ Birthdays branded stores that were closed as part of the Clinton Cards bankruptcy administration process. Partially offsetting these increases were reduced greeting cards sales of approximately $5 million, lower other ancillary product sales of approximately $9 million and the unfavorable impact of foreign currency translation and SBT implementations of approximately $17 million and $5 million, respectively.

The contribution of each major product category as a percentage of net sales for the past two fiscal years was as follows:


	2014			2013
Everyday greeting cards		47	%		49	%
Seasonal greeting cards		24	%		25	%
Gift packaging and party goods		14	%		14	%
All other products*		15	%		12	%

*	The “all other products” classification includes, among other things, giftware, ornaments, custom display fixtures, stickers, online greeting cards, other online digital products and specialty gifts.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, increased $1.7 million from $26.2 million during 2013 to $27.9 million in 2014.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for 2014 and 2013 are summarized below:


	Increase (Decrease) From the Prior Year
	Everyday Cards						Seasonal Cards						Total Greeting Cards
	2014			2013			2014			2013			2014			2013
Unit volume		(2.9	%)		(0.3	%)		(1.9	%)		1.6	%		(2.6	%)		0.3	%
Selling prices		3.1	%		0.3	%		2.1	%		2.3	%		2.8	%		1.0	%
Overall increase		0.1	%		0.1	%		0.1	%		4.0	%		0.1	%		1.3	%

During 2014, total wholesale greeting card sales less returns increased 0.1%, compared to the prior year, with a 2.8% increase in selling prices and a 2.6% decrease in unit volume. The overall increase was primarily driven by increases in selling prices from our everyday and seasonal greeting cards in both our North American Social Expression Products and our International Social Expression Products segments, mostly offset by decreases in unit volume of everyday cards in both of our greeting card segments and seasonal greeting cards in our International Social Expression Products segment.

Everyday card sales less returns were up 0.1%, compared to the prior year, as a result of increased selling prices of 3.1% mostly offset by a decline in unit volume of 2.9%. The selling price increase was a result of general price increases outpacing the continued shift to a higher proportion of value card sales. The unit volume decline was primarily driven by generally soft unit trends across most distribution channels.

Seasonal card sales less returns increased 0.1%, with an increase in selling prices of 2.1% and a decrease in unit volume of 1.9%. The increase in selling prices was primarily driven by both our North American Social Expression Products and International Social Expression Products segments across most of our seasonal card programs. The decline in unit volume was driven by our International Social Expression Products segment and was primarily attributable to our Mother’s Day and Easter programs.

Expense Overview

Material, labor and other production costs (“MLOPC”) for 2014 were $857.2 million, an increase of $39.5 million from $817.7 million in the prior year. As a percentage of total revenue, these costs were 43.5% in 2014 compared to 43.8% in 2013. The retail operations we purchased from Clinton Cards in the prior year second quarter caused a net increase in MLOPC of approximately $37 million during the current year compared to the prior year. In addition, the combination of higher sales volume and unfavorable product mix, partially offset by lower costs caused an increase in MLOPC of approximately $7 million. These increases were partially offset by the favorable impact of foreign currency translation of approximately $5 million.

Selling, distribution and marketing expenses (“SDM”) for 2014 were $685.1 million, increasing $31.2 million from $653.9 million in the prior year. As a percentage of total revenue, these costs were 34.8% in the current year compared to 35.0% in the prior year. The dollar increase was primarily driven by higher expenses of approximately $56 million within our Retail Operations segment due to the timing of the Clinton Cards acquisition in the prior year second quarter. The current year period includes twelve months of activity related to Clinton Cards retail stores while the prior year period includes activity for slightly less than eight months. This increase was partially offset by lower sales, marketing and product management expenses of approximately $13 million, the majority of which related to Cardstore.com, lower supply chain costs of approximately $6 million and the favorable impact of foreign currency translation of approximately $6 million.

Administrative and general expenses were $297.4 million in 2014, a decrease of $1.2 million from $298.6 million in the prior year. The decrease was driven by lower bad debt expense, whereby the prior year period included approximately $17 million related to increased unsecured accounts receivable exposure as a result of Clinton Cards being placed into administration. In addition, the prior year period included transaction costs in connection with the acquisition of the Clinton Cards retail operations of approximately $7 million that did not recur in the current year. Also contributing to the decrease were lower legal related expenses of approximately $8 million, a year-over-year decrease in costs related to our information technology systems refresh project of approximately $5 million, the favorable impact of foreign currency translation of approximately $1 million and general cost savings, of which no items were individually significant, of approximately $4 million. These decreases were substantially offset by higher costs and fees related to the Merger of approximately $21 million compared to the prior year period and higher expenses of approximately $9 million within our Retail Operations segment primarily due to the timing of the Clinton Cards acquisition in the prior year second quarter. The current year also includes approximately $11 million of higher variable compensation expense primarily related to the establishment during the current year of a long-term incentive program to replace the prior stock-based compensation programs.

Other operating (income) expense – net was $7.7 million of income during the current year compared to $4.3 million of expense in the prior year. The prior year included expenses of $2.1 million related to the termination of certain agency agreements associated with our licensing business and an impairment of $8.1 million related to the senior secured debt of Clinton Cards that we acquired in the prior year first quarter. In the current year, based on updated estimated recovery information provided in connection with the Clinton Cards bankruptcy administration, we recorded adjustments to the Clinton Cards debt impairment resulting in a gain totaling $4.9 million.

Interest expense was $27.4 million during the current year, up from $17.9 million in 2013. The increase of $9.5 million was primarily attributable to increased borrowings in connection with the Merger. For further information of the increased borrowings, see Note 11, “Debt,” to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report.

Other non-operating income was $3.3 million during 2014 compared to $9.2 million in 2013. The current year includes a non-cash impairment of $1.9 million related to our investment in Schurman. Refer to Note 1, “Significant Accounting Policies,” to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report for further information regarding our investment in Schurman. In addition, the current and prior years included gains associated with our investment in Party City Holdings, Inc. (“Party City”) in the amounts of $3.3 million and $4.3 million, respectively. The remaining decrease was primarily due to a year-over-year change in foreign currency gains of $2.5 million.

The effective tax rate was 55.4% and 41.9% during 2014 and 2013, respectively. The higher than statutory tax rate in 2014 was due to an increase to the valuation allowance in the amount of $12.6 million against certain net operating loss and foreign tax credit carryforwards that we believe will expire unused and an increase in the state income tax expense due to the receipt of intercompany foreign dividends. The valuation allowance was recorded in accordance with Internal Revenue Code section 382 and 383 due to the Merger as previously disclosed. The higher than statutory tax rate in 2013 was primarily due to certain nondeductible expenses incurred as a result of the Clinton Cards acquisition as well as certain items includable as taxable income which did not have corresponding book income amounts also as a result of the Clinton Cards transaction.

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 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 primary channel. As permitted under Accounting Standards Codification (“ASC”) Topic 280 (“ASC 280”), “Segment Reporting,” certain operating segments have been aggregated into the International Social Expression Products segment. The aggregated operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. At February 28, 2014, we operated 396 card and gift retail stores in the UK through our Retail Operations segment. These stores sell products purchased from the International Social Expression Products segment as well as products purchased from other vendors. The AG Interactive segment distributes social expression products, including electronic greetings, and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals and electronic mobile devices. The Non-reportable segments primarily include licensing activities and the design, manufacture and sales of display fixtures.

Segment results are reported using actual foreign exchange rates for the periods presented. Refer to Note 19, “Business Segment Information,” to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report for further information and a reconciliation of total segment revenue to consolidated “Total revenue” and total segment earnings (loss) before tax to consolidated “Income before income tax expense.”

North American Social Expression Products Segment


(Dollars in thousands)	2014		2013		% Change
Total revenue	$	1,253,842	$	1,245,269		0.7	%
Segment earnings		172,502		160,052		7.8	%

Total revenue of our North American Social Expression Products segment increased $8.6 million compared to the prior year. The increase was primarily driven by higher sales of gift packaging and party goods of approximately $9 million, increased greeting card sales of approximately $7 million and higher sales of other ancillary products of approximately $4 million. Partially offsetting these increases were the unfavorable impact of higher SBT implementations and foreign currency translation of approximately $6 million and $5 million, respectively.

Segment earnings increased $12.5 million in 2014 compared to the prior year. The increase was driven by the impact of higher revenues which provided approximately $7 million of additional gross margin, net of the unfavorable impact of higher SBT implementations of approximately $6 million, as well as a decrease in sales, marketing and product management expenses of approximately $13 million and lower costs related to our information technology systems refresh project of approximately $5 million. These favorable items were partially offset by an increase in variable compensation expense (as noted above) of approximately $9 million and the unfavorable impact of foreign currency translation of approximately $3 million.

International Social Expression Products Segment


(Dollars in thousands)	2014		2013			% Change
Total revenue	$	249,790	$	275,861			(9.5	%)
Segment earnings (loss)		9,270		(13,428	)		N/A

Total revenue of our International Social Expression Products segment decreased $26.1 million compared to the prior year. The decrease was primarily due to lower sales of greeting cards, gift packaging and other ancillary products of approximately $12 million, $3 million and $8 million, respectively. In addition, foreign currency translation had an unfavorable impact of approximately $8 million for the current year. Partially offsetting these decreases was the prior year impairment of deferred costs of approximately $4 million related to the supply agreement associated with the Clinton Cards’ Birthdays stores that were closed as part of the Clinton Cards bankruptcy administration process that did not recur in the current year and the impact of lower SBT implementations in the current year compared to the prior year of approximately $1 million.

Segment earnings increased $22.7 million compared to prior year. The improvement in earnings was primarily driven by prior year costs of approximately $21 million related to Clinton Cards that do not have comparative amounts in the current year period. In the first quarter of the prior year, Clinton Cards, a significant third-party customer at the time, was placed into administration. As a result, we incurred bad debt expense of approximately $17 million and an impairment of deferred costs related to the supply agreement associated with the Clinton Cards’ Birthdays stores of approximately $4 million. The prior year also included charges of approximately $3 million due to strategic business actions, including the divestiture of a small non-card product line and the closure of a small gift wrap manufacturing facility in Italy, which did not recur in the current year. In the current year, the impact on earnings from decreased revenue was substantially offset by favorable product mix as well as lower supply chain costs and scrap expenses of approximately $7 million and $2 million, respectively.

Retail Operations Segment


(Dollars in thousands)	2014			2013		% Change
Total revenue	$	332,066		$	244,106		36.0	%
Segment (loss) earnings		(4,637	)		6,581		—

In the prior year second quarter, we acquired retail stores in the UK that we are operating under the “Clintons” brand. As of February 28, 2014, we were operating 396 stores. Total revenue in our Retail Operations segment increased approximately $88 million, which includes approximately $91 million of higher sales less the unfavorable impact from foreign exchange translation of approximately $3 million. The revenue increase was due to the timing of the Clinton Cards acquisition, whereby the operating results of the Retail Operations segment for the year ended February 28, 2013 included slightly less than eight months of activity compared to a full twelve months during the current year. During the comparable eight month period in the current year, net sales at stores open one year or more were down approximately 2.6% compared to the prior year period. Start-up and transitional costs related to the actions taken to execute our strategy to stabilize and improve the profitability of the stores acquired totaled $1.3 million and $7.7 million in the current and prior year, respectively. The retail operations are consolidated on a one-month lag corresponding with a fiscal year-end of February 1 for fiscal 2014.

AG Interactive Segment


(Dollars in thousands)	2014		2013		% Change
Total revenue	$	61,084	$	64,440		(5.2	%)
Segment earnings		15,540		16,465		(5.6	%)

Total revenue of our AG Interactive segment decreased $3.4 million compared to the prior year. The decrease in revenue was driven primarily by lower advertising revenue and lower subscription revenue related to the disposition of a minor photo sharing business in the prior fiscal year. At the end of 2014 and 2013, AG Interactive had approximately 3.7 million online paid subscriptions.

Segment earnings decreased $0.9 million compared to the prior year, primarily due to the prior year gain recognized in connection with the disposition of a minor photo sharing business that did not recur in the current period and severance expense incurred in the current year third quarter. These decreases in earnings and the impact of lower revenue were substantially offset by overall cost savings across most functional areas of the business.

Non-reportable Segments


(Dollars in thousands)	2014		2013		% Change
Total revenue	$	72,884	$	39,063		86.6	%
Segment earnings		24,521		6,586		272.3	%

Total revenue from our Non-reportable segment increased $33.8 million compared to the prior year. This increase in revenue was driven primarily by an approximately $35 million increase from our fixtures business, which obtained and completed a $26 million contract to supply fixtures to a large consumer electronics company during the year.

Segment earnings increased $17.9 million compared to the prior year. About eighty percent of the increase was due to the impact of the higher revenue from the fixtures business. The remaining improvement was from our licensing business primarily due to cost savings initiatives during the current year.

Unallocated Items


(Dollars in thousands)	2014			2013
Interest expense	$	(27,363	)	$	(17,896	)
Profit-sharing expense		(9,149	)		(7,536	)
Stock-based compensation expense		(13,812	)		(10,743	)
Corporate overhead expense		(53,646	)		(54,167	)

Total Unallocated	$	(103,970	)	$	(90,342	)

Interest expense for the current year increased approximately $9 million, primarily due to increased borrowings in connection with the Merger. For further information, refer to the discussion of our borrowing arrangements as disclosed in Note 11, “Debt,” to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report. In the prior year, corporate overhead expense included legal and advisory fees of approximately $7 million related to the Clinton Cards transaction, an impairment of approximately $8 million related to the senior secured debt of Clinton Cards and higher legal expenses of approximately $8 million primarily related to two class action lawsuits involving corporate-owned life insurance policies. The current year included an adjustment to the Clinton Cards debt impairment, based on current estimated recovery information provided in connection with the Clinton Cards bankruptcy administration, which resulted in a gain of approximately $5 million and higher expenses related to the Going Private Proposal and Merger of approximately $21 million. The current year also included a non-cash impairment of approximately $2 million related to our investment in Schurman and a non-cash loss of approximately $2 million in connection with the freeze to the accrued benefit of the Supplemental Executive Retirement Plan. For the current year, stock-based compensation in the table above includes stock-based compensation prior to the Merger and the impact of the settlement of stock options and the cancellation or modification of outstanding restricted stock units and performance shares concurrent with the Merger, a portion of which is non-cash. There is no stock-based compensation subsequent to the Merger, as these plans were converted into cash compensation plans at the time of the Merger. Refer to Note 2, “Merger,” to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report for further information.

Comparison of the years ended February 28, 2013 and February 29, 2012

In 2013, net income was $49.9 million compared to $57.2 million in 2012.

Our results for 2013 and 2012 are summarized below:


(Dollars in thousands)	2013			% Total Revenue			2012			% Total Revenue
Net sales	$	1,842,544			98.6	%	$	1,663,281			98.1	%
Other revenue		26,195			1.4	%		31,863			1.9	%

Total revenue		1,868,739			100.0	%		1,695,144			100.0	%

Material, labor and other production costs		817,740			43.8	%		741,645			43.8	%
Selling, distribution and marketing expenses		653,935			35.0	%		533,827			31.5	%
Administrative and general expenses		298,569			16.0	%		250,691			14.8	%
Goodwill impairment		—			0.0	%		27,154			1.6	%
Other operating expense (income) – net		4,330			0.2	%		(8,200	)		(0.5	%)


Operating income		94,165			5.0	%		150,027			8.8	%

Interest expense		17,896			0.9	%		53,073			3.1	%
Interest income		(471	)		(0.0	%)		(982	)		(0.1	%)
Other non-operating (income) expense – net		(9,174	)		(0.5	%)		121			0.0	%


Income before income tax expense		85,914			4.6	%		97,815			5.8	%
Income tax expense		35,996			1.9	%		40,617			2.4	%


Net income	$	49,918			2.7	%	$	57,198			3.4	%

Revenue Overview

During 2013, consolidated net sales were $1.84 billion, up from $1.66 billion in 2012. This 10.8%, or $179.3 million, increase was primarily related to the purchase of retail stores from Clinton Cards which caused an increase in net sales of approximately $187 million compared to 2012. The increase was comprised of approximately $243 million of net sales from the new Retail Operations segment, reduced by approximately $56 million for the elimination of intersegment sales from the International Social Expression Products segment to the Retail Operations segment. For comparison purposes, the sales being eliminated in 2013 would have been third-party sales in 2012 to Clinton Cards stores that were not owned by us at that time. In addition, greeting card sales through our wholesale divisions improved approximately $17 million. More than offsetting these increases were reduced gift packaging, party goods and other ancillary product sales of approximately $11 million, lower net sales in our fixtures business of approximately $4 million and a $4 million impairment of deferred costs related to the supply agreement associated with the Birthdays stores that were closed as part of the Clinton Cards administration process. Foreign currency translation and SBT implementations unfavorably impacted net sales versus the prior year by approximately $4 million and $2 million, respectively.

The contribution of each major product category as a percentage of net sales for the fiscal years 2012 and 2013 was as follows:


	2013			2012
Everyday greeting cards		49	%		50	%
Seasonal greeting cards		25	%		25	%
Gift packaging and party goods		14	%		14	%
All other products*		12	%		11	%

*	The “all other products” classification includes, among other things, giftware, ornaments, custom display fixtures, stickers, online greeting cards, other online digital products and specialty gifts.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, decreased $5.7 million from $31.9 million during 2012 to $26.2 million in 2013.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for 2013 and 2012 are summarized below:


	Increase (Decrease) From the Prior Year
	Everyday Cards						Seasonal Cards						Total Greeting Cards
	2013			2012			2013			2012			2013			2012
Unit volume		(0.3	%)		9.5	%		1.6	%		6.4	%		0.3	%		8.5	%
Selling prices		0.3	%		(3.6	%)		2.3	%		(0.8	%)		1.0	%		(2.8	%)
Overall increase		0.1	%		5.5	%		4.0	%		5.5	%		1.3	%		5.5	%

During 2013, total wholesale greeting card sales less returns increased 1.3%, compared to 2012, with a 0.3% improvement in unit volume and a 1.0% increase in selling prices. The overall increase was primarily driven by increases in unit volume and selling prices from our seasonal greeting cards in our North American Social Expression Products segment.

Everyday card sales less returns were up 0.1% in 2013, compared to 2012, as a result of increased selling prices of 0.3% offset by a decline in unit volume of 0.3%. Both the selling price increase and unit volume decrease were driven by our North American Social Expression Products segment. The continued shift to a higher proportion of value cards was more than offset by general price increases. These impacts were partially offset by decreases in selling prices and unit volume improvement within our International Social Expression Products segment.

Seasonal card sales less returns increased 4.0%, with increases in unit volume of 1.6% and selling prices of 2.3%. The improvement in unit volume was driven by both of our greeting card segments and was primarily attributable to our Mother’s Day and Graduation programs. This improvement was partially offset by a decline in unit volume related to our Easter program. The increase in selling prices was primarily driven by our North American Social Expression Products segment across all of our seasonal card programs.

Expense Overview

MLOPC for 2013 were $817.7 million, an increase of $76.1 million from $741.6 million in 2012. As a percentage of total revenue, these costs were 43.8% in both 2013 and 2012. The new retail operations we purchased from Clinton Cards caused a net increase in MLOPC of approximately $43 million during 2013 compared to 2012. This net increase was comprised of approximately $96 million for cost of goods sold through the new Retail Operations segment, reduced by approximately $53 million for the adjustment to cost of goods related to intersegment sales from the International Social Expression Products segment to the Retail Operations segment. Excluding the impact of the Retail Operations segment, MLOPC increased by approximately $33 million. Of this increase, approximately $28 million was attributable primarily to a combination of higher product content costs and an unfavorable change in sales mix, including the continued shift toward a higher proportion of value cards while maintaining a relatively consistent net sales level. Also contributing to the increase in MLOPC was approximately $4 million of higher scrap expense and approximately $3 million of higher costs associated with in-store product displays.

SDM for 2013 were $653.9 million, increasing from $533.8 million in 2012. The increase of $120.1 million was driven by approximately $126 million of expenses within our new Retail Operations segment. Also contributing to the increase were higher marketing and product management expenses of approximately $7 million. These increases were partially offset by lower agency fees related to our licensing business of approximately $4 million and lower costs in our field service and merchandiser organization of approximately $8 million, primarily related to prior year store setup activities for the value channel, which did not recur in 2013.

Administrative and general expenses were $298.6 million in 2013, an increase from $250.7 million in 2012. The increase of $47.9 million was driven partially by approximately $17 million of higher bad debt expense recorded in the UK. The increased bad debt expense related to unsecured accounts receivable of Clinton Cards being written off after Clintons was placed into administration during 2013. Expenses within our new Retail Operations segment added approximately $16 million. Transaction costs of approximately $7 million related to the purchase of the senior secured debt and the retail store acquisition of Clinton Cards were also recorded during 2013. Costs and fees associated with the Going Private Proposal, higher legal expense and increased costs incurred in connection with our information technology systems refresh project added approximately $7 million, $9 million and $3 million, respectively. These increases were partially offset by reduced bad debt expense primarily within our North American Social Expression Products segment, lower administrative costs within our International Social Expression Products segment due to overhead cost savings initiatives and lower profit-sharing plan expenses of approximately $5 million, $4 million and $2 million, respectively.

During 2012, goodwill impairment charges of $27.2 million were recorded. In the fourth quarter of 2012, our market capitalization significantly declined as a result of decreases in our stock price. In connection with the preparation of our annual financial statements, we concluded that the decline in the stock price and market capitalization were indicators of potential impairment which required the performance of an impairment analysis. Based on this analysis, it was determined that the fair values of our North American Social Expression Products segment, which is also the reporting unit, and our reporting unit located in the UK (“UK Reporting Unit”) within the International Social Expression Products segment, were less than their carrying values. As a result, we recorded non-cash goodwill impairment charges of $21.3 million and $5.9 million, respectively, which included all of the goodwill for the North American Social Expression Products segment and the UK Reporting Unit.

Other operating expense was $4.3 million during 2013 compared to income of $8.2 million in 2012. The increase in net expense was primarily attributable to an impairment of $8.1 million related to the senior secured debt of Clinton Cards in 2013. In addition, the prior year included a gain of $4.5 million from the sale of certain minor characters within our intellectual properties portfolio.

Interest expense was $17.9 million during 2013, down from $53.1 million in 2012. The decrease of $35.2 million was primarily attributable to the debt refinancing that occurred during the fourth quarter of 2012 that did not recur. In conjunction with the issuance of new 7.375% senior notes due 2021, we retired our 7.375% senior notes due 2016 and our 7.375% notes due 2016. As a result, we recorded $21.7 million for the write-off of the unamortized discount and deferred financing costs associated with the retired debt and a charge of $9.1 million for the consent payment, tender fees, call premiums and other fees associated with the refinancing.

Other non-operating income was $9.2 million during 2013 compared to expense of $0.1 million during 2012. The 2013 results included a gain of $4.3 million related to the sale of a portion of our investment in the common stock of Party City. The remaining increase was primarily due to a year-over-year change in foreign currency gains and losses of $4.1 million.

The effective tax rate was 41.9% and 41.5% during 2013 and 2012, respectively. The higher than statutory tax rate in 2013 was primarily due to certain nondeductible expenses incurred as a result of the Clinton Cards acquisition as well as certain items includable as taxable income which did not have corresponding book income amounts also as a result of the Clinton Cards transaction. The higher than statutory tax rate in 2012 was primarily due to the goodwill impairment charge for the UK Reporting Unit, which was nondeductible.

Segment Results

North American Social Expression Products Segment


(Dollars in thousands)	2013		2012		% Change
Total revenue	$	1,245,269	$	1,228,548		1.4	%
Segment earnings		160,052		149,655		6.9	%

Total revenue of our North American Social Expression Products segment increased $16.7 million compared to 2012. The increase was primarily driven by higher sales in seasonal greeting cards of approximately $15 million and other consumer products such as party goods, stationery and gift packaging of approximately $4 million. Partially offsetting these increases were lower sales of everyday greeting cards of approximately $3 million.

Segment earnings increased $10.4 million in 2013 compared to 2012. The increase is attributable to a goodwill impairment charge of approximately $21 million in 2012 that did not recur in 2013 as well lower supply chain costs and lower bad debt expense of approximately $7 million and $5 million, respectively. The lower supply chain costs, specifically field sales and merchandiser expenses, were primarily driven by 2012 store setup activities for the value channel, which did not recur in 2013. These favorable variances were partially offset by higher marketing and product management expenses of approximately $10 million, increased product related costs of approximately $6 million, higher in-store product display costs of approximately $4 million, increased scrap expense of approximately $2 million and approximately $3 million of higher costs related to our technology refresh project. Gross margin dollars improved slightly due to higher sales volume, partially offset by unfavorable product mix as a result of a continued shift to a higher proportion of lower margin value cards.

International Social Expression Products Segment


(Dollars in thousands)	2013			2012		% Change
Total revenue	$	275,861		$	347,866		(20.7	%)
Segment (loss) earnings		(13,428	)		20,276		(166.2	%)

Total revenue of our International Social Expression Products segment decreased $72.0 million compared to 2012. The decrease was driven primarily by the elimination of intersegment sales to the Retail Operations segment of $55.9 million. For comparison purposes, the sales being eliminated would have been third-party sales in 2012 to Clinton Cards stores that were not owned by us at that time. The remaining decrease of approximately $16 million for 2013 was driven primarily by a combination of lower sales of both gift packaging and other ancillary products of approximately $6 million each, primarily due to the divestiture of an insignificant non-card product line. Also contributing to the lower revenue was an impairment of deferred costs of approximately $4 million related to the supply agreement associated with the Birthdays branded stores that were closed as part of the Clinton Cards administration process. Partially offsetting these decreases were higher sales of everyday greeting cards of approximately $2 million. The sales shortfall resulting from Clinton Cards retail store closings were mostly offset by higher sales to other customers. Foreign currency translation unfavorably impacted sales by approximately $3 million for 2013.

Segment earnings decreased $33.7 million compared to 2012 due to bad debt expense of approximately $17 million in connection with Clinton Cards being placed into administration and an impairment of deferred costs of approximately $4 million related to the supply agreement associated with the Birthdays stores that were closed as part of the Clinton Cards administration process. Earnings also decreased by approximately $17 million for 2013 due to a combination of lower sales volume, unfavorable mix and higher scrap expense. Also contributing to the decrease in earnings was the adjustment of approximately $3 million associated with intersegment earnings generated from sales to the Retail Operations segment. This adjustment reduced consolidated inventory for

intercompany profit in the Retail Operations segment’s inventory and deferred the recognition of this profit in the International Social Expression Products segment’s earnings until the inventory is sold to the ultimate customer in the Retail Operations segment. In addition, segment earnings decreased by approximately $3 million as a result of strategic business actions, including the divestiture of a small non-card product line and the closure of a small gift wrap manufacturing facility in Italy. These decreases were partially offset by a goodwill impairment charge of approximately $6 million in 2012 that did not recur in 2013 and lower general and administrative costs of approximately $5 million primarily related to overhead cost savings initiatives.

Retail Operations Segment

(Dollars in thousands)

2013

2012

% Change

Total revenue

244,106

—

N/A

Segment earnings

6,581

—

N/A

As a result of the June 6, 2012 Clinton Cards acquisition, during 2013 we operated approximately 400 retail stores in the United Kingdom that we are operating under the “Clintons” brand. The retail operations are consolidated on a one-month lag corresponding with a fiscal year-end of February 2 for fiscal 2013. As such, the operating results of the Retail Operations segment for 2013 included only eight months of activity, beginning June 6, 2012, the date of acquisition. The segment earnings of $6.6 million in 2013 included start-up and transitional costs of $7.7 million related to the actions taken to execute our strategy to stabilize and improve the profitability of the stores acquired.

AG Interactive Segment


(Dollars in thousands)	2013		2012		% Change
Total revenue	$	64,440	$	68,514		(5.9	%)
Segment earnings		16,465		13,942		18.1	%

Total revenue of our AG Interactive segment decreased $4.1 million compared to 2012. The decrease in revenue was primarily driven by lower revenue from advertising. At February 28, 2013, AG Interactive had approximately 3.7 million online paid subscriptions as of February 28, 2013 as compared to approximately 3.8 million at February 29, 2012.

Segment earnings for 2013 increased $2.5 million compared to 2012. The impact of decreased sales administration, product management and marketing costs is partially offset by the impact of lower sales and higher technology costs.

Unallocated Items

Centrally incurred and managed costs are not allocated back to the operating segments. The unallocated items include interest expense for centrally-incurred debt, domestic profit-sharing expense and stock-based compensation expense. Unallocated items also included costs associated with corporate operations such as the senior management, corporate finance, legal and insurance programs. In 2013, unallocated items included approximately $15 million for certain charges associated with the activities and transactions related to the Clinton Cards acquisition, approximately $7 million related to the Going Private Proposal as well as approximately $9 million of higher legal expenses. Partially offsetting these increases was a gain of $4.3 million related to the sale of Party City common stock. In 2012, unallocated items included a loss on extinguishment of debt of approximately $31 million.


(Dollars in thousands)	2013			2012
Interest expense	$	(17,896	)	$	(53,073	)
Profit-sharing expense		(7,536	)		(9,401	)
Stock-based compensation expense		(10,743	)		(10,982	)
Corporate overhead expense		(54,167	)		(29,636	)

Total Unallocated	$	(90,342	)	$	(103,092	)

Liquidity and Capital Resources

Operating Activities

During the year, cash flow from operating activities provided cash of $160.1 million compared to $162.8 million in 2013, a decrease of $2.7 million. Cash flow from operating activities for 2013 compared to 2012 resulted in an increase of $39.0 million from $123.8 million in 2012.

Accounts receivable, net of the effect of acquisitions and dispositions, was a source of cash of $8.4 million in 2014 compared to a use of cash of $9.8 million in 2013 and a source of cash of $4.5 million in 2012. As a percentage of the prior twelve months’ net sales, net accounts receivable was 5.0% at February 28, 2014 compared to 5.7% at February 28, 2013. The year-over-year fluctuations occurred primarily within our North American Social Expression Products and International Social Expression Products segments are primarily due to the timing of collections from, or credits issued to, certain customers occurring in a different pattern in the current period compared to the prior periods.

Inventories, net of the effect of acquisitions and dispositions, were a use of cash of $6.8 million in 2014 compared to a use of cash of $31.6 million in 2013 and a use of cash of $23.3 million in 2012. The use of cash in 2014 was primarily due to our Retail Operations segment that grew inventory by approximately $13 million. This was partially offset by lower inventory levels within our North American Social Expression Products segment. In 2013, the use of cash was driven primarily by our Retail Operations segment that grew inventory by approximately $27 million from its acquisition in June 2012 to February 2013. The use of cash in 2012 was primarily due to the inventory build of cards associated with expanded distribution.

Other current assets, net of the effect of acquisitions and dispositions, were a source of cash of $15.7 million during 2014, compared to a use of cash of $23.4 million in 2013 and a source of cash of $7.0 million in 2012. The source of cash in 2014 was primarily due to lower prepaid rents within our Retail Operations segment and lower prepaid insurance within our North American Social Expressions segment. The use of cash in 2013 was driven primarily by prepaid rents within our new Retail Operations segment that was not present in prior years. The source of cash in 2012 was primarily due to the use of trust assets to pay medical claim expenses as we terminated the active employees’ medical trust fund as of February 29, 2012.

Deferred costs – net generally represents payments under agreements with retailers net of the related amortization of those payments. During 2014, payments exceeded amortization by $22.2 million. During 2013, amortization exceeded payments by $27.1 million. In 2012, payments exceeded amortization by $31.3 million. See Note 10, “Deferred Costs,” to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report for further detail of deferred costs related to customer agreements.

Accounts payable and other liabilities, net of the effect of acquisitions and dispositions, were a source of cash of $2.0 million in 2014, compared to source of cash of $58.6 million in 2013 and use of cash of $13.6 million in 2012. The 2013 growth in accounts payable and other liabilities, and thus an increase in cash flow in that fiscal year, was primarily due to our new Retail Operations segment as well as activities related to our information technology systems refresh project and other strategic projects.

Investing Activities

Investing activities used $32.7 million of cash in 2014 compared to $163.2 million of cash used in 2013 and $70.3 million of cash used in 2012. The use of cash in the current year was primarily driven by $54.1 million of cash paid for capital expenditures. The decrease in capital expenditures compared to 2013 related primarily to a decrease in assets acquired in connection with our information technology systems refresh project and machinery and equipment purchased for our card-producing facilities. The current year also included the receipt of a cash distribution of $12.1 million related to our investment in Party City and proceeds of $7.6 million received from the Clinton Cards bankruptcy administration.

The use of cash during 2013 was primarily related to cash outlays of $114.1 million associated with capital expenditures. The increase in capital expenditures for 2013 compared to 2012 related primarily to assets acquired in connection with our information technology systems refresh project and investments in our new Retail Operations segment. In addition, during the first quarter of 2013 we paid $56.6 million of cash to acquire all of the outstanding senior secured debt of Clinton Cards.

The use of cash during 2012 was primarily related to cash payments for capital expenditures of $78.2 million as well as business acquisitions of $5.9 million. Capital expenditures in 2012 related primarily to assets acquired in connection with our information technology systems refresh project and our new world headquarters project, as well as machinery and equipment purchased for our card-producing facilities. During 2012, cash paid for the Watermark acquisition, net of cash acquired, was $5.9 million. Partially offsetting these uses of cash in 2012 were cash receipts of $6.0 million from the sale of the land and building related to our DesignWare party goods product lines in our North American Social Expression Products segment, $4.5 million from the sale of certain minor characters in our intellectual properties portfolio and approximately $2.4 million from the sale of the land, building and certain equipment associated with a distribution facility in our International Social Expression Products segment.

Financing Activities

Financing activities used $153.0 million of cash during 2014 compared to $42.0 million in 2013 and $136.9 million in 2012. The primary use of cash in the current year was in connection with activities related to the Merger. These activities included borrowings under our new credit agreement, net of repayments and debt issuance costs, which provided cash of $264.5 million, a contribution of $240.0 million from Parent and payment of cash of $568.3 million to complete the Merger and cancel outstanding shares. In addition, we paid cash dividends of $85.0 million, of which $9.6 million was paid to shareholders prior to the Merger and $75.4 million was paid to Parent after the Merger.

The 2013 use of cash primarily related to share repurchases and dividend payments. We paid $81.0 million to repurchase approximately 5.3 million Class A common shares under our repurchase programs during 2013, which included $2.2 million of cash settlements related to the repurchase of approximately 0.1 million Class A common shares that were initiated during 2012. In addition, we paid cash dividends of $19.9 million during 2013. Partially offsetting these uses of cash, were borrowings under our credit agreement, which provided $61.2 million of cash during 2013.

The 2012 use of cash primarily related to the tender offers and redemption of our 7.375% senior notes due 2016 of $222.0 million, our 7.375% notes due 2016 of $32.7 million and a charge of $9.1 million for the consent payments, tender fees, call premium and other fees associated with these transactions. Share repurchases and dividend payments also contributed to the use of the cash in 2012. We paid $72.4 million to repurchase approximately 4.4 million Class A common shares under our repurchase program and $10.1 million to purchase approximately 0.4 million Class B common shares in accordance with our Amended and Restated Articles of Incorporation. Repurchases of $2.2 million for approximately 0.1 million Class A common shares initiated at the end of 2012 were not included in the above repurchase amount in the Consolidated Statement of Cash Flows because the cash settlement for these transactions did not occur until 2013. However, this $2.2 million was included in the shares repurchased amount within our Consolidated Statement of Shareholders’ Equity under Part II, Item 8 of this Annual Report. In addition, we paid cash dividends of $23.9 million during 2012. Partially offsetting these uses of cash was a cash receipt of $225.0 million from the issuance of the 7.375% senior notes due 2021. Also, proceeds from the exercise of stock options and tax benefits from share-based payment awards provided $13.6 million of cash during 2012.

Credit Sources

Substantial credit sources are available to us. In total, we had available sources of credit of approximately $640 million at February 28, 2014, which included $340 million outstanding on our term loan facility, a $250 million revolving credit facility and a $50 million accounts receivable securitization facility, of which $267.8 million in the aggregate was unused as of February 28, 2014. Borrowings under the accounts receivable securitization facility are limited based on our eligible receivables outstanding. The term

loan facility was fully drawn on August 9, 2013, the closing date of the Merger. At February 28, 2014, we had $4.5 million of borrowings outstanding under our revolving credit facility and we had no borrowings outstanding under the accounts receivable securitization facility. We had, in the aggregate, $27.7 million outstanding under letters of credit, which reduced the total credit availability thereunder as of February 28, 2014.

For further information, refer to the discussion of our borrowing arrangements as disclosed in Note 11, “Debt,” to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report.

Credit Facility

In connection with the closing of the Merger, on August 9, 2013, we entered into a $600 million secured credit agreement (“Credit Agreement”), which provides for a $350 million term loan facility (“Term Loan Facility”) and a $250 million revolving credit facility (“Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Facilities”). The Term Loan Facility was fully drawn on August 9, 2013, the effective date of the Merger. We issued the Term Loan Facility at a discount of $10.8 million. Installment payments are being made on the Term Loan Facility, beginning with an installment payment of $10 million made in February, 2014. Future payments are scheduled to be made quarterly in the amount of $5 million through May 31, 2019. A final payment of $235 million will be due on August 9, 2019. We may elect to increase the commitments under each of the Term Loan Facility and the Revolving Credit Facility up to an aggregate amount of $150 million. The proceeds of the term loans and the revolving loans borrowed on the Merger Date were used to fund a portion of the Merger consideration and pay fees and expenses associated therewith. After the Merger Date, revolving loans borrowed under the Credit Agreement were used for working capital and general corporate purposes.

On January 24, 2014, we amended the Credit Agreement. The amendment modifies the Credit Agreement to, among other things, permit us to: (i) convert from a “C corporation” to an “S corporation” for U.S. federal income tax purposes (the “S-Corp Conversion”), (ii) in connection with the S-Corp Conversion, (x) change our fiscal year to end on December 31 of each year, (y) change our inventory accounting method from last-in, first-out to first-in, first-out and (z) make S-Corp tax distributions (as defined in the amended Credit Agreement) to the holders of our capital stock while we are treated as an S corporation or disregarded entity of an S corporation, (iii) make restricted payments (as defined in the Credit Agreement) to enable the payment of current interest on certain senior unsecured notes issued by an indirect parent company of ours in a principal amount not to exceed $300 million, (iv) make a one-time restricted payment of up to $50 million to Parent, so long as on or about the date of such restricted payment Parent redeems the non-voting preferred stock of Parent held by Koch Investment in an amount of not less than such restricted payment, (v) make certain additional capital expenditures each year primarily related to our information systems refresh project and (vi) make changes to certain definitions to exclude the accounting treatment of the future lease that may be entered into in connection with the new world headquarters.

The obligations under our Credit Agreement are guaranteed by Parent and our material domestic subsidiaries and are secured by substantially all of our assets and the guarantors.

The interest rate per annum applicable to the loans under the Credit Facilities are, at our election, equal to either (i) the base rate plus the applicable margin or (ii) the relevant adjusted Eurodollar rate for an interest period of one, two, three or six months, at our election, plus the applicable margin.

The Credit Agreement contains certain customary covenants, including covenants that limit our ability and the ability of our subsidiaries and the Parent to, among other things, incur or suffer to exist certain liens; make investments; enter into consolidations, mergers, acquisitions and sales of assets; incur or guarantee additional indebtedness; make distributions; enter into agreements that restrict the ability to incur liens or make distributions; and engage in transactions with affiliates. In addition, the Credit Agreement contains financial covenants that require us to maintain a total leverage ratio and interest coverage ratio in accordance with the limits set forth therein.

Accounts Receivable Facility

We are also a party to an accounts receivable facility that provides funding of up to $50 million, under which there were no borrowings outstanding as of February 28, 2014 and 2013.

Under the terms of the accounts receivable facility, we sell accounts receivable to AGC Funding Corporation (our wholly-owned, consolidated subsidiary), which in turn sells undivided interests in eligible accounts receivable to third party financial institutions as part of a process that provides us funding similar to a revolving credit facility.

On August 9, 2013, we amended our accounts receivable facility. The amendment modified the accounts receivable facility by providing for a scheduled termination date that is 364 days following the date of the amendment, subject to two additional, consecutive 364-day terms with the consent of the parties thereto. The amendment also, among other things, permitted the Merger and changed the definition of the base rate to equal the higher of the prime rate as announced by the applicable purchaser financial institution, and the federal funds rate plus 0.50%.

AGC Funding Corporation pays an annual facility fee of 80 basis points on the commitment of the accounts receivable securitization facility, together with customary administrative fees on letters of credit that have been issued and on outstanding amounts funded under the facility. Funding under the facility may be used for working capital, general corporate purposes and the issuance of letters of credit.

The accounts receivable facility contains representations, warranties, covenants and indemnities customary for facilities of this type, including our obligation to maintain the same consolidated leverage ratio as it is required to maintain under our Credit Agreement.

7.375% Senior Notes Due 2021

On November 30, 2011, we closed a public offering of $225 million aggregate principal amount of 7.375% senior notes due 2021 (the “2021 Senior Notes”). The net proceeds from this offering were used to redeem other existing debt. In connection with this transaction, we wrote off the remaining unamortized discount and deferred financing costs related to the previously existing debt, totaling $21.7 million, as well as recorded a charge of $9.1 million for the consent payments, tender fees, call premium and other fees incurred in connection with these transactions.

The 2021 Senior Notes will mature on December 1, 2021 and bear interest at a fixed rate of 7.375% per year. The 2021 Senior Notes constitute our general unsecured senior obligations. The 2021 Senior Notes rank senior in right of payment to all our future obligations that are, by their terms, expressly subordinated in right of payment to the 2021 Senior Notes and pari passu in right of payment with all our existing and future unsecured obligations that are not so subordinated. The 2021 Senior Notes are effectively subordinated to our secured indebtedness, including borrowings under the Credit Facilities described above, to the extent of the value of the assets securing such indebtedness. The 2021 Senior Notes also contain certain restrictive covenants that are customary for similar credit arrangements, including covenants that limit our ability to incur additional debt; declare or pay dividends; make distributions on or repurchase or redeem capital stock; make certain investments; enter into transactions with affiliates; grant or permit liens; sell assets; enter into sale and leaseback transactions; and consolidate, merge or sell all or substantially all of our assets. These restrictions are subject to customary baskets and financial covenant tests.

At February 28, 2014, the Corporation was in compliance with the financial covenants under its borrowing agreements described above.

Capital Deployment and Investments

In connection with the Merger, Parent issued approximately $245 million in aggregate stated value of non-voting preferred stock. Parent could elect to either accrue or pay cash for dividends on the preferred stock. The preferred stock carried a cash dividend rate of LIBOR plus 11.5%. We provided Parent with the cash flow for Parent to pay dividends on the preferred stock. During the post-merger period of 2014, we made cash dividend payments of $75.4 million to Parent of which $11.4 million was used for the payment of dividends on the preferred stock. On February 10, 2014, the preferred stock was fully redeemed by Parent.

Also on February 10, 2014, in connection with the redemption of the preferred stock, Century Intermediate Holding Company 2 (“CIHC2”), an indirect parent of American Greetings, issued $285 million aggregate principal amount of 9.75%/10.50% Senior PIK

Toggle Notes due 2019 (the “PIK Notes”). Excluding the first and last interest payment periods, which must be paid in cash, CIHC2 may elect to either accrue or pay cash interest on the PIK Notes. The PIK Notes carry a cash interest rate of 9.75%. Prior to the payment of interest by CIHC2, it is expected that we will provide CIHC2 with the cash flow for CHIC2 to pay interest on the PIK Notes. Assuming interest is paid regularly in cash, rather than accrued, the annual cash required to pay the interest is expected to be approximately $27.8 million while the entire issuance of PIK Notes are outstanding. For further information, refer to the discussion of the PIK Notes as disclosed in “Transactions with Parent Companies and Other Affiliated Companies” in Note 18, “Related Party Information,” to the Consolidated Financial Statements under Part II, Item 18 of this Annual Report.

Throughout fiscal 2014 and thereafter, we will continue to consider all options for capital deployment including growth opportunities, acquisitions and other investments in third parties, expanding customer relationships, expenditures or investments related to our current product leadership initiatives or other future strategic initiatives, capital expenditures, the information technology systems refresh project, paying down debt and, as appropriate, preserving cash. Our future operating cash flow and borrowing availability under our credit agreement and our accounts receivable securitization facility are expected to meet these and other currently anticipated funding requirements. The seasonal nature of our business results in peak working capital requirements that may be financed through short-term borrowings when cash on hand is insufficient.

Over roughly the next five or six 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 of which are intended to drive efficiencies within the business and add new capabilities. Amounts that we spend could be material in any fiscal year and over the life of the project. The total amount spent through fiscal 2013 on this project was approximately $84 million. During 2014, we spent approximately $25 million, including capital of approximately $21 million and expense of approximately $4 million, on these information technology systems. We currently expect to spend a total of at least an additional $150 million on these information technology systems over the remaining life of the project, the majority of which we expect will be capital expenditures. We believe these investments are important to our business, help us drive further efficiencies and add new capabilities; however, there can be no assurance that we will not spend more or less than $150 million over the remaining life of the project, or that we will achieve the anticipated efficiencies or any cost savings.

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 our business results in peak working capital requirements that may be financed through short-term borrowings when cash on hand is insufficient.

Contractual Obligations

The following table presents our contractual obligations and commitments to make future payments as of February 28, 2014:


	Payment Due by Period as of February 28, 2014
(Dollars in thousands)	2015		2016		2017		2018		2019		Thereafter		Total
Long-term debt	$	20,000	$	20,000	$	20,000	$	20,000	$	24,500	$	465,181	$	569,681
Operating leases (1)		71,392		66,446		59,994		50,840		37,680		102,694		389,046
Commitments under customer agreements		84,859		28,016		35,417		35,397		50,361		—		234,050
Commitments under royalty agreements		7,763		11,280		5,864		5,676		675		844		32,102
Interest payments		32,425		30,495		29,696		28,898		27,270		53,920		202,704
Severance		2,672		1,302		—		—		—		—		3,974
Commitments under purchase agreements		1,767		—		—		—		—		—		1,767

	$	220,878	$	157,539	$	150,971	$	140,811	$	140,486	$	622,639	$	1,433,324

(1)

Approximately $7 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 an adverse effect on us because if Schurman is not able to comply with its obligations under the subleases, we remain contractually obligated, as primary lessee, under those leases. In connection with our acquisition of Clinton Cards, the number of stores that we are operating as of February 29, 2014, is 396. The estimated future minimum rental payments for noncancelable operating leases related to these stores is approximately $360 million. Refer to Note 3, “Acquisitions,” to the Consolidated Financial Statements for further information.

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, 2014. Also, we provide credit support to Schurman through a liquidity guaranty of up to $10 million in favor of the lenders under Schurman’s senior revolving credit facility as described in Note 1 to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report, which are not included in the table as no amounts have been drawn and therefore we cannot determine the amount of usage in the future.

We expect to contribute approximately $5 million in 2015 to the defined benefit pension plan that we assumed in connection with our acquisition of Gibson Greetings, Inc. in 2001. This represents the legally required minimum contribution level. Any discretionary additional contributions we may make are not expected to exceed the deductible limits established by Internal Revenue Service regulations. Refer to Note 12 to the Consolidated Financial Statements under Part II, Item 8 of this Annual Report.

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 requires 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 under Part II, Item 8 of this Annual Report. 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 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.

Sales Returns

We provide for estimated returns for products sold with the right of return, primarily seasonal cards and certain other seasonal products, 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 return rates and the adjustments attributable to any changes have historically not been material.

Deferred Costs

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 may receive a combination of cash payments, credits, discounts, allowances and other incentives to be earned as product is purchased from us over the stated term of the agreement or 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 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 an estimate of its future value based upon expected recoverability. Losses attributed to these specific events have historically not been material. The aggregate average remaining life of our customer contract base is 7.2 years.

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 ASC Topic 350 (“ASC 350”), “Intangibles—Goodwill and Other,” goodwill and certain intangible assets are presumed to have indefinite useful lives and are thus not amortized, but subject to an impairment test annually or more frequently if indicators of impairment arise. We complete the annual goodwill and indefinite-lived intangible asset impairment tests 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

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 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.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08 (“ASU 2014-08”), “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results and is disposed of or classified as held for sale. The standard also introduces several new disclosures. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. ASU 2014-08 is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. We do not expect that the adoption of this standard will have a material effect on our financial statements.

In July 2013, the FASB issued ASU No. 2013-11 (“ASU 2013-11”), “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and not combined with deferred tax assets. ASU 2013-11 is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. We do not expect that the adoption of this standard will have a material effect on our financial statements.

In February 2013, the FASB issued ASU No. 2013-02 (“ASU 2013-02”), “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires entities to disclose additional information about changes in other comprehensive income (“OCI”) by component. In addition, an entity is required to present, either on the face of the statement where income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income and the income statement line items affected. The provisions of this guidance are effective prospectively for annual and interim periods beginning after December 15, 2012. We adopted this standard on March 1, 2013. The amended accounting standard only impacts the financial statement presentation of OCI and does not change the components that are recognized in net income or OCI. The adoption of this standard had no impact on our financial position or results of operations.

In July 2012, the FASB issued ASU No. 2012-02 (“ASU 2012-02”), “Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that an indefinite-lived intangible asset is impaired. If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We adopted this standard on March 1, 2013. The adoption of this standard did not have a material effect on our financial 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” 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;

•

the loss of one or more retail customers and/or retail consolidations, acquisitions and bankruptcies, including the possibility of resulting adverse changes to retail contract terms;

•

competitive terms of sale offered to customers, including costs and other terms associated with new and expanded customer relationships;

•

the ability of Clinton Cards to achieve the anticipated revenue and operating profits;

•

the ability of the bankruptcy administration to generate sufficient proceeds from the liquidation of the remaining Clinton Cards business to repay the remaining secured debt owed to us;

•

the timing and impact of expenses incurred and investments made to support new retail or product strategies, as well as new product introductions and achieving the desired benefits from those investments;

•

unanticipated expenses we may be required to incur relating to our world headquarters project;

•

our ability to qualify for state and local incentives offered to assist us in the development of a new world headquarters;

•

the timing of investments in, together with the ability to successfully implement or achieve the desired benefits and cost savings associated with, any information systems refresh we may implement;

•

the timing and impact of converting customers to a SBT model;

•

Schurman’s ability to successfully operate its retail operations and satisfy its obligations to us;

•

consumer demand for social expression products generally, shifts in consumer shopping behavior, and consumer acceptance of products as priced and marketed, including the success of new and expanded advertising and marketing efforts, such as our online efforts through Cardstore.com;

•

the impact and availability of technology, including social media, on product sales;

•

escalation in the cost of providing employee health care;

•

the ability to comply with our debt covenants;

•

risks associated with leasing substantial amounts of space;

•

our ability to adequately maintain the security of our electronic and other confidential information;

•

fluctuations in the value of currencies in major areas where we operate, including the U.S. Dollar, Euro, UK Pound Sterling and Canadian Dollar; and

•

the outcome of any legal claims, known or unknown.

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 under Part I, Item 1A of this Annual Report.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Derivative Financial Instruments – We had no derivative financial instruments as of February 28, 2014.

Interest Rate Exposure – We manage interest rate exposure through a mix of fixed and floating rate debt. Currently, approximately 60% of our debt is carried at variable interest rates. We believe that our overall interest rate exposure risk is limited. Based on our interest rate exposure on our non-fixed rate debt as of and during the year ended February 28, 2014, 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 36%, 35% and 28% of our 2014, 2013 and 2012 total revenue from continuing operations, respectively, were generated from operations outside the United States. Operations in Australia, New Zealand, Canada, the European Union and the UK 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. However, for the year ended February 28, 2014, a hypothetical 10% weakening of the U.S. dollar would not materially affect our income before income tax expense.

Item 8.

Financial Statements and Supplementary Data


Index to Consolidated Financial Statements and Supplementary Financial Data	Page Number
Report of Independent Registered Public Accounting Firm		46

Consolidated Statement of Income - Years ended February 28, 2014, February 28, 2013 and February 29, 2012		47

Consolidated Statement of Comprehensive Income - Years ended February 28, 2014, February 28, 2013 and February 29, 2012		48

Consolidated Statement of Financial Position - February 28, 2014 and 2013		49

Consolidated Statement of Cash Flows - Years ended February 28, 2014, February 28, 2013 and February 29, 2012		50

Consolidated Statement of Shareholder’s Equity - Years ended February 28, 2014, February 28, 2013 and February 29, 2012		51

Notes to Consolidated Financial Statements - Years ended February 28, 2014, February 28, 2013 and February 29, 2012		52

Supplementary Financial Data:

Quarterly Results of Operations (Unaudited)		90

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholder

American Greetings Corporation

We have audited the accompanying consolidated statement of financial position of American Greetings Corporation as of February 28, 2014 and February 28, 2013, and the related consolidated statements of income, comprehensive income, shareholder’s equity, and cash flows for each of the three years in the period ended February 28, 2014. 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. We were not engaged to perform an audit of the Corporation’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2014 and February 28, 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 28, 2014, 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.

/s/ Ernst & Young LLP

Cleveland, Ohio

June 2, 2014

CONSOLIDATED STATEMENT OF INCOME

Years ended February 28, 2014, February 28, 2013 and February 29, 2012

Thousands of dollars


	2014			2013			2012
Net sales	$	1,941,809		$	1,842,544		$	1,663,281
Other revenue		27,857			26,195			31,863

Total revenue		1,969,666			1,868,739			1,695,144

Material, labor and other production costs		857,227			817,740			741,645
Selling, distribution and marketing expenses		685,088			653,935			533,827
Administrative and general expenses		297,443			298,569			250,691
Goodwill impairment		733			—			27,154
Other operating (income) expense – net		(7,718	)		4,330			(8,200	)


Operating income		136,893			94,165			150,027

Interest expense		27,363			17,896			53,073
Interest income		(400	)		(471	)		(982	)
Other non-operating (income) expense – net		(3,296	)		(9,174	)		121


Income before income tax expense		113,226			85,914			97,815
Income tax expense		62,704			35,996			40,617


Net income	$	50,522		$	49,918		$	57,198

See notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Years ended February 28, 2014, February 28, 2013 and February 29, 2012

Thousands of dollars


	2014			2013			2012
Net income	$	50,522		$	49,918		$	57,198

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		12,545			(11,015	)		(2,412	)
Pension and postretirement benefit adjustments		5,344			5,712			(7,074	)
Unrealized (loss) gain on securities		(4	)		—			2

Other comprehensive income (loss), net of tax		17,885			(5,303	)		(9,484	)

Comprehensive income	$	68,407		$	44,615		$	47,714

See notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

February 28, 2014 and 2013

Thousands of dollars except share and per share amounts


	2014		2013
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	63,963	$	86,059
Trade accounts receivable, net		97,925		105,497
Inventories		254,761		242,447
Deferred and refundable income taxes		46,996		72,560
Prepaid expenses and other		146,164		155,343

Total current assets		609,809		661,906

OTHER ASSETS		542,766		456,751
DEFERRED AND REFUNDABLE INCOME TAXES		74,103		92,354
PROPERTY, PLANT AND EQUIPMENT – NET		375,765		372,452

	$	1,602,443	$	1,583,463


LIABILITIES AND SHAREHOLDER’S EQUITY
CURRENT LIABILITIES
Debt due within one year	$	20,000	$	—
Accounts payable		120,568		119,777
Accrued liabilities		68,838		80,098
Accrued compensation and benefits		74,017		69,309
Income taxes payable		14,866		4,968
Deferred revenue		31,288		31,851
Other current liabilities		85,785		62,593

Total current liabilities		415,362		368,596

LONG-TERM DEBT		539,114		286,381
OTHER LIABILITIES		301,815		225,044
DEFERRED INCOME TAXES AND NONCURRENT INCOME TAXES PAYABLE		18,705		21,565

SHAREHOLDER’S EQUITY
Common shares – par value $.01 per share: 100 shares issued in 2014 and zero shares issued in 2013		—		—
Common shares - Class A - par value $1 per share: zero shares issued less zero treasury shares in 2014 and 83,935,490 shares issued less 54,847,733 treasury shares in 2013		—		29,088
Common shares - Class B - par value $1 per share: zero shares issued less zero treasury shares in 2014 and 6,057,116 shares issued less 3,174,032 treasury shares in 2013		—		2,883
Capital in excess of par value		240,000		522,425
Treasury stock		—		(1,093,782	)
Accumulated other comprehensive income (loss)		752		(17,133	)
Retained earnings		86,695		1,238,396

Total shareholder’s equity		327,447		681,877

	$	1,602,443	$	1,583,463

See notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

Years ended February 28, 2014, February 28, 2013 and February 29, 2012

Thousands of dollars


	2014			2013			2012
OPERATING ACTIVITIES:
Net income	$	50,522		$	49,918		$	57,198
Adjustments to reconcile net income to cash flows from operating activities:
Goodwill impairment		733			—			27,154
Stock-based compensation		8,091			10,743			10,982
Net gain on dispositions		—			—			(4,500	)
Net loss (gain) on disposal of fixed assets		560			631			(461	)
Loss on extinguishment of debt		—			—			30,812
Depreciation and intangible assets amortization		55,283			49,405			43,666
Provision for doubtful accounts		368			16,064			4,776
Clinton Cards secured debt (recovery) impairment		(4,910	)		8,106			—
Deferred income taxes		22,615			27,530			15,391
Gain related to Party City investment		(3,262	)		(4,293	)		—
Other non-cash charges		6,783			1,198			3,034
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Trade accounts receivable		8,359			(9,820	)		4,495
Inventories		(6,761	)		(31,558	)		(23,321	)
Other current assets		15,691			(23,404	)		7,004
Income taxes		21,151			(18,607	)		(11,411	)
Deferred costs – net		(22,209	)		27,069			(31,254	)
Accounts payable and other liabilities		2,046			58,586			(13,560	)
Other – net		5,014			1,196			3,797

Total Cash Flows From Operating Activities		160,074			162,764			123,802

INVESTING ACTIVITIES:
Property, plant and equipment additions		(54,097	)		(114,149	)		(78,207	)
Cash payments for business acquisitions, net of cash acquired		—			621			(5,899	)
Proceeds from sale of fixed assets		1,652			853			9,310
Proceeds related to Party City investment		12,105			6,061			—
Proceeds from Clinton Cards administration		7,644			—			—
Purchase of Clinton Cards debt		—			(56,560	)		—
Proceeds from sale of intellectual properties		—			—			4,500

Total Cash Flows From Investing Activities		(32,696	)		(163,174	)		(70,296	)

FINANCING ACTIVITIES:
Proceeds from revolving line of credit and long-term borrowings		385,736			543,150			225,000
Repayments on revolving line of credit and long-term borrowings		(442,436	)		(481,950	)		(263,787	)
Proceeds from term loan		339,250			—			—
Repayments on term loan		(10,000	)		—			—
Issuance, exercise or settlement of share-based payment awards		(4,487	)		(2,648	)		10,153
Tax benefit from share-based payment awards		279			364			3,468
Contribution from parent		240,000			—			—
Purchase of treasury shares		—			(80,991	)		(82,459	)
Payments to shareholders to effect merger		(568,303	)		—			—
Dividends to shareholders		(85,034	)		(19,927	)		(23,893	)
Financing fees		(8,045	)		—			(5,391	)

Total Cash Flows From Financing Activities		(153,040	)		(42,002	)		(136,909	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		3,566			(3,967	)		3


DECREASE IN CASH AND CASH EQUIVALENTS		(22,096	)		(46,379	)		(83,400	)
Cash and Cash Equivalents at Beginning of Year		86,059			132,438			215,838

Cash and Cash Equivalents at End of Year	$	63,963		$	86,059		$	132,438

See notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY

Years ended February 28, 2014, February 28, 2013 and February 29, 2012

Thousands of dollars except per share amounts


									Capital in Excess of Par Value						Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
												Treasury Stock
	Common Shares
	Common		Class A			Class B
BALANCE FEBRUARY 28, 2011	$	—	$	37,470		$	2,937		$	492,048		$	(952,206	)	$	(2,346	)	$	1,185,855		$	763,758
Net income		—		—			—			—			—			—			57,198			57,198
Other comprehensive loss		—		—			—			—			—			(9,484	)		—			(9,484	)
Cash dividends - $0.60 per share		—		—			—			—			—			—			(23,908	)		(23,908	)
Sale of shares under benefit plans, including tax benefits		—		1,054			314			10,117			11,042			—			(8,978	)		13,549
Purchase of treasury shares		—		(4,514	)		(412	)		—			(79,782	)		—			—			(84,708	)
Stock compensation expense		—		—			—			10,982			—			—			—			10,982
Stock grants and other		—		1			3			16			108			—			(57	)		71

BALANCE FEBRUARY 29, 2012		—		34,011			2,842			513,163			(1,020,838	)		(11,830	)		1,210,110			727,458
Net income		—		—			—			—			—			—			49,918			49,918
Other comprehensive loss		—		—			—			—			—			(5,303	)		—			(5,303	)
Cash dividends - $0.60 per share		—		—			—			—			—			—			(19,929	)		(19,929	)
Sale of shares under benefit plans, including tax benefits		—		401			40			(1,491	)		411			—			(1,699	)		(2,338	)
Purchase of treasury shares		—		(5,325	)		(2	)		—			(73,415	)		—			—			(78,742	)
Stock compensation expense		—		—			—			10,743			—			—			—			10,743
Stock grants and other		—		1			3			10			60			—			(4	)		70

BALANCE FEBRUARY 28, 2013		—		29,088			2,883			522,425			(1,093,782	)		(17,133	)		1,238,396			681,877
Net income		—		—			—			—			—			—			50,522			50,522
Other comprehensive income		—		—			—			—			—			17,885			—			17,885
Cash dividends to common shareholders - $.30 per share (pre-merger)		—		—			—			—			—			—			(9,614	)		(9,614	)
Cash dividends to parent		—		—			—			—			—			—			(75,420	)		(75,420	)
Sales of shares under benefit plans, including tax benefits		—		223			28			560			342			—			(1,080	)		73
Contribution from parent		—		—			—			240,000			—			—			—			240,000
Payments to shareholders to effect merger		—		(29,305	)		(606	)		—			(538,392	)		—			—			(568,303	)
Cancellation of Family Shareholders’ shares		—		(5	)		(2,307	)		—			—			—			2,312			—
Stock compensation expense		—		—			—			4,125			—			—						4,125
Stock grants and other		—		(1	)		2			2			25			—			(5	)		23
Settlement, modification or cancellation of share-based payment awards pursuant to merger (see Note 15)		—		—			—			(13,721	)		—			—			—			(13,721	)
Cancellation of treasury shares		—		—			—			(513,391	)		1,631,807						(1,118,416	)		—

BALANCE FEBRUARY 28, 2014	$	—	$	—		$	—		$	240,000		$	—		$	752		$	86,695		$	327,447

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended February 28, 2014, February 28, 2013 and February 29, 2012

Thousands of dollars

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Consolidation: 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, 2014 refers to the year ended February 28, 2014. The Corporation’s subsidiary, AG Retail Cards Limited, acquired in 2013, operates retail stores in the United Kingdom (also referred to herein as “UK”), and is consolidated on a one-month lag corresponding with its fiscal year-end of February 1 for 2014. See Note 3 for further information.

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 Accounting Standards Codification (“ASC”) Topic 810 (“ASC 810”), “Consolidation.” Investments that do not meet the above criteria are accounted for under the cost method.

Prior to the current year fourth quarter, the Corporation held an approximate 15% equity interest in Schurman Fine Papers (“Schurman”) which is a VIE as defined in ASC 810. Schurman owns and operates 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 year third quarter, the Corporation determined that, due to continued operating losses, shareholders’ deficit and lack of return on the Corporation’s investment, the cost method investment was permanently impaired. As a result, the Corporation recorded an impairment charge in the amount of $1,935 which reduced the carrying amount of the investment to zero. In addition, during the current year fourth quarter, in order to mitigate ongoing risks to the Corporation that may arise from retaining an equity interest in Schurman, the Corporation transferred to Schurman its 15% equity interest and, as a result, no longer has an equity interest in Schurman.

The Corporation provides Schurman limited credit support through the provision of a liquidity guaranty (“Liquidity Guaranty”) in favor of the lenders under Schurman’s senior revolving credit facility (the “Senior Credit Facility”). Pursuant to the terms of the Liquidity Guaranty, the Corporation has guaranteed the repayment of up to $10,000 of Schurman’s borrowings under the Senior 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 July 2016. The Corporation’s obligations under the Liquidity Guaranty generally may 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. There was no triggering event or liquidation of collateral as of February 28, 2014 requiring the use of the Liquidity Guaranty.

During the current period, the Corporation assessed the variable interests in Schurman and determined that a third party holder of 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, 2014 includes:

•

Liquidity Guaranty of Schurman’s indebtedness of $10,000;

•

normal course of business trade and other receivables due from Schurman of $24,121, the balance of which fluctuates throughout the year due to the seasonal nature of the business; and

•

the operating leases currently subleased to Schurman, the aggregate lease payments for the remaining life of which was $7,117 and $11,812 as of February 28, 2014 and 2013, respectively.

In addition, the Corporation held a minority investment in the common stock of Party City Holdings, Inc. (“Party City”), formerly known as AAH Holdings Corporation (“AAH”). On June 4, 2012, Party City announced that it entered into a definitive agreement (the “Party City Merger Agreement”) to sell a majority stake of the company in a recapitalization transaction valued at $2,690,000. On July 27, 2012, this transaction closed and Party City merged with and into PC Merger Sub, Inc., a wholly-owned subsidiary of PC Topco Holdings, Inc. (“Holdings”). In connection with this recapitalization transaction, in 2013 the Corporation exchanged 617.3 shares of its Party City common stock for 1,200 shares of common stock of the new company, Holdings, and sold its remaining 123.44 shares of Party City common stock realizing a gain of $4,293. Additionally, on August 1, 2013, the Corporation received a cash distribution from Party City totaling $12,105, which was in part a return of capital of $8,843 that reduced the carrying amount of the investment to zero, and the remaining $3,262 realized as an investment gain. The total proceeds from the distributions received in 2014 and from the sale of Party City common stock in 2013 amounted to $12,105 and $6,061, respectively, and are reflected in “Investing Activities” on the Consolidated Statement of Cash Flows. The gains related to the Corporation’s investment in Party City are included in “Other non-operating (income) expense – net” on the Consolidated Statement of Income. See Note 4 for further information.

In addition to the investment in Holdings, the Corporation has a supply and distribution agreement with Party City and/or its affiliates dated December 31, 2009, with a purchase commitment of $22,500 spread over five years. The Corporation purchased party goods of $4,729, $4,038 and $5,531 during 2014, 2013 and 2012, respectively. As of February 28, 2014, the Corporation has purchased $20,733 of party goods under this agreement since inception.

Reclassifications: Certain amounts in the prior year financial statements have been reclassified to conform to the 2014 presentation.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates, including those related to sales returns, allowance for doubtful accounts, recoverability of intangibles and other long-lived assets, deferred tax asset valuation allowances, deferred costs and various other 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.

Earnings per Share: As a result of the Merger (as defined in Note 2), the Corporation’s equity is no longer publicly traded. As such, earnings per share information is not required, and therefore prior period earnings per share information is not included in this annual report.

Cash Equivalents: The Corporation considers all highly liquid instruments purchased with an original maturity of less than three months to be cash equivalents.

Allowance for Doubtful Accounts: 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.

Concentration of Credit Risks: The Corporation sells primarily to customers in the retail trade, primarily those in mass merchandising, which is comprised of three distinct channels: mass merchandisers (including discount retailers), chain drug stores and supermarkets. In addition, the Corporation sells its products through a variety of other distribution channels, including card and gift shops, department stores, military post exchanges, variety stores and combo stores (stores combining food, general merchandise and drug items) as well as through its retail operations in the UK. The Corporation also sells paper greeting cards through its Cardstore.com Web site, and, from time to time, the Corporation sells its products to independent, third-party distributors. These customers are located throughout the United States, Canada, the United Kingdom, Australia and New Zealand. Net sales to the Corporation’s five largest customers accounted for approximately 39%, 39% and 42% of total revenue in 2014, 2013 and 2012, respectively. Net sales to Wal-Mart Stores, Inc. and its subsidiaries accounted for approximately 14%, 14% and 14% of total revenue in 2014, 2013 and 2012, respectively. Net sales to Target Corporation accounted for approximately 13%, 13% and 14% of total revenue in 2014, 2013 and 2012, respectively.

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.

Inventories: Finished products, work in process and raw materials inventories are carried at the lower of cost or market. The last-in, first-out (“LIFO”) cost method is used for certain domestic inventories, which approximate 55% and 60% of the total pre-LIFO consolidated inventories at February 28, 2014 and 2013, respectively. The remaining domestic and international non-retail store inventories principally use the first-in, first-out (“FIFO”) method except for display material and factory supplies which are carried at average cost. Retail store inventories are carried at average cost. The Corporation 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 Costs: 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” on 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 Corporation maintains an 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 Costs: 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 ASC Topic 926 (“ASC 926”), “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 based on the ratio of the current period’s revenue to estimated remaining ultimate revenues. Ultimate revenues are calculated in accordance with ASC 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.

Production expense totaled $3,514, $3,360 and $5,985 in 2014, 2013 and 2012, respectively, with no significant amounts related to changes in ultimate revenue estimates during these periods. These production costs are included in “Material, labor and other production costs” on the Consolidated Statement of Income. Amortization of production costs totaling $2,776, $2,089 and $3,646 in 2014, 2013 and 2012, respectively, are included in “Other - net” within “Operating Activities” on the Consolidated Statement of Cash Flows. The balance of deferred film production costs was $7,031 and $9,765 at February 28, 2014 and 2013, respectively, and is included in “Other assets” on the Consolidated Statement of Financial Position. The Corporation expects to amortize approximately $1,200 of production costs during the next twelve months.

Investment in Life Insurance: The Corporation’s investment in corporate-owned life insurance policies is recorded in “Other assets” net of policy loans and related interest payable on the Consolidated Statement of Financial Position. The net balance was $28,714 and $25,998 as of February 28, 2014 and 2013, respectively. The net life insurance expense, including interest expense, is included in “Administrative and general expenses” on the Consolidated Statement of Income. The related interest expense, which approximates amounts paid, was $11,591, $11,427 and $11,209 in 2014, 2013 and 2012, respectively.

Goodwill and Other Intangible Assets: 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 ASC Topic 350, “Intangibles – Goodwill and Other.” This topic addresses the amortization of intangible assets with defined lives and 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. 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 impairment tests 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 Depreciation: Property, plant and equipment are carried at cost. Depreciation and amortization of buildings, software, 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 40 years; computer hardware and software over 3 to 10 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 ASC Topic 360 (“ASC 360”), “Property, Plant and Equipment.” ASC 360 also provides a single accounting model for the disposal of long-lived assets. In accordance with 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 Benefits: 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 accordance with ASC Topic 715, “Compensation-Retirement Benefits,” the Corporation recognizes the plans’ funded status in its statement of financial position, measures the plans’ assets and obligations as of the end of its fiscal year and recognizes the changes in a defined benefit postretirement plan’s funded status in comprehensive income in the year in which the changes occur. See Note 12 for further information.

Revenue Recognition: Sales are recognized when title and the risk of loss have been transferred to the customer, which generally occurs upon delivery.

Seasonal cards and certain other seasonal products are generally sold with the right of return on unsold merchandise. The Corporation provides for estimated returns of these products when those sales 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.

Products sold without a right of return may be subject to sales credit 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 a 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 SBT arrangement with a retailer is finalized, the Corporation reverses previous sales 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 the conversion and the amount of sales reversal is finalized based on the actual inventory at the time of conversion.

Sales at the Corporation’s retail operations in the UK are recognized upon the sale of product to the consumer.

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 monthly payments from the agents. Royalty revenue is generally recognized upon cash receipt and is recorded in “Other revenue.” Revenues and expenses associated with the servicing of these agreements are summarized as follows:


	2014		2013		2012
Royalty revenue	$	26,170	$	24,740	$	31,360

Royalty expenses:
Material, labor and other production costs	$	8,583	$	9,929	$	13,516
Selling, distribution and marketing expenses		6,339		7,336		11,368
Administrative and general expenses		1,945		1,848		1,748

	$	16,867	$	19,113	$	26,632

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 Currencies: 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 shareholder’s equity within accumulated other comprehensive income (loss). Upon sale, or upon complete or substantially complete liquidation of an investment in a foreign entity, that component of shareholder’s 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 “Other non-operating (income) expense - net” as incurred.

Shipping and Handling Fees: The Corporation classifies shipping and handling fees as part of “Selling, distribution and marketing expenses.” Shipping and handling fees were $127,400, $132,508 and $134,204 in 2014, 2013 and 2012, respectively.

Advertising Expenses: Advertising costs are expensed as incurred. Advertising expenses were $22,724, $32,120 and $25,718 in 2014, 2013 and 2012, respectively.

Income Taxes: 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 recognized 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 realized for income tax purposes. The effect of a change to the deferred tax assets or liabilities as a result of new tax law, including tax rate changes, is recognized in the period that the tax law is enacted. Valuation allowances are recorded against deferred tax assets 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 is measured to determine the amount of benefit to recognize in the financial statements. See Note 17 for further discussion.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08 (“ASU 2014-08”), “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results and is disposed of or classified as held for sale. The standard also introduces several new disclosures. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. ASU 2014-08 is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. The Corporation does not expect that the adoption of this standard will have a material effect on its financial statements.

In July 2013, the FASB issued ASU No. 2013-11 (“ASU 2013-11”), “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and not combined with deferred tax assets. ASU 2013-11 is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. The Corporation does not expect that the adoption of this standard will have a material effect on its financial statements.

In February 2013, the FASB issued ASU No. 2013-02 (“ASU 2013-02”), “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires entities to disclose additional information about changes in other comprehensive income (“OCI”) by component. In addition, an entity is required to present, either on the face of the statement where income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income and the income statement line items affected. The provisions of this guidance are effective prospectively for annual and interim periods beginning after December 15, 2012. The Corporation adopted this standard on March 1, 2013. The amended accounting standard only impacts the financial statement presentation of OCI and does not change the components that are recognized in net income or OCI. The adoption of this standard had no impact on the Corporation’s financial position or results of operations. See Note 5 for further information.

In July 2012, the FASB issued ASU No. 2012-02 (“ASU 2012-02”), “Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that an indefinite-lived intangible asset is impaired. If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Corporation adopted this standard on March 1, 2013. The adoption of this standard did not have a material effect on the Corporation’s financial statements.

NOTE 2 – MERGER

At a special meeting of the Corporation’s shareholders held on August 7, 2013, the shareholders voted to adopt an Agreement and Plan of Merger, as amended (the “Merger Agreement”) among the Corporation, Century Intermediate Holding Company, a Delaware corporation (“Parent”), and Century Merger Company, an Ohio corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), and the merger contemplated thereby (the “Merger”). On August 9, 2013 (“Merger Date”), the Corporation completed the Merger. As a result of the Merger, the Corporation is now wholly owned by Parent, which is indirectly owned by Morry Weiss, the Chairman of the Board of the Corporation, Zev Weiss, a co-Chief Executive Officer and a director of the Corporation, Jeff Weiss, a co-Chief Executive Officer and a director of the Corporation, Elie Weiss, the President of Real Estate and a director of the Corporation, Gary Weiss, a Vice President and a director of the Corporation, and certain other members of the Weiss family and related entities (“Family Shareholders”).

In connection with the Merger, common shares held by the shareholders of the Corporation, other than the Family Shareholders, were converted into the right to receive $19.00 per share in cash. Common shares held by the Family Shareholders were contributed to Parent as equity and thereafter cancelled for no consideration. As a result of the Merger, all formerly outstanding and treasury Class A and Class B common shares have been cancelled. As described in the Agreement and Plan of Merger, all stock based compensation plans of the Corporation were modified, settled or cancelled as a result of the Merger. All outstanding stock based awards related to the Family Shareholders were cancelled without consideration. See Note 15 for further information.

The Corporation incurred costs associated with the Merger which included transaction costs and incremental compensation expense related to the settlement of stock options and modification and cancellation of outstanding restricted stock units and performance shares. The charges incurred in 2014 associated with the Merger are reflected on the Consolidated Statement of Income as follows:


	Incremental compensation expense		Transaction- related costs		Total

Administrative and general expenses	$	10,601	$	17,524	$	28,125

These charges are included in the Corporation’s Unallocated segment.

The Corporation will continue to apply its historical basis of accounting in its stand-alone financial statements after the Merger. This is based on the determination under Accounting Standards Codification Topic 805, “Business Combinations,” that Parent is the acquiring entity and the determination under SEC Staff Accounting Bulletin No. 54, codified as Topic 5J, “Push Down Basis of Accounting Required In Certain Limited Circumstances,” that while the push down of Parent’s basis in the Corporation is permissible, it is not required due to the existence of significant outstanding public debt securities of the Corporation before and after the Merger. In concluding that the outstanding public debt is significant, the Corporation considered both quantitative and qualitative factors, including both the book value and fair value of the outstanding public debt securities, as well as a number of provisions contained within the securities which impacted Parent’s ability to control their form of ownership of the Corporation.

In connection with the Merger, Parent issued approximately $245,000 in aggregate stated value of non-voting preferred stock. Parent could elect to either accrue or pay cash for dividends on the preferred stock. The preferred stock carried a cash dividend rate of LIBOR plus 11.5%. The Corporation provided Parent with the cash flow for Parent to pay dividends on the preferred stock. During the post-merger period of 2014, the Corporation made cash dividend payments of $75,420 to Parent of which $11,437 was used for the payment of dividends on the preferred stock. On February 10, 2014, the preferred stock was fully redeemed by Parent. See Note 18 for further information.

NOTE 3 – ACQUISITIONS

Clinton Cards Acquisition

During the first quarter of 2013, the Corporation acquired all of the outstanding senior secured debt of Clinton Cards for $56,560 (£35,000) through Lakeshore Lending Limited (“Lakeshore”), a wholly-owned subsidiary of the Corporation organized under the laws of the UK. Subsequently, on May 9, 2012, Clinton Cards was placed into administration, a procedure similar to Chapter 11 bankruptcy in the United States. Prior to entering into administration, Clinton Cards had approximately 750 stores and annual revenues of approximately $600,000 across its two primary retail brands, Clinton Cards and Birthdays. The legacy Clinton Cards business had been an important customer to the Corporation’s international business for approximately forty years and was one of the Corporation’s largest customers.

As part of the administration process, the administrators (“Administrators”) of Clinton Cards and certain of its subsidiaries (the “Sellers”) conducted an auction of certain assets of the business of the Sellers that they believed constituted a viable ongoing business. Lakeshore bid $37,168 (£23,000) for certain of these remaining assets. The bid took the form of a “credit bid,” where the Corporation used a portion of the outstanding senior secured debt owed to Lakeshore by Clinton Cards to pay the purchase price for the assets. The bid was accepted by the Administrators and on June 6, 2012 the Corporation entered into an agreement with the Sellers and the Administrators for the purchase of certain assets and the related business of the Sellers.

Under the terms of the agreement, the Corporation acquired 388 stores from the Sellers, including lease assignments with the landlords, the associated inventory and overhead, as well as the Clinton Cards and related brands. See Note 13 for further information regarding long-term lease obligations.

The stores and assets not acquired by the Corporation remain part of the administration process. It is anticipated that these remaining assets not purchased by the Corporation will be liquidated and the proceeds will be used to repay the creditors of the Sellers, including the Corporation. The Corporation will seek to recover the remaining senior secured debt claim held by it through the liquidation process. However, based on the estimated recovery information provided by the Administrators, the Corporation recorded an aggregate charge of $8,106 in 2013 relating to the senior secured debt it acquired in the first quarter of the prior year. In 2014, based on updated estimated recovery information provided by the Administrators, the Corporation recorded adjustments to the charge resulting in a gain of $4,910. During 2014 the Corporation received cash distributions from the Administrators totaling $7,644. The remaining balance of the senior secured debt is $8,662 (£5,174) as of February 28, 2014 and is included in “Prepaid expenses and other” on the Consolidated Statement of Financial Position. The liquidation process was originally expected to take approximately twelve months from the closing of the transaction on June 6, 2012. The process is currently expected to be completed during fiscal year 2015.

In 2013, charges associated with the aforementioned acquisition totaled $35,730 and are reflected on the Consolidated Statement of Income as follows:


	Contract asset impairment		Bad debt expense		Legal and advisory fees		Impairment of debt purchased		Total
Net sales	$	3,981	$	—	$	—	$	—	$	3,981
Administrative and general expenses		—		16,514		7,129		—		23,643
Other operating (income) expense – net		—		—		—		8,106		8,106

	$	3,981	$	16,514	$	7,129	$	8,106	$	35,730

These charges are reflected in the Corporation’s reportable segments as follows:


	Contract asset impairment		Bad debt expense		Legal and advisory fees		Impairment of debt purchased		Total
International Social Expression Products	$	3,981	$	16,514	$	—	$	—	$	20,495
Unallocated		—		—		7,129		8,106		15,235

	$	3,981	$	16,514	$	7,129	$	8,106	$	35,730

The fair value of the consideration given has been allocated to the assets acquired and the liabilities assumed based upon their fair values at the date of acquisition. The following represents the final purchase price allocation:


Purchase price (in millions):
Credit bid	$	37.2
Effective settlement of pre-existing relationships with the legacy Clinton Cards business		6.4
Cash acquired		(0.6	)

	$	43.0

Allocation (in millions):
Inventory	$	5.5
Property, plant and equipment		18.4
Indefinite-lived intangible assets		22.5
Current liabilities assumed		(3.4	)

	$	43.0

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 at the date of acquisition. The acquired business is included in the Corporation’s Retail Operations segment.

Watermark Acquisition

On March 1, 2011, the Corporation’s European subsidiary, UK Greetings Ltd., acquired Watermark Publishing Limited and its wholly-owned subsidiary Watermark Packaging Limited (“Watermark”). Watermark was a privately held company located in Corby, England, and is considered a leader in the United Kingdom in the innovation and design of greeting cards. Under the terms of the transaction, the Corporation acquired 100% of the equity interests of Watermark for approximately $17,069 in cash. Cash paid for Watermark, net of cash acquired, was approximately $5,899 and is reflected in “Investing Activities” on the Consolidated Statement of Cash Flows.


Purchase price (in millions):
Cash paid	$	17.1
Cash acquired		(11.2	)

	$	5.9

Allocation (in millions):
Current assets	$	11.4
Property, plant and equipment		0.4
Intangible assets		1.5
Goodwill		1.0
Liabilities assumed		(8.4	)

	$	5.9

The financial results of this acquisition are included in the Corporation’s consolidated results from the date of acquisition. The Watermark business is included in the Corporation’s International Social Expression Products segment.

NOTE 4 – OTHER INCOME AND EXPENSE

Other Operating (Income) Expense - Net


	2014			2013			2012
Clinton Cards secured debt (recovery) impairment	$	(4,910	)	$	8,106		$	—
Gain on sale of intellectual properties		—			—			(4,500	)
Termination of certain agency agreements		—			2,125			—
Loss (gain) on fixed asset disposals		560			631			(461	)
Miscellaneous		(3,368	)		(6,532	)		(3,239	)

Other operating (income) expense – net	$	(7,718	)	$	4,330		$	(8,200	)

The Corporation recorded a loss of $8,106 during 2013 related to the senior secured debt of Clinton Cards. During 2014 the impairment of the secured debt of Clinton Cards was adjusted based on updated estimated recovery information provided by the Administrators, resulting in a gain of $4,910. See Note 3 for further information.

In May 2012, the Corporation recorded expenses totaling $2,125 related to the termination of certain agency agreements associated with its licensing business.

“Miscellaneous” in 2013 included, among other things, a gain recognized on the sale of an insignificant non-card product line within the International Social Expression Products segment of $1,432 and a gain recognized on the disposition of assets within the AG Interactive segment of $1,134.

In October 2011, the Corporation sold the land and buildings relating to its party goods product lines in the North American Social Expression Products segment and recorded a gain of approximately $393. The cash proceeds of $6,000 received from the sale of the assets are included in “Proceeds from sale of fixed assets” on the Consolidated Statement of Cash Flows.

In June 2011, the Corporation sold the land, building and certain equipment associated with a distribution facility in the International Social Expression Products segment and recorded a gain of approximately $500. The cash proceeds of approximately $2,400 received from the sale of the assets are included in “Proceeds from sale of fixed assets” on the Consolidated Statement of Cash Flows.

Also in June 2011, the Corporation sold certain minor character properties and recognized a gain of $4,500. The proceeds of $4,500 are included in “Proceeds from sale of intellectual properties” on the Consolidated Statement of Cash Flows.

Other Non-Operating (Income) Expense - Net


	2014			2013			2012
Impairment of investment in Schurman	$	1,935		$	—		$	—
Gain related to Party City investment		(3,262	)		(4,293	)		—
Foreign exchange (gain) loss		(280	)		(2,783	)		1,314
Rental income		(1,714	)		(1,919	)		(1,217	)
Miscellaneous		25			(179	)		24

Other non-operating (income) expense – net	$	(3,296	)	$	(9,174	)	$	121

In November 2013, the Corporation recognized an impairment loss of $1,935 associated with its investment in Schurman. See Note 1 for further information.

The Corporation recognized gains from its investment in Party City of $3,262 and $4,293 in 2014 and 2013, respectively. See Note 1 for further information.

NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) and activity for 2014 are as follows:


	Foreign Currency Translation Adjustments		Pensions and Postretirement Benefits			Unrealized Investment Gain			Total
Balance at February 28, 2013	$	12,594	$	(29,731	)	$	4		$	(17,133	)
Other comprehensive income (loss) before reclassifications		11,561		3,413			(4	)		14,970
Amounts reclassified from accumulated other comprehensive income (loss)		984		1,931			—			2,915

Net current period other comprehensive income (loss)		12,545		5,344			(4	)		17,885

Balance at February 28, 2014	$	25,139	$	(24,387	)	$	—		$	752

The reclassifications out of accumulated other comprehensive income (loss) are as follows:


	2014			Classification on Consolidated Statement of Income
Pensions and Postretirement Benefits:
Amortization of pensions and other postretirement benefits items:
Actuarial losses, net	$	(2,442	)	Administrative and general expenses
Prior service credit, net		1,113		Administrative and general expenses
Transition obligation		(6	)	Administrative and general expenses
Recognition of prior service cost upon curtailment		(1,746	)	Administrative and general expenses

		(3,081	)
Tax benefit		1,150		Income tax expense

Total, net of tax		(1,931	)

Foreign Currency Translation Adjustments:
Loss upon dissolution of business		(984	)	Other non-operating (income) expense - net
Tax benefit		—		Income tax expense

Total, net of tax		(984	)


Total reclassifications	$	(2,915	)

NOTE 6 – CUSTOMER ALLOWANCES AND DISCOUNTS

In the normal course of business, the Corporation enters into agreements with certain customers for the supply of greeting cards and related products. The agreements are negotiated individually to meet competitive situations and, therefore, while some aspects of the agreements may be similar, important contractual terms may vary. Under these agreements, the customer may receive allowances and discounts including 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.

Trade accounts receivable are reported net of certain allowances and discounts. The most significant of these are as follows:


	February 28, 2014		February 28, 2013
Allowance for seasonal sales returns	$	26,613	$	24,574
Allowance for outdated products		9,692		11,156
Allowance for doubtful accounts		2,488		3,419
Allowance for marketing funds		28,277		28,610
Allowance for rebates		27,369		31,771

	$	94,439	$	99,530

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 $16,453 and $13,455 as of February 28, 2014 and 2013, respectively.

NOTE 7 – INVENTORIES


	February 28, 2014		February 28, 2013
Raw materials	$	20,915	$	21,303
Work in process		8,093		6,683
Finished products		287,481		278,573

		316,489		306,559
Less LIFO reserve		82,140		84,166

		234,349		222,393
Display material and factory supplies		20,412		20,054

	$	254,761	$	242,447

There were no material LIFO liquidations in 2014 and 2013. Inventory held on location for retailers with SBT arrangements, which is included in finished products, totaled approximately $67,000 and $60,000 as of February 28, 2014 and 2013, respectively.

NOTE 8 - PROPERTY, PLANT AND EQUIPMENT


	February 28, 2014		February 28, 2013
Land	$	19,231	$	19,104
Buildings		201,619		205,071
Capitalized software		174,405		152,867
Equipment and fixtures		459,886		444,717

		855,141		821,759
Less accumulated depreciation		479,376		449,307

	$	375,765	$	372,452

During 2014, the Corporation disposed of approximately $27,000 of property, plant and equipment that included accumulated depreciation of approximately $24,000. During 2013, the Corporation disposed of approximately $36,000 of property, plant and equipment that included accumulated depreciation of approximately $34,000.

Depreciation expense totaled $50,751, $44,326 and $38,651 in 2014, 2013 and 2012, respectively. Interest expense capitalized was $3,748, $2,355 and $1,138 in 2014, 2013 and 2012, respectively.

NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS

At February 28, 2014 and 2013, intangible assets, net of accumulated amortization, were $49,138 and $53,333, 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, 2014							February 28, 2013
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Intangible assets with indefinite useful lives:
Tradenames	$	28,802	$	—		$	28,802	$	6,200	$	—		$	6,200
Other		—		—			—		20,451		—			20,451

Subtotal		28,802		—			28,802		26,651		—			26,651

Intangible assets with finite useful lives:
Patents		5,175		(3,557	)		1,618		5,325		(3,927	)		1,398
Trademarks		9,556		(8,221	)		1,335		9,714		(8,158	)		1,556
Artist relationships		19,230		(11,193	)		8,037		19,230		(8,034	)		11,196
Customer relationships		16,987		(8,874	)		8,113		16,725		(6,670	)		10,055
Other		15,740		(14,507	)		1,233		14,806		(12,329	)		2,477

Subtotal		66,688		(46,352	)		20,336		65,800		(39,118	)		26,682

Total	$	95,490	$	(46,352	)	$	49,138	$	92,451	$	(39,118	)	$	53,333

For 2013, indefinite-lived intangible assets associated with the acquisition of Clinton Cards totaling $20,451 (£13,478) were categorized in the table above as “Other” pending the finalization of the purchase price allocation. These intangible assets were reclassified in 2014 to “Tradenames” and “Goodwill” upon completion of the purchase price allocation.

In 2014, the required annual impairment test of indefinite-lived intangible assets was completed in the fourth quarter and based on the results of the testing the Corporation determined that the goodwill portion of the intangibles associated with the acquisition of Clinton Cards was impaired. As a result, the Corporation recorded an impairment charge of $733 (£465) reducing the goodwill balance to zero. As of February 28, 2014 the intangible assets associated with the acquisition of Clinton Cards were valued at $22,602 (£13,500). In 2013, the required annual impairment test was performed and based on the results of the testing, no impairment charges were recorded.

In 2012, the Corporation concluded that a goodwill impairment analysis was required because of the significant decline in its market capitalization as a result of decreases in the Corporation’s stock price during the fourth quarter of that year. Based on this analysis, the Corporation incurred goodwill impairment charges of $21,254 and $5,900, which comprised all of the goodwill of its North American Social Expression Products segment and the UK reporting unit within the International Social Expression Products segment, respectively.

As a consequence of the impairment of all goodwill for financial reporting purposes in 2012, the then remaining excess tax deductible goodwill resulting from the 2009 acquisition of Recycled Paper Greetings, Inc. is being recognized as a reduction of other intangible assets when such benefits are realized for income tax purposes. Reductions of other intangible assets resulting from the realization of excess tax deductible goodwill in 2014 and 2013 totaled $2,749 and $2,731, respectively, and are included in “Accumulated Amortization” in the table above.

Amortization expense for intangible assets totaled $4,532, $5,079 and $5,015 in 2014, 2013 and 2012, respectively. Estimated annual amortization expense for the next five years will approximate $3,705 in 2015, $3,426 in 2016, $2,914 in 2017, $2,801 in 2018 and $2,653 in 2019.

NOTE 10 – DEFERRED COSTS

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 agreements are negotiated individually to meet competitive situations and, therefore, while some aspects of the agreements may be similar, important contractual terms may vary. Under these agreements, the customer may receive 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 minimum purchase volume commitment. In the event an agreement is not completed, in most instances, the Corporation has a claim for unearned advances under the agreement. The agreements may or may not specify the Corporation as the sole supplier of social expression products to the customer. See Note 1 for further information.

A portion of the total consideration may not be paid 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” on the Consolidated Statement of Financial Position and the remaining payment commitments beyond the next twelve months are classified as “Other liabilities.” The Corporation maintains an allowance for deferred costs related to supply agreements of $4,100 and $7,900 at February 28, 2014 and 2013, respectively. This allowance is included in “Other assets” on the Consolidated Statement of Financial Position.

Deferred costs and future payment commitments were as follows:


	February 28, 2014			February 28, 2013
Prepaid expenses and other	$	100,282		$	93,873
Other assets		428,090			332,159

Deferred cost assets		528,372			426,032

Other current liabilities		(84,860	)		(61,282	)
Other liabilities		(149,190	)		(92,153	)

Deferred cost liabilities		(234,050	)		(153,435	)

Net deferred costs	$	294,322		$	272,597

A summary of the changes in the carrying amount of the Corporation’s net deferred costs during the years ended February 28, 2014, February 28, 2013 and February 29, 2012 is as follows:


Balance at February 28, 2011	$	275,246
Payments		134,247
Amortization		(102,993	)
Currency translation		(283	)

Balance at February 29, 2012		306,217
Payments		82,474
Amortization		(109,543	)
Effective settlement of Clinton Cards contract upon acquisition		(6,192	)
Currency translation		(359	)

Balance at February 28, 2013		272,597
Payments		130,970
Amortization		(108,761	)
Currency translation		(484	)

Balance at February 28, 2014	$	294,322

NOTE 11 – DEBT

Debt due within one year totaled $20,000 as of February 28, 2014, which represented the current maturity of the term loan. There was no debt due within one year as of February 28, 2013.

Long-term debt and their related calendar year due dates as of February 28, 2014 and 2013, respectively, were as follows:


	February 28, 2014			February 28, 2013
Term loan, due 2019	$	340,000		$	—
7.375% senior notes, due 2021		225,000			225,000
Revolving credit facility, due 2017		—			61,200
Revolving credit facility, due 2018		4,500			—
6.10% senior notes, due 2028		181			181

		569,681			286,381
Current portion of term loan		(20,000	)		—
Unamortized financing fees		(10,567	)		—

	$	539,114		$	286,381

At February 28, 2014, the balances outstanding on the revolving credit facility and the term loan facility bear interest at a rate of approximately 3.1% and 4.0%, respectively. In addition to the balances outstanding on the aforementioned agreements, the Corporation also finances certain transactions with some of its vendors, which include a combination of various guaranties and letters of credit. At February 28, 2014, the Corporation had credit arrangements under a credit facility and an accounts receivable facility to support the letters of credit up to $145,800 with $27,668 of credit outstanding.

Aggregate maturities of long-term debt, by fiscal year, are as follows:


2015	$	20,000
2016		20,000
2017		20,000
2018		20,000
2019		24,500
Thereafter		465,181

	$	569,681

Interest paid in cash on long-term debt was $46,869, $19,184 and $34,946 in 2014, 2013 and 2012, respectively.

7.375% Senior Notes Due 2021

On November 30, 2011, the Corporation closed a public offering of $225,000 aggregate principal amount of 7.375% senior notes due 2021 (the “2021 Senior Notes”). The net proceeds from this offering were used to redeem other existing debt. In connection with this transaction, the Corporation wrote off the remaining unamortized discount and deferred financing costs related to the previously existing debt, totaling $21,711, as well as recorded a charge of $9,101 for the consent payments, tender fees, call premium and other fees. Both amounts totaling $30,812 are included in “Interest expense” on the Consolidated Statement of Income for the year ended February 29, 2012.

The 2021 Senior Notes will mature on December 1, 2021 and bear interest at a fixed rate of 7.375% per year. The 2021 Senior Notes constitute general unsecured senior obligations of the Corporation. The 2021 Senior Notes rank senior in right of payment to all future obligations of the Corporation that are, by their terms, expressly subordinated in right of payment to the 2021 Senior Notes and pari passu in right of payment with all existing and future unsecured obligations of the Corporation that are not so subordinated. The 2021 Senior Notes are effectively subordinated to secured indebtedness of the Corporation, including borrowings under its Credit Facilities described below, to the extent of the value of the assets securing such indebtedness. The 2021 Senior Notes also contain certain restrictive covenants that are customary for similar credit arrangements, including covenants that limit the Corporation’s ability to incur additional debt; declare or pay dividends; make distributions on or repurchase or redeem capital stock; make certain investments; enter into transactions with affiliates; grant or permit liens; sell assets; enter into sale and leaseback transactions; and consolidate, merge or sell all or substantially all of the Corporation’s assets. These restrictions are subject to customary baskets and financial covenant tests.

The total fair value of the Corporation’s publicly traded debt, which was considered a Level 1 valuation as it was based on quoted market prices, was $234,698 (at a carrying value of $225,181) and $233,577 (at a carrying value of $225,181) at February 28, 2014 and 2013, respectively.

Credit Facility

In connection with the closing of the Merger, on August 9, 2013, the Corporation entered into a $600,000 secured credit agreement (“Credit Agreement”), which provides for a $350,000 term loan facility (“Term Loan Facility”) and a $250,000 revolving credit facility (“Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Facilities”). The Term Loan Facility was fully drawn on the Merger Date. The Corporation issued the Term Loan Facility at a discount of $10,750. Installment payments are being made on the Term Loan Facility, beginning with an installment payment of $10,000 made in February, 2014. Future payments are scheduled to be made quarterly in the amount of $5,000 through May 31, 2019. A final payment of $235,000 will be due on August 9, 2019. The Corporation may elect to increase the commitments under each of the Term Loan Facility and the Revolving Credit Facility up to an aggregate amount of $150,000. The proceeds of the term loans and the revolving loans borrowed on the Merger Date were used to fund a portion of the Merger consideration and pay fees and expenses associated therewith. After the Merger Date, revolving loans borrowed under the Credit Agreement were used for working capital and general corporate purposes.

On January 24, 2014, the Corporation amended the Credit Agreement. The amendment modifies the Credit Agreement to, among other things, permit the Corporation to: (i) convert from a “C corporation” to an “S corporation” for U.S. federal income tax purposes (the “S-Corp Conversion”), (ii) in connection with the S-Corp Conversion, (x) change its fiscal year to end on December 31 of each year, (y) change its inventory accounting method from last-in, first-out to first-in, first-out and (z) make S-Corp tax distributions (as defined in the amended Credit Agreement) to the holders of its capital stock while the Corporation is treated as an S corporation or disregarded entity of an S corporation, (iii) make restricted payments (as defined in the Credit Agreement) to enable the payment of current interest on certain senior unsecured notes issued by an indirect parent company of the Corporation in a principal amount not to exceed $300,000, (iv) make a one-time restricted payment of up to $50,000 to Parent, so long as on or about the date of such restricted payment Parent redeems the non-voting preferred stock of Parent held by Koch AG Investment, LLC (“Koch Investment”) in an amount of not less than such restricted payment, (v) make certain additional capital expenditures each year primarily related to the Corporation’s information systems refresh project and (vi) make changes to certain definitions to exclude the accounting treatment of the future lease that may be entered into in connection with the new world headquarters.

The obligations under the Credit Agreement are guaranteed by the Corporation’s Parent and material domestic subsidiaries and are secured by substantially all of the assets of the Corporation and the guarantors.

The interest rate per annum applicable to the loans under the Credit Facilities are, at the Corporation’s election, equal to either (i) the base rate plus the applicable margin or (ii) the relevant adjusted Eurodollar rate for an interest period of one, two, three or six months, at the Corporation’s election, plus the applicable margin.

The Credit Agreement contains certain customary covenants, including covenants that limit the ability of the Corporation, its subsidiaries and the Parent to, among other things, incur or suffer to exist certain liens; make investments; enter into consolidations, mergers, acquisitions and sales of assets; incur or guarantee additional indebtedness; make distributions; enter into agreements that restrict the ability to incur liens or make distributions; and engage in transactions with affiliates. In addition, the Credit Agreement contains financial covenants that require the Corporation to maintain a total leverage ratio and interest coverage ratio in accordance with the limits set forth therein.

Accounts Receivable Facility

The Corporation is also a party to an accounts receivable facility that provides available funding of up to $50,000, under which there were no borrowings outstanding as of February 28, 2014 and 2013.

Under the terms of the accounts receivable facility, the Corporation sells accounts receivable to AGC Funding Corporation (a wholly-owned, consolidated subsidiary of the Corporation), 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.

On August 9, 2013, the Corporation amended its accounts receivable facility. The amendment modified the accounts receivable facility by providing for a scheduled termination date that is 364 days following the date of the amendment, subject to two additional, consecutive 364-day terms with the consent of the parties thereto. The amendment also, among other things, permitted the Merger and changed the definition of the base rate to equal the higher of the prime rate as announced by the applicable purchaser financial institution, and the federal funds rate plus 0.50%.

AGC Funding pays an annual facility fee of 80 basis points on the commitment of the accounts receivable securitization facility, together with customary administrative fees on letters of credit that have been issued and on outstanding amounts funded under the facility. Funding under the facility may be used for working capital, general corporate purposes and the issuance of letters of credit.

The accounts receivable facility 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 Credit Agreement.

The total fair value of the Corporation’s non-publicly traded debt, which was considered a Level 2 valuation as it was based on comparable privately traded debt prices, was $344,500 (at a principal carrying value of $344,500) and $61,200 (at a carrying value of $61,200) at February 28, 2014 and 2013, respectively.

At February 28, 2014, the Corporation was in compliance with the financial covenants under its borrowing agreements described above.

NOTE 12 – RETIREMENT AND POSTRETIREMENT BENEFIT PLANS

The Corporation has a discretionary profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. Corporate contributions to the profit-sharing plan were $9,149, $7,536 and $9,401 for 2014, 2013 and 2012, respectively. In addition, the Corporation matches a portion of employee 401(k) contributions. The Corporation’s matching contributions were $5,070, $6,273 and $5,976 for 2014, 2013 and 2012, respectively.

The Corporation also has defined contribution plans that cover certain employees in the United Kingdom. Under these plans, the employees contribute to the plans and the Corporation matches a portion of the employee contributions. The Corporation’s matching contributions were $2,124, $1,970 and $2,012 for 2014, 2013 and 2012, respectively.

The Corporation also participates in a multiemployer pension plan covering certain domestic employees who are part of a collective bargaining agreement. Total pension expense for the multiemployer plan, representing contributions to the plan, was $582, $544 and $513 in 2014, 2013 and 2012, respectively.

The Corporation has nonqualified deferred compensation plans that previously enabled 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 generally funded these deferred compensation liabilities by making contributions to a rabbi trust. On December 8, 2011, the Corporation froze the deferred compensation plans. Accordingly, participants are no longer permitted to make new deferral elections, although deferral elections previously made will continue to be honored and amounts already deferred may be re-deferred in accordance with deferred compensation plans. In connection with the Merger, shares of the Corporation’s common stock held in the rabbi trust were redeemed for cash and reallocated to other participant-directed investment options within the trust. Additionally, the memorandum restricted stock units credited to certain participants’ accounts were converted to future cash-settled obligations. See Note 14 for further information.

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 2014 or 2013. The Gibson Retirement Plan was underfunded at February 28, 2014 and 2013.

The Corporation also has an unfunded nonqualified defined benefit pension plan (the “Supplemental Executive Retirement Plan” or “SERP”) covering certain management employees. In accordance with the plan’s change of control provision, certain active participants became fully vested due to the Merger. This accelerated vesting resulted in an increase in the SERP’s benefit obligation of $2,613 and has been reflected as an actuarial loss within accumulated other comprehensive income as of the Merger Date. Effective December 31, 2013, the Corporation amended the SERP to freeze the accrued benefit for all active participants and closed the plan to new participants. As a result, the liabilities of the SERP were re-measured as of December 31, 2013, and a curtailment gain of $7,164 was recognized as a reduction of actuarial losses within accumulated other comprehensive income with a corresponding reduction in the SERP’s overall benefit obligation. In addition, a non-cash loss of $1,746 arising from the recognition of previously recorded prior service costs is included in net periodic benefit cost in 2014. The amendment did not affect the benefits of participants who retired or separated from the Corporation with a deferred vested benefit prior to December 31, 2013. The Supplemental Executive Retirement Plan has a measurement date of February 28 or 29.

The Corporation also has several defined benefit pension plans and one defined contribution plan 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 defined benefit 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. Effective January 1, 2006, a defined contribution plan was established and integrated with the defined benefit salaried plan. Under the defined contribution plan, the Corporation fully matches employee contributions which can range between 2% and 4% of eligible compensation. The Corporation’s matching contributions were $378, $359 and $414 for 2014, 2013 and 2012, respectively. All defined benefit plans have a measurement date of February 28 or 29.

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, with retiree contributions adjusted periodically, and contains other cost-sharing features such as deductibles and coinsurance. The Corporation maintains a trust for the payment of retiree health care benefits. This trust is funded at the discretion of management. The plan has a measurement date of February 28 or 29.

The following table sets forth summarized information on the defined benefit pension plans and postretirement benefits plan:


	Defined Benefit Pension Plans						Postretirement Benefits
	2014			2013			2014			2013
Change in benefit obligation:
Benefit obligation at beginning of year	$	188,146		$	184,344		$	67,452		$	82,344
Service cost		1,115			1,369			431			684
Interest cost		7,065			7,394			2,397			2,841
Participant contributions		20			22			3,485			3,963
Retiree drug subsidy payments		—			—			796			822
Plan amendments		414			232			—			—
Actuarial loss (gain)		6,043			6,970			(1,470	)		(15,880	)
Change in control		2,613			—			—			—
Plan curtailment		(7,164	)		—			—			—
Benefit payments		(11,519	)		(11,035	)		(6,459	)		(7,322	)
Currency exchange rate changes		(1,947	)		(1,150	)		—			—

Benefit obligation at end of year		184,786			188,146			66,632			67,452

Change in plan assets:
Fair value of plan assets at beginning of year		104,521			106,341			51,794			57,563
Actual return on plan assets		11,386			7,774			3,255			1,319
Employer contributions		2,199			2,424			(3,485	)		(3,729	)
Participant contributions		20			22			3,485			3,963
Benefit payments		(11,519	)		(11,035	)		(6,292	)		(7,322	)
Currency exchange rate changes		(1,713	)		(1,005	)		—			—

Fair value of plan assets at end of year		104,894			104,521			48,757			51,794


Funded status at end of year	$	(79,892	)	$	(83,625	)	$	(17,875	)	$	(15,658	)

Amounts recognized on the Consolidated Statement of Financial Position consist of the following:


	Defined Benefit Pension Plans						Postretirement Benefits
	2014			2013			2014			2013
Accrued compensation and benefits	$	(2,624	)	$	(2,267	)	$	—		$	—
Other liabilities		(77,268	)		(81,358	)		(17,875	)		(15,658	)

Net amount recognized	$	(79,892	)	$	(83,625	)	$	(17,875	)	$	(15,658	)


Amounts recognized in accumulated other comprehensive (income) loss
Net actuarial loss (gain)	$	63,614		$	71,385		$	(17,013	)	$	(16,397	)
Net prior service cost (credit)		—			1,522			(5,477	)		(6,780	)
Net transition obligation		23			30			—			—

Accumulated other comprehensive loss (income)	$	63,637		$	72,937		$	(22,490	)	$	(23,177	)

For the defined benefit pension plans, the estimated net loss and transition obligation that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are approximately $2,818 and $5, respectively. For the postretirement benefit plan, the estimated net gain and prior service credit that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are approximately ($935) and ($1,300), respectively.

The following table presents significant weighted-average assumptions to determine benefit obligations and net periodic benefit cost:


	Defined Benefit Pension Plans						Postretirement Benefits
	2014			2013			2014			2013
Weighted average discount rate used to determine:
Benefit obligations at measurement date
U.S.		4.00-4.25	%		3.75-4.00	%		4.25	%		3.75	%
International		4.05	%		3.90	%		N/A			N/A
Net periodic benefit cost
U.S.		3.75-4.50	%		4.00-4.25	%		3.75	%		4.00	%
International		3.90	%		4.45	%		N/A			N/A
Expected long-term return on plan assets:
U.S.		6.75	%		6.75	%		6.50	%		6.50	%
International		5.00	%		5.25	%		N/A			N/A
Rate of compensation increase:
U.S.		6.50	%		6.50	%		N/A			N/A
International		3.00	%		3.00	%		N/A			N/A
Health care cost trend rates:
For year following February 28 or 29		N/A			N/A			8.50	%		9.00	%
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			2021

For 2014 and 2013, the net periodic pension cost for the defined benefit 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, current mix of investments and historical return for the asset classes.

For 2014 and 2013, the Corporation assumed a long-term asset rate of return of 6.50% to calculate the expected return for the postretirement benefit plan. In developing the expected long-term rate of return assumption, consideration was given to various factors, including a review of asset class return expectations based on historical compounded returns for such asset classes.


	2014			2013
Effect of a 1% increase in health care cost trend rate on:
Service cost plus interest cost	$	80		$	140
Accumulated postretirement benefit obligation		2,462			2,304

Effect of a 1% decrease in health care cost trend rate on:
Service cost plus interest cost		(70	)		(122	)
Accumulated postretirement benefit obligation		(2,139	)		(2,011	)

The following table presents selected defined benefit pension plan information:


	2014		2013
For all defined benefit pension plans:
Accumulated benefit obligation	$	184,769	$	180,558

For defined benefit pension plans that are not fully funded:
Projected benefit obligation		184,527		187,855
Accumulated benefit obligation		184,510		180,267
Fair value of plan assets		104,635		104,230

A summary of the components of net periodic benefit cost for the defined benefit pension plans is as follows:


	2014			2013			2012
Components of net periodic benefit cost:
Service cost	$	1,115		$	1,369		$	1,106
Interest cost		7,065			7,394			8,353
Expected return on plan assets		(6,267	)		(6,473	)		(6,858	)
Amortization of transition obligation		6			7			6
Amortization of prior service cost		190			240			240
Amortization of actuarial loss		3,485			3,514			2,126
Recognition of prior service cost upon curtailment		1,746			—			—

Net periodic benefit cost		7,340			6,051			4,973
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Actuarial loss		941			5,657			14,996
Prior service cost		414			231			924
Amortization of prior service cost		(190	)		(240	)		(240	)
Amortization of actuarial loss		(3,485	)		(3,514	)		(2,126	)
Amortization of transition obligation		(6	)		(7	)		(6	)
Change in control		2,613			—			—
Curtailment gain		(7,164	)		—			—
Recognition of prior service cost upon curtailment		(1,746	)		—			—

Total recognized in other comprehensive income		(8,623	)		2,127			13,548

Total recognized in net periodic benefit cost and other comprehensive income	$	(1,283	)	$	8,178		$	18,521

A summary of the components of net periodic benefit cost for the postretirement benefit plan is as follows:


	2014			2013			2012
Components of net periodic benefit cost:
Service cost	$	431		$	684		$	726
Interest cost		2,397			2,841			3,929
Expected return on plan assets		(3,067	)		(3,430	)		(4,310	)
Amortization of prior service credit		(1,303	)		(2,075	)		(2,461	)
Amortization of actuarial gain		(1,043	)		(452	)		(766	)

Net periodic benefit cost		(2,585	)		(2,432	)		(2,882	)
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Actuarial gain		(1,659	)		(13,768	)		(5,115	)
Prior service credit added during the year		—			—			—
Amortization of actuarial gain		1,043			452			766
Amortization of prior service credit		1,303			2,075			2,461

Total recognized in other comprehensive income		687			(11,241	)		(1,888	)

Total recognized in net periodic benefit cost and other comprehensive income	$	(1,898	)	$	(13,673	)	$	(4,770	)

At February 28, 2014 and 2013, the assets of the plans are held in trust and allocated as follows:


	Defined Benefit Pension Plans						Postretirement Benefits
	2014			2013			2014			2013			Target Allocation
Equity securities:
U.S.		52	%		51	%		27	%		27	%		15% - 30	%
International		40	%		33	%		N/A			N/A			N/A
Debt securities:
U.S.		47	%		48	%		71	%		69	%		65% - 85	%
International		59	%		64	%		N/A			N/A			N/A
Cash and cash equivalents:
U.S.		1	%		1	%		2	%		4	%		0% - 15	%
International		1	%		3	%		N/A			N/A			N/A

As of February 28, 2014, the investment policy for the U.S. pension plans targets 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 targets an approximately 30/65/5 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. This policy is subject to review and change.

The following table summarizes the fair value of the defined benefit pension plan assets at February 28, 2014:


	Fair value at February 28, 2014		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)
U.S. plans:
Short-term investments	$	719	$	—	$	719
Equity securities (collective funds)		42,599		—		42,599
Fixed-income funds		38,154		—		38,154

International plans:
Short-term investments		259		—		259
Equity securities (collective funds)		9,470		—		9,470
Fixed-income funds		13,693		—		13,693

Total	$	104,894	$	—	$	104,894

The following table summarizes the fair value of the defined benefit pension plan assets at February 28, 2013:


	Fair value at February 28, 2013		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)
U.S. plans:
Short-term investments	$	713	$	—	$	713
Equity securities (collective funds)		41,106		—		41,106
Fixed-income funds		38,223		—		38,223

International plans:
Short-term investments		651		—		651
Equity securities (collective funds)		8,193		—		8,193
Fixed-income funds		15,635		—		15,635

Total	$	104,521	$	—	$	104,521

The following table summarizes the fair value of the postretirement benefit plan assets at February 28, 2014:


	Fair value at February 28, 2014		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)
Short-term investments	$	1,312	$	—	$	1,312
Equity securities		12,968		12,968		—
Fixed-income funds		34,477		—		34,477

Total	$	48,757	$	12,968	$	35,789

The following table summarizes the fair value of the postretirement benefit plan assets at February 28, 2013:


	Fair value at February 28, 2013		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)
Short-term investments	$	1,706	$	—	$	1,706
Equity securities		14,195		14,195		—
Fixed-income funds		35,893		—		35,893

Total	$	51,794	$	14,195	$	37,599

Short-term investments: Short-term investments, which are primarily money market funds, are valued based on exit prices or net asset values. These investments are generally classified as Level 2 since the valuations use observable inputs.

Equity securities: The fair value of collective funds is valued at the closing net asset value or at the executed exchange trade prices. Pricing for these securities is typically provided by a recognized pricing service. Generally, these collective fund investments are classified as Level 2 because the valuations are based on observable inputs. Common stock and exchange traded mutual funds are valued at the closing price reported on the active market on which such securities are traded. These investments are classified as Level 1 because a quoted price in an active market is available.

Fixed-income funds: Fixed-income funds primarily consist of U.S. and foreign-issued corporate notes and bonds, convertible bonds, asset-backed securities, government agency obligations, government obligations, municipal bonds and interest-bearing commercial paper. The fair value of these securities is valued using evaluated prices provided by a recognized pricing service. Because the evaluated prices are based on observable inputs, such as dealer quotes, available trade information, spread, bids and offers, prepayment speeds, U.S. Treasury curves and interest rate movements, securities in this category are classified as Level 2.

The Corporation expects to contribute approximately $4,965 in 2015 to the Gibson Retirement Plan, which represents the legally required minimum contribution level. Any discretionary additional contributions the Corporation may make are not expected to exceed the deductible limits established by Internal Revenue Service (“IRS”) regulations.

Based on historic patterns and currently scheduled benefit payments, the Corporation expects to contribute approximately $2,497 to the Supplemental Executive Retirement Plan in 2015, which represents the expected benefit payment for that period. The plan is a nonqualified and unfunded plan, and annual contributions, which are equal to benefit payments, are made from the Corporation’s general funds.

The benefits expected to be paid out are as follows:


			Postretirement Benefits
	Defined Benefit Pension Plans		Excluding Effect of Medicare Part D Subsidy		Including Effect of Medicare Part D Subsidy
2015	$	11,531	$	4,517	$	3,878
2016		11,827		4,516		3,944
2017		11,817		4,515		4,368
2018		11,737		4,512		4,374
2019		11,482		4,494		4,350
2020 – 2024		57,320		21,856		21,202

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 approximately 8 years. Rental expense under operating leases for the years ended 2014, 2013 and 2012 is as follows:


	2014			2013			2012
Gross rentals	$	83,790		$	66,840		$	30,641
Sublease rentals		(5,152	)		(7,758	)		(11,332	)

Net rental expense	$	78,638		$	59,082		$	19,309

At February 28, 2014, future minimum rental payments for noncancelable operating leases, net of aggregate future minimum noncancelable sublease rentals, are as follows:


Gross rentals:
2015	$	71,392
2016		66,446
2017		59,994
2018		50,840
2019		37,680
Later years		102,694

		389,046
Sublease rentals		(9,923	)

Net rentals	$	379,123

The table above includes approximately $360,000 of estimated future minimum rental payments for noncancelable operating leases related to the Clinton Cards business.

The majority of sublease 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. 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 are classified using the fair value hierarchy based upon the transparency of inputs as of the measurement date. The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. The three levels are defined as follows:

•

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.

The following table summarizes the financial assets measured at fair value as of February 28, 2014:


	February 28, 2014		Level 1		Level 2		Level 3
Assets measured on a recurring basis:
Deferred compensation plan assets	$	12,285	$	10,289	$	1,996	$	—

Liabilities measured on a recurring basis:
Deferred compensation plan liabilities	$	13,230	$	10,289	$	2,941	$	—

The following table summarizes the financial assets measured at fair value as of February 28, 2013:


	February 28, 2013		Level 1		Level 2		Level 3
Assets measured on a recurring basis:
Deferred compensation plan assets	$	10,636	$	9,175	$	1,461	$	—

Liabilities measured on a recurring basis:
Deferred compensation plan liabilities	$	10,636	$	9,175	$	1,461	$	—

The deferred compensation plan includes investments in mutual funds and a money market fund. Assets held in mutual funds are recorded at fair value, which is considered a Level 1 valuation as it is based on each fund’s quoted market value per share in an active market. The money market fund is classified as Level 2 as substantially all of the fund’s investments are determined using amortized cost. The fair value of the deferred compensation plan liabilities is based on the fair value of: (i) the plan’s assets for invested deferrals and (ii) hypothetical investments for unfunded deferrals resulting from the conversion of memorandum restricted stock units to future cash-settled obligations pursuant to the Merger. Prior to the Merger, the assets and related obligation associated with deferred memorandum restricted stock units were carried at cost in equity and offset each other.

NOTE 15 – COMMON SHARES AND STOCK-BASED COMPENSATION

At February 28, 2014 the Corporation has 100 shares of common stock authorized and outstanding. In conjunction with the Merger and pursuant to the Corporation’s amended and restated articles of incorporation all previously authorized Class A and Class B shares were canceled and replaced by the new class of common stock.

Stock Options

Under the Corporation’s prior stock option plans, when options to purchase common shares were granted to directors, officers or other key employees, they were granted at the then-current market price. In general, subject to continuing service, options became exercisable commencing twelve months after the date of grant in annual installments and expired over a period of not more than ten years from the date of grant. The Corporation generally issued new shares when options to purchase Class A common shares were exercised and treasury shares when options to purchase Class B common shares were exercised.

Pursuant to the Merger Agreement, all outstanding stock options held by directors and employees, excluding the Family Shareholders, were settled through cash payments totaling $7,159. Included in this amount was $3,933 for “in the money” stock options that were settled at fair value as of the Merger Date and were therefore recognized as a reduction of Capital in Excess of Par Value on the Consolidated Statement of Shareholder’s Equity. The remaining $3,226 of the total payments represented the settlement of stock options that had an exercise price in excess of fair value as of the Merger Date and has been recognized as additional compensation expense.

The outstanding stock options held by the Family Shareholder employees, which included options to purchase 24,500 Class A common shares and options to purchase 857,581 Class B common shares were canceled without a replacement award or the payment of any consideration. Because these options were fully vested, no additional compensation expense was recognized upon cancellation. See Note 2 for further information.

The following table summarizes the activity related to stock options during 2014:


	Number of Class A Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at February 28, 2013		3,235,953		$	21.23		4.3	$	3,352
Exercised		(136,192	)		12.61
Expired		(20,300	)		14.92
Forfeited		(130,115	)		23.63
Settled		(2,949,346	)		21.57

Outstanding at February 28, 2014		—


	Number of Class B Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at February 28, 2013		857,581		$	23.06		3.7	$	489
Exercised		—			—
Expired		—			—
Forfeited		(857,581	)		23.06

Outstanding at February 28, 2014		—

Performance Shares

Performance shares represented the right to receive common shares, at no cost to the employee, upon the achievement of management objectives over the performance period and the satisfaction of service-based vesting requirements. In 2013, the Corporation introduced a performance share program that was designed to reward the Corporation’s officers and certain management employees for the attainment of performance objectives over a three-year measurement period. The shares granted in 2013 were equally divided into three tranches, each containing specified performance goals consisting of unit sales and expense efficiency targets over three separate, but sequentially cumulative performance periods as follows:

•

Tranche 1 – performance period March 1, 2012 to February 28, 2013

•

Tranche 2 – performance period March 1, 2012 to February 28, 2014

•

Tranche 3 – performance period March 1, 2012 to February 28, 2015

Achievement of performance criteria may range from 0% to 200% of the initial number of shares awarded in each tranche. All shares credited to participants under this program upon the achievement of specified performance goals will, subject to service-based vesting requirements, vest on February 28, 2015. The expense recognized each period is dependent upon an estimate of the number of shares that will ultimately vest. Compensation expense associated with the performance shares is recognized on a straight line basis over the vesting period, beginning on the date the awards were made.

In connection with the Merger, all performance shares granted to employees, excluding the Family Shareholders, were converted from share-based equity awards to cash-based liability awards. Under this award modification, each outstanding performance share will be settled at $19.00 upon satisfaction of performance and vesting conditions. Further, in the third quarter of 2014, the Corporation amended the performance goals for the second and third tranches of performance shares from unit sales and expense efficiency goals to goals based on an earnings-based measurement. An expense of $1,545, representing the cumulative effect on previously recognized compensation cost attributable to the difference between the $19.00 per unit cash settlement value and the award’s grant date fair value, was recorded following the completion of the Merger.

The outstanding performance shares held by the Family Shareholders at the Merger date (consisting of 9,328 Class A shares and 354,464 Class B shares) were canceled without a replacement award or the payment of any consideration. Accordingly, the previously unrecognized compensation cost of $2,603 attributable to these awards was recognized as incremental stock-based compensation expense upon cancellation.

The following table summarizes the activity related to performance shares during 2014:


	Number of Class A Performance Shares			Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Unvested at February 28, 2013		611,562			2.2	$	9,907
Credited		—
Vested		—
Forfeited		(19,173	)
Modified to cash-based liability awards		(592,389	)

Unvested at February 28, 2014		—


	Number of Class B Performance Shares			Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Unvested at February 28, 2013		354,464			2.2	$	5,742
Credited		—
Vested		—
Forfeited		(354,464	)

Unvested at February 28, 2014		—

Restricted Stock Units

Prior to the Merger, the Corporation awarded restricted stock units to directors, officers and other key employees. The restricted stock units represented the right to receive Class A common shares or Class B common shares, at no cost to the holder, upon the satisfaction of a two or three-year continuous service-based vesting period. The awards have a graded-vesting feature with compensation expense being recognized over the requisite service period for each separately vesting tranche. The expense recognized each period is dependent upon an estimate of the number of stock units that will ultimately vest.

In connection with the Merger, all restricted stock units held by employees, excluding the Family Shareholders, were converted from share-based equity awards to cash-based liability awards, whereupon each restricted stock unit entitles the holder to receive $19.00 upon satisfaction of the award’s vesting conditions. Except for the cash settlement feature, the modified awards retained the same terms and conditions, including service-based vesting, of the original equity-based awards. An expense of $464 representing the cumulative effect on previously recognized compensation cost attributable to the difference between the $19.00 per unit cash settlement value and each award’s grant date fair value was recorded following the completion of the Merger.

The Merger Agreement also provided that each outstanding restricted stock unit held by members of the board of directors, other than the Family Shareholders, became fully vested and was settled for a cash payment equal to $19.00. The accelerated vesting of these awards resulted in the recognition of incremental compensation expense of $512 as of the Merger Date.

The outstanding restricted stock units held by the Family Shareholders consisting of 3,871 Class A restricted stock units and 126,804 Class B restricted stock units were canceled at the closing of the Merger without a replacement award or the payment of any consideration. Accordingly, the previously unrecognized compensation cost of $1,363 attributable to these awards was recognized as incremental stock-based compensation expense upon cancellation.

The following table summarizes the activity related to the restricted stock units during 2014:


	Number of Class A Restricted Stock Units			Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Unvested at February 28, 2013		447,698			0.6	$	7,253
Granted		277,256
Vested		(270,487	)
Forfeited		(9,715	)
Settled		(46,470	)
Modified to cash-based liability awards		(398,282	)

Unvested at February 28, 2014		—


	Number of Class B Restricted Stock Units			Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Unvested at February 28, 2013		117,601			0.9	$	1,905
Granted		62,636
Vested		(53,433	)
Forfeited		(126,804	)

Unvested at February 28, 2014		—

Total stock-based compensation expense, recognized in “Administrative and general expenses” on the Consolidated Statement of Income, was $13,812, $10,743 and $10,982 in 2014, 2013 and 2012, respectively. Stock-based compensation expense for 2014 includes the expense attribution of equity-based awards prior to the Merger of $4,125 and the incremental stock-based compensation expense, caused as a direct result of the Merger, associated with the cancellation of the outstanding performance shares and restricted stock units held by the Family Shareholders of $3,966. The combined amount of $8,091 is included as stock-based compensation on the Consolidated Statement of Cash Flows. Stock-based compensation expense for 2014 also includes incremental compensation expense of $5,721 associated with the settlement of stock options and non-executive directors’ awards as well as the cumulative effect through the Merger Date on previously recognized compensation cost attributable to the modified awards’ $19.00 per unit cash settlement value, which has been or will be settled in cash. The expense attributable to the modified cash-based liability awards for vesting service rendered in the post-merger period is included in non-stock-based compensation expense.

The table below summarizes the incremental compensation expense, caused as a direct result of the Merger, which includes both stock-based and non-stock-based compensation expense, and the adjustments to Capital in Excess of Par Value resulting from the settlement, modification and cancellation of the outstanding equity-based awards in 2014.


	Compensation Expense		Capital in Excess of Par Value
Settlement of stock options	$	3,226	$	(3,933	)
Modification and settlement of non-executive directors’ awards		512		(371	)
Net tax deficiency from settlement and cancellation of stock-based awards		—		(6,885	)
Conversion of performance share and restricted stock awards to cash-based liability awards		2,897		(6,498	)
Cancellation of the Family Shareholders’ performance share and restricted stock awards		3,966		3,966

	$	10,601	$	(13,721	)

Cash received from stock options exercised for the years ended February 28, 2014, February 28, 2013 and February 29, 2012, was $1,718, $1,259, and $13,310, respectively. The total intrinsic value from the exercise of stock-based payment awards was $6,298, $7,423 and $17,117 in 2014, 2013 and 2012, respectively. The actual tax benefit realized from the exercise of stock-based payment awards totaled $2,486, $2,929 and $6,705 for 2014, 2013, and 2012, respectively.

NOTE 16 – CONTINGENCY

The Corporation is presently involved in various judicial, administrative, regulatory and arbitration proceedings concerning matters arising in the ordinary course of business, including but not limited to, employment, commercial disputes and other contractual matters. These matters are inherently subject to many uncertainties regarding the possibility of a loss to the Corporation. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur, confirming the incurrence of a liability or reduction of a liability. In accordance with ASC Topic 450, “Contingencies,” the Corporation accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. Due to this uncertainty, the actual amount of any loss may ultimately prove to be larger or smaller than the amounts reflected in the Corporation’s Consolidated Financial Statements. Some of these proceedings are at preliminary stages and some of these cases seek an indeterminate amount of damages.

NOTE 17 - INCOME TAXES

Income from continuing operations before income taxes:

2014