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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
February 28, 2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 1-13859
American Greetings
Corporation
(Exact name of registrant as
specified in its charter)
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Ohio
(State or other
jurisdiction
of incorporation or organization)
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34-0065325
(I.R.S. Employer
Identification No.)
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One American Road, Cleveland, Ohio
(Address of principal
executive offices)
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44144
(Zip
Code)
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Registrants telephone number, including area code:
(216) 252-7300
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A Common Shares, Par Value $1.00
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
Class B Common Shares, Par Value $1.00
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES þ NO o
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 o NO þ
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 þ NO o
Indicate by a check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). YES o NO o
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 registrants 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. þ
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 the definition of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act) YES o NO þ
State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of the last business day of
the registrants most recently completed second fiscal
quarter, August 28, 2009 $507,015,359
(affiliates, for this purpose, have been deemed to be directors,
executive officers and certain significant shareholders).
Number of
shares outstanding as of April 27, 2010:
CLASS A COMMON 36,270,550
CLASS B COMMON 3,256,893
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the American Greetings Corporation Definitive Proxy
Statement for the Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days
after the close of the registrants fiscal year
(incorporated into Part III).
AMERICAN
GREETINGS CORPORATION
INDEX
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.
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. Greeting cards, gift wrap, party goods, stationery and
giftware are manufactured or sold by us in North America,
including the United States, Canada and Mexico, and throughout
the world, primarily in the United Kingdom, Australia and New
Zealand. In addition, our subsidiary, AG Interactive, Inc.,
distributes social expression products, including electronic
greetings, physical products incorporating consumer photos, and
a broad range of graphics and digital services and products,
through a variety of electronic channels, including Web sites,
Internet portals, instant messaging services and electronic
mobile devices. Design licensing is done primarily by our
subsidiary AGC, LLC, and character licensing is done primarily
by our subsidiaries, Those Characters From Cleveland, Inc. and
Cloudco, Inc. Our A.G. Industries, Inc. (doing business as AGI
In-Store) subsidiary manufactures custom display fixtures for
our products and products of others.
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, 2010 refers to the year ended
February 28, 2010.
PRODUCTS
American Greetings creates, manufactures
and/or
distributes social expression products including greeting cards,
gift wrap, party goods, and stationery as well as custom display
fixtures. Our major domestic greeting card brands are American
Greetings, Recycled Paper, 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. Electronic greetings
and other digital content, services and products are available
through our subsidiary, AG Interactive, Inc. Our major Internet
brands are AmericanGreetings.com, BlueMountain.com,
Egreetings.com, Kiwee.com, PhotoWorks.com and Webshots.com.
Through its Webshots and PhotoWorks sites, our AG Interactive
business also operates an online photo sharing space and
provides consumers the ability to use their own photos to create
unique, high quality physical products, including greeting
cards, calendars, online photo albums and photo books. 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.
BUSINESS
SEGMENTS
At February 28, 2010, we operated in four business
segments: North American Social Expression Products,
International Social Expression Products, AG Interactive and
non-reportable operating segments. For information regarding the
various business segments comprising our business, see the
discussion included in Part II, Item 7 and in
Note 16 to the Consolidated Financial Statements included
in Part II, Item 8.
CONCENTRATION
OF CREDIT RISKS
Net sales to our five largest customers, which include mass
merchandisers and national drug store and supermarket chains,
accounted for approximately 39%, 36% and 37% of total revenue in
2010, 2009 and 2008, respectively. Net sales to Wal-Mart Stores,
Inc. and its subsidiaries accounted for approximately 14%, 15%
and 16% of total revenue in 2010, 2009 and 2008, respectively.
Net sales to Target Corporation accounted for approximately 13%
of total revenue in 2010, but less than 10% of total revenue in
2009 and 2008. No other customer accounted for 10% or more of
our consolidated total revenue. Approximately 54% of the North
American Social Expression Products segments revenue in
2010, 2009 and 2008 was attributable to its top
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five customers. Approximately 42% of the International Social
Expression Products segments revenue in 2010, 2009 and
2008 was attributable to its top three customers.
CONSUMERS
We believe that women purchase the majority of all greeting
cards sold and that the median age of our consumers is
approximately 47. We also believe that approximately 84% of
American households purchase greeting cards each year, the
average number of greeting card occasions for which cards are
purchased each year is approximately seven, and consumers
purchase approximately 15 greeting cards per year.
COMPETITION
The greeting card and gift wrap industries are intensely
competitive. Competitive factors include quality, design,
customer service and terms, which may include payments and other
concessions to retail customers under long-term agreements.
These agreements are discussed in greater detail below. There
are an estimated 3,000 greeting card publishers in the United
States, ranging from small family-run organizations to major
corporations. In general, however, the greeting card business is
extremely concentrated. We believe that we are one of only two
main suppliers offering a full line of social expression
products. Our principal competitor is Hallmark Cards, Inc. Based
upon our general familiarity with the greeting card and gift
wrap industries and limited information as to our competitors,
we believe that we are the second-largest company in the
industry and the largest publicly owned greeting card company.
The digital photography products and services industries are
intensely competitive and still emerging. Webshots and
PhotoWorks, our photo sharing and personal publishing
businesses, face intense competition from a wide range of
companies, including the following:
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Online digital photography services companies such as
Shutterfly, Kodak EasyShare Gallery (formerly known as Ofoto),
Snapfish, which is a service of Hewlett-Packard, Vista Print,
and others;
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Internet portals and search engines such as Yahoo!, AOL, and
Google that offer broad-reaching digital photography and related
products and services to their large user bases;
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Social media companies that host images such as MySpace,
Facebook and Hi5; and
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Specialized companies in the photo book and stationery business
such as Hallmark, Shutterfly, Tiny Prints, Minted, Picaboo and
Blurb.
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We believe the primary competitive factors in attracting and
retaining customers are brand recognition and trust; quality;
innovative and breadth of products and services; ease of use;
and price. We believe that we compete favorably with respect to
many of these factors, particularly on the basis of product
quality and innovation.
PRODUCTION
AND DISTRIBUTION
In 2010, our channels of distribution continued to be primarily
through mass retail, which is comprised of mass merchandisers,
discount retailers, chain drug stores and supermarkets. Other
major channels of distribution included card and gift retail
stores, department stores, military post exchanges, variety
stores and combo stores (stores combining food, general
merchandise and drug items). From time to time, we also sell our
products to independent, third-party distributors. Our AG
Interactive segment provides social expression content through
the Internet and wireless platforms.
Many of our products are manufactured at common production
facilities and marketed by a common sales force. Our
manufacturing operations involve complex processes including
printing, die cutting, hot stamping and embossing. We employ
modern printing techniques which allow us to perform short runs
and multi-color 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. Beginning on or
about March 2010, we discontinued manufacturing party goods and
now purchase most of our party goods from a third party
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vendor. The photofinishing products provided through our AG
Interactive segment are provided primarily by third party
vendors. Additionally, information by geographic area is
included in Note 16 to the Consolidated Financial
Statements included in Part II, Item 8.
Production of our products is generally on a level basis
throughout the year, with the exception of gift wrap for which
production generally peaks in advance of the Christmas season.
Everyday inventories (such as birthday and anniversary related
products) remain relatively constant throughout the year, while
seasonal inventories peak in advance of each major holiday
season, including Christmas, Valentines Day, Easter,
Mothers Day, Fathers 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, 2010, three of our five largest customers in
2010 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, other seasonal products and
everyday cards at certain foreign locations with the right of
return. Sales of other products are generally sold without the
right of return. Sales credits for these products are issued at
our discretion for damaged, obsolete and outdated products.
Information regarding the return of product is included in
Note 1 to the Consolidated Financial Statements included in
Part II, Item 8.
During the year, we experienced no material difficulties in
obtaining raw materials from our suppliers.
INTELLECTUAL
PROPERTY RIGHTS
We have a number of trademarks, service marks, trade secrets,
copyrights, inventions, patents, and other intellectual
property, which are used in connection with our products and
services. Our designs, artwork, musical compositions,
photographs and editorial verse are protected by copyright. In
addition, we seek to register our trademarks in the United
States and elsewhere. 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, 2010, we employed approximately
8,000 full-time employees and approximately
18,000 part-time employees which, when jointly considered,
equate to approximately 17,000 full-time equivalent
employees. Approximately 1,300 of our U.S. hourly plant
employees are unionized and covered by collective bargaining
agreements. The following table sets forth by location the
unions representing our domestic employees, together with the
expiration date of the applicable governing collective
bargaining agreement.
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Union
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Location
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Contract Expiration Date
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International Brotherhood of Teamsters
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Bardstown, Kentucky;
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March 20, 2011
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Kalamazoo, Michigan;
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April 30, 2010*
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Cleveland, Ohio
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March 31, 2013
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UNITE-HERE Union
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Greeneville, Tennessee (Plus Mark)
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October 19, 2011
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In connection with our sale of certain assets, equipment and
processes used in the manufacture and distribution of party
goods, we are in the process of winding down and closing our
Kalamazoo, Michigan facility. |
Other locations with unions are the United Kingdom and
Australia. We believe that labor relations at each location
where we operate have generally been satisfactory.
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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 typically receives from
American Greetings 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 effective time period of the
agreement to meet a minimum purchase volume commitment. The
agreements are negotiated individually to meet competitive
situations and, therefore, while some aspects of the agreements
may be similar, important contractual terms vary. The agreements
may or may not specify American Greetings as the sole supplier
of social expression products to the customer. In the event an
agreement is not completed, in most instances, we have a claim
for unearned advances under the agreement.
Although risk is inherent in the granting of advances, we
subject such customers to our normal credit review. We maintain
an allowance for deferred costs based on estimates developed by
using standard quantitative measures incorporating historical
write-offs. In instances where we are aware of a particular
customers inability to meet its performance obligation, we
record a specific allowance to reduce the deferred cost asset to
our estimate of its value based upon expected recovery. These
agreements are accounted for as deferred costs. Losses
attributed to these specific events have historically not been
material. See Note 10 to the Consolidated Financial
Statements in Part II, Item 8, and the discussion
under the Deferred Costs heading in the
Critical Accounting Policies in Part II,
Item 7 for further information and discussion of deferred
costs.
ENVIRONMENTAL
AND GOVERNMENTAL REGULATIONS
Our business is subject to numerous foreign and domestic
environmental laws and regulations maintained to protect the
environment. These environmental laws and regulations apply to
chemical usage, air emissions, wastewater and storm water
discharges and other releases into the environment as well as
the generation, handling, storage, transportation, treatment and
disposal of waste materials, including hazardous waste. Although
we believe that we are in substantial compliance with all
applicable laws and regulations, because legal requirements
frequently change and are subject to interpretation, these laws
and regulations may give rise to claims, uncertainties or
possible loss contingencies for future environmental remediation
liabilities and costs. We have implemented various programs
designed to protect the environment and comply with applicable
environmental laws and regulations. The costs associated with
these compliance and remediation efforts have not and are not
expected to have a material adverse effect on our financial
condition, cash flows or operating results. In addition, the
impact of increasingly stringent environmental laws and
regulations, regulatory enforcement activities, the discovery of
unknown conditions and third party claims for damages to the
environment, real property or persons could also result in
additional liabilities and costs in the future.
The legal environment of the Internet is evolving rapidly in the
United States and elsewhere. The manner in which existing laws
and regulations will be applied to the Internet in general, and
how they will relate to our business in particular, is unclear
in many cases. Accordingly, we often cannot be certain how
existing laws will apply in the online context, including with
respect to such topics as privacy, defamation, pricing, credit
card fraud, advertising, taxation, sweepstakes, promotions,
content regulation, net neutrality, quality of products and
services and intellectual property ownership and infringement.
In particular, legal issues relating to the liability of
providers of online services for activities of their users are
currently unsettled both within the United States and abroad.
Numerous laws have been adopted at the national and state level
in the United States that could have an impact on our business.
These laws include the following:
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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 websites that include materials that
infringe copyrights or other rights of others.
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The Childrens Online Privacy Protection Act and the
Prosecutorial Remedies and Other Tools to End Exploitation of
Children Today Act of 2003, which are intended to restrict the
distribution of certain materials deemed harmful to children and
impose additional restrictions on the ability of online services
to collect user information from minors. In addition, the
Protection of Children From Sexual Predators Act of 1998
requires online service providers to report evidence of
violations of federal child pornography laws under certain
circumstances.
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Statutes adopted in the State of California require online
services to report certain breaches of the security of personal
data, and to report to California consumers when their personal
data might be disclosed to direct marketers.
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To resolve some of the remaining legal uncertainty, we expect
new U.S. and foreign laws and regulations to be adopted
over time that will be directly or indirectly applicable to the
Internet and to our activities. Any existing or new legislation
applicable to us could expose us to government investigations or
audits, prosecution for violations of applicable laws
and/or
substantial liability, including penalties, damages, significant
attorneys fees, expenses necessary to comply with such
laws and regulations or the need to modify our business
practices.
We post on our websites our privacy policies and practices
concerning the use and disclosure of user data. Any failure by
us to comply with our posted privacy policies, Federal Trade
Commission requirements or other privacy-related laws and
regulations could result in proceedings that could potentially
harm our business, results of operations and financial
condition. In this regard, there are a large number of federal
and state legislative proposals before the United States
Congress and various state legislative bodies regarding privacy
issues related to our business. It is not possible to predict
whether or when such legislation may be adopted, and certain
proposals, such as required use of disclaimers, 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 www.corporate.americangreetings.com Web site, our
Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and, if applicable, amendments to those reports as soon as
reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange
Commission (SEC). Copies of our filings with the SEC
also can be obtained at the SECs Internet site,
www.sec.gov. Information contained on our Web site shall not be
deemed incorporated into, or be part of, this report.
Our Corporate Governance Guidelines, Code of Business Conduct
and Ethics, and the charters of the Boards Audit
Committee, Compensation and Management Development Committee,
and Nominating and Governance Committee are available on or
through the Investors section of our
www.corporate.americangreetings.com Web site.
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. Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
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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.
Beginning in fiscal 2009, economic conditions deteriorated
significantly in the United States, and worldwide, and may
remain depressed for the foreseeable future. During periods of
economic decline, when discretionary income is lower, consumers
or potential consumers could delay, reduce or forego their
purchases of our products and services, which reduces our sales.
In addition, during such periods, advertising revenue in our AG
Interactive businesses decline, as advertisers reduce their
advertising budgets. 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 share by providing relevant, compelling and a superior
product offering. As a result, the need to continuously update
and refresh our product offerings is an ongoing, evolving
process requiring expenditures and investments that will
continue to impact net sales, earnings and cash flows over
future periods. 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 either increase our
revenue or profitability. In addition, even if our strategy is
successful, our profitability may be adversely affected if
consumer demand for lower priced, value cards continues to
expand, thereby eroding our average selling prices. Our strategy
may also have flaws and may not be successful. For example, we
may not be able to anticipate or respond in a timely manner to
changing customer demands and preferences for greeting cards. If
we misjudge the market, we may significantly sell or overstock
unpopular products and be forced to grant significant credits,
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
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 and chain drug stores, accounted for
approximately 39%, 36% and 37% of total revenue for fiscal years
2010, 2009 and 2008, respectively. Approximately 54% of the
North American Social Expression Products segments revenue
in 2010, 2009 and 2008 was attributable to its top five
customers, and approximately 42% of the International Social
Expression Products segments revenue in 2010, 2009 and
2008 was attributable to its top three customers. Net sales to
Wal-Mart Stores, Inc. and its subsidiaries accounted for
approximately 14%, 15% and 16% of total revenue in 2010, 2009
and 2008, respectively, and net sales to Target Corporation
accounted for approximately 13% of total revenue in 2010. 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.
In calendar year 2009, we acquired the greeting card company
Recycled Paper Greetings, Inc. (now known as Papyrus-Recycled
Greetings, Inc.), and the Papyrus brand and associated wholesale
division of Schurman Fine Papers (Schurman), which
supplies Papyrus brand greeting cards primarily to leading
specialty, mass, grocery and drug store channels. In addition,
we continue to regularly evaluate potential acquisition
opportunities to support and strengthen our business. We cannot
be 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
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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 our recent acquisitions, as well as 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
managements 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 Retail Operations segment,
including all 341 of our card and gift retail store assets, to
Schurman, which now operates stores under the American
Greetings, Carlton Cards and Papyrus brands. Although we do not
control Schurman, because Schurman is licensing the
Papyrus, American Greetings and
Carlton Cards names 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 of the Retail Operations store
leases on a contingent basis through our subleasing of stores to
Schurman (as described in Note 13 to the Consolidated
Financial Statements included in Part II, Item 8 of
this Annual Report, as of February 28, 2010,
Schurmans aggregate commitments to us under these
subleases was approximately $51 million);
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we are the predominant supplier of greetings 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 up to
$24.0 million of guarantees in favor of the lenders under
Schurmans senior revolving credit facility as described in
Note 2 to the Consolidated Financial Statements under
Part II, Item 8 of this Annual Report.
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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 guarantees of
its indebtedness. Accordingly, we may decide in the future to
provide Schurman with additional financial or operational
support to assist Schurman successfully operate its stores.
Providing such support, however, could result in it being
determined that we have a controlling financial
interest in Schurman under the Financial Accounting
Standards Boards standards pertaining to the consolidation
of a variable interest entity. For information regarding the
consolidation of variable interest entities, see Note 1 to
the Consolidated Financial Statements included in Part II,
Item 8. If it is determined that we have a controlling
financial interest in Schurman, we will be required to
consolidate Schurmans 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 Schurmans income or losses and assets and liabilities
into our financial statements.
7
Our
business, results of operations and financial condition may be
adversely affected by retail consolidations.
With the growing trend toward retail trade consolidation, 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-market retailers. The
mass-market retail channel has experienced significant shifts in
market share among competitors in recent years. In addition, the
retail industry in general has experienced significant declines
due to the worldwide downturn in the economy and decreasing
consumer demand. As a result, retailers have experienced
liquidity problems and some have been forced to file for
bankruptcy protection. There is a risk that certain of our key
customers will not pay us, or that payment may be delayed
because of bankruptcy or other factors beyond our control, which
could increase our exposure to losses from bad debts and may
require us to write-off deferred cost assets. Additionally, our
business, results of operations and financial condition could be
materially and adversely affected if certain of these
mass-market retailers were to cease doing business as a result
of bankruptcy, or significantly reduce the number of stores they
operate.
We
rely on foreign sources of production and face a variety of
risks associated with doing business in foreign
markets.
We rely to a significant extent on foreign manufacturers and
suppliers for various products we distribute to customers. In
addition, many of our domestic suppliers purchase a portion of
their products from foreign sources. We generally do not have
long-term supply contracts and some of our imports are subject
to existing or potential duties, tariffs or quotas. In addition,
a portion of our current operations are conducted and located
abroad. The success of our sales to, and operations in, foreign
markets depends on numerous factors, many of which are beyond
our control, including economic conditions in the foreign
countries in which we sell our products. We also face a variety
of other risks generally associated with doing business in
foreign markets and importing merchandise from abroad, such as:
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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.
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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
8
regulations and other international trade regulations, the USA
Patriot Act and the Foreign Corrupt Practices Act. Failure to
comply with any such legal requirements could subject us to
criminal or monetary liabilities and other sanctions, which
could harm our business, results of operations and financial
condition.
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 U.S. dollars at
the applicable exchange rate for inclusion in our financial
statements. The strengthening of the U.S. dollar against
these foreign currencies ordinarily has a negative impact on our
reported sales and operating income (and conversely, the
weakening of the U.S. dollar against these foreign
currencies has a positive impact). For the year ended
February 28, 2010, foreign currency translation unfavorably
affected revenues by $30.7 million and favorably affected
segment operating income by $3.5 million compared to the
year ended February 28, 2009. Certain transactions,
particularly in foreign locations, are denominated in other than
that locations 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, 2010, the impact
of currency movements on these transactions favorably affected
operating income by $4.7 million. The volatility of
currency exchange rates may materially and adversely affect our
operating results.
The
greeting card and gift wrap 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 an
estimated 3,000 greeting card publishers in the United States
ranging from small, family-run organizations to major
corporations. In general, however, the greeting card business is
extremely concentrated. We believe that we are one of only two
main suppliers offering a full line of social expression
products. Our main competitor, Hallmark Cards, Inc., may have
substantially greater financial, technical or marketing
resources, a greater customer base, stronger name recognition
and a lower cost of funds than we do. This competitor may also
have longstanding relationships with certain large customers to
which it may offer products that we do not provide, putting us
at a competitive disadvantage. As a result, this competitor as
well as other competitors that may be smaller than us, may be
able to:
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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 its
products; and
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adopt more aggressive pricing policies.
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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
face intense competition from a range of competitors in the
digital photography products and services industries and may be
unsuccessful in competing against current and future
competitors.
The digital photography products and services industries are
intensely competitive, and we expect competition to increase in
the future as current competitors improve their offerings and as
new participants enter the market or as industry consolidation
further develops. Competition may result in pricing pressures,
reduced profit margins or our inability to gain market share,
any of which could substantially harm our business and
9
results of operations. Webshots and PhotoWorks, our photo
sharing and personal publishing businesses, face intense
competition from a wide range of companies, including the
following:
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Online digital photography services companies such as
Shutterfly, Kodak EasyShare Gallery (formerly known as Ofoto),
Snapfish, which is a service of Hewlett-Packard, Vista Print,
and others;
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Internet portals and search engines such as Yahoo!, AOL and
Google that offer broad-reaching digital photography and related
products and services to their large user bases;
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Social media companies that host images such as MySpace,
Facebook and Hi5; and
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Specialized companies in the photo book and stationery business
such as Hallmark, Shutterfly, Tiny Prints, Minted, Picaboo and
Blurb.
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Many of our competitors have significantly longer operating
histories, larger and broader customer bases, greater brand and
name recognition and greater financial, research and
development, and distribution resources. Some competitors are
able to devote substantially more resources to website and
systems development or to investments or partnerships with
traditional and online competitors. Well-funded competitors,
particularly new entrants, may choose to prioritize growing
their market share and brand awareness instead of profitability.
Competitors and new entrants in the digital photography products
and services industries may develop new products, technologies,
or capabilities that could render obsolete or less competitive
many of our products, services and content. In addition, because
many of these existing and future products, technologies and
capabilities are protected by intellectual property laws, from
time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights claims against
us. We may incur significant costs to defend these claims and we
may not be able to create successful or cost-effective
alternatives, or otherwise obtain rights to similar product,
technologies or capability on a reasonable or timely basis. As a
result, we may be unable to compete successfully against current
and future competitors, and competitive pressures could harm our
business and prospects.
We are
subject to a number of restrictive covenants under our borrowing
arrangements, which could affect our flexibility to fund ongoing
operations, uses of capital and strategic initiatives, and, if
we are unable to maintain compliance with such covenants, could
lead to significant challenges in meeting our liquidity
requirements.
The terms of our borrowing arrangements contain a number of
restrictive covenants, including customary operating
restrictions that limit our ability to engage in such activities
as borrowing and making investments, capital expenditures and
distributions on our capital stock, and engaging in mergers,
acquisitions and asset sales. We are also subject to customary
financial covenants, including a leverage ratio and an interest
coverage ratio. These covenants restrict the amount of our
borrowings, reducing our flexibility to fund ongoing operations
and 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. During fiscal 2011 we
anticipate refinancing indebtedness under our senior credit
facility, at which time, certain of these covenants may change
and, in some instance, become more restrictive than those that
are currently in place. 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, pay
dividends and repurchase our stock. 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.
10
We may
be unsuccessful in completing the divestiture of the Strawberry
Shortcake and Care Bears properties.
We have entered into agreements to sell our Strawberry Shortcake
and Care Bears properties. These transactions have failed to
close as scheduled, and have resulted in three separate legal
proceedings involving us and our subsidiary, Those Characters
From Cleveland, Inc. For more information regarding the legal
proceedings, see Item 3. Legal Proceedings. If
we are unable to sell these properties, it could limit some of
our financial flexibility due to the absence of additional
liquidity that would have been available from the proceeds of
the transaction. For information regarding the proposed
divestiture of these properties, see Note 2 to the
Consolidated Financial Statements included in Part II,
Item 8.
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, we
are engaged in several lawsuits which may require significant
management time and attention and legal expense, and may result
in an unfavorable outcome, which could have a material, adverse
effect on our business, financial condition, liquidity, results
of operations, and cash flows. Current estimates of loss
regarding pending litigation are based on information that is
then available to us and may not reflect any particular final
outcome. The results of rulings, judgments or settlements of
pending litigation may result in financial liability that is
materially higher than what management has estimated at this
time. We make no assurances that we will not be subject to
liability with respect to current or future litigation. We
maintain various forms of insurance coverage. However,
substantial rulings, judgments or settlements could exceed the
amount of insurance coverage, or could be excluded under the
terms of an existing insurance policy.
We may
not realize the full benefit of the material we license from
third parties if the licensed material has less market appeal
than expected or if sales revenue from the licensed products is
not sufficient to earn out the minimum guaranteed
royalties.
An important part of our business involves obtaining licenses to
produce products based on various popular brands, celebrities,
character properties, design and other licensed material owned
by third parties. Such license agreements usually require that
we pay an advance
and/or
provide a minimum royalty guarantee that may be substantial, and
in some cases may be greater than what we will be able to recoup
in profits from actual sales, which could result in write-offs
of such amounts that would adversely affect our results of
operations. In addition, we may acquire or renew licenses
requiring minimum guarantee payments that may result in us
paying higher effective royalties, if the overall benefit of
obtaining the license outweighs the risk of potentially losing,
not renewing or otherwise not obtaining a valuable license. When
obtaining a license, we realize there is no guarantee that a
particular licensed property will make a successful greeting
card or other product in the eye of the ultimate consumer.
Furthermore, there can be no assurance that a successful
licensed property will continue to be successful or maintain a
high level of sales in the future. In the event that we are not
able to acquire or maintain advantageous licenses, our business,
results of operations and financial condition may be materially
and adversely affected.
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
11
time-consuming, result in costly settlements, litigation or
restrictions on our business and damage our reputation.
Rapidly
changing trends in the childrens 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 childrens entertainment
industry experiences significant, sudden and often unpredictable
shifts in demand caused by changes in the preferences of
children to more on trend entertainment properties.
In recent years, there have been trends towards shorter life
cycles for individual youth entertainment products. Our ability
to maintain our current market share and increase our market
share in the future depends on our ability to satisfy consumer
preferences by enhancing existing entertainment properties and
developing new entertainment properties. If we are not able to
successfully meet these challenges in a timely and
cost-effective manner, demand for our collection of
entertainment properties could decrease and our business,
results of operations and financial condition may be materially
and adversely affected. In addition, we may incur significant
costs developing entertainment properties that may not generate
future revenues at the levels that we anticipated, which could
in turn create fluctuations in our reported results based on
when those costs are expensed and could otherwise materially and
adversely affect our results of operations and financial
condition.
Our
results of operations fluctuate on a seasonal
basis.
The social expression industry is a seasonal business, with
sales generally being higher in the second half of our fiscal
year due to the concentration of major holidays during that
period. Consequently, our overall results of operations in the
future may fluctuate substantially based on seasonal demand for
our products. Such variations in demand could have a material
adverse effect on the timing of cash 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, since we usually order and manufacture
merchandise in advance of peak selling periods and sometimes
before new trends are confirmed by customer orders or consumer
purchases. We must carry significant amounts of inventory,
especially before the holiday season selling period. If we are
not successful in selling the inventory during the holiday
period, we may have to sell the inventory at significantly
reduced prices, or we may not be able to sell the inventory at
all.
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, stock ownership,
bonus plans, or other incentives, but we can make no assurance
that these programs will enable us to retain key employees or
hire new employees.
12
If we
fail to extend or renegotiate our primary collective bargaining
contracts with our labor unions as they expire from time to
time, or if our unionized employees were to engage in a strike,
or other work stoppage, our business and results of operations
could be materially adversely affected.
We are party to collective bargaining contracts with our labor
unions, which represent a significant number of our employees.
In particular, approximately 1,300 of our U.S. employees are
unionized and are covered by collective bargaining agreements.
Although we believe our relations with our employees are
satisfactory, no assurance can be given that we will be able to
successfully extend or renegotiate our collective bargaining
agreements as they expire from time to time. If we fail to
extend or renegotiate our collective bargaining agreements, if
disputes with our unions arise, or if our unionized workers
engage in a strike or other work related stoppage, we could
incur higher ongoing labor costs or experience a significant
disruption of operations, which could have a material adverse
effect on our business.
Employee
benefit costs constitute a significant element of our annual
expenses, and funding these costs could adversely affect our
financial condition.
Employee benefit costs are a significant element of our cost
structure. Certain expenses, particularly postretirement costs
under defined benefit pension plans and healthcare costs for
employees and retirees, may increase significantly at a rate
that is difficult to forecast and may adversely affect our
financial results, financial condition or cash flows. In
addition, at this point, we are unable to determine the impact
that newly enacted federal healthcare legislation could have on
our employer-sponsored medical plans. Declines in global capital
markets may cause reductions in the value of our pension plan
assets. Such circumstances could have an adverse effect on
future pension expense and funding requirements. Further
information regarding our retirement benefits is presented in
Note 12 to the Consolidated Financial Statements included
in Part II, Item 8.
Various
environmental regulations and risks applicable to a manufacturer
and/or distributor of consumer products may require us to take
actions, which will adversely affect our results of
operations.
Our business is subject to numerous federal, state, provincial,
local and foreign laws and regulations, including regulations
with respect to chemical usage, air emissions, wastewater and
storm water discharges and other releases into the environment
as well as the generation, handling, storage, transportation,
treatment and disposal of waste materials, including hazardous
materials. Although we believe that we are in substantial
compliance with all applicable laws and regulations, because
legal requirements frequently change and are subject to
interpretation, we are unable to predict the ultimate cost of
compliance with these requirements, which may be significant, or
the effect on our operations as these laws and regulations may
give rise to claims, uncertainties or possible loss
contingencies for future environmental remediation liabilities
and costs. We cannot be certain that existing laws or
regulations, as currently interpreted or reinterpreted in the
future, or future laws or regulations, will not have a material
and adverse effect on our business, results of operations and
financial condition. The impact of environmental laws and
regulations, regulatory enforcement activities, the discovery of
unknown conditions, and third party claims for damages to the
environment, real property or persons could result in additional
liabilities and costs in the future.
We may
be subject to product liability claims and our products could be
subject to voluntary or involuntary recalls and other
actions.
We are subject to numerous federal and state regulations
governing product safety including, but not limited to, those
regulations enforced by the Consumer Product Safety Commission.
A failure to comply with such 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
13
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 websites that include)
materials that infringe copyrights or other rights of others.
Portions of the Communications Decency Act, or CDA, are intended
to provide statutory protections to online service providers who
distribute third-party content. We rely on the protections
provided by both the DMCA and CDA in conducting our AG
Interactive business. Any changes in these laws or judicial
interpretations narrowing their protections will subject us to
greater risk of liability and may increase our costs of
compliance with these regulations or limit our ability to
operate certain lines of business. The Childrens Online
Privacy Protection Act is intended to 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. The costs of
compliance with these regulations may increase in the future as
a result of changes in the regulations or the interpretation of
them. Further, any failures on our part to comply with these
regulations may subject us to significant liabilities. Those
current and future laws and regulations or unfavorable
resolution of these issues may substantially harm our business
and results of operations.
Information
technology infrastructure failures could significantly affect
our business.
We depend heavily on our information technology (IT)
infrastructure in order to achieve our business objectives.
Portions of our IT infrastructure are old and difficult to
maintain. We could experience a problem that impairs this
infrastructure, such as a computer virus, a problem with the
functioning of an important IT application, or an intentional
disruption of our IT systems. In addition, our IT systems 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.
We are refreshing our IT systems in stages in an effort to
redesign and deploy new processes, organization structures and a
common information system over a number of years. Such an
implementation carries substantial operations 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.
14
Acts
of nature could result in an increase in the cost of raw
materials; other catastrophic events, including earthquakes,
could interrupt critical functions and otherwise adversely
affect our business and results of operations.
Acts of nature could result in an increase in the cost of raw
materials or a shortage of raw materials, which could influence
the cost of goods supplied to us. Additionally, we have
significant operations, including our largest manufacturing
facility, near a major earthquake fault line in Arkansas. A
catastrophic event, such as an earthquake, fire, tornado, or
other natural or man-made disaster, could disrupt our operations
and impair production or distribution of our products, damage
inventory, interrupt critical functions or otherwise affect our
business negatively, harming our results of operations.
Members
of the Weiss family and related entities, whose interests may
differ from those of other shareholders, own a substantial
portion of our common shares.
Our authorized capital stock consists of Class A common
shares and Class B common shares. The economic rights of
each class of common shares are identical, but the voting rights
differ. Class A common shares are entitled to one vote per
share and Class B common shares are entitled to ten votes
per share. There is no public trading market for the
Class B common shares, which are held by members of the
extended family of American Greetings founder, officers
and directors of American Greetings and their extended family
members, family trusts, institutional investors and certain
other persons. As of April 26, 2010, Morry Weiss, the
Chairman of the Board of Directors, Zev Weiss, the Chief
Executive Officer, Jeffrey Weiss, the President and Chief
Operating Officer, and Erwin Weiss, the Senior Vice President,
Enterprise Resource Planning, together with other members of the
Weiss family and certain trusts and foundations established by
the Weiss family beneficially owned approximately 93% in the
aggregate of our outstanding Class B common shares
(approximately 91%, excluding stock options that are presently
exercisable or exercisable within 60 days of April 26,
2010), which, together with Class A common shares
beneficially owned by them, represents approximately 51% of the
voting power of our outstanding capital stock (approximately
44%, excluding stock options that are presently exercisable or
exercisable within 60 days of April 26, 2010).
Accordingly, these members of the Weiss family, together with
the trusts and foundations established by them, would be able to
significantly influence the outcome of shareholder votes,
including votes concerning the election of directors, the
adoption or amendment of provisions in our Articles of
Incorporation or Code of Regulations, and the approval of
mergers and other significant corporate transactions, and their
interests may not be aligned with your interests. The existence
of these levels of ownership concentrated in a few persons makes
it less likely that any other shareholder will be able to affect
our management or strategic direction. These factors may also
have the effect of delaying or preventing a change in our
management or voting control or its acquisition by a third party.
Our
charter documents and Ohio law may inhibit a takeover and limit
our growth opportunities, which could adversely affect the
market price of our common shares.
Certain provisions of Ohio law and our charter documents,
together or separately, could have the effect of discouraging,
or making it more difficult for, a third party to acquire or
attempt to acquire control of American Greetings and limit the
price that certain investors might be willing to pay in the
future for our common shares. For example, our charter documents
establish a classified board of directors, serving staggered
three-year terms, allow the removal of directors only for cause,
and establish certain advance notice procedures for nomination
of candidates for election as directors and for shareholder
proposals to be considered at shareholders meetings. In
addition, while shareholders have the right to cumulative voting
in the election of directors, Class B common shares have
ten votes per share which limits the ability of holders of
Class A common shares to elect a director by exercising
cumulative voting rights.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
15
As of February 28, 2010, we own or lease approximately
10 million square feet of plant, warehouse and office space
throughout the world, of which approximately 267,500 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, 2010,
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 Fine Papers, which operates
these retail stores throughout North America. See Note 13
to the Consolidated Financial Statements included in
Part II, Item 8.
* Indicates calendar year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
|
|
|
|
|
|
Approximate Square Feet
|
|
|
Date of
|
|
|
|
|
|
Occupied
|
|
|
Material
|
|
|
|
Location
|
|
Owned
|
|
|
Leased
|
|
|
Leases*
|
|
|
Principal Activity
|
|
Cleveland,
(1)(3)(4)
Ohio
|
|
|
1,700,000
|
|
|
|
|
|
|
|
|
|
|
World Headquarters: General offices of North American Greeting
Card Division; Plus Mark, Inc.; AG Interactive, Inc.; and AGC,
LLC; creation and design of greeting cards, gift wrap, party
goods, stationery and giftware; marketing of electronic greetings
|
Bardstown,(1)
Kentucky
|
|
|
413,500
|
|
|
|
|
|
|
|
|
|
|
Cutting, folding, finishing and packaging of greeting cards
|
Danville,(1)
Kentucky
|
|
|
1,374,000
|
|
|
|
|
|
|
|
|
|
|
Distribution of everyday products including greeting cards
|
Osceola,(1)
Arkansas
|
|
|
2,552,000
|
|
|
|
|
|
|
|
|
|
|
Cutting, folding, finishing and packaging of greeting cards and
warehousing; distribution of seasonal products
|
Ripley,(1)
Tennessee
|
|
|
165,000
|
|
|
|
|
|
|
|
|
|
|
Greeting card printing (lithography)
|
Kalamazoo,
(1)(5)
Michigan
|
|
|
602,500
|
|
|
|
|
|
|
|
|
|
|
Manufacture and distribution of party goods
|
Forest
City,(4)
North Carolina
|
|
|
498,000
|
|
|
|
|
|
|
|
|
|
|
Manufacture of display fixtures and other custom display
fixtures by A.G. Industries, Inc.
|
Greeneville,(1)
Tennessee (Two Locations)
|
|
|
1,410,000
|
|
|
|
|
|
|
|
|
|
|
Printing and packaging of seasonal greeting cards and wrapping
items and order filling and shipping for Plus Mark, Inc.
|
Chicago,(1)
Illinois
|
|
|
|
|
|
|
45,000
|
|
|
|
2018
|
|
|
Administrative office for Recycled Paper Greetings, Inc. (now
known as Papyrus-Recycled Greetings, Inc.)
|
University
Park,(1)
Illinois
|
|
|
|
|
|
|
184,500
|
|
|
|
2010
|
|
|
Warehousing and distribution for Recycled Paper Greetings, Inc.
(now known as Papyrus-Recycled Greetings, Inc.)
|
Mississauga,(1)
Ontario, Canada
|
|
|
|
|
|
|
38,000
|
|
|
|
2018
|
|
|
General office of Carlton Cards Limited (Canada)
|
Clayton,(2)
Australia
|
|
|
208,000
|
|
|
|
|
|
|
|
|
|
|
General offices of John Sands companies
|
Dewsbury,(2)
England (Two Locations)
|
|
|
441,500
|
|
|
|
|
|
|
|
|
|
|
General offices of UK Greetings Ltd. and manufacture and
distribution of greeting cards and related products
|
Corby, England
(2)
|
|
|
85,000
|
|
|
|
|
|
|
|
|
|
|
Distribution of greeting cards and related products
|
|
|
|
1 |
|
North American Social Expression Products |
|
2 |
|
International Social Expression Products |
|
3 |
|
AG Interactive |
|
4 |
|
Non-reportable |
|
5 |
|
In connection with our sale of certain assets, equipment and
processes used in the manufacture and distribution of party
goods, we are in the process of winding down and closing our
Kalamazoo, Michigan facility. |
16
|
|
Item 3.
|
Legal
Proceedings
|
Cookie Jar/MoonScoop Litigation. On May 6, 2009,
American Greetings Corporation and its subsidiary, Those
Characters From Cleveland, Inc. (TCFC), filed an
action in the Cuyahoga County (Ohio) Court of Common Pleas
against Cookie Jar Entertainment Inc. (Cookie Jar)
and its affiliates, Cookie Jar Entertainment (USA) Inc.
(formerly known as DIC Entertainment Corporation)
(DIC), and Cookie Jar Entertainment Holdings (USA)
Inc. (formerly known as DIC Entertainment Holdings, Inc.). In
the complaint, American Greetings Corporation and TCFC seek to
rescind a series of related agreements with Cookie Jar,
including the July 20, 2008 Binding Letter Agreement
between American Greetings Corporation and Cookie Jar (the
July 20, 2008 Binding Letter Agreement)
relating to the sale of the Strawberry Shortcake and Care Bears
properties (the Properties) that was entered into in
connection with the settlement of a 2008 lawsuit between the
parties. American Greetings Corporation also seeks a declaratory
judgment that it may terminate an October 2001 License Agreement
between TCFC and DIC. In the alternative, American Greetings
Corporation seeks an order requiring Cookie Jar to specifically
perform its obligations under the July 20, 2008 Binding
Letter Agreement and purchase the Properties or, in the
alternative, pay damages for Cookie Jars breach of the
July 20, 2008 Binding Letter Agreement in an amount in
excess of $100,000,000. On May 7, 2009, Cookie Jar removed
the case to the United States District Court for the Northern
District of Ohio, where it remains. The parties have filed
motions for summary judgment on various claims. Trial is
currently scheduled for May 24, 2010.
On May 6, 2009, Cookie Jar filed an action against American
Greetings Corporation, TCFC, Mike Young Productions, LLC
(Mike Young Productions) and MoonScoop SAS
(MoonScoop) in the Supreme Court of the State of New
York, County of New York. Mike Young Productions and MoonScoop
were named as defendants in the action in connection with the
binding term sheet between American Greetings Corporation and
MoonScoop dated March 24, 2009 (the MoonScoop Binding
Agreement), providing for the sale to MoonScoop of the
Properties. In the complaint, Cookie Jar alleges that American
Greetings Corporation and TCFC breached the July 20, 2008
Binding Letter Agreement. Cookie Jar also alleges that Mike
Young Productions and MoonScoop tortiously interfered with
Cookie Jars business relationship with American Greetings
Corporation and TCFC in relation to Cookie Jars rights
under the July 20, 2008 Binding Letter Agreement. In
addition, Cookie Jar alleges fraud and civil conspiracy against
all defendants related to certain representations and actions
taken by the defendants in relation to the July 20, 2008
Binding Letter Agreement. In its request for relief, Cookie Jar
seeks damages in excess of $25,000,000. On American Greetings
Corporation and TCFCs motion, the Court stayed the lawsuit
to allow disposition of the Ohio lawsuits. On December 10,
2009, Cookie Jar appealed the decision, which is currently still
pending.
On August 11, 2009, MoonScoop filed an action against
American Greetings Corporation in the United States District
Court for the Northern District of Ohio, alleging breach of
contract and promissory estoppel relating to the MoonScoop
Binding Agreement. American Greetings Corporation filed a
third-party
complaint against Cookie Jar seeking a declaration that Cookie
Jar relinquish its license rights in the Properties, an order
requiring Cookie Jar to specifically perform its obligations to
relinquish its license rights in the Properties and transfer
them to MoonScoop, and for damages for its actions. Cookie Jar
then filed a counterclaim against American Greetings Corporation
and TCFC, alleging breach of contract, fraud and civil
conspiracy. Cookie Jar seeks a declaration of the parties
rights under the MoonScoop Binding Agreement and an unspecified
amount of damages. Cookie Jar also asserted a
cross-claim
against MoonScoop alleging fraud, civil conspiracy, tortious
interference, and aiding and abetting fraud. Cookie Jar seeks an
unspecified amount of damages from MoonScoop. MoonScoop seeks a
declaratory judgment that MoonScoop has the right to acquire the
Properties and to require American Greetings Corporation to sell
the Properties or, in the alternative, requests an unspecified
amount of damages. MoonScoop also demands that American
Greetings Corporation indemnify it against Cookie Jars
claims. On MoonScoops request, the court agreed to
consolidate this lawsuit with the first Ohio lawsuit (described
above) for all pretrial purposes. The parties filed motions for
summary judgment on various claims. On April 27, 2010, the
court granted American Greetings Corporations motion for
summary judgment on MoonScoops breach of contract and
promissory estoppel claims, dismissing these claims with
prejudice. As a result, American Greetings Corporation is not
obligated to sell the Properties to MoonScoop under the
MoonScoop Binding Agreement. On the same day, the court also
ruled that American Greetings Corporation must indemnify
MoonScoop against Cookie Jars claims in this lawsuit.
17
We believe that the allegations in the lawsuits against American
Greetings Corporation and TCFC are without merit and intend to
continue to defend the actions vigorously. We currently do not
believe that the impact of the lawsuits against American
Greetings Corporation and TCFC, if any, will have a material
adverse effect on our financial position, liquidity or results
of operations.
Electrical Workers Pension Fund, Local 103, I.B.E.W.
Litigation. On March 20, 2009, a shareholder derivative
complaint was filed in the Court of Common Pleas of Cuyahoga
County, Ohio, by the Electrical Workers Pension Fund, Local 103,
I.B.E.W., against certain of our current and former officers and
directors (the Individual Defendants) and names
American Greetings Corporation as a nominal defendant. The suit
alleges that the Individual Defendants breached their fiduciary
duties to American Greetings Corporation by, among other things,
backdating stock options granted to our officers and directors,
accepting backdated options
and/or
causing American Greetings Corporation to file false and
misleading financial statements. The suit seeks an unspecified
amount of damages from the Individual Defendants and
modifications to our corporate governance policies. On
April 16, 2009, the Individual Defendants removed the
matter to the United States District Court for the Northern
District of Ohio, Eastern Division. On February 17, 2010,
the case was remanded to state court. The defendants then moved
to transfer the matter to the commercial docket, but their
motion and subsequent appeal were denied. On April 2, 2010,
the defendants filed a writ of mandamus to the Supreme Court of
Ohio, seeking to have the matter heard by the commercial docket.
Management continues to believe the allegations made in the
complaint are without merit and continues to vigorously defend
this action. We currently do not believe that the impact of this
lawsuit, if any, will have a material adverse effect on our
financial position, liquidity or results of operations. We
currently believe that any liability will be covered by
insurance coverage available with financially viable insurance
companies, subject to self-insurance retentions and customary
exclusions, conditions, coverage gaps, and policy limits, as
well as insurer solvency.
RPG Investment Holdings, LLC Litigation. On
August 6, 2008, RPG Investment Holdings, LLC
(RPGI), the former indirect parent company of
Recycled Paper Greetings, Inc., now known as Papyrus-Recycled
Greetings, Inc. (RPG), sued American Greetings
Corporation in the United States District Court for the Northern
District of Illinois. The complaint alleges breach of contract
and tortious interference with contractual and beneficial
relations, based on a confidentiality agreement entered into
between American Greetings Corporation and RPGI in May 2008, and
American Greetings Corporations subsequent purchase of
certain debt of RPG held by third parties. It seeks injunctive
relief (which has been denied) and damages, which are
unspecified in the complaint. The complaint was subsequently
amended to add as plaintiffs both RPG and RPG Holdings, Inc.
(RPGH), which was then a wholly owned subsidiary of
RPGI and the direct parent of RPG; later, following American
Greetings Corporations acquisition of RPG and RPGH through
a prepackaged bankruptcy plan of reorganization, both RPG and
RPGH dismissed their claims with prejudice, once again leaving
RPGI as the sole plaintiff in the action. On February 24,
2010, the parties settled the matter with American Greetings
Corporation paying $24 million to RPGI. On March 3,
2010, the court entered an order dismissing all claims with
prejudice.
In addition to the foregoing, we are involved in certain legal
proceedings arising in the ordinary course of business. We,
however, do not believe that any of the other litigation in
which we are currently engaged, either individually or in the
aggregate, will have a material adverse effect on our business,
consolidated financial position or results of operations.
18
Executive
Officers of the Registrant
The following table sets forth our executive officers, their
ages as of April 29, 2010, and their positions and offices:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Current Position and Office
|
|
Morry Weiss
|
|
|
69
|
|
|
Chairman
|
Zev Weiss
|
|
|
43
|
|
|
Chief Executive Officer
|
Jeffrey Weiss
|
|
|
46
|
|
|
President and Chief Operating Officer
|
John W. Beeder
|
|
|
50
|
|
|
Senior Vice President, Executive Sales and Marketing Officer
|
Michael L. Goulder
|
|
|
50
|
|
|
Senior Vice President, Executive Supply Chain Officer
|
Thomas H. Johnston
|
|
|
62
|
|
|
Senior Vice President, Creative/Merchandising
|
Catherine M. Kilbane
|
|
|
47
|
|
|
Senior Vice President, General Counsel and Secretary
|
Josef Mandelbaum
|
|
|
43
|
|
|
CEOAG Intellectual Properties
|
Brian T. McGrath
|
|
|
59
|
|
|
Senior Vice President, Human Resources
|
Douglas W. Rommel
|
|
|
54
|
|
|
Senior Vice President, Chief Information Officer
|
Stephen J. Smith
|
|
|
46
|
|
|
Senior Vice President and Chief Financial Officer
|
Robert C. Swellie
|
|
|
58
|
|
|
Senior Vice President, Wal-Mart Team; President Carlton Cards
Limited (Canada)
|
Erwin Weiss
|
|
|
61
|
|
|
Senior Vice President, Enterprise Resource Planning
|
Joseph B. Cipollone
|
|
|
51
|
|
|
Vice President, Corporate Controller
|
Morry Weiss and Erwin Weiss are brothers. Jeffrey Weiss and Zev
Weiss are the sons of Morry Weiss. The Board of Directors
annually elects all executive officers; however, executive
officers are subject to removal, with or without cause, at any
time; provided, however, that the removal of an executive
officer would be subject to the terms of their respective
employment agreements, if any.
|
|
|
|
|
Morry Weiss has held various positions with the Corporation
since joining in 1961, including most recently Chief Executive
Officer of the Corporation from October 1987 until June 2003.
Mr. Morry Weiss has been Chairman since February 1992.
|
|
|
|
Zev Weiss has held various positions with the Corporation since
joining in 1992, including most recently Executive Vice
President from December 2001 until June 2003 when he was named
Chief Executive Officer.
|
|
|
|
Jeffrey Weiss has held various positions with the Corporation
since joining in 1988, including most recently Executive Vice
President, North American Greeting Card Division of the
Corporation from March 2000 until June 2003 when he was named
President and Chief Operating Officer.
|
|
|
|
John W. Beeder held various positions with Hallmark Cards, Inc.
since 1983, most recently as Senior Vice President and General
Manager Greeting Cards from 2002 to 2006.
Thereafter, Mr. Beeder served as the President and Chief
Operating Officer of Handleman Corporation (international music
distribution company) in 2006, and the Managing Partner and
Chief Operating Officer of Compact Clinicals (medical publishing
company) in 2007. He became Senior Vice President, Executive
Sales and Marketing Officer of the Corporation in April 2008.
|
|
|
|
Michael L. Goulder was a Vice President in the management
consulting firm of Booz Allen Hamilton from October 1998 until
September 2002. He became a Senior Vice President of the
Corporation in November 2002 and is currently the Senior Vice
President, Executive Supply Chain Officer.
|
|
|
|
Thomas H. Johnston was Managing Director of Gruppo,
Levey & Co., an investment banking firm focused on the
direct marketing and specialty retail industries, from November
2001 until May 2004, when he became Senior Vice President and
President of Carlton Cards Retail, a position he held until
|
19
|
|
|
|
|
May 2009, shortly after the sale of the Corporations
Retail Operations segment in April 2009. Mr. Johnston
became Senior Vice President, Creative/Merchandising in December
2004.
|
|
|
|
|
|
Catherine M. Kilbane was a partner with the law firm of
Baker & Hostetler LLP until becoming Senior Vice
President, General Counsel and Secretary in October 2003.
|
|
|
|
Josef Mandelbaum has held various positions with the Corporation
since joining in 1995, including most recently President and
Chief Executive Officer of the Corporations subsidiary, AG
Interactive, Inc. from May 2000 until becoming CEO
AG Intellectual Properties, which consists of the
Corporations AG Interactive, outbound licensing and
entertainment businesses, in February 2005.
|
|
|
|
Brian T. McGrath has held various positions with the Corporation
since joining in 1989, including most recently Vice President,
Human Resources from November 1998 until July 2006, when he
became Senior Vice President, Human Resources.
|
|
|
|
Douglas W. Rommel has held various positions with the
Corporation since joining in 1978, including most recently Vice
President, Information Services from November 2001 until March
2010, when he became Senior Vice President, Chief Information
Officer.
|
|
|
|
Stephen J. Smith was Vice President and Treasurer of General
Cable Corporation, a wire and cable company, from 1999 until
2002. He became Vice President, Treasurer and Investor Relations
of the Corporation in April 2003, and became Senior Vice
President and Chief Financial Officer in November 2006.
|
|
|
|
Robert C. Swellie, has held various positions with the
Corporation since joining in 1977, including most recently as
Group Vice President, Key Accounts, until becoming Senior Vice
President, Wal-Mart Team in October, 2008. He is also President,
Carlton Cards Limited (Canada), a position he has held since
2005.
|
|
|
|
Erwin Weiss has held various positions with the Corporation
since joining in 1977, including most recently Senior Vice
President, Program Realization from June 2001 to June 2003, and
Senior Vice President, Specialty Business from June 2003 until
becoming Senior Vice President, Enterprise Resource Planning in
February 2007.
|
|
|
|
Joseph B. Cipollone has held various positions with the
Corporation since joining in 1991, including most recently
Executive Director, International Finance from December 1997
until becoming Vice President and Corporate Controller in April
2001.
|
20
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
(a) Market Information. Our Class A
common shares are listed on the New York Stock Exchange under
the symbol AM. The high and low sales prices, as reported in the
New York Stock Exchange listing, for the years ended
February 28, 2010 and 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
1st
Quarter
|
|
$
|
8.85
|
|
|
$
|
3.24
|
|
|
$
|
19.99
|
|
|
$
|
16.95
|
|
2nd
Quarter
|
|
|
16.13
|
|
|
|
6.33
|
|
|
|
19.14
|
|
|
|
11.69
|
|
3rd
Quarter
|
|
|
24.10
|
|
|
|
13.20
|
|
|
|
18.45
|
|
|
|
7.85
|
|
4th
Quarter
|
|
|
25.58
|
|
|
|
17.05
|
|
|
|
13.04
|
|
|
|
3.73
|
|
There is no public market for our Class B common shares.
Pursuant to our Amended and Restated Articles of Incorporation,
a holder of Class B common shares may not transfer such
Class B common shares (except to permitted transferees, a
group that generally includes members of the holders
extended family, family trusts and charities) unless such holder
first offers such shares to American Greetings for purchase at
the most recent closing price for our Class A common
shares. If we do not purchase such Class B common shares,
the holder must convert such shares, on a share for share basis,
into Class A common shares prior to any transfer. It is the
Corporations general policy to repurchase Class B
common shares, in accordance with the terms set forth in our
Amended and Restated Articles of Incorporation, whenever they
are offered by a holder, unless such repurchase is not otherwise
permitted under agreements to which the Corporation is a party.
Wells Fargo, St. Paul, Minnesota, is our registrar and transfer
agent.
Shareholders. At February 28, 2010, there
were approximately 15,020 holders of Class A common shares
and 140 holders of Class B common shares of record and
individual participants in security position listings.
Dividends. The following table sets forth the
dividends declared by us in 2010 and 2009.
|
|
|
|
|
|
|
|
|
Dividends per share declared in
|
|
2010
|
|
|
2009
|
|
|
1st
Quarter
|
|
$
|
*
|
|
|
$
|
0.12
|
|
2nd
Quarter
|
|
|
0.12
|
|
|
|
0.12
|
|
3rd
Quarter
|
|
|
0.12
|
|
|
|
0.12
|
|
4th
Quarter
|
|
|
0.12
|
|
|
|
0.24
|
*
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.36
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
On March 4, 2010, we raised our quarterly dividend by 2
cents per share from 12 cents to 14 cents per share. Although we
expect to continue paying dividends, payment of future dividends
will be determined by the Board of Directors in light of
appropriate business conditions. In addition, our borrowing
arrangements, including our senior secured credit facility and
our 7.375% Notes due 2016 restrict our ability to pay
shareholder dividends. Our borrowing arrangements also contain
certain other restrictive covenants that are customary for
similar credit arrangements. For example, our credit facility
contains covenants relating to financial reporting and
notification, compliance with laws, preservation of existence,
maintenance of books and records, use of proceeds, maintenance
of properties and insurance, and limitations on liens,
dispositions, issuance of debt, investments, repurchases of
capital stock, acquisitions and transactions with affiliates.
There are also financial covenants that require us to maintain a
maximum leverage ratio (consolidated indebtedness minus
unrestricted cash over consolidated EBITDA) and a minimum
interest coverage ratio (consolidated EBITDA over consolidated
interest expense). These restrictions are subject to customary
baskets and financial covenant tests. For a further description
of the limitations imposed by our borrowing arrangements, see
the discussion in Part II, Item 7, under the heading
Liquidity and Capital Resources, and Note 11 to
the Consolidated Financial Statements included in Part II,
Item 8.
|
|
|
* |
|
We generally pay dividends on a quarterly basis. During the
fourth quarter of fiscal 2009, however, two dividends were
declared, but only one dividend of $0.12 per share was paid in
the fourth quarter. The other $0.12 per share dividend was paid
in the first quarter of fiscal 2010. |
21
COMPARISON
OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
AMERICAN GREETINGS CORPORATION, THE S&P 400 INDEX AND PEER
GROUP INDEX
Set forth below is a line graph comparing the cumulative total
return of a hypothetical investment in the our Class A
common shares with the cumulative total return of hypothetical
investments in the S&P 400 Index, and the Peer Group based
on the respective market price of each investment at
February 28, 2005, February 28, 2006,
February 28, 2007, February 29, 2008,
February 27, 2009 and February 26, 2010, the last
trading day of our fiscal year over the past five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/05
|
|
2/06
|
|
2/07
|
|
2/08
|
|
2/09
|
|
2/10
|
American Greetings
|
|
|
$100
|
|
|
|
$86
|
|
|
|
$97
|
|
|
|
$80
|
|
|
|
$17
|
|
|
|
$89
|
|
S & P 400
|
|
|
$100
|
|
|
|
$117
|
|
|
|
$129
|
|
|
|
$123
|
|
|
|
$71
|
|
|
|
$119
|
|
Peer Group*
|
|
|
$100
|
|
|
|
$94
|
|
|
|
$109
|
|
|
|
$104
|
|
|
|
$72
|
|
|
|
$124
|
|
Source: Bloomberg L.P.
|
|
|
|
|
*Peer Group
|
|
|
|
|
Blyth Inc. (BTH)
|
|
Fossil Inc. (FOSL)
|
|
McCormick & Co.-Non Vtg Shrs (MKC)
|
Central Garden & Pet Co. (CENT)
|
|
Jo-Ann Stores Inc. (JAS)
|
|
Scotts Miracle-Gro Co. (The) - CL A (SMG)
|
CSS Industries Inc. (CSS)
|
|
Lancaster Colony Corp. (LANC)
|
|
Tupperware Brands Corp. (TUP)
|
The Peer Group Index takes into account companies selling
cyclical nondurable consumer goods with the following
attributes, among others, that are similar to those of American
Greetings: customer demographics, sales, market capitalizations
and distribution channels.
22
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.
(b) Not applicable.
(c) The following table provides information with respect
to our purchases of our common shares made during the three
months ended February 28, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
(or Approximate
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Dollar Value) of Shares
|
|
|
|
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
that May Yet Be
|
|
|
|
Total Number of
|
|
|
Price Paid
|
|
|
Announced Plans or
|
|
|
Purchased Under
|
|
Period
|
|
Shares Purchased
|
|
|
per Share
|
|
|
Programs(2)
|
|
|
the Plans or Programs
|
|
|
December 2009
|
|
|
Class A -
|
|
|
|
-
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
46,578,874
|
|
|
|
|
Class B -
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
January 2010
|
|
|
Class A -
|
|
|
|
-
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
46,578,874
|
|
|
|
|
Class B -
|
|
|
|
1,107
|
(1)
|
|
$
|
20.49
|
|
|
|
-
|
|
|
|
|
|
February 2010
|
|
|
Class A -
|
|
|
|
-
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
46,578,874
|
|
|
|
|
Class B -
|
|
|
|
9,217
|
(1)
|
|
$
|
19.07
|
|
|
|
-
|
|
|
|
|
|
Total
|
|
|
Class A -
|
|
|
|
-
|
(2)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Class B -
|
|
|
|
10,324
|
(1)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
(1) |
|
There is no public market for our Class B common shares.
Pursuant to our Amended and Restated Articles of Incorporation,
all of the Class B common shares were repurchased by
American Greetings for cash pursuant to its right of first
refusal. It is the Corporations general policy to
repurchase Class B common shares, in accordance with the
terms set forth in our Amended and Restated Articles of
Incorporation, whenever they are offered by a holder, unless
such repurchase is not otherwise permitted under agreements to
which the Corporation is a party. |
|
(2) |
|
On January 13, 2009, American Greetings announced that its
Board of Directors authorized a program to repurchase up to
$75 million of its Class A common shares. There is no
set expiration date for this repurchase program. No repurchases
were made in the current quarter under this program. |
23
|
|
Item 6.
|
Selected
Financial Data
|
Thousands
of dollars except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010(1)
|
|
|
2009
|
|
|
2008
|
|
|
2007(2)
|
|
|
2006
|
|
|
Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,598,292
|
|
|
$
|
1,646,399
|
|
|
$
|
1,730,784
|
|
|
$
|
1,744,798
|
|
|
$
|
1,875,472
|
|
Total revenue
|
|
|
1,635,858
|
|
|
|
1,690,738
|
|
|
|
1,776,451
|
|
|
|
1,794,290
|
|
|
|
1,928,136
|
|
Goodwill and other intangible assets impairment
|
|
|
-
|
|
|
|
290,166
|
|
|
|
-
|
|
|
|
2,196
|
|
|
|
43,153
|
|
Interest expense
|
|
|
26,311
|
|
|
|
22,854
|
|
|
|
20,006
|
|
|
|
34,986
|
|
|
|
35,124
|
|
Income (loss) from continuing operations
|
|
|
81,574
|
|
|
|
(227,759)
|
|
|
|
83,320
|
|
|
|
39,938
|
|
|
|
89,219
|
|
(Loss) income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(317)
|
|
|
|
2,440
|
|
|
|
(4,843)
|
|
Net income (loss)
|
|
|
81,574
|
|
|
|
(227,759)
|
|
|
|
83,003
|
|
|
|
42,378
|
|
|
|
84,376
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
2.07
|
|
|
|
(4.89)
|
|
|
|
1.54
|
|
|
|
0.69
|
|
|
|
1.35
|
|
(Loss) income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.01)
|
|
|
|
0.04
|
|
|
|
(0.07)
|
|
Earnings (loss) per share
|
|
|
2.07
|
|
|
|
(4.89)
|
|
|
|
1.53
|
|
|
|
0.73
|
|
|
|
1.28
|
|
Earnings (loss) per share assuming dilution
|
|
|
2.03
|
|
|
|
(4.89)
|
|
|
|
1.52
|
|
|
|
0.71
|
|
|
|
1.16
|
|
Cash dividends declared per share
|
|
|
0.36
|
|
|
|
0.60
|
|
|
|
0.40
|
|
|
|
0.32
|
|
|
|
0.32
|
|
Fiscal year end market price per share
|
|
|
19.07
|
|
|
|
3.73
|
|
|
|
18.82
|
|
|
|
23.38
|
|
|
|
20.98
|
|
Average number of shares outstanding
|
|
|
39,467,811
|
|
|
|
46,543,780
|
|
|
|
54,236,961
|
|
|
|
57,951,952
|
|
|
|
65,965,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,598,292
|
|
|
$
|
1,646,399
|
|
|
$
|
1,730,784
|
|
|
$
|
1,744,798
|
|
|
$
|
1,875,472
|
|
Inventories
|
|
|
163,956
|
|
|
|
194,945
|
|
|
|
207,629
|
|
|
|
174,426
|
|
|
|
205,057
|
|
Working capital
|
|
|
305,381
|
|
|
|
227,915
|
|
|
|
242,860
|
|
|
|
431,128
|
|
|
|
586,803
|
|
Total assets
|
|
|
1,529,651
|
|
|
|
1,448,049
|
|
|
|
1,809,133
|
|
|
|
1,784,748
|
|
|
|
2,229,789
|
|
Property, plant and equipment additions
|
|
|
26,550
|
|
|
|
55,733
|
|
|
|
56,623
|
|
|
|
41,716
|
|
|
|
46,177
|
|
Long-term debt
|
|
|
328,723
|
|
|
|
389,473
|
|
|
|
220,618
|
|
|
|
223,915
|
|
|
|
300,516
|
|
Shareholders equity(3)
|
|
|
636,064
|
|
|
|
529,189
|
|
|
|
943,411
|
|
|
|
1,012,574
|
|
|
|
1,220,025
|
|
Shareholders equity per share
|
|
|
16.11
|
|
|
|
13.05
|
|
|
|
19.35
|
|
|
|
18.37
|
|
|
|
20.22
|
|
Net return on average shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity per share
|
|
|
16.11
|
|
|
|
13.05
|
|
|
|
19.35
|
|
|
|
18.37
|
|
|
|
20.22
|
|
from continuing operations
|
|
|
14.0
|
%
|
|
|
(30.9
|
%)
|
|
|
8.5
|
%
|
|
|
3.6
|
%
|
|
|
6.8
|
%
|
|
|
|
(1) |
|
During 2010, the Corporation incurred a loss of
$29.3 million on the disposition of the Retail Operations
segment. The Corporation also recorded a gain of
$34.2 million related to the Party Goods Transaction and a
charge of approximately $15.8 million for asset impairments
and severance associated with a facility closure. In 2010, the
Corporation recognized a cost of $18.2 million in
connection with shutdown of its distribution operations in
Mexico. See Note 2 and 3 to the Corporations 2010
financial statements. |
|
(2) |
|
During 2007, as a result of retailer consolidation, wherein,
multiple long-term supply agreements were terminated and a new
agreement was negotiated with a new legal entity with
substantially different terms and sales commitments, a gain of
$20.0 million was recorded. Also, in 2007, the Corporation
sold substantially all of the assets associated with its candle
product lines and recorded a loss of approximately
$16.0 million. |
|
(3) |
|
The Corporation adopted new guidance on accounting for
convertible debt instruments in 2010. This guidance requires an
issuer of certain convertible instruments that may be settled in
cash or other asset on conversion to separately account for the
liability and equity components of the instrument in a manner
that reflects the issuers nonconvertible debt borrowing
rate. The impact on Shareholders equity of retrospectively
applying this guidance related to the Corporations 7.00%
convertible subordinated notes issued in 2002 and settled in
2007 would have been $35 million for both 2006 and 2007.
The convertible subordinated notes were not outstanding in the
three years ended February 28, 2010. |
24
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Managements 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 are the worlds largest publicly owned
creator, manufacturer and distributor of social expression
products. Headquartered in Cleveland, Ohio, as of
February 28, 2010, we employ approximately 17,000
associates around the world and are home to one of the
worlds 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, Egreetings.com, Kiwee.com, PhotoWorks.com and
WebShots.com.
Our international operations include wholly-owned subsidiaries
in the United Kingdom (U.K.), Canada, Australia and
New Zealand as well as licensees in approximately 60 other
countries. During 2010, we shutdown our subsidiary in Mexico and
now supply the Mexican market through a third party distributor.
We achieved significantly improved operating income in 2010
compared to the prior year. This improvement was partially
driven by several major actions taken during the past year as we
capitalized on market opportunities to leverage ourselves for
future success. The following transactions and activities have
occurred in the past thirteen months:
|
|
|
|
|
February 24, 2009 acquisition of RPG;
|
|
|
|
April 17, 2009 acquisition of the Papyrus trademark and
wholesale business division of Schurman that supplies Papyrus
brand greeting cards to specialty, mass merchandise, grocery and
drug store channels;
|
|
|
|
April 17, 2009 divestiture of our Retail Operations segment;
|
|
|
|
September 3, 2009 execution of a distribution agreement
with a distributor in Mexico and determination to shutdown our
operations in Mexico; and
|
|
|
|
December 21, 2009 transaction (the Party Goods
Transaction) with Amscan, Inc., a leading designer,
manufacturer and distributor of party goods.
|
The acquisitions of RPG and Papyrus align with our corporate
strategy of growing our main greeting card business by building
on our core competencies of greeting cards. In addition, the
change in business mix resulting from our divestiture of
company-owned retail stores, which had historically generated an
operating loss, to the RPG and Papyrus wholesale greeting card
business, which were accretive to operating income, drove a
portion of our operating income improvement compared to the
prior year.
The decision to close our distribution facility in Mexico and
transition to a third party distributor model was the result of
a comprehensive review of alternatives designed to reduce costs.
At the same time, we recognize the importance of the Mexican
market and this solution allows us to provide continuity of
service to this market with a lower cost structure. In addition,
the transition to a third party distributor model is expected to
provide a more cost-effective method of servicing and
merchandising product to retail customers in Mexico while
focusing our resources on designing relevant Spanish language
products.
25
We expect that the Party Goods Transaction will enable us to
reduce our cost structure within the party goods product lines
by discontinuing the manufacture of party goods. We intend to
leverage our existing distribution strengths and continue to
supply party goods to various channels, including mass
merchandisers, drug, grocery and specialty retail partners. As a
result of the Party Goods Transaction, we expect that we will be
able to offer a broader assortment of licensed and non-licensed
party goods products to our retail partners. However, we expect
total sales of party goods products to be reduced as a result of
this transaction. In conjunction with this transaction, we
announced the closure of the party goods manufacturing and
distribution facility in Kalamazoo, Michigan. Distribution of
party goods will be moved to our other distribution facilities.
The transactions and activities discussed above generated
significant gains, losses and expenses during 2010 as detailed
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Party Goods
|
|
|
Mexico
|
|
|
Retail
|
|
|
|
|
|
|
Transaction
|
|
|
Shut Down
|
|
|
Disposition
|
|
|
Total
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
0.7
|
|
|
$
|
-
|
|
|
$
|
0.7
|
|
Material, labor and other production costs
|
|
|
15.6
|
|
|
|
4.4
|
|
|
|
1.0
|
|
|
|
21.0
|
|
Selling, distribution and marketing expenses
|
|
|
0.2
|
|
|
|
1.0
|
|
|
|
-
|
|
|
|
1.2
|
|
Administrative and general expenses
|
|
|
-
|
|
|
|
0.6
|
|
|
|
-
|
|
|
|
0.6
|
|
Other operating (income) expense - net
|
|
|
(34.2)
|
|
|
|
11.5
|
|
|
|
28.2
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(18.4)
|
|
|
$
|
18.2
|
|
|
$
|
29.2
|
|
|
$
|
29.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact of the Party Goods Transaction includes a
$34.2 million gain on the transaction and approximately
$15.8 million of asset impairments and severance charges
associated with the facility closure. We recorded
$18.2 million associated with the shut down of the
distribution facility in Mexico, including $11.3 million
related to the cumulative foreign currency translation
adjustment of equity that was written off upon liquidation and
$6.9 million of severance, asset impairments and other
closing expenses. We generated a loss on the disposition of the
Retail Operations segment of $29.2 million.
In addition to the operating income improvements from the above
strategic actions, also contributing to our improved operating
results were the benefits we realized during the year from our
continued focus on the efficiency of our operations, including
tightened control of overhead costs and reductions in supply
chain, scrap, and distribution costs due to an improved balance
of card unit shipments with card unit net sales. During 2010, we
also realized the benefits associated with the elimination of
approximately 275 positions during the prior year fourth quarter.
We recognized net income of $81.6 million in 2010 compared
to a net loss of $227.8 million in 2009, on total revenue
of $1.64 billion in 2010 compared to $1.69 billion in
2009.
Foreign currency movements and the change in business mix were
the primary drivers of the lower consolidated revenues of
approximately $55 million. Partially offsetting these
decreases was a reduction of certain deferred cost reserves of
approximately $14 million. This lower reserve balance is
the result of improvements in the historical trends and a
reduced average term. See Critical Accounting
Policies for additional information. Unfavorable foreign
currency movements, due to a strengthening of the
U.S. dollar, accounted for slightly more than half of the
total revenue decline, at approximately $31 million. In
addition, the revenue loss from the Retail Operations segment
divestiture was only partially offset by the revenue additions
associated with the RPG and Papyrus acquisitions, for a net
decrease of approximately $29 million.
Operating income for 2010 was $139.1 million compared to an
operating loss of $253.2 million in 2009. In addition to
the improvements and charges discussed above, 2010 operating
income included a benefit related to certain
company-owned
life insurance programs, a charge related to the settlement of a
legal claim and significantly more variable compensation expense
than during 2009 due to the considerably higher level of net
income. For a description of the legal claim and the settlement
thereof, see Part I, Item 3. Legal
Proceedings.
26
The prior year operating loss included goodwill, intangible and
fixed assets impairments totaling approximately
$296 million, caused primarily by the global economic
slowdown and our declining stock price during the prior year
fourth quarter.
Our improvement was broad based as all reporting segments
experienced higher operating income in 2010 compared to 2009.
The North American Social Expression Products and the
International Social Expression Products segments both reported
higher revenues, with everyday cards driving the improvement in
the North American Social Expression Products segment and
non-card product, as a result of new product introductions,
causing growth in the International Social Expression Products
segment. The AG Interactive segment reported lower revenues
compared to the prior year primarily due to lower advertising
revenue within our online product group, as market conditions
for on-line advertising remained soft throughout the year.
RESULTS
OF OPERATIONS
Comparison
of the years ended February 28, 2010 and 2009
In 2010, net income was $81.6 million, or $2.03 per diluted
share, compared to a net loss of $227.8 million, or $4.89
per diluted share, in 2009.
Our results for 2010 and 2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Total
|
|
|
|
|
|
% Total
|
|
(Dollars in thousands)
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
Net sales
|
|
$
|
1,598,292
|
|
|
|
97.7
|
%
|
|
$
|
1,646,399
|
|
|
|
97.4
|
%
|
Other revenue
|
|
|
37,566
|
|
|
|
2.3
|
%
|
|
|
44,339
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,635,858
|
|
|
|
100.0
|
%
|
|
|
1,690,738
|
|
|
|
100.0
|
%
|
Material, labor and other production costs
|
|
|
713,075
|
|
|
|
43.6
|
%
|
|
|
809,956
|
|
|
|
47.9
|
%
|
Selling, distribution and marketing expenses
|
|
|
507,960
|
|
|
|
31.0
|
%
|
|
|
618,899
|
|
|
|
36.6
|
%
|
Administrative and general expenses
|
|
|
276,031
|
|
|
|
16.9
|
%
|
|
|
226,317
|
|
|
|
13.4
|
%
|
Goodwill and other intangible assets impairment
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
290,166
|
|
|
|
17.2
|
%
|
Other operating income net
|
|
|
(310
|
)
|
|
|
(0.0
|
%)
|
|
|
(1,396
|
)
|
|
|
(0.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
139,102
|
|
|
|
8.5
|
%
|
|
|
(253,204
|
)
|
|
|
(15.0
|
%)
|
Interest expense
|
|
|
26,311
|
|
|
|
1.6
|
%
|
|
|
22,854
|
|
|
|
1.4
|
%
|
Interest income
|
|
|
(1,676
|
)
|
|
|
(0.1
|
%)
|
|
|
(3,282
|
)
|
|
|
(0.2
|
%)
|
Other non-operating (income) expense net
|
|
|
(6,487
|
)
|
|
|
(0.4
|
%)
|
|
|
2,157
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
120,954
|
|
|
|
7.4
|
%
|
|
|
(274,933
|
)
|
|
|
(16.3
|
%)
|
Income tax expense (benefit)
|
|
|
39,380
|
|
|
|
2.4
|
%
|
|
|
(47,174
|
)
|
|
|
(2.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
81,574
|
|
|
|
5.0
|
%
|
|
$
|
(227,759
|
)
|
|
|
(13.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Overview
Consolidated net sales in 2010 were $1.60 billion, compared
to $1.65 billion in the prior year. This 2.9%, or
approximately $48 million, decrease was primarily the
result of lower net sales in our Retail Operations segment of
approximately $158 million, unfavorable foreign currency
translation of approximately $31 million and a decrease in
net sales in our AG Interactive segment of approximately
$3 million. These decreases were partially offset by higher
net sales in our North American Social Expression Products
segment of approximately $140 million and increased net
sales in our International Social Expression Products segment of
approximately $4 million due to improved sales of gifting
and other non-card products.
Net sales of our North American Social Expression Products
segment increased approximately $140 million compared to
the prior year. Greeting cards improved approximately
$169 million, due to the acquisitions of RPG and Papyrus,
which added approximately $129 million, as well as growth
in our legacy greeting card business of approximately
$26 million and the impact of lower deferred cost reserves
of approximately
27
$14 million. This increase was partially offset by lower
accessories sales of approximately $24 million, including
gift packaging, calendars and party goods, as well as lower
sales of approximately $5 million in Mexico as we began
winding down our operations there in the third quarter of 2010.
Net sales of our Retail Operations segment decreased
approximately $158 million due to the sale of this business
in April 2009. Approximately $12 million of sales is
included in 2010 compared to approximately $170 million of
sales in the prior year.
Net sales of our AG Interactive segment decreased approximately
$3 million compared to 2009. The decrease is due primarily
to lower
e-commerce
revenue in our digital photography product group and lower
advertising revenue in our online product group, as market
conditions continue to be challenging, partially offset by
increased subscription revenue in our online product group.
The contribution of each major product category as a percentage
of net sales for the past two fiscal years was as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Everyday greeting cards
|
|
|
48
|
%
|
|
|
43
|
%
|
Seasonal greeting cards
|
|
|
23
|
%
|
|
|
22
|
%
|
Gift packaging
|
|
|
14
|
%
|
|
|
14
|
%
|
All other products*
|
|
|
15
|
%
|
|
|
21
|
%
|
* The all other products classification
includes, among other things, giftware, party goods, calendars,
custom display fixtures, stickers, online greeting cards and
other digital products.
Other revenue, primarily royalty revenue from our Strawberry
Shortcake and Care Bears properties, decreased $6.7 million
from $44.3 million during 2009 to $37.6 million in
2010.
Wholesale
Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis)
for 2010 and 2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) From the Prior Year
|
|
|
|
Everyday Cards
|
|
|
Seasonal Cards
|
|
|
Total Greeting Cards
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Unit volume
|
|
|
7.2
|
%
|
|
|
1.7
|
%
|
|
|
6.7
|
%
|
|
|
3.4
|
%
|
|
|
7.0
|
%
|
|
|
2.2
|
%
|
Selling prices
|
|
|
1.4
|
%
|
|
|
(1.5
|
%)
|
|
|
(1.6
|
%)
|
|
|
(5.3
|
%)
|
|
|
0.4
|
%
|
|
|
(2.7
|
%)
|
Overall increase / (decrease)
|
|
|
8.7
|
%
|
|
|
0.2
|
%
|
|
|
5.0
|
%
|
|
|
(2.1
|
%)
|
|
|
7.5
|
%
|
|
|
(0.5
|
%)
|
During 2010, combined everyday and seasonal greeting card sales
less returns improved 7.5%, compared to the prior year, with
increases coming from both everyday and seasonal cards. The
overall increase was driven by the RPG and Papyrus acquisitions.
Everyday card sales less returns were up 8.7%, compared to the
prior year, as a result of increases in both unit volume and
selling prices of 7.2% and 1.4%, respectively. The increase in
unit volume was the result of the RPG and Papyrus acquisitions.
Increased selling prices were driven primarily by our North
American Social Expression Products segment where higher priced
technology and Papyrus cards are continuing to improve average
prices despite the growing volume of value line cards.
Seasonal card sales less returns increased 5.0% compared to the
prior year as a result of increases in unit volume of 6.7%. This
increase in unit volume was driven by the acquisitions of RPG
and Papyrus as well as improvements in the Easter, Christmas and
Fathers Day seasonal programs. The decrease in selling
prices of 1.6% related primarily to the continued mix shift
towards value priced cards across most seasonal programs and a
more balanced offering of technology cards.
28
Expense
Overview
Material, labor and other production costs (MLOPC)
for 2010 were $713.1 million, a decrease from
$810.0 million in 2009. As a percentage of total revenue,
these costs were 43.6% in 2010 compared to 47.9% in 2009. The
decrease of $96.9 million is driven by our continued focus
on the efficiency of our operations, including tightened control
of costs, reductions in supply chain, scrap, and distribution
costs due to an improved balance of card unit shipments with
card unit net sales, a favorable change in the product mix, and
a favorable foreign currency translation impact of approximately
$16 million. The favorable product mix of approximately
$27 million is primarily due to a sales shift towards lower
cost card products versus non-card products. This shift to a
higher mix of greeting cards was due to the acquisition of RPG
and Papyrus as well as increased net sales within our legacy
greeting card business, as well as lower sales of gift
packaging, calendars and party goods products. The disposition
of the Retail Operations segment, which sold many non-card
gifting products, also contributed to the favorable mix. The
lower costs are also attributable to decreased scrap and shrink
($23 million) and the LIFO liquidation ($13 million)
that we experienced during the year as a result of improved
inventory management. The remaining decrease of approximately
$17 million is attributable to lower product input costs,
realization of other cost savings initiatives put in place
during the fourth quarter of 2009 and a favorable volume
variance. The prior year included costs ($5 million)
associated with the conversion to our new Canadian line of cards
and expenses ($16 million) associated with our production
of film-based entertainment, both of which did not recur in
2010. Partially offsetting these decreases were current year
impairment and severance charges related to the closure of the
Kalamazoo, Michigan facility ($16 million) and inventory
charges associated with the wind down of our Mexico distribution
facility ($4 million).
Selling, distribution and marketing expenses (SDM)
were $508.0 million in 2010, decreasing from
$618.9 million in the prior year. The decrease of
$110.9 million is due to lower spending ($97 million)
and favorable foreign currency translation ($14 million).
The decreased spending is a result of the elimination of the
costs to operate our retail stores ($98 million) due to the
disposition of those stores during the first quarter of 2010,
reduced supply chain costs ($36 million), specifically
freight and distribution costs, due to a decrease in units
shipped, as well as less expenses in our licensing business
($11 million). The lower expenses in our licensing business
are attributable to the benefits from prior year overhead
reductions and less agency fees in line with the decrease in
royalty revenue in 2010. These favorable variances were
substantially offset by ongoing SDM expenses ($48 million)
from our recent RPG and Papyrus acquisitions.
Administrative and general expenses were $276.0 million in
2010, an increase from $226.3 million in 2009. The
$49.7 million increase is due to increased spending
($53 million) offset by favorable foreign currency
translation impacts ($3 million). The increase in spending
is primarily driven by variable compensation expense
($47 million) which includes bonus, profit-sharing
contributions, and 401(k) matching contributions and the
settlement of a legal claim ($24 million). The prior year
included a nominal amount of variable compensation expenses, as
we did not meet the 2009 operating results required to make
these variable compensation payments. These increases were
partially offset by a corporate-owned life insurance benefit
($10 million) due to higher than average death benefit
income reported by our third party administrators, lower bad
debt expense ($4 million) and savings from prior year cost
reduction initiatives.
During the prior year, goodwill and other intangible assets
impairment charges of $290.2 million were recorded. In the
third quarter of 2009, indicators emerged during the period that
led us to conclude that an impairment test was required prior to
the annual test. As a result, impairment was recorded for a
reporting unit in the International Social Expression Products
segment, located in the U.K., and in our AG Interactive segment.
The goodwill impairment charge recorded in the U.K. was
$82.1 million, which represented all of the goodwill for
this reporting unit. The goodwill and intangible assets
impairment charge for the AG Interactive segment was
$160.1 million, which included all of the goodwill for AG
Interactive. An additional impairment analysis was performed at
the end of the fourth quarter of 2009 as a result of the
continued significant deterioration of the global economic
environment and the decline in the price of our common shares.
Based on that analysis, we recorded goodwill charges of
$47.9 million, which included all the goodwill for our
North American Greeting Card Division (NAGCD). NAGCD
is part of our North American Social Expression Products segment.
29
Interest expense was $26.3 million in 2010, compared to
$22.9 million in 2009. The increase of $3.4 million is
attributable to increased borrowings on the new
7.375% notes and the $100 million term loan facility
that were issued and drawn down, respectively, during the fourth
quarter of 2009. These increases were partially offset by
decreased borrowings on our revolving credit facility.
Other operating income net was $0.3 million in
2010 compared to $1.4 million in 2009. The current year
includes a loss of approximately $28 million on the sale of
our retail stores to Schurman and a net loss of approximately
$8.6 million on the recognition of cumulative foreign
currency translation adjustments related to the shutdown of our
distribution facility in Mexico and the liquidation of an
operation in France. These losses were partially offset by a
gain of approximately $34 million associated with the Party
Goods Transaction.
Other non-operating (income) expense net was income
of $6.5 million during 2010 compared to expense of
$2.2 million in 2009. The $8.7 million increase in
income is due primarily to a swing from foreign exchange loss in
the prior year to a gain in the current year.
The effective tax rate was 32.6% and 17.2% during 2010 and 2009,
respectively. The lower than statutory rate in the current year
is primarily a result of the favorable effect of the wind down
of our operations in Mexico, settlements with taxing authorities
in foreign jurisdictions and the benefit of certain tax free
proceeds from
company-owned
life insurance. The lower effective tax rate in the prior year
is primarily related to the goodwill impairment and its impact
on the pretax loss in that period as only a portion of the
charge was deductible for tax purposes.
Segment
Results
We review segment results, including the evaluation of
management performance, using consistent exchange rates between
years to eliminate the impact of foreign currency fluctuations
from operating performance. The 2010 segment results below are
presented using our planned foreign exchange rates, which were
set at the beginning of the year. In addition, 2009 segment
results have been recast to reflect the 2010 foreign exchange
rates for a consistent presentation. Refer to Note 16,
Business Segment Information, to the Consolidated
Financial Statements for further information and a
reconciliation of total segment revenue to consolidated
Total revenue and total segment earnings (loss) to
consolidated Income (loss) from continuing operations
before income tax expense (benefit).
North
American Social Expression Products Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
% Change
|
|
Total revenue
|
|
$
|
1,226,746
|
|
|
$
|
1,086,940
|
|
|
|
12.9
|
%
|
Segment earnings
|
|
|
232,794
|
|
|
|
67,107
|
|
|
|
246.9
|
%
|
Total revenue of our North American Social Expression Products
segment, excluding the impact of foreign exchange and
intersegment items, increased $139.8 million during 2010
compared to 2009. The majority of the revenue improvement is
attributable to higher sales of greetings cards, from both the
acquisition of RPG and Papyrus, which added approximately
$129 million, as well as growth in our legacy greeting card
business, which increased by approximately $26 million and
the impact of lower deferred cost reserves of approximately
$14 million. The increased revenue from greeting cards was
partially offset by lower sales in our gift packaging, calendar
and party goods product lines of approximately $24 million.
Additionally, the current year includes the impact of lower
revenue from our operations in Mexico of approximately
$5 million as we moved to a third party distribution
business model during the third quarter.
Segment earnings, excluding the impact of foreign exchange and
intersegment items, increased $165.7 million in the current
year compared to 2009. Higher net sales combined with
improvements in product mix, lower input costs and other cost
savings initiatives provided benefits of approximately
$35 million. An improved balance of card unit shipments
compared to card unit net sales reduced supply chain, scrap and
distribution costs by approximately $63 million. The gain
on the sale of certain assets, equipment and processes of the
DesignWare party goods product lines in conjunction with the
Party Goods Transaction resulted in a gain of
30
approximately $34 million. Segment earnings were also
favorably impacted by a reduction of certain deferred cost
reserves of approximately $14 million. The LIFO liquidation
resulting from better inventory management of approximately
$13 million and approximately $7 million in savings
recognized from reductions in non-income tax expenses positively
impacted earnings. Also contributing to the current year
favorability was the prior year goodwill impairment charge of
$48 million, which unfavorably impacted the 2009 earnings.
Partially offsetting these improvements were the impairment and
severance charges of approximately $16 million recorded in
connection with closing of the Kalamazoo, Michigan facility,
increased variable compensation expense of approximately
$17 million and approximately $18 million associated
with the shut down of the distribution facility in Mexico.
International
Social Expression Products Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
% Change
|
|
Total revenue
|
|
$
|
209,974
|
|
|
$
|
205,687
|
|
|
|
2.1
|
%
|
Segment earnings (loss)
|
|
|
13,778
|
|
|
|
(60,206
|
)
|
|
|
-
|
|
Total revenue of our International Social Expression Products
segment, excluding the impact of foreign exchange, increased
$4.3 million, or 2.1% during 2010, compared to the prior
year. The revenue improvement is primarily attributable to
improved sales of non-card products as a result of new product
introductions.
Segment earnings, excluding the impact of foreign exchange,
increased $74.0 million from a loss of $60.2 million
in 2009 to earnings of $13.8 million during the current
year. The increase is primarily the result of the goodwill
impairment charge of approximately $59 million
(approximately $82 million reported above less
approximately $23 million of foreign currency based on the
consistent exchange rates utilized for segment reporting
purposes) that was recorded during the third quarter of 2009.
The remaining increase is attributable to the cost reduction
initiatives implemented during 2009, higher sales in the current
year, customer sales mix and charges taken in the prior year as
a result of the bankruptcy of a major customer.
Retail
Operations Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
% Change
|
|
Total revenue
|
|
$
|
11,727
|
|
|
$
|
170,066
|
|
|
|
(93.1
|
%)
|
Segment loss
|
|
|
(34,830
|
)
|
|
|
(19,727
|
)
|
|
|
(76.6
|
%)
|
In April 2009, we sold our retail store assets to Schurman. As a
result, 2010 included results for the portion of the period that
we operated the stores as well as the loss on disposition.
Total revenue, excluding the impact of foreign exchange, in our
Retail Operations segment decreased $158.3 million for
2010, compared to the prior year period due to the disposition.
Segment earnings, excluding the impact of foreign exchange, was
a loss of $34.8 million in 2010, compared to a loss of
$19.7 million during 2009. The segment loss for the current
year included a $28 million loss on the disposition and
approximately $1 million of severance expense as a result
of the disposition of the stores.
AG
Interactive Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
% Change
|
|
Total revenue
|
|
$
|
78,955
|
|
|
$
|
81,615
|
|
|
|
(3.3
|
%)
|
Segment earnings (loss)
|
|
|
10,586
|
|
|
|
(156,325
|
)
|
|
|
-
|
|
Total revenue of our AG Interactive segment for 2010, excluding
the impact of foreign exchange, was $79.0 million compared
to $81.6 million in the prior year. The lower revenue is
due primarily to lower
e-commerce
revenue in our digital photography product group and lower
advertising revenue in our online product group, as market
conditions continue to be challenging, partially offset by
increased subscription revenue in our online product group. At
the end of 2010, AG Interactive had approximately
3.9 million online paid subscriptions versus
4.1 million at the prior year-end.
31
Segment earnings, excluding the impact of foreign exchange, were
$10.6 million in 2010 compared to a loss of
$156.3 million during the prior year. The increase of
$166.9 million compared to the prior year is primarily
attributable to the goodwill and intangible asset impairments of
approximately $153 million (approximately $160 million
reported above less approximately $7 million of foreign
currency based on the consistent exchange rates utilized for
segment reporting purposes). The current year includes a benefit
of approximately $3 million related to the currency
translation adjustment of equity that was recognized in
conjunction with the liquidation of an operation in France. Also
contributing to the improvement in the current year are benefits
of cost reduction efforts taken towards the end of the prior
fiscal year and less intangible asset amortization expense as a
result of the intangible asset impairment recorded during the
prior year.
Unallocated
Items
Centrally incurred and managed costs, excluding the impact of
foreign exchange, totaled $116.1 million and
$84.0 million in 2010 and 2009, respectively, and are not
allocated back to the operating segments. The unallocated items
included interest expense for centrally incurred debt of
$26.3 million and $22.9 million in 2010 and 2009,
respectively, and domestic profit-sharing expense of
$9.3 million in 2010. We did not incur profit-sharing
expense during 2009 based on the operating results in the year.
Unallocated items also included stock-based compensation expense
in accordance with ASC Topic 718 (ASC 718),
Stock Compensation of $5.8 million and
$4.4 million in 2010 and 2009, respectively. In 2010,
unallocated items included the negotiated settlement of a
lawsuit totaling $24.0 million, all of which was paid as of
February 28, 2010. In addition, unallocated items included
costs associated with corporate operations including the senior
management staff, corporate finance, legal and human resource
functions, as well as insurance programs and other strategic
costs. These costs totaled $50.7 million and
$56.7 million in 2010 and 2009, respectively.
Comparison
of the years ended February 28, 2009 and February 29,
2008
In 2009, net loss was $227.8 million, or $4.89 per diluted
share, compared to net income of $83.0 million, or $1.52
per diluted share, in 2008.
Our results for 2009 and 2008 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Total
|
|
|
|
|
|
% Total
|
|
(Dollars in thousands)
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
Net sales
|
|
$
|
1,646,399
|
|
|
|
97.4
|
%
|
|
$
|
1,730,784
|
|
|
|
97.4
|
%
|
Other revenue
|
|
|
44,339
|
|
|
|
2.6
|
%
|
|
|
45,667
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,690,738
|
|
|
|
100.0
|
%
|
|
|
1,776,451
|
|
|
|
100.0
|
%
|
Material, labor and other production costs
|
|
|
809,956
|
|
|
|
47.9
|
%
|
|
|
780,771
|
|
|
|
43.9
|
%
|
Selling, distribution and marketing expenses
|
|
|
618,899
|
|
|
|
36.6
|
%
|
|
|
621,478
|
|
|
|
35.0
|
%
|
Administrative and general expenses
|
|
|
226,317
|
|
|
|
13.4
|
%
|
|
|
246,722
|
|
|
|
13.9
|
%
|
Goodwill and other intangible assets impairment
|
|
|
290,166
|
|
|
|
17.2
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Other operating income net
|
|
|
(1,396
|
)
|
|
|
(0.1
|
%)
|
|
|
(1,325
|
)
|
|
|
(0.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(253,204
|
)
|
|
|
(15.0
|
%)
|
|
|
128,805
|
|
|
|
7.3
|
%
|
Interest expense
|
|
|
22,854
|
|
|
|
1.4
|
%
|
|
|
20,006
|
|
|
|
1.1
|
%
|
Interest income
|
|
|
(3,282
|
)
|
|
|
(0.2
|
%)
|
|
|
(7,758
|
)
|
|
|
(0.4
|
%)
|
Other non-operating expense (income) net
|
|
|
2,157
|
|
|
|
0.1
|
%
|
|
|
(7,411
|
)
|
|
|
(0.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before income tax (benefit) expense
|
|
|
(274,933
|
)
|
|
|
(16.3
|
%)
|
|
|
123,968
|
|
|
|
7.0
|
%
|
Income tax (benefit) expense
|
|
|
(47,174
|
)
|
|
|
(2.8
|
%)
|
|
|
40,648
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(227,759
|
)
|
|
|
(13.5
|
%)
|
|
|
83,320
|
|
|
|
4.7
|
%
|
Loss from discontinued operations, net of tax
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(317
|
)
|
|
|
(0.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(227,759
|
)
|
|
|
(13.5
|
%)
|
|
$
|
83,003
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Revenue
Overview
Consolidated net sales in 2009 were $1.65 billion, a
decrease of $84.4 million from the prior year.
Approximately half, or $42 million, of the decrease is
attributable to unfavorable foreign currency translation
impacts. The remaining decrease was the result of lower sales in
our North American Social Expression Products segment, Retail
Operations segment and International Social Expression Products
segment partially offset by increases in our AG Interactive
segment of approximately $6 million and the non-reportable
segments of approximately $3 million. The increased revenue
in the AG Interactive segment was primarily due to the digital
photography acquisitions completed during the second half of
2008 partially offset by lower advertising revenues.
Net sales of our North American Social Expression Products
segment decreased approximately $31 million. The majority
of the decrease is attributable to decreased sales of our gift
packaging and party goods product lines of approximately
$37 million and $11 million, respectively. Also
contributing to the decrease was a decline in specialty product
sales, which include stationery, calendars and stickers, of
approximately $7 million. These decreases were partially
offset by the favorable impact of fewer SBT implementations
during the year and the favorable impact of an SBT
implementation completed during the year that had previously
been estimated, which together increased net sales by
approximately $28 million in 2009 compared to 2008.
The Retail Operations segments net sales decreased
approximately $14 million due to both the decrease in
same-store sales of 4% and the reduction in stores.
Net sales of our International Social Expression Products
segment decreased approximately $5 million. The decrease
during the year is primarily attributable to reduced sales in
the U.K. due to the recent bankruptcy of a major customer; a
buying freeze implemented by another major customer, including
on our everyday products; and a general decline in seasonal and
everyday card sales to most customers during the fourth quarter.
This decrease was partially offset by an increase in sales of
approximately $11 million from the U.K. acquisition
completed during the first quarter of 2009.
The contribution of each major product category as a percentage
of net sales for 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Everyday greeting cards
|
|
|
43%
|
|
|
|
41%
|
|
Seasonal greeting cards
|
|
|
22%
|
|
|
|
22%
|
|
Gift packaging
|
|
|
14%
|
|
|
|
15%
|
|
All other products*
|
|
|
21%
|
|
|
|
22%
|
|
* The all other products classification
includes, among other things, giftware, party goods, calendars,
custom display fixtures, stickers, online greeting cards and
other digital products.
Other revenue, primarily royalty revenue from our Strawberry
Shortcake and Care Bears properties, decreased $1.4 million
from $45.7 million in 2008 to $44.3 million in 2009.
We entered into agreements to sell our Strawberry Shortcake and
Care Bears properties for net proceeds to us of approximately
$76.0 million. The transactions failed to close and have
resulted in three separate legal proceedings involving us and
our subsidiary, TCFC. See Note 2 to the Consolidated
Financial Statements as well as Part I, Item 3.
Legal Proceedings for further information.
33
Wholesale
Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis)
for 2009 and 2008 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) From the Prior Year
|
|
|
|
Everyday Cards
|
|
|
Seasonal Cards
|
|
|
Total Greeting Cards
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Unit volume
|
|
|
1.7
|
%
|
|
|
9.6
|
%
|
|
|
3.4
|
%
|
|
|
7.0
|
%
|
|
|
2.2
|
%
|
|
|
8.8
|
%
|
Selling prices
|
|
|
(1.5
|
%)
|
|
|
(5.6
|
%)
|
|
|
(5.3
|
%)
|
|
|
(4.4
|
%)
|
|
|
(2.7
|
%)
|
|
|
(5.2
|
%)
|
Overall increase / (decrease)
|
|
|
0.2
|
%
|
|
|
3.5
|
%
|
|
|
(2.1
|
%)
|
|
|
2.3
|
%
|
|
|
(0.5
|
%)
|
|
|
3.1
|
%
|
During 2009, combined everyday and seasonal greeting card sales
less returns decreased 0.5% compared to the prior year, with
increases in unit volume more than offset by lower average
selling prices.
Everyday card unit volume was up 1.7% compared to the prior
year. However, net of prior year SBT implementations that
reduced unit volume, everyday card unit volume was essentially
flat compared to the prior year. Overall unit volume had been
strong through the first three-quarters of the year, up 6.0%,
but dropped significantly during the fourth quarter due to the
general economic downturn and reduced inventory at retail.
Selling prices were down 1.5% compared to the prior year as a
result of the continued trend toward a higher mix of value line
cards. The increased volume of value priced card sales is driven
by expanded distribution and changes in consumer preferences.
This growth in the value priced cards more than offsets the
impact of the growth in higher priced technology cards.
Seasonal card unit volume increased 3.4% compared to the prior
year, driven by improvement in most seasonal programs. Lower
selling prices of 5.3% related to a higher mix of value priced
cards across most seasonal programs compared to the prior year.
The increased volume of value priced card sales is driven by
expanded distribution and changes in consumer preferences.
Expense
Overview
MLOPC for 2009 were $810.0 million, an increase from
$780.8 million in 2008. As a percentage of total revenue,
these costs were 47.9% in 2009 compared to 43.9% in 2008. The
increase of $29.2 million is due to unfavorable mix
($17 million) and spending variances ($44 million)
partially offset by favorable volume variances
($12 million) due to the lower sales volume and the impact
of foreign currency translation ($20 million). The
unfavorable spending variances are primarily attributable to
higher scrap and shrink ($19 million) and increased
expenses ($11 million) associated with our production of
film-based entertainment, which is used to support our
merchandise licensing strategies by increasing the awareness of
our properties within the target audience. Costs
($5 million) associated with the conversion to our new
Canadian line of cards and increased severance expenses
($3 million) during the year also contributed to the
unfavorable variances. The unfavorable mix is due to a shift
toward cards with more content, including music, lights and
other embellishments.
Selling, distribution and marketing expenses were
$618.9 million in 2009, decreasing from $621.5 million
in the prior year. The decrease of $2.6 million is due
primarily to the impact of favorable foreign currency
translation ($15 million) partially offset by increased
spending ($12 million). The increased spending is the
result of higher supply chain costs, specifically merchandiser
and distribution costs ($15 million) due to an increase in
units shipped. This increase was partially offset by lower
advertising expenses ($3 million) as the prior year
included additional advertising related to our investment in
cards strategy. Increased fixed asset impairment charges
($4 million) in our Retail Operations segment in 2009
compared to 2008 were substantially offset by reduced store
expenses ($4 million) due to the reduced store doors in our
Retail Operations segment.
Administrative and general expenses were $226.3 million in
2009, compared to $246.7 million in 2008. The
$20.4 million decrease in expense in 2009 is due to reduced
spending ($16 million) and favorable foreign currency
translation impacts ($4 million). The lower spending is
primarily the result of decreased variable compensation expenses
($29 million) including management bonuses and
profit-sharing contributions. The operating results during the
year did not meet the 2009 operating results required to make
these variable
34
compensation payments. This decrease was partially offset by an
increase in bad debt expense ($6 million) partially due to
the recent bankruptcy of a major customer in the U.K., increased
amortization of intangible assets ($3 million) due to the
acquisitions in both 2009 and 2008 and increased business taxes
($4 million) due primarily to revised assessment values for
certain personal property.
Goodwill and other intangible assets impairment charges of
$290.2 million were recorded in 2009. In the third quarter
of 2009, indicators emerged during the period that led us to
conclude that an impairment test was required prior to the
annual test. As a result, impairment was recorded for a
reporting unit in the International Social Expression Products
segment, located in the U.K., and in our AG Interactive segment.
The goodwill impairment charge recorded in the U.K. was
$82.1 million, which represents all of the goodwill for
this reporting unit. The goodwill and intangible assets
impairment charge for the AG Interactive segment was
$160.8 million, which includes all of the goodwill for AG
Interactive. An additional impairment analysis was performed at
the end of the fourth quarter of 2009 as a result of the
continued significant deterioration of the global economic
environment and the decline in the price of our common shares.
Based on that analysis, we recorded goodwill impairment charges
of $47.9 million, which includes all the goodwill for our
NAGCD and $0.1 million, which includes all the goodwill for
our fixtures business. NAGCD is part of our North American
Social Expression Products segment and the fixtures business is
included in non-reportable segments. Also, in the fourth
quarter, the estimated AG Interactive goodwill impairment charge
recorded in the third quarter was finalized which resulted in a
credit of $0.7 million being recorded due to final purchase
accounting adjustments in the fourth quarter.
Interest expense was $22.9 million in 2009, compared to
$20.0 million in 2008. The increase of $2.9 million is
primarily attributable to increased borrowings on our revolving
credit facility ($4 million) and the accounts receivable
securitization facility ($1 million) in the period. These
increases were partially offset by interest savings
($1 million) associated with the reduced balance
outstanding of our 6.10% notes as well as reduced fees for
our credit and accounts receivable facilities. The reduction in
commitment fees is primarily due to increased borrowings under
the facilities.
Other non-operating expense (income) net was expense
of $2.2 million in 2009 compared to income of
$7.4 million in 2008. The decrease of $9.6 million is
due to a swing of approximately $8 million from a foreign
exchange gain in 2008 to a loss in 2009 and to the loss of
approximately $3 million on our investment in debt
securities.
The effective tax rate for 2009 and 2008 was 17.2% and 32.8%,
respectively. These rates reflect the United States statutory
rate of 35% combined with the additional net impact of the
various foreign, state and local income tax rates. The lower
rate in 2009 reflects the nondeductible portion of the goodwill
impairment described above, interest expense on settled
positions and reduced charitable allowances partially offset by
the favorable impact of the closure of our French subsidiary.
See Note 17 to the Consolidated Financial Statements for
further information.
Segment
Results
We review segment results, including the evaluation of
management performance, using consistent exchange rates between
years to eliminate the impact of foreign currency fluctuations
from operating performance. The segment results of prior years
have been recast to reflect the 2010 foreign exchange rates for
a consistent presentation. Refer to Note 16, Business
Segment Information, to the Consolidated Financial
Statements for further information and a reconciliation of total
segment revenue to consolidated Total revenue and
total segment earnings (loss) to consolidated Income
(loss) from continuing operations before income tax expense
(benefit).
North
American Social Expression Products Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
% Change
|
|
Total revenue
|
|
$
|
1,086,940
|
|
|
$
|
1,118,342
|
|
|
|
(2.8
|
%)
|
Segment earnings
|
|
|
67,107
|
|
|
|
173,955
|
|
|
|
(61.4
|
%)
|
35
In 2009, total revenue of the North American Social Expression
Products segment, excluding the impact of foreign exchange and
intersegment items, decreased $31.4 million, or 2.8%, from
2008. The decrease is primarily attributable to lower sales of
our gift packaging ($37 million) and party goods
($11 million) product lines. Also contributing to the
decrease was a decline in specialty product sales
($7 million), which include stationery, calendars and
stickers. Sales of our everyday and seasonal cards remained
relatively flat compared to prior year sales. These decreases
were partially offset by the favorable impact of fewer SBT
implementations during the year and the favorable impact of an
SBT implementation completed during the year that had previously
been estimated, which together increased net sales by
approximately $28 million in 2009 compared to 2008.
Segment earnings, excluding the impact of foreign exchange and
intersegment items, decreased $106.8 million, or 61.4%, in
2009 compared to the prior year. Approximately half of the
decrease is attributable to the goodwill impairment charge
($48 million) recorded in the fourth quarter. Also
contributing to the decrease are lower margins and increased
supply chain costs of approximately $12 million. The lower
margins are a result of a shift in product mix toward cards with
more content, including music, lights and other embellishments.
The additional supply chain spending, specifically freight and
distribution costs, is due to an increase in card units shipped.
The remaining decrease in earnings is attributable to an
increase in SBT scrap costs.
International
Social Expression Products Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
% Change
|
|
Total revenue
|
|
$
|
205,687
|
|
|
$
|
211,191
|
|
|
|
(2.6
|
%)
|
Segment (loss) earnings
|
|
|
(60,206
|
)
|
|
|
15,979
|
|
|
|
-
|
|
Total revenue of the International Social Expression Products
segment, excluding the impact of foreign exchange, decreased
$5.5 million, or 2.6%, in 2009 compared to 2008. The
majority of the decrease is due to lower sales in the U.K.,
which is attributable to the significant decreases in the sales
of everyday and seasonal cards, particularly during the fourth
quarter. Everyday card sales were down across the customer base
and were accentuated by the bankruptcy of a major customer in
the third quarter of 2009, a buying freeze implemented by a
second major customer and lost shelf space with a third major
customer. The seasonal card decline was the result of decreased
sales in the Christmas and Valentines Day seasonal
programs and
year-over-year
timing differences related to the Easter and Mothers Day
programs. These decreases were partially offset by an increase
in revenue ($11 million) from the U.K. acquisition
completed during the first quarter of 2009.
Segment earnings, excluding the impact of foreign exchange,
decreased $76.2 million from income of $16.0 million
in 2008 to a loss of $60.2 million in 2009. This decrease
is mainly attributable to the goodwill impairment charge of
approximately $59 million (approximately $82 million
reported above less approximately $23 million of foreign
currency based on the consistent exchange rates utilized for
segment reporting purposes). The remaining decrease in earnings
was a result of the lower card sales, severance charges
($5 million) associated with headcount reductions and
facility reorganizations and charges related to the recent
bankruptcy of a major customer in the U.K.
Retail
Operations Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
% Change
|
|
Total revenue
|
|
$
|
170,066
|
|
|
$
|
184,099
|
|
|
|
(7.6
|
%)
|
Segment loss
|
|
|
(19,727
|
)
|
|
|
(5,011
|
)
|
|
|
-
|
|
The Retail Operations segment exhibits considerable seasonality,
which is typical for most retail store operations. A significant
amount of the total revenue and segment earnings occur during
the fourth quarter in conjunction with the major holiday seasons.
Total revenue in our Retail Operations segment, excluding the
impact of foreign exchange, decreased $14.0 million, or
7.6%, year over year. Total revenue at stores open one year or
more was down 4.0%, or approximately $7 million, from 2008.
This sales decline occurred primarily during the final four
months of the
36
year as consumer spending decreased due to the severity of the
economic downturn. Also contributing to the decrease is the
reduction in store doors as the average number of stores was
approximately 5% less than in the prior year period. During the
fourth quarter of 2009, approximately 70 underperforming stores
were closed.
Segment loss, excluding the impact of foreign exchange, was
$19.7 million in 2009 compared to $5.0 million in
2008. Earnings during 2009 were unfavorably impacted by the
lower sales level and a weakening of gross margins as a result
of more promotional pricing. Gross margins decreased by
approximately 3.6 percentage points. Also contributing to
the decrease in earnings were the fixed asset impairment charges
recorded during the year. Due to weak performance in certain of
our stores and the anticipated store closures, long-lived assets
within the segment were reviewed. As a result, impairment
charges of approximately $5 million were recorded compared
to fixed asset impairment charges of approximately
$1 million in 2008.
AG
Interactive Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
Total revenue
|
|
$
|
81,615
|
|
|
$
|
75,637
|
|
|
|
7.9
|
%
|
Segment (loss) earnings
|
|
|
(156,325
|
)
|
|
|
5,974
|
|
|
|
-
|
|
Total revenue, excluding the impact of foreign exchange,
increased $6.0 million, or 7.9%, from 2008. This increase
is primarily due to the digital photography acquisitions
completed during the second half of 2008. Digital photography
revenue contributed approximately $13 million to the
increase. This increase was offset by reduced sales in the
online product group ($7 million) as increases in
subscription revenue were more than offset by reduced
advertising revenue. At the end of 2009, AG Interactive had
approximately 4.1 million paid subscriptions versus
3.8 million in 2008.
Segment earnings, excluding the impact of foreign exchange,
decreased $162.3 million from income of $6.0 million
in 2008 to a loss of $156.3 million in 2009. This decrease
was a direct result of the goodwill and intangible asset
impairments of $160.1 million discussed above. The
remaining decrease is attributable to severance charges
($2 million) due to the headcount reductions during 2009
and expenses incurred associated with the digital photography
product line, including marketing, intangible asset amortization
and technology costs.
Unallocated
Items
Centrally incurred and managed costs, excluding the impact of
foreign exchange, totaled $84.0 million and
$83.0 million in 2009 and 2008, respectively, and are not
allocated back to the operating segments. The unallocated items
included interest expense for centrally incurred debt of
$22.9 million and $20.0 million in 2009 and 2008,
respectively, and domestic profit-sharing expense of
$5.2 million in 2008. We did not incur profit-sharing
expense during 2009 based on the operating results in the year.
Unallocated items also included stock-based compensation expense
in accordance with ASC 718 of $4.4 million and
$6.5 million in 2009 and 2008, respectively. In addition,
unallocated items included costs associated with corporate
operations including the senior management staff, corporate
finance, legal and human resource functions, as well as
insurance programs and other strategic costs. These costs
totaled $56.7 million and $51.3 million in 2009 and
2008, respectively.
Liquidity
and Capital Resources
Operating
Activities
During the year, cash flow from operating activities provided
cash of $197.5 million compared to $73.0 million in
2009, an increase of $124.5 million. Cash flow from
operating activities for 2009 compared to 2008 resulted in a
decrease of $170.5 million from $243.5 million in 2008.
Other non-cash charges were $18.3 million during 2010
compared to $8.3 million in 2009. The increase is primarily
due to an approximately $8.6 million loss on foreign
currency translation adjustments that were reclassified to
earnings upon liquidation of our distribution operation in
Mexico and an operation in France. Other non-cash charges in
2010 also included $5.8 million of stock-based compensation
expense.
37
Accounts receivable, net of the effect of acquisitions and
dispositions, was a use of cash of $56.1 million in 2010
compared to $6.5 million in 2009 and a source of cash of
$41.7 million in 2008. As a percentage of the prior twelve
months net sales, net accounts receivable was 8.5% at
February 28, 2010, compared to 4.7% at February 28,
2009. The current year use of cash is due to higher accounts
receivable balances in the North American Social Expression
Products segment of approximately $49 million and the
International Social Expression Products segment of
approximately $8 million. Within the North American Social
Expression Products segment, approximately half of the increase
is due to a combination of higher fourth quarter sales and the
acquisition of RPG and Papyrus. The remaining amount in the
North American Social Expression Products segment and the amount
in the International Social Expression Products segment is
related to the timing of collections from certain customers
compared to the prior year period.
Inventories, net of the effect of acquisitions and dispositions,
provided a source of cash of $14.9 million in 2010,
compared to $2.9 million in 2009 and a use of cash of
$28.9 million in 2008. The decrease in inventory, thus a
source of cash, in 2010 from 2009 is attributable to the North
American Social Expression Products segment, which lowered
inventory levels for all product categories. The increase in
inventory, thus a use of cash, in 2008 from 2007 is attributable
to the North American Social Expression Products segment,
primarily due to the increase in technology cards and the
inventory build related to the new Canadian product line.
Other current assets, net of the effect of acquisitions and
dispositions, were a source of cash of $17.0 million during
2010, compared to $17.6 million in 2009 and
$26.3 million in 2008. The current year cash generation is
attributable to the use of trust assets to fund active medical
claim expenses. The activity in 2009 and 2008 is primarily
attributable to a $90 million receivable recorded as part
of the termination of several long-term supply agreements in
fiscal 2007. Approximately $60 million of this receivable
was collected in the fourth quarter of 2007 and the balance was
received in 2008 and 2009.
Deferred costs net generally represents payments
under agreements with retailers net of the related amortization
of those payments. During 2010, 2009 and 2008, amortization
exceeded payments by $18.4 million, $27.6 million and
$38.5 million, respectively. In 2008, deferred
costs net also included the impact of a reduction of
deferred contract costs of approximately $15 million
associated with the termination of a long-term supply agreement
and related refund received. See Note 10 to the
Consolidated Financial Statements for further detail of deferred
costs related to customer agreements.
Accounts payable and other liabilities, net of the effect of
acquisitions and dispositions, provided $14.2 million of
cash in 2010 compared to using $67.5 million of cash in
2009 and providing $18.9 million of cash in 2008. The
change was attributable primarily to the difference in variable
compensation payments and accruals in the year ended
February 28, 2010 compared to the year ended
February 28, 2009. The prior year period included the
payment of variable compensation from the year ended
February 29, 2008, plus a nominal accrual at
February 28, 2009 due to the expectation that 2009
compensation performance targets would not be met, thus a large
use of cash in the prior year period. The current year includes
nominal cash payments related to the year end February 28,
2009, as such targets were not met, plus larger than normal
accruals at February 28, 2010, since we exceeded our
previously established compensation performance targets for the
year, thus a large source of cash.
Investing
Activities
Cash used by investing activities was $40.0 million during
2010 compared to $137.3 million during 2009 and
$125.6 million during 2008. The use of cash in the current
year is primarily related to cash payments for business
acquisitions and capital expenditures. During fiscal 2010, we
acquired the Papyrus brand and its related wholesale business
division from Schurman. At the same time, we sold the assets of
our Retail Operations segment to Schurman and acquired an equity
interest in Schurman. Cash paid, net of cash acquired, was
$14.0 million. Also, in fiscal 2010, we paid
$5.3 million of acquisition costs related to RPG, which we
acquired in the fourth quarter of 2009. Partially offsetting
these uses of cash were proceeds of $4.7 million from the
sale of our calendar and candy product lines and
$1.1 million from the sale of fixed assets.
Capital expenditures totaled $26.6 million,
$55.7 million and $56.6 million in 2010, 2009 and
2008, respectively. We currently expect 2011 capital
expenditures to total in the range of $35 million to
$45 million.
38
The use of cash during 2009 was primarily related to investments
in debt securities, business acquisitions and capital
expenditures. During the second quarter of 2009, we paid
$44.2 million to acquire, at a substantial discount, first
lien debt securities of RPG. During the fourth quarter of 2009,
we acquired all of the issued and outstanding capital stock of
RPG for a combination of cash, long-term debt and the
contribution of the debt securities that we acquired during the
second quarter of 2009. The cash paid as a result of this
transaction, net of cash acquired, was $22.3 million. We
also issued approximately $55 million of long-term debt
(with a fair market value of approximately $28 million) and
relinquished the RPG first lien debt securities (with a fair
market value of approximately $41 million), which we had
previously purchased for $44.2 million.
Also, in 2009, we purchased a card publisher and franchised
distributor of greeting cards in the U.K. for $15.6 million.
Cash used for investing activities in 2008 included the
acquisition of two businesses for $70.2 million. In October
2007, we acquired the online assets of the Webshots brand, and
in January 2008, we acquired PhotoWorks, Inc., an online photo
sharing and personal publishing company. Also, the final payment
of $6.1 million for the online greeting card business
acquired in 2007 was made during the first quarter of 2008.
These outflows were partially offset by cash inflows of
$3.1 million from the sale of fixed assets and
$4.3 million related to discontinued operations.
Financing
Activities
Financing activities used $86.5 million of cash in 2010
compared to providing $23.0 million of cash in 2009 and
using $146.9 million in 2008. The current year amount
relates primarily to net repayments of long-term debt borrowings
of $62.4 million as well as share repurchases and dividend
payments. During 2010, $5.8 million was paid to repurchase
approximately 1.5 million Class A common shares under
our repurchase program. In addition to the repurchases under the
Class A common share repurchase program, $6.0 million
was paid to repurchase approximately 0.3 million
Class B common shares in accordance with our Amended and
Restated Articles of Incorporation. We paid $19.0 million
for dividends, which were declared in February 2009, June 2009,
September 2009 and December 2009. We paid dividends totaling
$22.6 million and $21.8 million in 2009 and 2008,
respectively.
In 2009, the cash provided by financing activities related
primarily to additional long-term debt borrowings of
$141.5 million partially offset by share repurchases and
long-term debt repayments. During 2009, $73.8 million was
paid to repurchase approximately 7.9 million shares under
our Class A common share repurchase programs and
$0.2 million was paid to repurchase approximately 10,000
Class B common shares, in accordance with our Amended and
Restated Articles of Incorporation. During the second quarter of
2009, $22.5 million was paid upon exercise of the put
option on our 6.10% senior notes.
In 2008, cash used for financing activities primarily related to
our Class A common share repurchase programs. During 2008,
$149.2 million was paid to repurchase 6.7 million
shares under the repurchase programs. We paid $23.1 million
to repurchase 0.9 million Class B common shares during
2008, in accordance with our Amended and Restated Articles of
Incorporation. The majority of the Class B common shares
repurchased were held by the American Greetings Retirement
Profit Sharing and Savings Plan (the Plan) on behalf
of participants investing in the Plans company stock fund.
In connection with the Plans determination that the
company stock fund should consist solely of Class A common
shares to facilitate participant transactions, during November
2007, the Plan sold the remaining Class B common shares
back to American Greetings in accordance with our Amended and
Restated Articles of Incorporation. The cash outflow for
repurchases was partially offset by net borrowings of
$20.1 million under our credit facility.
Our receipt of the exercise price on stock options provided
$6.7 million, $0.5 million and $27.2 million in
2010, 2009 and 2008, respectively.
Credit
Sources
Substantial credit sources are available to us. In total, we had
available sources of approximately $530 million at
February 28, 2010. This included our $450 million
senior secured credit facility and our $80 million
39
accounts receivable securitization facility. We had
$99.3 million outstanding under the term loan facility and
no borrowing outstanding under the revolving credit facility at
February 28, 2010. In addition to these borrowings, we had,
in the aggregate, $46.2 million outstanding under letters
of credit, which reduces the total credit availability
thereunder as of February 28, 2010.
The credit agreement includes a $350 million revolving
credit facility and a $100 million term loan. The
obligations under the credit agreement are guaranteed by our
material domestic subsidiaries and are secured by substantially
all of the personal property of American Greetings and each of
our material domestic subsidiaries, including a pledge of all of
the capital stock in substantially all of our domestic
subsidiaries and 65% of the capital stock of our first tier
foreign subsidiaries. The revolving credit facility will mature
on April 4, 2011, and any outstanding term loans will
mature on April 4, 2013. Each term loan will amortize in
equal quarterly installments equal to 0.25% of the amount of
such term loan, beginning on April 3, 2009, with the
balance payable on April 4, 2013.
Although our revolving credit facility does not mature until
April 4, 2011 and the term loan does not mature until April
2013, during fiscal 2011 we anticipate refinancing this
indebtedness. Depending on market conditions at the time of the
refinancing, our interest and other costs with respect to these
borrowing arrangements may increase, and our covenants may
change, as compared to the interest and costs we pay, and the
covenants to which we are subject, under the current revolving
credit facility and term loan.
Revolving loans denominated in U.S. dollars under the
credit agreement will bear interest at a rate per annum based on
the then applicable London Inter-Bank Offer Rate
(LIBOR) or the alternate base rate
(ABR), as defined in the credit agreement, in each
case, plus margins adjusted according to our leverage ratio.
Term loans will bear interest at a rate per annum based on
either LIBOR plus 150 basis points or based on the ABR, as
defined in the credit agreement, plus 25 basis points. The
commitment fee on the revolving facility fluctuates based on our
leverage ratio.
The credit agreement contains certain restrictive covenants that
are customary for similar credit arrangements, including
covenants relating to limitations on liens, dispositions,
issuance of debt, investments, payment of dividends, repurchases
of capital stock, acquisitions and transactions with affiliates.
There are also financial performance covenants that require us
to maintain a maximum leverage ratio and a minimum interest
coverage ratio. The credit agreement also requires us to make
certain mandatory prepayments of outstanding indebtedness using
the net cash proceeds received from certain dispositions, events
of loss and additional indebtedness that we may incur from time
to time.
We are also party to an amended and restated receivables
purchase agreement with available financing of up to
$80 million. Under the amended and restated receivables
purchase agreement, American Greetings and certain of its
subsidiaries sell accounts receivable to AGC Funding Corporation
(AGC Funding), a wholly-owned, consolidated
subsidiary of American Greetings Corporation, which in turn
sells undivided interests in eligible accounts receivable to
third party financial institutions as part of a process that
provides funding similar to a revolving credit facility. Funding
under the facility may be used for working capital, general
corporate purposes and the issuance of letters of credit.
On September 23, 2009, the amended and restated receivables
purchase agreement was further amended. The amendment decreased
the amount of available financing under the agreement from
$90 million to $80 million and allows certain
receivables to be excluded from the program in connection with
the exercise of rights under insurance and other products that
may be obtained from time to time by American Greetings
Corporation or other originators that are designed to mitigate
credit risks associated with the collection of accounts
receivable. The amendment also extended the maturity date to
September 21, 2012; provided, however, that in addition to
customary termination provisions, the receivables purchase
agreement will terminate upon termination of the liquidity
commitments obtained by the purchaser groups from third party
liquidity providers. Such commitments may be made available to
the purchaser groups for
364-day
periods only (initial
364-day
period began on September 23, 2009), and there can be no
assurances that the third party liquidity providers will renew
or extend their commitments under the receivables purchase
agreement. If that is the case, the receivables purchase
agreement will terminate and we will not receive the benefit of
the entire three-year term of the agreement.
40
There were no balances outstanding under the amended and
restated receivables purchase agreement as of February 28,
2010 or 2009.
The interest rate under the accounts receivable securitization
facility is based on (i) commercial paper interest rates,
(ii) LIBOR rates plus an applicable margin or (iii) a
rate that is the higher of the prime rate as announced by the
applicable purchaser financial institution or the federal funds
rate plus 0.50%. AGC Funding pays an annual commitment fee of
28 basis points on the unfunded portion of the accounts
receivable securitization facility, together with customary
administrative fees on outstanding letters of credit that have
been issued and on outstanding amounts funded under the facility.
The amended and restated receivables purchase agreement contains
representations, warranties, covenants and indemnities customary
for facilities of this type, including the obligation of
American Greetings to maintain the same consolidated leverage
ratio as it is required to maintain under its secured credit
facility.
On May 24, 2006, we issued $200 million of
7.375% senior unsecured notes, due on June 1, 2016.
The proceeds from this issuance were used for the repurchase of
our 6.10% senior notes due on August 1, 2028 that were
tendered in the tender offer and consent solicitation that was
completed on May 25, 2006.
On February 24, 2009, we issued $22 million of
additional 7.375% senior unsecured notes described above
(Additional Senior Notes) and $32.7 million of
new 7.375% unsecured notes due on June 1, 2016 (New
Notes) in conjunction with the acquisition of RPG. The
original issue discount from the issuance of these notes of
$26.2 million was recorded as a reduction of the underlying
debt issuances and is being amortized over the life of the debt
using the effective interest method. Including the original
issue discount, the New Notes and the Additional Senior Notes
have an effective annualized interest rate of approximately
20.3%. Except as described below, the terms of the New Notes and
the Additional Senior Notes are the same.
The New Notes and the Additional Senior Notes will mature on
June 1, 2016 and bear interest at a fixed rate of 7.375%
per annum, commencing June 1, 2009. The New Notes and the
Additional Senior Notes constitute general, unsecured
obligations of the Corporation. The New Notes and the Additional
Senior Notes rank equally with our other senior unsecured
indebtedness and senior in right of payment to all of our
obligations that are, by their terms, expressly subordinated in
right of payment to the New Notes or the Additional Senior
Notes, as applicable. The Additional Senior Notes are
effectively subordinated to all of our secured indebtedness,
including borrowings under our credit agreement, to the extent
of the value of the assets securing such indebtedness. The New
Notes are contractually subordinated to amounts outstanding
under the credit agreement, and are effectively subordinated to
any other secured indebtedness that we may issue from time to
time to the extent of the value of the assets securing such
indebtedness.
The New Notes and the Additional Senior Notes generally contain
comparable covenants as described above for our credit
agreement. The New Notes also provide that if we incur more than
an additional $10 million of indebtedness (other than
indebtedness under the credit agreement or certain other
permitted indebtedness), such indebtedness must be (a) pari
passu in right of payment to the New Notes and expressly
subordinated in right of payment to the credit agreement at
least to the same extent as the New Notes, or (b) expressly
subordinated in right of payment to the New Notes.
Alternatively, we can redeem the New Notes in whole, but not in
part, at a purchase price equal to 100% of the principal amount
thereof plus accrued but unpaid interest, if any, or have the
subordination provisions removed from the New Notes.
At February 28, 2010, we were in compliance with our
financial covenants under the borrowing agreements described
above.
The total fair value of our publicly traded debt, based on
quoted market prices, was $224.7 million (at a carrying
value of $230.5 million) and $119.0 million (at a
carrying value of $228.6 million) at February 28, 2010
and 2009, respectively. The carrying amount of our publicly
traded debt significantly exceeded its fair value at
February 28, 2009 due to the tighter U.S. credit
markets. The total fair value of our non-publicly traded debt,
term loan and revolving credit facility, based on comparable
publicly traded debt prices, was $99.3 million (at a
carrying value of $99.3 million) and $129.3 million
(at a carrying value of $161.6 million) at
February 28, 2010 and 2009, respectively.
41
We will continue to consider all options for capital deployment
including growth options, capital expenditures, the opportunity
to repurchase our own shares, or by reducing debt. To this end,
in January 2009, we announced that our Board of Directors
authorized the repurchase of up to $75 million of
Class A common shares, that may be made through open market
purchases or privately negotiated transactions as market
conditions warrant, at prices we deem appropriate, and subject
to applicable legal requirements and other factors. There is no
set expiration date for this program. We also may from time to
time seek to retire or purchase our outstanding debt through
cash purchases
and/or
exchanges, in open market purchases, privately negotiated
transactions or otherwise, including strategically repurchasing
our 7.375% senior unsecured notes due in 2016 at a discount
to par. Such repurchases or exchanges, if any, will depend on
prevailing market conditions, our liquidity requirements,
contractual restrictions and other factors. The amounts involved
may be material.
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 the business results in
peak working capital requirements that may be financed through
short-term borrowings.
Contractual
Obligations
The following table presents our contractual obligations and
commitments to make future payments as of February 28, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period as of February 28, 2010
|
|
(In thousands)
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
Long-term debt
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
96,250
|
|
|
$
|
-
|
|
|
$
|
254,867
|
|
|
$
|
354,117
|
|
Operating leases(1)
|
|
|
20,993
|
|
|
|
15,459
|
|
|
|
11,431
|
|
|
|
7,778
|
|
|
|
5,680
|
|
|
|
14,863
|
|
|
|
76,204
|
|
Commitments under customer agreements
|
|
|
53,701
|
|
|
|
27,303
|
|
|
|
24,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,504
|
|
Commitments under royalty agreements
|
|
|
11,732
|
|
|
|
9,854
|
|
|
|
10,623
|
|
|
|
3,400
|
|
|
|
3,400
|
|
|
|
11,427
|
|
|
|
50,436
|
|
Interest payments
|
|
|
21,789
|
|
|
|
21,056
|
|
|
|
20,759
|
|
|
|
18,934
|
|
|
|
18,794
|
|
|
|
23,627
|
|
|
|
124,959
|
|
Severance
|
|
|
12,797
|
|
|
|
1,229
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,030
|
|
Commitments under purchase agreements
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
-
|
|
|
|
22,500
|
|
|
|
|
|
|
|
|
|
$
|
126,512
|
|
|
$
|
80,401
|
|
|
$
|
72,817
|
|
|
$
|
130,862
|
|
|
$
|
32,374
|
|
|
$
|
304,784
|
|
|
$
|
747,750
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Approximately $51 million of the operating lease
commitments in the table above relate to retail stores acquired
by Schurman that are being conditionally subleased to Schurman.
The failure of Schurman to operate the retail stores
successfully could have a material adverse effect on the
Corporation, because if Schurman is not able to comply with its
obligations under the subleases, the Corporation remains
contractually obligated, as primary lessee, under those leases. |
The interest payments in the above table are determined assuming
the same level of debt outstanding in the future years as at
February 28, 2010 for the revolving credit facility and the
term loan facility at the current average interest rates for
those facilities.
In addition to the contracts noted in the table, we issue
purchase orders for products, materials and supplies used in the
ordinary course of business. These purchase orders typically do
not include long-term volume commitments, are based on pricing
terms previously negotiated with vendors and are generally
cancelable with the appropriate notice prior to receipt of the
materials or supplies. Accordingly, the foregoing table excludes
open purchase orders for such products, materials and supplies
as of February 28, 2010.
Although we do not anticipate that contributions will be
required in 2011 to the defined benefit pension plan that we
assumed in connection with our acquisition of Gibson Greetings,
Inc. in 2001, we may make contributions in excess of the legally
required minimum contribution level. Refer to Note 12 to
the
42
Consolidated Financial Statements. We do anticipate that
contributions will be required beginning in fiscal 2014, but
those amounts have not been determined as of February 28,
2010.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these financial statements require us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the periods presented. Refer to Note 1 to the
Consolidated Financial Statements. The following paragraphs
include a discussion of the critical areas that required a
higher degree of judgment or are considered complex.
Allowance
for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based
on a combination of factors. In circumstances where we are aware
of a customers 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, certain other
seasonal products and everyday cards at certain foreign
locations, in the same period as the related revenues are
recorded. These estimates are based upon historical sales
returns, the amount of current year sales and other known
factors. Estimated return rates utilized for establishing
estimated returns reserves have approximated actual returns
experience. However, actual returns may differ significantly,
either favorably or unfavorably, from these estimates if factors
such as the historical data we used to calculate these estimates
do not properly reflect future returns or as a result of changes
in economic conditions of the customer
and/or its
market. We regularly monitor our actual performance to estimated
rates and the adjustments attributable to any changes have
historically not been material.
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 typically receives 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 the effective time period of the agreement to meet
a minimum purchase volume commitment. These agreements are
negotiated individually to meet competitive situations and
therefore, while some aspects of the agreements may be similar,
important contractual terms may vary. In addition, the
agreements may or may not specify us as the sole supplier of
social expression products to the customer.
Although risk is inherent in the granting of advances, we
subject such customers to our normal credit review. We maintain
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
customers inability to meet its performance obligation, we
record a specific allowance to reduce the deferred cost asset to
an estimate of its future value based upon expected
recoverability. Losses attributed to these specific events have
historically not been material.
For those contractual arrangements that are based upon a minimum
purchase volume commitment, we periodically review the progress
toward the volume commitment and estimate future sales
expectations for each customer. Factors that can affect our
estimate include store door openings and closings, retail
industry
43
consolidation, amendments to the agreements, consumer shopping
trends, addition or deletion of participating products and
product productivity. Based upon our review, we may modify the
remaining amortization periods of individual agreements to
reflect the changes in the estimates for the attainment of the
minimum volume commitment in order to align amortization expense
with the periods benefited. We do not make retroactive expense
adjustments to prior fiscal years as amounts, if any, have
historically not been material. The aggregate average remaining
life of our contract base is 5.6 years.
The accuracy of our assessments of the performance-related value
of a deferred cost asset related to a particular agreement and
of the estimated time period of the completion of a volume
commitment is based upon our ability to accurately predict
certain key variables such as product demand at retail, product
pricing, customer viability and other economic factors.
Predicting these key variables involves uncertainty about future
events; however, the assumptions used are consistent with our
internal planning. If the deferred cost assets are assessed to
be recoverable, they are amortized over the periods benefited.
If the carrying value of these assets is considered to not be
recoverable through performance, such assets are written down as
appropriate.
Goodwill
and Other Intangible Assets
Goodwill represents the excess of purchase price over the
estimated fair value of net assets acquired in business
combinations accounted for by the purchase method. In accordance
with 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 impairment
test during the fourth quarter. To test for goodwill impairment,
we are required to estimate the fair market value of each of our
reporting units. While we may use a variety of methods to
estimate fair value for impairment testing, our primary methods
are discounted cash flows and a market based analysis. We
estimate future cash flows and allocations of certain assets
using estimates for future growth rates and our judgment
regarding the applicable discount rates. Changes to our
judgments and estimates could result in a significantly
different estimate of the fair market value of the reporting
units, which could result in an impairment of goodwill.
Deferred
Income Taxes
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.
New
Accounting Pronouncements
In September 2006, the FASB issued ASC Topic 820 (ASC
820), Fair Value Measurements and Disclosures,
which provides a definition of fair value, establishes a
framework for measuring fair value and requires expanded
disclosures about fair value measurements. In November 2007, the
FASB deferred the effective date of ASC 820 for
non-financial assets and liabilities until fiscal years and
interim periods beginning after November 15, 2008. We
adopted the standard for non-financial assets and liabilities on
March 1, 2009.
In December 2007, the FASB issued an update to ASC Topic 805,
Business Combinations. This update provides revised
guidance on the recognition and measurement of the consideration
transferred, identifiable assets acquired, liabilities assumed,
noncontrolling interests and goodwill acquired in a business
combination. This update also expands required disclosures
surrounding the nature and financial effects of business
44
combinations. This update is effective, on a prospective basis,
for fiscal years beginning after December 15, 2008. We
adopted this update on March 1, 2009.
In December 2007, the FASB issued ASC Topic 810 (ASC
810), Consolidation, which establishes
accounting and reporting standards for noncontrolling interests
(i.e. minority interests) in a subsidiary and for the
deconsolidation of a subsidiary. Under the standard,
noncontrolling interests are considered equity and should be
clearly identified, presented and disclosed on the consolidated
statement of financial position within equity, but separate from
the parents equity. This guidance is effective, on a
prospective basis, for fiscal years beginning after
December 15, 2008. However, presentation and disclosure
requirements must be retrospectively applied to comparative
financial statements. We adopted this standard on March 1,
2009. The adoption of this standard does not materially impact
our financial statements.
In April 2008, the FASB issued an update to ASC Topic 350
(ASC 350), Intangibles-Goodwill and
Other. This update amends the factors that should be
considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset
under ASC 350. The intent of this updated guidance is to
improve the consistency between the useful life of a recognized
intangible asset under the original guidance within ASC 350
and the period of expected cash flows used to measure the fair
value of the asset under other U.S. generally accepted
accounting principles (GAAP). This update is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. The guidance for determining the
useful life of a recognized intangible asset shall be applied
prospectively to intangible assets acquired after the effective
date. Certain disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. The adoption of this updated
standard on March 1, 2009 did not materially impact our
financial statements.
In December 2008, the FASB issued an update to ASC Topic 715
(ASC 715), Compensation-Retirement
Benefits. This update provides guidance on an
employers disclosures about plan assets of a defined
benefit pension or other postretirement plan. It requires
disclosure of additional information about investment
allocation, fair values of major categories of assets, the
development of fair value measurements and concentrations of
risk. ASC 715 is effective for fiscal years ending after
December 15, 2009; however, earlier application is
permitted. We adopted this standard during 2010.
In April 2009, the FASB issued an update to ASC Topic 825,
Financial Instruments, to require disclosures about
fair value of financial instruments in both interim and annual
financial statements. This update is effective for interim and
annual periods ending after June 15, 2009, with early
application permitted. We adopted this updated standard in the
second quarter of 2010. Since this guidance only requires
additional disclosures, adoption of the standard did not
materially impact our financial statements.
In May 2009, the FASB issued ASC Topic 855, Subsequent
Events. ASC Topic 855 establishes general standards of
accounting for and disclosure of events that occur after the
balance sheet date but before the financial statements are
issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent
events and the basis for that date. This standard is effective
for interim and annual reporting periods ending after
June 15, 2009. We adopted this standard in the second
quarter of 2010. In February 2010, the FASB issued Accounting
Standards Update
2010-09
(ASU
2010-09),
Subsequent Events (Topic 855) Amendments to Certain
Recognition and Disclosure Requirements. ASU
2010-09
amends disclosure requirements within Subtopic
855-10. An
entity that is a filer with the Securities and Exchange
Commission (SEC) is not required to disclose the
date through which subsequent events have been evaluated. This
change alleviates potential conflicts between Subtopic
855-10 and
the SECs requirements. All of the amendments in ASU
2010-09 that
are applicable to us are effective upon issuance. Our adoption
of this update during the fourth quarter of 2010 did not have a
material effect on our financial statements.
In June 2009, the FASB issued ASC Topic 105, Generally
Accepted Accounting Principles, which establishes the FASB
ASC as the authoritative source of GAAP recognized by the FASB
to be applied by nongovernmental entities. This statement is
effective for interim and annual reporting periods ending after
September 15, 2009. The ASC supersedes all existing non-SEC
accounting and reporting standards. Since the
45
ASC does not change existing GAAP, our adoption of this standard
during the third quarter of 2010 did not have a material effect
on our financial statements.
In June 2009, the FASB issued a new standard pertaining to the
consolidation of a variable interest entity (VIE)
that improves financial reporting by enterprises involved with
VIEs and requires an ongoing reassessment of determining whether
a variable interest gives a company a controlling financial
interest in a VIE. This standard also eliminates the
quantitative approach to determining whether a company is the
primary beneficiary of a VIE previously required by FASB
guidance. This statement is effective for all interim and annual
periods beginning after February 28, 2010. We are currently
evaluating the impact that this standard will have on our
financial statements, particularly our interest in Schurman,
which, is a VIE as defined in ASC 810. Although our
interest in Schurman is a significant variable interest, under
the standard existing prior to the issuance of the new guidance
on VIEs, it was determined that we are not the primary
beneficiary of Schurman and as such, Schurman does not need to
be consolidated into our results. If, under the new standard, it
is determined that we have a controlling financial interest in
Schurman, we will be required to consolidate Schurmans
operations into our results. The initial determination must be
made in our first quarter of 2011 and such determination must be
reevaluated in all interim and annual periods going forward. If
we are required to consolidate Schurman, it could materially
affect our results of operations and financial position as we
would be required to include a portion of Schurmans income
or losses and assets and liabilities into our consolidated
financial statements.
In January 2010, the FASB issued Accounting Standards Update
2010-06
(ASU
2010-06),
Improving Disclosures about Fair Value Measurements.
ASU 2010-06
provides amendments to subtopic
820-10 that
require separate disclosure of significant transfers in and out
of Level 1 and Level 2 fair value measurements in
addition to the presentation of purchases, sales, issuances and
settlements for Level 3 fair value measurements. ASU
2010-06 also
provides amendments to subtopic
820-10 that
clarify existing disclosures about the level of disaggregation
and inputs and valuation techniques. The new disclosure
requirements are effective for interim and annual periods
beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements
of Level 3 fair value measurements. Those disclosures are
effective for interim and annual periods beginning after
December 15, 2010. As ASU
2010-06 only
requires enhanced disclosures, we do not expect that the
adoption of this update will 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 ability to achieve both the desired benefits from the Party
Goods Transaction as well as ensuring a seamless transition for
affected retail customers and consumers;
|
|
|
the ability to successfully integrate acquisitions, including
the recent acquisitions of RPG and Papyrus;
|
|
|
our ability to successfully complete the sale of the Strawberry
Shortcake and Care Bears properties;
|
|
|
our successful transition of the Retail Operations segment to
its buyer, Schurman Fine Papers, and Schurmans ability to
successfully operate its retail operations and satisfy its
obligations to us;
|
|
|
retail consolidations, acquisitions and bankruptcies, including
the possibility of resulting adverse changes to retail contract
terms;
|
46
|
|
|
the ability to achieve the desired benefits associated with our
cost reduction efforts;
|
|
|
competitive terms of sale offered to customers;
|
|
|
our ability to comply with our debt covenants and to refinance
our debt on acceptable terms as the debt instruments mature;
|
|
|
the timing and impact of investments in new retail or product
strategies as well as new product introductions and achieving
the desired benefits from those investments;
|
|
|
consumer acceptance of products as priced and marketed;
|
|
|
the impact of technology on core product sales;
|
|
|
the timing and impact of converting customers to a scan-based
trading model;
|
|
|
escalation in the cost of providing employee health care;
|
|
|
the ability to successfully implement, or achieve the desired
benefits associated with, any information systems refresh we may
implement;
|
|
|
our ability to achieve the desired accretive effect from any
share repurchase programs;
|
|
|
fluctuations in the value of currencies in major areas where we
operate, including the U.S. Dollar, Euro, U.K. Pound
Sterling, and Canadian Dollar; and
|
|
|
the outcome of any legal claims known or unknown.
|
Risks pertaining specifically to AG Interactive include the
viability of online advertising, subscriptions as revenue
generators, and the ability to adapt to rapidly changing social
media and the digital photo sharing space.
The risks and uncertainties identified above are not the only
risks we face. Additional risks and uncertainties not presently
known to us or that we believe to be immaterial also may
adversely affect us. Should any known or unknown risks or
uncertainties develop into actual events, or underlying
assumptions prove inaccurate, these developments could have
material adverse effects on our business, financial condition
and results of operations. For further information concerning
the risks we face and issues that could materially affect our
financial performance related to forward-looking statements,
refer to the Risk Factors section included in
Part I, Item 1A of this Annual Report on
Form 10-K.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Derivative Financial Instruments We had no
derivative financial instruments as of February 28, 2010.
Interest Rate Exposure We manage interest
rate exposure through a mix of fixed and floating rate debt.
Currently, the majority of our debt is carried at fixed interest
rates. Therefore, our overall interest rate exposure risk is
minimal. Based on our interest rate exposure on our non-fixed
rate debt as of and during the year ended February 28,
2010, 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 23%, 27% and 28% of our 2010, 2009 and 2008 total
revenue from continuing operations, respectively, were generated
from operations outside the United States. Operations in
Australia, New Zealand, Canada, Mexico, the European Union and
the U.K. are denominated in currencies other than
U.S. dollars. No assurance can be given that future results
will not be affected by significant changes in foreign currency
exchange rates.
47
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
|
|
|
|
|
|
|
Page
|
Index to Consolidated Financial Statements and Supplementary
Financial Data
|
|
Number
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
Supplementary Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
48
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
American Greetings Corporation
We have audited the accompanying consolidated statement of
financial position of American Greetings Corporation as of
February 28, 2010 and February 28, 2009, and the
related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended February 28, 2010. 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 Corporations
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of American Greetings Corporation at
February 28, 2010 and February 28, 2009, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended February 28,
2010, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, in 2010 the Corporation changed its method of
accounting for business combinations and, in 2008, the
Corporation changed its method of accounting for uncertain tax
positions.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
American Greetings Corporations internal control over
financial reporting as of February 28, 2010, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated April 29, 2010
expressed an unqualified opinion thereon.
Cleveland, Ohio
April 29, 2010
49
CONSOLIDATED
STATEMENT OF OPERATIONS
Years ended February 28, 2010, February 28,
2009 and February 29, 2008
Thousands of dollars except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net sales
|
|
$
|
1,598,292
|
|
|
$
|
1,646,399
|
|
|
$
|
1,730,784
|
|
Other revenue
|
|
|
37,566
|
|
|
|
44,339
|
|
|
|
45,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,635,858
|
|
|
|
1,690,738
|
|
|
|
1,776,451
|
|
Material, labor and other production costs
|
|
|
713,075
|
|
|
|
809,956
|
|
|
|
780,771
|
|
Selling, distribution and marketing expenses
|
|
|
507,960
|
|
|
|
618,899
|
|
|
|
621,478
|
|
Administrative and general expenses
|
|
|
276,031
|
|
|
|
226,317
|
|
|
|
246,722
|
|
Goodwill and other intangible assets impairment
|
|
|
|
|
|
|
290,166
|
|
|
|
|
|
Other operating income net
|
|
|
(310
|
)
|
|
|
(1,396
|
)
|
|
|
(1,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
139,102
|
|
|
|
(253,204
|
)
|
|
|
128,805
|
|
Interest expense
|
|
|
26,311
|
|
|
|
22,854
|
|
|
|
20,006
|
|
Interest income
|
|
|
(1,676
|
)
|
|
|
(3,282
|
)
|
|
|
(7,758
|
)
|
Other non-operating (income) expense- net
|
|
|
(6,487
|
)
|
|
|
2,157
|
|
|
|
(7,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
expense (benefit)
|
|
|
120,954
|
|
|
|
(274,933
|
)
|
|
|
123,968
|
|
Income tax expense (benefit)
|
|
|
39,380
|
|
|
|
(47,174
|
)
|
|
|
40,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
81,574
|
|
|
|
(227,759
|
)
|
|
|
83,320
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
81,574
|
|
|
$
|
(227,759
|
)
|
|
$
|
83,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
2.07
|
|
|
$
|
(4.89
|
)
|
|
$
|
1.54
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2.07
|
|
|
$
|
(4.89
|
)
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share assuming dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
2.03
|
|
|
$
|
(4.89
|
)
|
|
$
|
1.53
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2.03
|
|
|
$
|
(4.89
|
)
|
|
$
|
1.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of shares outstanding
|
|
|
39,467,811
|
|
|
|
46,543,780
|
|
|
|
54,236,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of shares outstanding assuming
dilution
|
|
|
40,159,651
|
|
|
|
46,543,780
|
|
|
|
54,506,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.36
|
|
|
$
|
0.60
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
50
CONSOLIDATED
STATEMENT OF FINANCIAL POSITION
February 28, 2010 and 2009
Thousands of dollars except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
137,949
|
|
|
$
|
60,216
|
|
Trade accounts receivable, net
|
|
|
135,758
|
|
|
|
77,703
|
|
Inventories
|
|
|
163,956
|
|
|
|
194,945
|
|
Deferred and refundable income taxes
|
|
|
78,433
|
|
|
|
67,267
|
|
Assets of businesses held for sale
|
|
|
13,280
|
|
|
|
23,627
|
|
Prepaid expenses and other
|
|
|
148,048
|
|
|
|
162,125
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
677,424
|
|
|
|
585,883
|
|
GOODWILL
|
|
|
31,106
|
|
|
|
26,871
|
|
OTHER ASSETS
|
|
|
428,160
|
|
|
|
376,665
|
|
DEFERRED AND REFUNDABLE INCOME TAXES
|
|
|
148,210
|
|
|
|
183,066
|
|
PROPERTY, PLANT AND EQUIPMENT NET
|
|
|
244,751
|
|
|
|
275,564
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,529,651
|
|
|
$
|
1,448,049
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Debt due within one year
|
|
$
|
1,000
|
|
|
$
|
750
|
|
Accounts payable
|
|
|
95,434
|
|
|
|
117,504
|
|
Accrued liabilities
|
|
|
79,478
|
|
|
|
90,236
|
|
Accrued compensation and benefits
|
|
|
85,092
|
|
|
|
32,198
|
|
Income taxes payable
|
|
|
13,901
|
|
|
|
11,743
|
|
Other current liabilities
|
|
|
97,138
|
|
|
|
105,537
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
372,043
|
|
|
|
357,968
|
|
LONG-TERM DEBT
|
|
|
328,723
|
|
|
|
389,473
|
|
OTHER LIABILITIES
|
|
|
164,642
|
|
|
|
149,820
|
|
DEFERRED INCOME TAXES AND NONCURRENT INCOME TAXES PAYABLE
|
|
|
28,179
|
|
|
|
21,599
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common shares par value $1 per share:
|
|
|
|
|
|
|
|
|
Class A 80,884,505 shares issued less
44,627,298 treasury shares in 2010 and 80,548,353 shares
issued less 43,505,203 treasury shares in 2009
|
|
|
36,257
|
|
|
|
37,043
|
|
Class B 6,066,092 shares issued less
2,843,069 treasury shares in 2010 and 6,066,092 shares
issued less 2,566,875 treasury shares in 2009
|
|
|
3,223
|
|
|
|
3,499
|
|
Capital in excess of par value
|
|
|
461,076
|
|
|
|
449,085
|
|
Treasury stock
|
|
|
(946,724
|
)
|
|
|
(938,086
|
)
|
Accumulated other comprehensive loss
|
|
|
(29,815
|
)
|
|
|
(67,278
|
)
|
Retained earnings
|
|
|
1,112,047
|
|
|
|
1,044,926
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
636,064
|
|
|
|
529,189
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,529,651
|
|
|
$
|
1,448,049
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
51
CONSOLIDATED
STATEMENT OF CASH FLOWS
Years ended February 28, 2010, February 28,
2009 and February 29, 2008
Thousands of dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
81,574
|
|
|
$
|
(227,759
|
)
|
|
$
|
83,003
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
81,574
|
|
|
|
(227,759
|
)
|
|
|
83,320
|
|
Adjustments to reconcile income (loss) from continuing
operations to cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets impairment
|
|
|
|
|
|
|
290,166
|
|
|
|
|
|
Net gain on dispositions
|
|
|
(6,507
|
)
|
|
|
|
|
|
|
|
|
Net loss on disposal of fixed assets
|
|
|
59
|
|
|
|
1,215
|
|
|
|
961
|
|
Depreciation and intangible assets amortization
|
|
|
45,165
|
|
|
|
50,016
|
|
|
|
48,535
|
|
Deferred income taxes
|
|
|
25,268
|
|
|
|
(29,438
|
)
|
|
|
(7,562
|
)
|
Fixed assets impairment
|
|
|
13,005
|
|
|
|
5,465
|
|
|
|
1,436
|
|
Other non-cash charges
|
|
|
18,289
|
|
|
|
8,270
|
|
|
|
7,867
|
|
Changes in operating assets and liabilities, net of acquisitions
and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(56,105
|
)
|
|
|
(6,504
|
)
|
|
|
41,698
|
|
Inventories
|
|
|
14,923
|
|
|
|
2,877
|
|
|
|
(28,926
|
)
|
Other current assets
|
|
|
16,962
|
|
|
|
17,585
|
|
|
|
26,342
|
|
Deferred costs net
|
|
|
18,405
|
|
|
|
27,596
|
|
|
|
53,438
|
|
Accounts payable and other liabilities
|
|
|
14,193
|
|
|
|
(67,542
|
)
|
|
|
18,934
|
|
Other net
|
|
|
12,259
|
|
|
|
1,093
|
|
|
|
(2,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Flows From Operating Activities
|
|
|
197,490
|
|
|
|
73,040
|
|
|
|
243,537
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of short-term investments
|
|
|
|
|
|
|
|
|
|
|
692,985
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
|
|
|
|
(692,985
|
)
|
Property, plant and equipment additions
|
|
|
(26,550
|
)
|
|
|
(55,733
|
)
|
|
|
(56,623
|
)
|
Cash payments for business acquisitions, net of cash acquired
|
|
|
(19,300
|
)
|
|
|
(37,882
|
)
|
|
|
(76,338
|
)
|
Cash receipts related to discontinued operations
|
|
|
|
|
|
|
|
|
|
|
4,283
|
|
Proceeds from sale of fixed assets
|
|
|
1,124
|
|
|
|
433
|
|
|
|
3,104
|
|
Other net
|
|
|
4,713
|
|
|
|
(44,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Flows From Investing Activities
|
|
|
(40,013
|
)
|
|
|
(137,335
|
)
|
|
|
(125,574
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in long-term debt
|
|
|
(62,350
|
)
|
|
|
118,991
|
|
|
|
20,100
|
|
Sale of stock under benefit plans
|
|
|
6,705
|
|
|
|
525
|
|
|
|
27,156
|
|
Purchase of treasury shares
|
|
|
(11,848
|
)
|
|
|
(73,983
|
)
|
|
|
(172,328
|
)
|
Dividends to shareholders
|
|
|
(19,049
|
)
|
|
|
(22,566
|
)
|
|
|
(21,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Flows From Financing Activities
|
|
|
(86,542
|
)
|
|
|
22,967
|
|
|
|
(146,875
|
)
|
DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by operating activities from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Flows From Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
6,798
|
|
|
|
(21,956
|
)
|
|
|
7,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
77,733
|
|
|
|
(63,284
|
)
|
|
|
(21,213
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
60,216
|
|
|
|
123,500
|
|
|
|
144,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
137,949
|
|
|
$
|
60,216
|
|
|
$
|
123,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
52
CONSOLIDATED
STATEMENT OF SHAREHOLDERS EQUITY
Years ended February 28, 2010, February 28,
2009 and February 29, 2008
Thousands of dollars except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Excess of
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Par Value
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Total
|
|
|
BALANCE MARCH 1, 2007
|
|
$
|
50,839
|
|
|
$
|
4,283
|
|
|
$
|
414,859
|
|
|
$
|
(710,414
|
)
|
|
$
|
(1,013
|
)
|
|
$
|
1,254,020
|
|
|
$
|
1,012,574
|
|
Cumulative effect adjustment, adoption of ASC Topic 740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,017
|
)
|
|
|
(14,017
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,003
|
|
|
|
83,003
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,691
|
|
|
|
|
|
|
|
18,691
|
|
Pension and postretirement adjustments recognized in accordance
with ASC 715 (net of tax of $7,093)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,567
|
|
|
|
|
|
|
|
3,567
|
|
Unrealized loss on
available-for-sale
securities (net of tax of $1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,260
|
|
Cash dividends $0.40 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,803
|
)
|
|
|
(21,803
|
)
|
Sale of shares under benefit plans, including tax benefits
|
|
|
1,220
|
|
|
|
2
|
|
|
|
25,533
|
|
|
|
79
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
26,791
|
|
Purchase of treasury shares
|
|
|
(6,736
|
)
|
|
|
(928
|
)
|
|
|
|
|
|
|
(164,664
|
)
|
|
|
|
|
|
|
|
|
|
|
(172,328
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
6,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,547
|
|
Stock grants and other
|
|
|
1
|
|
|
|
77
|
|
|
|
(1,243
|
)
|
|
|
2,050
|
|
|
|
|
|
|
|
(498
|
)
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE FEBRUARY 29, 2008
|
|
|
45,324
|
|
|
|
3,434
|
|
|
|
445,696
|
|
|
|
(872,949
|
)
|
|
|
21,244
|
|
|
|
1,300,662
|
|
|
|
943,411
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227,759
|
)
|
|
|
(227,759
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80,845
|
)
|
|
|
|
|
|
|
(80,845
|
)
|
Pension and postretirement adjustments recognized in accordance
with ASC 715 (net of tax of $6,839)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,674
|
)
|
|
|
|
|
|
|
(7,674
|
)
|
Unrealized loss on
available-for-sale
securities (net of tax of $0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(316,281
|
)
|
Cash dividends $0.60 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,491
|
)
|
|
|
(27,491
|
)
|
Sale of shares under benefit plans, including tax benefits
|
|
|
26
|
|
|
|
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
410
|
|
Purchase of treasury shares
|
|
|
(8,311
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
(67,158
|
)
|
|
|
|
|
|
|
|
|
|
|
(75,479
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,369
|
|
Stock grants and other
|
|
|
4
|
|
|
|
75
|
|
|
|
(1,364
|
)
|
|
|
2,021
|
|
|
|
|
|
|
|
(486
|
)
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE FEBRUARY 28, 2009
|
|
|
37,043
|
|
|
|
3,499
|
|
|
|
449,085
|
|
|
|
(938,086
|
)
|
|
|
(67,278
|
)
|
|
|
1,044,926
|
|
|
|
529,189
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,574
|
|
|
|
81,574
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,467
|
|
|
|
|
|
|
|
22,467
|
|
Reclassification of currency translation adjustment for amounts
recognized in income (net of tax of $0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,627
|
|
|
|
|
|
|
|
8,627
|
|
Pension and postretirement adjustments recognized in accordance
with ASC 715 (net of tax of $5,837)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,366
|
|
|
|
|
|
|
|
6,366
|
|
Unrealized gain on
available-for-sale
securities (net of tax of $0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,037
|
|
Cash dividends $0.36 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,124
|
)
|
|
|
(14,124
|
)
|
Sale of shares under benefit plans, including tax benefits
|
|
|
336
|
|
|
|
|
|
|
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,508
|
|
Purchase of treasury shares
|
|
|
(1,125
|
)
|
|
|
(292
|
)
|
|
|
|
|
|
|
(9,111
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,528
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
5,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,819
|
|
Stock grants and other
|
|
|
3
|
|
|
|
16
|
|
|
|
|
|
|
|
473
|
|
|
|
|
|
|
|
(329
|
)
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE FEBRUARY 28, 2010
|
|
$
|
36,257
|
|
|
$
|
3,223
|
|
|
$
|
461,076
|
|
|
$
|
(946,724
|
)
|
|
$
|
(29,815
|
)
|
|
$
|
1,112,047
|
|
|
$
|
636,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
53
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 28, 2010, February 28,
2009 and February 29, 2008
Thousands of dollars except per share amounts
|
|
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 Corporations 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, 2010 refers to the year ended February 28, 2010.
The Corporations 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 and the Corporation is the primary
beneficiary, in which case the investments are consolidated in
accordance with Accounting Standards Codification
(ASC) Topic 810, Consolidation.
Reclassifications: Certain amounts in the prior year
financial statements have been reclassified to conform to the
2010 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, customer
allowances and discounts, recoverability of intangibles and
other long-lived assets, deferred tax asset valuation
allowances, deferred costs and various other operating
allowances and accruals, based on currently available
information. Changes in facts and circumstances may alter such
estimates and affect the results of operations and the financial
position in future periods.
Cash Equivalents: The Corporation considers all
highly liquid instruments purchased with an original maturity of
less than three months to be cash equivalents.
Short-term Investments: In prior years, the
Corporation invested in auction rate securities, which are
variable-rate debt securities associated with bond offerings.
While the underlying security had a long-term nominal maturity,
the interest rate was reset through Dutch auctions that are
typically held every 7, 28 or 35 days, creating short-term
liquidity for the Corporation. The securities traded at par and
were callable at par on any interest payment date at the option
of the issuer. Interest was paid at the end of each auction
period. The investments were classified as
available-for-sale
and were recorded at cost, which approximated market value. Cash
flows from the sale and purchase of short-term investments were
included in investing activities on the Consolidated Statement
of Cash Flows. There were no short-term investments as of
February 28, 2010 and 2009.
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 customers inability to meet its financial
obligations, a specific allowance for bad debts against amounts
due is recorded to reduce the receivable to the amount the
Corporation reasonably expects will be collected. In addition,
the Corporation recognizes allowances for bad debts based on
estimates developed by using standard quantitative measures
incorporating historical write-offs. See Note 6 for further
information.
Customer Allowances and Discounts: The Corporation
offers certain of its customers allowances and discounts
including cooperative advertising, rebates, marketing allowances
and various other allowances and discounts. These amounts are
recorded as reductions of gross accounts receivable or included
in accrued liabilities and are recognized as reductions of net
sales when earned. These amounts are earned by the customer as
product is purchased from the Corporation and are recorded based
on the terms of individual customer contracts. See Note 6
for further information.
54
Concentration of Credit Risks: The Corporation sells
primarily to customers in the retail trade, including those in
the mass merchandise, drug store, discount retailer, supermarket
and other channels of distribution. These customers are located
throughout the United States, Canada, the United Kingdom,
Australia, New Zealand and Mexico. Net sales from continuing
operations to the Corporations five largest customers
accounted for approximately 39%, 36% and 37% of total revenue in
2010, 2009 and 2008, respectively. Net sales to Wal-Mart Stores,
Inc. and its subsidiaries accounted for approximately 14%, 15%
and 16% of total revenue from continuing operations in 2010,
2009 and 2008, respectively. Net sales to Target Corporation
accounted for approximately 13% of total revenue from continuing
operations in 2010 and less than 10% in 2009 and 2008,
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 80% and 75% of the total
pre-LIFO consolidated inventories at February 28, 2010 and
2009, respectively. International inventories and the remaining
domestic inventories principally use the
first-in,
first-out (FIFO) method except for display material
and factory supplies which 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 properly
matches the cost of obtaining business over the periods to be
benefited. The periods of amortization are continually evaluated
to determine if later circumstances warrant revisions of the
estimated amortization periods. The Corporation maintains 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 customers 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 Corporations 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 periods 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.
55
During 2010, production expense totaled $4,360 with no
significant amounts related to changes in ultimate revenue
estimates. During 2009, production expense totaled $19,945 and
included amounts related to changes in ultimate revenue
estimates of approximately $8,856. The balance of deferred film
production costs was $11,479 and $10,290 at February 28,
2010 and 2009, respectively, and are included in Other
assets on the Consolidated Statement of Financial
Position. The Corporation expects to recognize amortization of
approximately $3,900 of production costs during the next twelve
months.
Investment in Life Insurance: The Corporations
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 $18,330 and $16,070 as
of February 28, 2010 and 2009, respectively. The net life
insurance expense, including interest expense, is included in
Administrative and general expenses on the
Consolidated Statement of Operations. The related interest
expense, which approximates amounts paid, was $12,207, $11,101
and $10,779 in 2010, 2009 and 2008, 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 (ASC
350), Intangibles Goodwill and
Other. This topic addresses the amortization of intangible
assets with defined lives and addresses the impairment testing
and recognition for goodwill and indefinite-lived intangible
assets. The Corporation is required to evaluate the carrying
value of its goodwill and indefinite-lived intangible assets for
potential impairment on an annual basis or more frequently if
indicators arise. 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, 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 10 to
40 years; computer hardware and software over 3 to
7 years; machinery and equipment over 3 to 15 years;
and furniture and fixtures over 8 to 20 years. Leasehold
improvements are amortized over the lesser of the lease term or
the estimated life of the leasehold improvement. Property, plant
and equipment are reviewed for impairment in accordance with 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
(ASC 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 plans funded status in comprehensive income
in the year in which the changes occur. See Note 12 for
further information.
Revenue Recognition: Sales of seasonal products are
recognized when title and the risk of loss have been transferred
to the customer. Seasonal cards, certain other seasonal products
and everyday cards at certain international locations 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
56
historical sales returns, the amount of current year sales and
other known factors. Accrual rates utilized for establishing
estimated returns reserves have approximated actual returns
experience.
Except for products sold with a right of return and retailers
with a scan-based trading (SBT) arrangement, sales
are recognized when title and risk of loss have been transferred
to the customer. Prior to April 17, 2009, sales at the
Corporation owned retail locations were recognized upon the sale
of product to the consumer. Sales of these products are
generally sold without the right of return and sales credits are
issued at the Corporations discretion for damaged,
obsolete and outdated products.
For retailers with an SBT arrangement, the Corporation owns the
product delivered to its retail customers until the product is
sold by the retailer to the ultimate consumer, at which time the
Corporation recognizes revenue for both everyday and seasonal
products. When a retailer commits to convert to an SBT
arrangement, 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 retailers 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.
Subscription revenue, primarily for the AG Interactive segment,
represents fees paid by customers for access to particular
services for the term of the subscription. Subscription revenue
is generally billed in advance and is recognized ratably over
the subscription periods.
The Corporation has agreements for licensing the Care Bears and
Strawberry Shortcake characters and other intellectual property.
These license agreements provide for royalty revenue to the
Corporation based on a percentage of net sales and are subject
to certain guaranteed minimum royalties. These license
agreements may include the receipt of upfront advances, which
are recorded as deferred revenue and earned during the period of
the agreement. Certain of these agreements are managed by
outside agents. All payments flow through the agents prior to
being remitted to the Corporation. Typically, the Corporation
receives quarterly payments from the agents. Royalty revenue is
generally recognized upon receipt and recorded in Other
revenue and expenses associated with the servicing of
these agreements are primarily recorded as Selling,
distribution and marketing expenses.
Deferred revenue, included in Other current
liabilities on the Consolidated Statement of Financial
Position, totaled $40,156 and $37,751 at February 28, 2010
and 2009, respectively. The amounts relate primarily to
subscription revenue in the Corporations AG Interactive
segment and the licensing activities included in non-reportable
segments.
Sales Taxes: Sales taxes are not included in net
sales as the Corporation is a conduit for collecting and
remitting taxes to the appropriate taxing authorities.
Translation of Foreign 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
shareholders equity within other comprehensive income.
Upon sale, or upon complete or substantially complete
liquidation of an investment in a foreign entity, that component
of shareholders equity is reclassified as part of the gain
or loss on sale or liquidation of the investment. Gains and
losses resulting from foreign currency transactions, including
intercompany transactions that are not considered permanent
investments, are included in other non-operating expense
(income) as incurred.
Shipping and Handling Fees: The Corporation
classifies shipping and handling fees as part of Selling,
distribution and marketing expenses. Shipping and handling
costs were $119,989, $130,271 and $128,177 in 2010, 2009 and
2008, respectively.
Advertising Expense: Advertising costs are expensed
as incurred. Advertising expense was $16,985, $19,784 and
$24,896 in 2010, 2009 and 2008, 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 provided for
temporary differences
57
between the carrying amounts of assets and liabilities for
financial reporting purposes and amounts used for income tax
purposes.
In July 2006, the Financial Accounting Standards Board (the
FASB) issued an update to ASC Topic 740 (ASC
740), Income Taxes. The guidance clarifies the
accounting for uncertain tax positions recognized in a
companys financial statements, including what criteria
must be met prior to recognition of the financial statement
benefit of a position taken or expected to be taken in a tax
return. The update requires a company to include additional
qualitative and quantitative disclosures within its financial
statements. The disclosures include potential tax benefits from
positions taken for tax return purposes that have not been
recognized for financial reporting purposes and a tabular
presentation of significant changes during each annual period.
The disclosures also include a discussion of the nature of
uncertainties, factors that could cause a change and an
estimated range of reasonably possible changes in tax
uncertainties. ASC 740 requires a company to recognize a
financial statement benefit for a position taken for tax return
purposes when it is more likely than not that the position will
be sustained. The cumulative effect of adopting this update is
recorded as an adjustment to the opening balance of retained
earnings in the period of adoption. The Corporation adopted the
updated guidance on March 1, 2007. See Note 17 for
further discussion.
Recent Accounting Pronouncements: In September 2006,
the FASB issued ASC Topic 820 (ASC 820), Fair
Value Measurements and Disclosures, which provides a
definition of fair value, establishes a framework for measuring
fair value and requires expanded disclosures about fair value
measurements. In November 2007, the FASB deferred the effective
date of ASC 820 for non-financial assets and liabilities
until fiscal years and interim periods beginning after
November 15, 2008. The Corporation adopted the standard for
non-financial assets and liabilities on March 1, 2009. See
Note 14 for further information.
In December 2007, the FASB issued an update to ASC Topic 805
(ASC 805), Business Combinations. This
update provides revised guidance on the recognition and
measurement of the consideration transferred, identifiable
assets acquired, liabilities assumed, noncontrolling interests
and goodwill acquired in a business combination. This update
also expands required disclosures surrounding the nature and
financial effects of business combinations. This update is
effective, on a prospective basis, for fiscal years beginning
after December 15, 2008. The Corporation adopted this
update on March 1, 2009. See Note 2 for further
information.
In December 2007, the FASB issued ASC Topic 810 (ASC
810), Consolidation, which establishes
accounting and reporting standards for noncontrolling interests
(i.e. minority interests) in a subsidiary and for the
deconsolidation of a subsidiary. Under the standard,
noncontrolling interests are considered equity and should be
clearly identified, presented and disclosed on the consolidated
statement of financial position within equity, but separate from
the parents equity. This guidance is effective, on a
prospective basis, for fiscal years beginning after
December 15, 2008. However, presentation and disclosure
requirements must be retrospectively applied to comparative
financial statements. The Corporation adopted this standard on
March 1, 2009. The adoption of this standard does not
materially impact the Corporations financial statements.
In April 2008, the FASB issued an update to
ASC 350. This update amends the factors that should be
considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset
under ASC 350. The intent of this updated guidance is to
improve the consistency between the useful life of a recognized
intangible asset under the original guidance within ASC 350
and the period of expected cash flows used to measure the fair
value of the asset under other U.S. generally accepted
accounting principles (GAAP). This update is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. The guidance for determining the
useful life of a recognized intangible asset shall be applied
prospectively to intangible assets acquired after the effective
date. Certain disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. The adoption of this updated
standard on March 1, 2009 did not materially impact the
Corporations financial statements. See Note 9 for
further information.
In December 2008, the FASB issued an update to ASC 715.
This update provides guidance on an employers disclosures
about plan assets of a defined benefit pension or other
postretirement plan. It requires disclosure of additional
information about investment allocation, fair values of major
categories of assets, the development
58
of fair value measurements and concentrations of risk.
ASC 715 is effective for fiscal years ending after
December 15, 2009, with early application permitted. The
Corporation adopted this standard during 2010. See Note 12
for further information.
In April 2009, the FASB issued an update to ASC Topic 825,
Financial Instruments, to require disclosures about
fair value of financial instruments in both interim and annual
financial statements. This update is effective for interim and
annual periods ending after June 15, 2009, with early
application permitted. The Corporation adopted this updated
standard in the second quarter of 2010. Since this guidance only
requires additional disclosures, adoption of the standard did
not materially impact the Corporations financial
statements. See Note 11 for further information.
In May 2009, the FASB issued ASC Topic 855, Subsequent
Events. ASC Topic 855 establishes general standards of
accounting for and disclosure of events that occur after the
balance sheet date but before the financial statements are
issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent
events and the basis for that date. This standard is effective
for interim and annual reporting periods ending after
June 15, 2009. The Corporation adopted this standard in the
second quarter of 2010. In February 2010, the FASB issued
Accounting Standards Update
2010-09
(ASU
2010-09),
Subsequent Events (Topic 855) Amendments to Certain
Recognition and Disclosure Requirements. ASU
2010-09
amends disclosure requirements within Subtopic
855-10. An
entity that is a filer with the Securities and Exchange
Commission (SEC) is not required to disclose the
date through which subsequent events have been evaluated. This
change alleviates potential conflicts between Subtopic
855-10 and
the SECs requirements. All of the amendments in ASU
2010-09 that
are applicable to the Corporation are effective upon issuance.
The Corporations adoption of this update during the fourth
quarter of 2010 did not have a material effect on its financial
statements.
In June 2009, the FASB issued ASC Topic 105, Generally
Accepted Accounting Principles, which establishes the FASB
ASC as the authoritative source of GAAP recognized by the FASB
to be applied by nongovernmental entities. This statement is
effective for interim and annual reporting periods ending after
September 15, 2009. The ASC supersedes all existing non-SEC
accounting and reporting standards. Since the ASC does not
change existing GAAP, the Corporations adoption of this
standard during the third quarter of 2010 did not have a
material effect on its financial statements.
In June 2009, the FASB issued a new standard pertaining to the
consolidation of a variable interest entity (VIE)
that improves financial reporting by enterprises involved with
VIEs and requires an ongoing reassessment of determining whether
a variable interest gives a company a controlling financial
interest in a VIE. This standard also eliminates the
quantitative approach to determining whether a company is the
primary beneficiary of a VIE previously required by FASB
guidance. This statement is effective for the Corporation for
all interim and annual periods beginning after February 28,
2010. The Corporation is currently evaluating the impact that
this standard will have on its financial statements,
particularly the Corporations interest in Schurman Fine
Papers (Schurman), which, as described in
Note 2, is a VIE as defined in ASC 810. Although the
Corporations interest in Schurman is a significant
variable interest, as described in Note 2, under the
standard existing prior to the issuance of the new guidance on
VIEs, it was determined that the Corporation is not the primary
beneficiary of Schurman and as such, Schurman does not need to
be consolidated into the Corporations results. If, under
the new standard, it is determined that the Corporation has a
controlling financial interest in Schurman, the Corporation will
be required to consolidate Schurmans operations into its
results. The initial determination must be made in the
Corporations first quarter of 2011 and such determination
must be reevaluated in all interim and annual periods going
forward. If the Corporation is required to consolidate Schurman,
it could materially affect the Corporations results of
operations and financial position as the Corporation would be
required to include a portion of Schurmans income or
losses and assets and liabilities into the Corporations
consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update
2010-06
(ASU
2010-06),
Improving Disclosures about Fair Value Measurements.
ASU 2010-06
provides amendments to subtopic
820-10 that
require separate disclosure of significant transfers in and out
of Level 1 and Level 2 fair value measurements in
addition to the presentation of purchases, sales, issuances and
settlements for Level 3 fair value
59
measurements. ASU
2010-6 also
provides amendments to subtopic
820-10 that
clarify existing disclosures about the level of disaggregation
and inputs and valuation techniques. The new disclosure
requirements are effective for interim and annual periods
beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements
of Level 3 fair value measurements. Those disclosures are
effective for interim and annual periods beginning after
December 15, 2010. As ASU
2010-06 only
requires enhanced disclosures, the Corporation does not expect
that the adoption of this update will have a material effect on
its financial statements. See Note 14 for further
information.
|
|
NOTE 2
|
ACQUISITIONS
AND DISPOSITIONS
|
Papyrus
Brand & Wholesale Business Acquisition / Retail
Operations Disposition
Continuing the strategy of focusing on growing its core greeting
card business, on April 17, 2009, the Corporation sold all
rights, title and interest in certain of the assets of the
Corporations Retail Operations segment to Schurman for
$6,000 in cash and Schurmans assumption of certain
liabilities related to the Retail Operations segment. The
Corporation sold all 341 of its card and gift retail store
assets to Schurman, which operates stores under the American
Greetings, Carlton Cards and Papyrus brands. Under the terms of
the transaction, the Corporation remains subject to certain of
its store leases on a contingent basis by subleasing the stores
to Schurman. See Note 13 for further information. Pursuant
to the terms of the agreement, the Corporation also purchased
from Schurman its Papyrus trademark and its wholesale business
division, which supplies Papyrus brand greeting cards primarily
to leading specialty, mass merchandise, grocery and drug store
channels, in exchange for $18,065 in cash and the
Corporations assumption of certain liabilities related to
Schurmans wholesale business. In addition, the Corporation
agreed to provide Schurman limited credit support through the
provision of a limited guarantee (Liquidity
Guarantee) and a limited bridge guarantee (Bridge
Guarantee) in favor of the lenders under Schurmans
senior revolving credit facility (the Senior Credit
Facility). The Corporation also purchased shares
representing approximately 15% of the issued and outstanding
equity interests in Schurman for $1,935, which is included in
Other assets on the Consolidated Statement of
Financial Position. The net cash paid of $14,000 related to this
transaction, which has been accounted for in accordance with
ASC 805, is included in Cash payments for business
acquisitions, net of cash acquired on the Consolidated
Statement of Cash Flows.
Pursuant to the terms of the Liquidity Guarantee, the
Corporation has guaranteed the repayment of up to $12,000 of
Schurmans borrowings under the Senior Credit Facility to
help ensure that Schurman has sufficient borrowing availability
under this facility. The Liquidity Guarantee is required to be
backed by a letter of credit for the term of the Liquidity
Guarantee, which is currently anticipated to end in January
2014. Pursuant to the terms of the Bridge Guarantee, the
Corporation has guaranteed the repayment of up to $12,000 of
Schurmans borrowings under the Senior Credit Facility
until Schurman is able to include the inventory and other assets
of the acquired retail stores in its borrowing base. The Bridge
Guarantee is required to be backed by a letter of credit.
Although the Bridge Guarantee may be reduced as Schurman is able
to include such inventory and other assets in its borrowing
base, the Corporation does not currently anticipate requiring
such reduction. The Corporations obligations under the
Liquidity Guarantee and the Bridge Guarantee generally may not
be triggered unless Schurmans lenders under its Senior
Credit Facility have substantially completed the liquidation of
the collateral under Schurmans 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, 2010 requiring the use of the
guarantees.
On April 17, 2009, the Corporation and Schurman also
entered into a loan agreement pursuant to which the Corporation
is providing Schurman with up to $10,000 of subordinated
financing (Subordinated Credit Facility) for an
initial term of nineteen months, subject to up to three
automatic one-year renewal periods (or partial-year, in the case
of the last renewal), unless either party provides the
appropriate written notice prior to the expiration of the
applicable term. Schurman can only borrow under the facility if
it does not have other sources of financing available, and
borrowings under the Subordinated Credit Facility may only be
used for specified purposes. In addition, availability under the
Subordinated Credit Facility is limited as long as the Bridge
Guarantee is in place to the difference between $10,000 and the
current maximum amount of the
60
Bridge Guarantee. Borrowings under the Subordinated Credit
Facility will be subordinate to borrowings under the Senior
Credit Facility. The Subordinated Credit Facility provides
affirmative and negative covenants and events of default
customary for such financings. Based on the current amount of
the Bridge Guarantee, there is no availability under the
Subordinated Credit Facility at February 28, 2010.
Schurman is a VIE as defined in ASC 810. The
Corporations interest in Schurman is a significant
variable interest, but the Corporation is not the primary
beneficiary. The Corporation performed a probability-based cash
flow analysis to determine if it was the primary beneficiary.
The factors that were considered in the analysis included the
equity at risk, the amount of the VIEs variability that
the Corporation absorbs, guarantees of indebtedness, voting
rights, power to direct the VIE and other factors. The
Corporations maximum exposure to loss includes its
investment in the equity of Schurman, its guarantee of
Schurmans indebtedness, loans outstanding under the
Subordinated Credit Facility, trade accounts receivable due from
Schurman and the operating leases currently subleased to
Schurman.
The purchase accounting for this acquisition was completed
during the fourth quarter of 2010. 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):
|
|
|
|
|
Cash paid
|
|
$
|
20.0
|
|
Fair value of Retail Operations
|
|
|
6.0
|
|
Cash acquired
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
$
|
20.0
|
|
|
|
|
|
|
Allocation (in millions):
|
|
|
|
|
Current assets
|
|
$
|
9.9
|
|
Property, plant and equipment
|
|
|
0.1
|
|
Other assets
|
|
|
5.4
|
|
Intangible assets
|
|
|
4.7
|
|
Goodwill
|
|
|
0.8
|
|
Liabilities assumed
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
$
|
20.0
|
|
|
|
|
|
|
The financial results of this acquisition are included in the
Corporations 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.
Recycled
Paper Greetings Acquisition
During the second quarter of 2009, the Corporation paid $44,153
to acquire, at a substantial discount, the first lien debt
securities of Recycled Paper Greetings, Inc., now known as
Papyrus-Recycled Greetings, Inc. The principal amount of the
securities was $67,100. The cash paid for this investment is
included in
Other-net
investing activities on the Consolidated Statement of Cash
Flows. This investment was written down to fair market value
during the fourth quarter of 2009. A loss of $2,740 was recorded
as a result.
During the fourth quarter of 2009, the Corporation acquired all
of the issued and outstanding capital stock of RPG Holdings,
Inc. and its subsidiary, Recycled Paper Greetings, Inc.
(together RPG). RPG is a Chicago-based creator and
designer of humorous and alternative greeting cards. RPGs
cards are distributed primarily through mass merchandise
retailers, drug stores and specialty retail stores. The
acquisition was completed pursuant to a petition and
pre-packaged plan of reorganization filed on January 2,
2009, by RPG under the U.S. Bankruptcy Code and an
agreement dated December 30, 2008, between the Corporation
and RPG.
On February 24, 2009, the Corporation acquired all of the
issued and outstanding capital stock of RPG in exchange for:
(a) approximately $17,700 in cash, which includes $4,500 of
U.S. Bankruptcy Court approved
61
professional fees and other amounts owed by RPG that were paid
by the Corporation; (b) the $67,100 in principal amount of
first lien debt securities held by American Greetings;
(c) approximately $22,000 in aggregate principal amount of
American Greetings 7.375% senior notes due
June 1, 2016, issued under American Greetings
existing senior notes indenture; and (d) approximately
$32,700 in aggregate principal amount of American
Greetings 7.375% notes due June 1, 2016, issued
under American Greetings new indenture. Also in connection
with the acquisition, approximately $6,500 of
debtor-in-possession
financing (the DIP) owed by RPG to American
Greetings under the
debtor-in-possession
credit agreement put in place in the fourth quarter of 2009 was
extinguished. The Corporation also incurred approximately $4,000
in transaction costs associated with this acquisition.
The purchase accounting for the RPG acquisition was completed
during the third quarter of 2010. 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 the acquisition. The following represents the final
purchase price allocation:
|
|
|
|
|
Purchase price (in millions):
|
|
|
|
|
Cash paid in 2009
|
|
$
|
22.9
|
|
Cash paid in 2010
|
|
|
5.3
|
|
Fair market value of first lien debt securities
|
|
|
41.4
|
|
Fair market value of long-term debt issued
|
|
|
28.4
|
|
Cash acquired
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
$
|
97.4
|
|
|
|
|
|
|
Allocation (in millions):
|
|
|
|
|
Current assets
|
|
$
|
17.6
|
|
Property, plant and equipment
|
|
|
1.5
|
|
Other assets (including deferred tax assets)
|
|
|
24.2
|
|
Intangible assets
|
|
|
36.4
|
|
Goodwill
|
|
|
28.2
|
|
Liabilities assumed
|
|
|
(10.5
|
)
|
|
|
|
|
|
|
|
$
|
97.4
|
|
|
|
|
|
|
Included in the liabilities assumed in the table above is $4,258
of accrued severance based on a management-approved detailed
integration plan including the shutdown of RPGs
manufacturing and distribution facility as well as the
elimination of certain redundant back office operations.
At the date of acquisition, there were two components of
tax-deductible goodwill specifically related to the operations
of RPG. The first component of tax-deductible goodwill of
approximately $28,170 is related to goodwill for financial
reporting purposes, and this asset will generate deferred income
taxes in the future as the asset is amortized for income tax
purposes. The second component of tax-deductible goodwill of
approximately $89,806 is the amount of tax deductible goodwill
in excess of goodwill for financial reporting purposes. In
accordance with ASC 740, the tax benefits associated with
this excess will be applied to first reduce the amount of
goodwill, and then other intangible assets for financial
reporting purposes in the future, if and when such tax benefits
are realized for income tax purposes. See Note 9 for
additional information.
Card
Connection Acquisition
In March 2008, the Corporation acquired a card publisher and
franchised distributor of greeting cards in the United Kingdom
(U.K.). Cash paid, net of cash acquired, was
approximately $15,600 and is reflected in investing activities
on the Consolidated Statement of Cash Flows. In connection with
this acquisition, intangible assets and goodwill of $5,800 and
$6,100, respectively, were recorded. Approximately $8,400 of
current assets and fixed assets were recorded and liabilities of
approximately $4,700 were assumed. The purchase agreement
provided for a contingent payment of up to 2 million U.K.
Pounds Sterling to be paid
62
based on the companys operating results over an
accumulated three-year period from the date of acquisition. The
financial results of this acquisition are included in the
Corporations 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.
Webshots
and Photoworks
During the second half of 2008, the Corporation acquired
Webshots and PhotoWorks, Inc. (PhotoWorks) for
$45,200 and $26,484, respectively. The financial results of
these acquisitions are included in the Corporations
consolidated results from their respective dates of acquisition.
Pro forma results of operations have not been presented as the
effects of these acquisitions were not deemed material.
The Corporation acquired Webshots, an online digital photography
business, on October 25, 2007. The $45,200 cash payment is
reflected in investing activities on the Consolidated Statement
of Cash Flows. Intangible assets and goodwill of $9,300 and
$41,600, respectively, were recorded. Liabilities of
approximately $5,500 were also assumed as part of the
acquisition.
PhotoWorks is an online photo sharing and personal publishing
company that allows consumers to use their digital images to
create high quality photo-personalized products such as greeting
cards, calendars, online photo albums and photo books. The
Corporation acquired PhotoWorks on December 13, 2007. Cash
paid, net of cash acquired, was $25,082 and is reflected in
investing activities on the Consolidated Statement of Cash
Flows. Intangible assets and goodwill totaling $4,870 and
$15,500, respectively, were recorded. A net deferred tax asset
of approximately $10,000 was recorded in connection with a net
operating loss carryforward that was acquired in the transaction
and liabilities of approximately $5,000 were also assumed as
part of the acquisition.
Online
Greeting Card Business Acquisition
During the second quarter of 2007, the Corporation acquired an
online greeting card business for approximately $21,000.
Approximately $15,000 was paid in the second quarter of 2007 and
approximately $6,000 was paid in the first quarter of 2008. Cash
paid, net of cash acquired, was $11,154 in 2007 and $6,056 in
2008 and is reflected in investing activities on the
Consolidated Statement of Cash Flows. In connection with this
acquisition, intangible assets and goodwill of $11,200 and
$12,500, respectively, were recorded. The financial results of
this acquisition are included in the Corporations
consolidated results from the date of acquisition. The pro forma
results of operations have not been presented because the effect
of this acquisition was not deemed material.
All the goodwill and certain intangible assets related to the
acquisitions in the AG Interactive segment completed in 2008 and
2007 disclosed above were impaired in 2009. See Note 9 for
further information.
Carlton
Mexico Shutdown
On September 3, 2009, the Corporation made the
determination to wind down the operations of Carlton
México, S.A. de C.V. (Carlton Mexico), its
subsidiary that distributes and merchandises greeting cards,
gift wrap and related products for retail customers throughout
Mexico. Going forward, the Corporation will continue to make
products available to its Mexican customers by selling to a
third party distributor. The wind down resulted in the closure
of Carlton Mexicos facility in Mexico City, Mexico, and
the elimination of approximately 170 positions.
In connection with the closure of this facility, the North
American Social Expression Products segment recorded charges of
$6,935, including asset impairments, severance charges and other
shut-down costs. Additionally, in accordance with ASC 830,
Foreign Currency Matters, the Corporation recognized
foreign currency translation adjustments totaling $11,300 in
Other operating income net on the
Consolidated Statement of Operations. This amount represents
foreign currency adjustments attributable to Carlton Mexico
that, prior to the liquidation, had been accumulated in the
foreign currency translation adjustment component of equity.
63
Party
Goods Transaction
On December 21, 2009, the Corporation entered into an Asset
Purchase Agreement under which it sold certain assets, equipment
and processes used in the manufacture and distribution of party
goods to Amscan Holdings, Inc. (Amscan) for a
purchase price of $24,880 (the Party Goods
Transaction). Amscan is a leading designer, manufacturer
and distributor of party goods, and owns or franchises party
good stores throughout the United States. Amscan and certain of
its subsidiaries have historically purchased party goods,
greeting cards and other social expression products from the
Corporation. Under the terms of the Party Goods Transaction, the
Corporation will no longer manufacture party goods, but will
purchase party goods from Amscan. As a result of the Party Goods
Transaction, on December 22, 2009, the Corporation
announced that it will wind down and close its party goods
manufacturing and distribution facility in Kalamazoo, Michigan
(Kalamazoo facility). The phase-out of manufacturing
at the Kalamazoo facility commenced in early March 2010 and is
anticipated to be complete by the end of May 2010. The
distribution activities at Kalamazoo are expected to end by
December 2010.
In connection with the Party Goods Transaction, the Corporation
also entered into various other agreements with Amscan
and/or its
affiliates, including a supply and distribution agreement dated
December 21, 2009, with a purchase commitment of $22,500
equally spread over five years. As a result of entering into the
supply and distribution agreement and agreeing that Amscan will
no longer be required to purchase party goods from the
Corporation, the Corporation also received a warrant valued at
$16,274 to purchase 740.74 shares of the common stock of
AAH Holdings Corporation, Amscans ultimate parent
corporation.
Through this relationship, each company will sell both
DesignWare and Amscan branded party goods. The Corporation will
purchase its party goods products from Amscan and will continue
to distribute party goods to various channels, including to its
mass merchandise, drug, grocery and specialty retail customers.
Amscan will have exclusive rights to manufacture and distribute
party goods into various channels, including the party store
channel.
During the fourth quarter of 2010, the Corporation recorded a
gain on the Party Goods Transaction of $34,178, which is
included in Other operating income net
on the Consolidated Statement of Operations. See Note 3 for
further information. In addition, the Corporation recorded
$13,005 of asset impairment charges related to the Kalamazoo
facility closure and incurred $2,798 in employee termination
costs.
The above transactions and activities generated significant
gains, losses and expenses during 2010 and are reflected on the
Consolidated Statement of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Party Goods
|
|
|
Mexico
|
|
|
Retail
|
|
|
|
|
(In millions)
|
|
Transaction
|
|
|
Shutdown
|
|
|
Disposition
|
|
|
Total
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
0.7
|
|
Material, labor and other production costs
|
|
|
15.6
|
|
|
|
4.4
|
|
|
|
1.0
|
|
|
|
21.0
|
|
Selling, distribution and marketing expenses
|
|
|
0.2
|
|
|
|
1.0
|
|
|
|
|
|
|
|
1.2
|
|
Administrative and general expenses
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
0.6
|
|
Other operating (income) expense net
|
|
|
(34.2
|
)
|
|
|
11.5
|
|
|
|
28.2
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(18.4
|
)
|
|
$
|
18.2
|
|
|
$
|
29.2
|
|
|
$
|
29.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These gains, losses and expenses are reflected in the
Corporations reportable segments as follows:
|
|
|
|
|
(In millions)
|
|
|
|
|
North American Social Expression Products
|
|
$
|
(0.2
|
)
|
Retail Operations
|
|
|
29.2
|
|
|
|
|
|
|
|
|
$
|
29.0
|
|
|
|
|
|
|
64
Sale
of Strawberry Shortcake and Care Bears Properties
On July 20, 2008, the Corporation entered into a binding
letter agreement (the July 20, 2008 Binding Letter
Agreement) to sell the Strawberry Shortcake and Care Bears
properties and the Corporations rights in the Sushi Pack
property to Cookie Jar Entertainment Inc. (Cookie
Jar) for $195,000 in cash. This transaction did not close
on September 30, 2008 as contemplated. As a result, under
the terms of the July 20, 2008 Binding Letter Agreement,
the Corporation had the right to solicit offers from third
parties to purchase the properties until March 31, 2009.
During the period of time between September 30, 2008 and
March 31, 2009, Cookie Jar could match any third party
offer up to a pre-established threshold.
On March 24, 2009, the Corporation entered into a binding
term sheet (the MoonScoop Binding Agreement) with
MoonScoop S.A.S. (MoonScoop) providing for the sale
to MoonScoop of the Strawberry Shortcake and Care Bears
properties owned by the Corporation, as well as all rights in
those properties owned by Cookie Jar and its affiliates. Under
the terms of the MoonScoop Binding Agreement, MoonScoop agreed
to pay approximately $95,000 for the properties and assume all
contracts and related obligations related to the properties. If
closed, the MoonScoop Binding Agreement contemplates that the
Corporation and Cookie Jar will be entitled to receive
approximately $76,000 and $19,000, respectively, as
consideration for their rights to the properties.
The MoonScoop Binding Agreement provided that MoonScoops
acquisition of the Strawberry Shortcake and Care Bears
properties was subject to Cookie Jars right, pursuant to
the July 20, 2008 Binding Letter Agreement discussed above,
to match the terms of the transaction set forth in the MoonScoop
Binding Agreement and acquire the properties. On March 30,
2009, Cookie Jar delivered notice to the Corporation that it had
elected to acquire the Strawberry Shortcake and Care Bears
properties pursuant to its matching right for aggregate
consideration payable to the Corporation of approximately
$76,000. Cookie Jar failed to close on the acquisition as
required. MoonScoop also failed to close on the transaction as
contemplated by the MoonScoop Binding Agreement. The failure of
the transactions to close has resulted in three separate legal
proceedings involving the Corporation and its subsidiary, TCFC.
For more information regarding the legal proceedings, see
Item 3. Legal Proceeding included in
Part I of this Annual Report on
Form 10-K.
As the transactions discussed above have failed to close, the
Corporation has not recognized any aspects of the proposed
transactions in the Corporations Consolidated Financial
Statements.
|
|
NOTE 3
|
OTHER
INCOME AND EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Loss on disposition of retail stores
|
|
$
|
28,333
|
|
|
$
|
|
|
|
$
|
|
|
Gain on disposition of calendar product lines
|
|
|
(547
|
)
|
|
|
|
|
|
|
|
|
Gain on disposition of candy product lines
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
Gain on disposition of party goods product lines
|
|
|
(34,178
|
)
|
|
|
|
|
|
|
|
|
Loss on recognition of foreign currency translation adjustments
|
|
|
8,627
|
|
|
|
|
|
|
|
|
|
Miscellaneous
|
|
|
(2,430
|
)
|
|
|
(1,396
|
)
|
|
|
(1,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income net
|
|
$
|
(310
|
)
|
|
$
|
(1,396
|
)
|
|
$
|
(1,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In April 2009, the Corporation sold the rights, title and
interest in certain of the assets of its retail store operations
to Schurman and recognized a loss on disposition of $28,333. See
Note 2 for further information.
The Corporation sold its calendar product lines in July 2009 and
its candy product lines in October 2009, which resulted in gains
totaling $547 and $115, respectively. Proceeds received from the
sales of the calendar and candy product lines of $3,063 and
$1,650, respectively, are included in
Other-net
investing activities on the Consolidated Statement of Cash Flows.
Pursuant to the Party Goods Transaction, in December 2010, the
Corporation sold certain assets, equipment and processes of the
DesignWare party goods product lines and recorded a gain of
$34,178. The cash proceeds of $24,880, which was held in escrow
at February 28, 2010, are recorded as a receivable and
included in Prepaid expenses and other on the
Consolidated Statement of Financial Position. A warrant valued
at
65
$16,274 was recorded in Other assets on the
Consolidated Statement of Financial Position. See Note 2
for further information.
During the fourth quarter of 2010, it was determined that the
wind down of Carlton Mexico was substantially complete. In
accordance with ASC 830, the currency translation
adjustments have been removed from the foreign currency
translation adjustment component of equity and recognized as a
loss of $11,300. The Corporation also recorded a loss totaling
$601 and a gain of $3,274 for foreign currency translation
adjustments realized in relation to two other entities
determined to be liquidated in accordance with ASC 830.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Foreign exchange (gain) loss
|
|
$
|
(4,746
|
)
|
|
$
|
483
|
|
|
$
|
(7,206
|
)
|
Rental income
|
|
|
(1,194
|
)
|
|
|
(1,432
|
)
|
|
|
(1,225
|
)
|
Miscellaneous
|
|
|
(547
|
)
|
|
|
3,106
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating (income) expense net
|
|
$
|
(6,487
|
)
|
|
$
|
2,157
|
|
|
$
|
(7,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous includes, among other things, gains
and losses on asset disposals and income/loss from debt and
equity securities. In 2009, miscellaneous included a loss of
$2,740 related to the Corporations investment in the first
lien debt securities of RPG prior to the acquisition of the
capital stock of RPG in February 2009. See Note 2 for
further information.
|
|
NOTE 4
|
EARNINGS
(LOSS) PER SHARE
|
The following table sets forth the computation of earnings
(loss) per share and earnings (loss) per share-assuming dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
81,574
|
|
|
$
|
(227,759
|
)
|
|
$
|
83,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
39,468
|
|
|
|
46,544
|
|
|
|
54,237
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other
|
|
|
692
|
|
|
|
-
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution
|
|
|
40,160
|
|
|
|
46,544
|
|
|
|
54,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per share
|
|
$
|
2.07
|
|
|
$
|
(4.89
|
)
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per share
assuming dilution
|
|
$
|
2.03
|
|
|
$
|
(4.89
|
)
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 5.7 million and 1.7 million stock
options, in 2010 and 2008, respectively, were excluded from the
computation of earnings per share-assuming dilution because the
options exercise prices were greater than the average
market price of the common shares during the respective years.
For 2009, all options outstanding (totaling approximately
6.7 million) were excluded from the computation of earnings
per share-assuming dilution, as the effect would have been
antidilutive due to the net loss in the period. Had the
Corporation reported income for the year, approximately
6.0 million stock options outstanding during the period
would have been excluded from the computation of earnings per
share-assuming dilution because the options exercise
prices were greater than the average market price of the common
shares during the year.
66
|
|
NOTE 5
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS
|
The balance of accumulated other comprehensive loss consisted of
the following components:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2010
|
|
|
February 28, 2009
|
|
|
Foreign currency translation adjustments
|
|
$
|
10,856
|
|
|
$
|
(20,238
|
)
|
Pension and postretirement benefits adjustments, net of tax (See
Note 12)
|
|
|
(40,672
|
)
|
|
|
(47,038
|
)
|
Unrealized investment gain (loss), net of tax
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(29,815
|
)
|
|
$
|
(67,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6
|
CUSTOMER
ALLOWANCES AND DISCOUNTS
|
Trade accounts receivable are reported net of certain allowances
and discounts. The most significant of these are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2010
|
|
|
February 28, 2009
|
|
|
Allowance for seasonal sales returns
|
|
$
|
36,443
|
|
|
$
|
47,121
|
|
Allowance for outdated products
|
|
|
10,438
|
|
|
|
11,486
|
|
Allowance for doubtful accounts
|
|
|
2,963
|
|
|
|
5,006
|
|
Allowance for cooperative advertising and marketing funds
|
|
|
24,061
|
|
|
|
25,048
|
|
Allowance for rebates
|
|
|
29,338
|
|
|
|
31,211
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,243
|
|
|
$
|
119,872
|
|
|
|
|
|
|
|
|
|
|
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 $15,326 and $14,563 as of
February 28, 2010 and 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
February 28, 2010
|
|
|
February 28, 2009
|
|
|
Raw materials
|
|
$
|
18,609
|
|
|
$
|
20,741
|
|
Work in process
|
|
|
6,622
|
|
|
|
7,068
|
|
Finished products
|
|
|
194,283
|
|
|
|
232,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,514
|
|
|
|
260,114
|
|
Less LIFO reserve
|
|
|
75,491
|
|
|
|
86,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,023
|
|
|
|
174,089
|
|
Display material and factory supplies
|
|
|
19,933
|
|
|
|
20,856
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
163,956
|
|
|
$
|
194,945
|
|
|
|
|
|
|
|
|
|
|
During 2010, inventory quantities declined resulting in the
liquidation of LIFO inventory layers carried at lower costs
compared with current year purchases. The income statement
effect of such liquidation on material, labor and other
production costs was approximately $13,000. There were no
material LIFO liquidations in 2009 and 2008. Inventory held on
location for retailers with SBT arrangements, which is included
in finished products, totaled approximately $38,000 and $34,000
as of February 28, 2010 and 2009, respectively.
67
|
|
NOTE 8
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2010
|
|
|
February 28, 2009
|
|
|
Land
|
|
$
|
10,147
|
|
|
$
|
9,977
|
|
Buildings
|
|
|
178,977
|
|
|
|
214,242
|
|
Equipment and fixtures
|
|
|
651,572
|
|
|
|
698,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
840,696
|
|
|
|
922,613
|
|
Less accumulated depreciation
|
|
|
595,945
|
|
|
|
647,049
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
244,751
|
|
|
$
|
275,564
|
|
|
|
|
|
|
|
|
|
|
During 2010, including the fixed assets that were part of the
Retail Operations segment and the DesignWare party goods product
lines, the Corporation disposed of approximately $118,000 of
property, plant and equipment that included accumulated
depreciation of approximately $102,000 compared to disposals in
2009 of approximately $43,000 with accumulated depreciation of
approximately $41,000.
During the fourth quarter of 2010, primarily due to the sale of
the DesignWare party goods product lines, impairment charges of
$12,206 were recorded in Material, labor and other
production costs on the Consolidated Statement of
Operations. Continued operating losses and negative cash flows
during 2009 and 2008 led to testing for impairment of long-lived
assets in the Retail Operations segment in accordance with
ASC 360. As a result, fixed asset impairment charges of
$5,465 and $1,436 were recorded in Selling, distribution
and marketing expenses on the Consolidated Statement of
Operations for 2009 and 2008, respectively. The charges
represent the difference between the carrying values of the
assets and the future net discounted cash flows estimated to be
generated by those assets.
Depreciation expense totaled $39,640, $42,843 and $43,903 in
2010, 2009 and 2008, respectively.
|
|
NOTE 9
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
In accordance with ASC 350, the Corporation is required to
evaluate the carrying value of its goodwill for potential
impairment on an annual basis or an interim basis if there are
indicators of potential impairment. During the third quarter of
2009, indicators emerged within the AG Interactive segment and
one reporting unit located in the United Kingdom within the
International Social Expression Products segment (the UK
Reporting Unit) that led the Corporations management
to conclude that a goodwill impairment test was required to be
performed during the third quarter.
Within the AG Interactive segment, there were three primary
indicators: (1) a substantial decline in advertising
revenues; (2) the
e-commerce
businesses not growing as anticipated; and (3) the
Corporations belief that the segments current
long-term cash flow forecasts may be unattainable based on the
lengthening and deepening economic deterioration.
The following three primary indicators emerged within the UK
Reporting Unit: (1) the recent bankruptcy of a major
customer; (2) a major customer implementing buying freezes,
including on the Corporations everyday products; and
(3) the Corporations belief that current long-term
cash flow forecasts may be unattainable based on the lengthening
and deepening economic deterioration.
Under ASC 350, the test for, and measurement of, impairment
of goodwill consists of two steps. In the first step, the
initial test for potential impairment, the Corporation compares
the fair value of each reporting unit to its carrying amount.
Fair values were determined using a combination of an income
approach and a market based approach which were validated by a
market capitalization reconciliation. Based on this evaluation,
it was determined that the fair values of the AG Interactive
segment and UK Reporting Unit were less than their carrying
values, thus indicating potential impairment. In the second
step, the measurement of the impairment, the Corporation
hypothetically applies purchase accounting to the reporting
units using the fair values from the first step. As a result,
the Corporation recorded goodwill charges of $150,208, which
included all the goodwill for the AG Interactive segment, and
$82,110, which included all of the goodwill for the UK Reporting
Unit. The amounts recorded in the third quarter were estimates.
The AG Interactive segment
68
impairment was adjusted down by $655 in the fourth quarter due
to final purchase accounting adjustments for a final impairment
total of $149,553.
The required annual impairment test of goodwill was completed as
of the beginning of the fourth quarter of 2009 and based on the
results of the testing, no additional impairment charges were
recorded.
However, based on the continued significant deterioration of the
global economic environment during the fourth quarter of 2009
and the closing share price of the Corporations
Class A common shares at February 28, 2009, that
resulted in the Corporations fair value of equity being
below the carrying value of equity, an additional interim
impairment analysis was performed at the end of the fourth
quarter following the same steps as described above. Based on
this analysis, it was determined that the fair values of the
North American Greeting Card Division (NAGCD) and
the Corporations fixtures business, which are both also
the reporting units for ASC 350 purposes, were less than
their carrying values. As a result, the Corporation recorded
goodwill impairment charges of $47,850, which included all the
goodwill for NAGCD, and $82, which included all the goodwill for
the Corporations fixtures business. NAGCD is included in
the North American Social Expression Products segment and the
fixtures business is included in non-reportable segments.
The Corporation completed the required annual impairment test of
goodwill in the fourth quarter of 2010 and based on the results
of the testing, no impairment charges were recorded for
continuing operations.
A summary of the changes in the carrying amount of the
Corporations goodwill during the years ended
February 28, 2010 and 2009 by segment, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
North American
|
|
|
Social
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Social Expression
|
|
|
Expression
|
|
|
AG
|
|
|
Reportable
|
|
|
|
|
|
|
Products
|
|
|
Products
|
|
|
Interactive
|
|
|
Segments
|
|
|
Total
|
|
|
Balance at February 29, 2008
|
|
$
|
47,862
|
|
|
$
|
87,050
|
|
|
$
|
150,078
|
|
|
$
|
82
|
|
|
$
|
285,072
|
|
Acquisition related
|
|
|
22,465
|
|
|
|
6,096
|
|
|
|
794
|
|
|
|
-
|
|
|
|
29,355
|
|
Impairment
|
|
|
(47,850
|
)
|
|
|
(82,110
|
)
|
|
|
(149,553
|
)
|
|
|
(82
|
)
|
|
|
(279,595
|
)
|
Currency translation
|
|
|
(12
|
)
|
|
|
(6,630
|
)
|
|
|
(1,319
|
)
|
|
|
-
|
|
|
|
(7,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2009
|
|
|
22,465
|
|
|
|
4,406
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,871
|
|
Acquisition related
|
|
|
6,510
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,510
|
|
Adjustment related to income taxes
|
|
|
(2,501
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,501
|
)
|
Currency translation
|
|
|
-
|
|
|
|
226
|
|
|
|
-
|
|
|
|
-
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2010
|
|
$
|
26,474
|
|
|
$
|
4,632
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
31,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above adjustment related to income taxes for 2010 is a
$2,501 reduction related to second component goodwill, as
defined by ASC 740, which results in a reduction of
goodwill for financial reporting purposes when amortized for tax
purposes. See Note 2 for further discussion.
69
At February 28, 2010 and 2009, intangible assets, net of
accumulated amortization and impairment charges, were $45,828
and $50,593, 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, 2010
|
|
|
February 28, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Intangible assets with indefinite lives
|
|
$
|
6,200
|
|
|
$
|
-
|
|
|
$
|
6,200
|
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
$
|
10,000
|
|
Patents
|
|
|
4,194
|
|
|
|
(3,417
|
)
|
|
|
777
|
|
|
|
3,910
|
|
|
|
(3,303
|
)
|
|
|
607
|
|
Trademarks
|
|
|
10,071
|
|
|
|
(8,496
|
)
|
|
|
1,575
|
|
|
|
9,547
|
|
|
|
(7,949
|
)
|
|
|
1,598
|
|
Artist relationships
|
|
|
19,180
|
|
|
|
(1,598
|
)
|
|
|
17,582
|
|
|
|
15,750
|
|
|
|
-
|
|
|
|
15,750
|
|
Customer relationships
|
|
|
24,669
|
|
|
|
(10,544
|
)
|
|
|
14,125
|
|
|
|
26,105
|
|
|
|
(9,476
|
)
|
|
|
16,629
|
|
Other
|
|
|
17,633
|
|
|
|
(12,064
|
)
|
|
|
5,569
|
|
|
|
15,526
|
|
|
|
(9,517
|
)
|
|
|
6,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,947
|
|
|
$
|
(36,119
|
)
|
|
$
|
45,828
|
|
|
$
|
80,838
|
|
|
$
|
(30,245
|
)
|
|
$
|
50,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the changes in the carrying amount of the
Corporations other intangible assets during 2010, is as
follows:
|
|
|
|
|
Balance at February 28, 2009
|
|
$
|
50,593
|
|
Purchase accounting adjustment related to RPG acquisition
|
|
|
(5,110
|
)
|
Intangible assets acquired in the transaction with Schurman
|
|
|
4,670
|
|
Amortization expense
|
|
|
(5,533
|
)
|
Other additions
|
|
|
715
|
|
Currency translation
|
|
|
493
|
|
|
|
|
|
|
Balance at February 28, 2010
|
|
$
|
45,828
|
|
|
|
|
|
|
The intangible assets with indefinite lives are the RPG and
Papyrus trade names, valued at $5,200 and $1,000, respectively.
The intangible assets acquired in the transaction with Schurman
primarily include the Papyrus trade name and customer and vendor
relationships. The weighted average amortization period for the
intangible assets acquired in 2009 and 2010 is approximately
13 years. See Note 2 for further information.
The Corporation completed the required annual impairment test of
indefinite-lived intangible assets in the fourth quarter of 2010
and based on the results of the testing, no impairment charges
were recorded for continuing operations.
In conjunction with the goodwill impairment analysis performed
in the third quarter of 2009 for the AG Interactive segment and
the UK Reporting Unit discussed above, intangible assets were
also tested for impairment in accordance with ASC 360.
Based on this testing, the Corporation recorded an impairment
charge of $10,571 in the AG Interactive segment. The impairment
charge was determined using a discounted cash flows analysis and
related primarily to customer relationships, developed
technology and trademarks.
Amortization expense for intangible assets totaled $5,533,
$7,173 and $4,632 in 2010, 2009 and 2008, respectively.
Estimated annual amortization expense for the next five years
will approximate $4,481 in 2011, $4,314 in 2012, $4,255 in 2013,
$3,672 in 2014 and $2,939 in 2015. The weighted average
remaining amortization period is approximately 12 years.
70
In the normal course of its business, the Corporation enters
into agreements with certain customers for the supply of
greeting cards and related products. Under these agreements, the
customer typically receives from the Corporation a combination
of cash payments, credits, discounts, allowances and other
incentive considerations to be earned by the customer as product
is purchased from the Corporation over the stated term of the
agreement or the effective time period of the agreement to meet
a minimum purchase volume commitment. In the event an agreement
is not completed because a minimum purchase volume commitment is
not met, in most instances, the Corporation has a claim for
unearned advances under the agreement. The Corporation
periodically reviews the progress toward the commitment and
adjusts the effective time period accordingly to match the costs
with the revenue associated with the agreement. The agreements
may or may not specify the Corporation as the sole supplier of
social expression products to the customer.
A portion of the total consideration may not be 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 $12,400 and $30,897 at
February 28, 2010 and 2009, 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, 2010
|
|
|
February 28, 2009
|
|
|
Prepaid expenses and other
|
|
$
|
82,914
|
|
|
$
|
107,596
|
|
Other assets
|
|
|
310,555
|
|
|
|
273,311
|
|
|
|
|
|
|
|
|
|
|
Deferred cost assets
|
|
|
393,469
|
|
|
|
380,907
|
|
Other current liabilities
|
|
|
(53,701
|
)
|
|
|
(55,877
|
)
|
Other liabilities
|
|
|
(51,803
|
)
|
|
|
(22,023
|
)
|
|
|
|
|
|
|
|
|
|
Deferred cost liabilities
|
|
|
(105,504
|
)
|
|
|
(77,900
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred costs
|
|
$
|
287,965
|
|
|
$
|
303,007
|
|
|
|
|
|
|
|
|
|
|
A summary of the changes in the carrying amount of the
Corporations net deferred costs during the years ended
February 28, 2010, February 28, 2009 and
February 29, 2008 is as follows:
|
|
|
|
|
Balance at February 28, 2007
|
|
$
|
389,747
|
|
Payments
|
|
|
104,705
|
|
Net contract termination
|
|
|
(14,920
|
)
|
Amortization
|
|
|
(143,223
|
)
|
Currency translation and other
|
|
|
1,815
|
|
|
|
|
|
|
Balance at February 29, 2008
|
|
|
338,124
|
|
Payments
|
|
|
105,952
|
|
Amortization
|
|
|
(133,548
|
)
|
Currency translation and other
|
|
|
(7,521
|
)
|
|
|
|
|
|
Balance at February 28, 2009
|
|
|
303,007
|
|
Payments
|
|
|
84,345
|
|
Amortization
|
|
|
(102,750
|
)
|
Currency translation and other
|
|
|
3,363
|
|
|
|
|
|
|
Balance at February 28, 2010
|
|
$
|
287,965
|
|
|
|
|
|
|
71
|
|
NOTE 11
|
LONG AND
SHORT-TERM DEBT
|
On May 24, 2006, the Corporation issued $200,000 of
7.375% senior unsecured notes, due on June 1, 2016.
The proceeds from this issuance were used for the repurchase of
the Corporations 6.10% senior notes due on
August 1, 2028 that were tendered in the Corporations
tender offer and consent solicitation that was completed on
May 25, 2006.
On May 25, 2006, the Corporation repurchased $277,310 of
its 6.10% senior notes due on August 1, 2028 and
recorded a charge of $5,055 for the consent payment and other
fees associated with the notes repurchased, as well as for the
write-off of related deferred financing costs. In conjunction
with the tender, the indenture governing the 6.10% senior
notes was amended to eliminate certain restrictive covenants and
events of default. The balance of the 6.10% senior notes
was reclassified to current during the second quarter of 2008 as
these notes could be put back to the Corporation on
August 1, 2008, at the option of the holders, at 100% of
the principal amount provided the holders exercised this option
between July 1, 2008 and August 1, 2008. During the
second quarter of 2009, $22,509 of these notes were repaid upon
exercise of the put option. The balance of the 6.10% senior
notes was reclassified to long-term.
On February 24, 2009, the Corporation issued $22,000 of
additional 7.375% senior unsecured notes described above
(Additional Senior Notes) and $32,686 of new 7.375%
unsecured notes due on June 1, 2016 (New Notes)
in conjunction with the acquisition of RPG. The original issue
discount from the issuance of these notes of $26,249 was
recorded as a reduction of the underlying debt issuances and is
being amortized over the life of the debt using the effective
interest method. Including the original issue discount, the New
Notes and the Additional Senior Notes have an effective
annualized interest rate of approximately 20.3%. See Note 2
for further information on the acquisition of RPG. Except as
described below, the terms of the New Notes and the Additional
Senior Notes are the same.
The New Notes and the Additional Senior Notes will mature on
June 1, 2016 and bear interest at a fixed rate of 7.375%
per annum, commencing June 1, 2009. The New Notes and the
Additional Senior Notes constitute general, unsecured
obligations of the Corporation. The New Notes and the Additional
Senior Notes rank equally with the Corporations other
senior unsecured indebtedness and senior in right of payment to
all of the Corporations obligations that are, by their
terms, expressly subordinated in right of payment to the New
Notes or the Additional Senior Notes, as applicable. The
Additional Senior Notes are effectively subordinated to all of
the Corporations secured indebtedness, including
borrowings under its credit agreement, to the extent of the
value of the assets securing such indebtedness. The New Notes
are contractually subordinated to amounts outstanding under the
credit agreement, and are effectively subordinated to any other
secured indebtedness that the Corporation may issue from time to
time to the extent of the value of the assets securing such
indebtedness.
The New Notes and the Additional Senior Notes generally contain
comparable covenants as described below for the
Corporations credit agreement. The New Notes also provide
that if the Corporation incurs more than an additional $10,000
of indebtedness (other than indebtedness under the credit
agreement or certain other permitted indebtedness), such
indebtedness must be (a) pari passu in right of payment to
the New Notes and expressly subordinated in right of payment to
the credit agreement at least to the same extent as the New
Notes, or (b) expressly subordinated in right of payment to
the New Notes. Alternatively, the Corporation can redeem the New
Notes in whole, but not in part, at a purchase price equal to
100% of the principal amount thereof plus accrued but unpaid
interest, if any, or have the subordination provisions removed
from the New Notes.
The total fair value of the Corporations publicly traded
debt, based on quoted market prices, was $224,709 (at a carrying
value of $230,468) and $118,966 (at a carrying value of
$228,618) at February 28, 2010 and 2009, respectively. The
carrying amount of the Corporations publicly traded debt
significantly exceeded its fair value at February 28, 2009
due to the tighter U.S. credit markets.
On April 4, 2006, the Corporation entered into a new
$650,000 secured credit agreement. The new credit agreement
included a $350,000 revolving credit facility and a $300,000
delay draw term loan. The Corporation could request one or more
term loans until April 4, 2007. In connection with the
execution of this new
72
agreement, the Corporations amended and restated credit
agreement dated May 11, 2004 was terminated and deferred
financing fees of $1,013 were written off. The obligations under
the new credit agreement are guaranteed by the
Corporations material domestic subsidiaries and are
secured by substantially all of the personal property of
American Greetings Corporation and each of its material domestic
subsidiaries, including a pledge of all of the capital stock in
substantially all of the Corporations domestic
subsidiaries and 65% of the capital stock of the
Corporations first tier international subsidiaries. The
revolving credit facility will mature on April 4, 2011 and
any outstanding term loans will mature on April 4, 2013.
Each term loan will amortize in equal quarterly installments
equal to 0.25% of the amount of such term loan, beginning on
April 4, 2007, with the balance payable on April 4,
2013.
Revolving loans denominated in U.S. dollars under the new
credit agreement will bear interest at a rate per annum based on
the then applicable London Inter-Bank Offer Rate
(LIBOR) or the alternate base rate
(ABR), as defined in the credit agreement, in each
case, plus margins adjusted according to the Corporations
leverage ratio. Term loans will bear interest at a rate per
annum based on either LIBOR plus 150 basis points or based
on the ABR, as defined in the credit agreement, plus
25 basis points. Initially, the Corporation paid an annual
commitment fee of 62.5 basis points on the undrawn portion
of the term loan. The commitment fee on the revolving facility
fluctuates based on the Corporations leverage ratio.
On February 26, 2007, the credit agreement dated
April 4, 2006 was amended. The amendment decreased the size
of the term loan facility to $100,000 and extended the period
during which the Corporation may borrow on the term loan until
April 4, 2008. In connection with the reduction of the term
loan facility, deferred financing fees of $1,128 were written
off. Further, it extended the commitment fee on the term loan
through April 4, 2008 and increased the fee to
75 basis points on the undrawn portion of the loan. In
connection with this amendment, the start of the amortization
period was also changed from April 4, 2007 to April 4,
2008.
On March 28, 2008, the aforementioned credit agreement was
further amended. The amendment extended the period during which
the Corporation may borrow on the term loan until April 3,
2009 and changed the start of the amortization period from
April 4, 2008 until April 3, 2009.
On September 23, 2008, the credit agreement was further
amended as follows: (1) to permit the Corporation to sell
its Strawberry Shortcake, Care Bears and Sushi Pack properties;
(2) to increase the permitted level of acquisitions that
the Corporation may make from $200,000 to $325,000; (3) to
authorize the Corporation to further amend its accounts
receivable facility described below to allow its wholly-owned,
consolidated accounts receivable subsidiary, AGC Funding
Corporation (AGC Funding), to enter into insurance
and other transactions that may mitigate credit risks associated
with the collection of accounts receivable; and (4) to
permit the Corporation to grant certain liens to third parties
engaged in connection with the production, marketing and
exploitation of the Corporations entertainment properties.
On February 23, 2009, the Corporation drew down $100,000 in
principal amount under the term loan to provide it with greater
financial flexibility and to enhance liquidity for the long term.
The credit agreement contains certain restrictive covenants that
are customary for similar credit arrangements, including
covenants relating to limitations on liens, dispositions,
issuance of debt, investments, payment of dividends, repurchases
of capital stock, acquisitions and transactions with affiliates.
There are also financial performance covenants that require the
Corporation to maintain a maximum leverage ratio and a minimum
interest coverage ratio. The credit agreement also requires the
Corporation to make certain mandatory prepayments of outstanding
indebtedness using the net cash proceeds received from certain
dispositions, events of loss and additional indebtedness that
the Corporation may incur from time to time.
The Corporation is also party to an amended and restated
receivables purchase agreement that had available financing of
up to $150,000. The agreement was set to expire on
October 23, 2009. Under the amended and restated
receivables purchase agreement, the Corporation and certain of
its subsidiaries sell accounts receivable to AGC Funding, which
in turn sells undivided interests in eligible accounts
receivable to third party financial institutions as part of a
process that provides funding to the Corporation similar to a
revolving credit facility. Funding under the facility may be
used for working capital, general corporate purposes and the
issuance of letters of credit. This arrangement is accounted for
as a financing transaction.
73
The interest rate under the accounts receivable securitization
facility is based on (i) commercial paper interest rates,
(ii) LIBOR rates plus an applicable margin or (iii) a
rate that is the higher of the prime rate as announced by the
applicable purchaser financial institution or the federal funds
rate plus 0.50%. AGC Funding pays an annual commitment fee of
28 basis points on the unfunded portion of the accounts
receivable securitization facility, together with customary
administrative fees on outstanding letters of credit that have
been issued and on outstanding amounts funded under the facility.
The amended and restated receivables purchase agreement contains
representations, warranties, covenants and indemnities customary
for facilities of this type, including the obligation of the
Corporation to maintain the same consolidated leverage ratio as
it is required to maintain under its secured credit facility.
On March 28, 2008, the amended and restated receivables
purchase agreement was further amended. The amendment decreased
the amount of available financing from $150,000 to $90,000.
On September 23, 2009, the amended and restated receivables
purchase agreement was further amended. The amendment decreased
the amount of available financing under the agreement from
$90,000 to $80,000 and allows certain receivables to be excluded
from the program in connection with the exercise of rights under
insurance and other products that may be obtained from time to
time by the Corporation or other originators that are designed
to mitigate credit risks associated with the collection of
accounts receivable. The amendment also extended the maturity
date to September 21, 2012; provided, however, that in
addition to customary termination provisions, the receivables
purchase agreement will terminate upon termination of the
liquidity commitments obtained by the purchaser groups from
third party liquidity providers. Such commitments may be made
available to the purchaser groups for
364-day
periods only (initial
364-day
period began on September 23, 2009), and there can be no
assurances that the third party liquidity providers will renew
or extend their commitments under the receivables purchase
agreement. If that is the case, the receivables purchase
agreement will terminate and the Corporation will not receive
the benefit of the entire three-year term of the agreement.
There were no balances outstanding under the amended and
restated receivables purchase agreement as of February 28,
2010 or 2009.
At February 28, 2010, the Corporation was in compliance
with its financial covenants under the borrowing agreements
described above.
The total fair value of the Corporations non-publicly
traded debt, term loan and revolving credit facility, based on
comparable publicly traded debt prices, was $99,250 (at a
carrying value of $99,250) and $129,280 (at a carrying value of
$161,600) at February 28, 2010 and 2009, respectively.
Debt due within one year is $1,000 and $750 at February 28,
2010 and 2009, respectively.
Long-term debt and their related calendar year due dates, net of
unamortized discounts, were as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2010
|
|
|
February 28, 2009
|
|
|
7.375% senior notes, due 2016
|
|
$
|
212,184
|
|
|
$
|
211,440
|
|
7.375% notes, due 2016
|
|
|
18,103
|
|
|
|
16,997
|
|
Term loan facility, due 2013
|
|
|
98,250
|
|
|
|
99,250
|
|
Revolving credit facility, due 2011
|
|
|
-
|
|
|
|
61,600
|
|
6.10% senior notes, due 2028
|
|
|
181
|
|
|
|
181
|
|
Other
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
328,723
|
|
|
$
|
389,473
|
|
|
|
|
|
|
|
|
|
|
At February 28, 2010, the balance outstanding on the term
loan facility bears interest at a rate of approximately 1.8%. In
addition to the balances outstanding under the aforementioned
agreement, the Corporation provides financing for certain
transactions with some of its vendors, which includes a
combination of various guarantees and letters of credit. At
February 28, 2010, the Corporation had credit arrangements
to support the letters of credit in the amount of $115,057 with
$46,222 of credit outstanding.
74
Aggregate maturities of long-term debt are as follows:
|
|
|
|
|
2011
|
|
$
|
1,000
|
|
2012
|
|
|
1,000
|
|
2013
|
|
|
1,000
|
|
2014
|
|
|
96,250
|
|
2015
|
|
|
-
|
|
Thereafter
|
|
|
254,867
|
|
|
|
|
|
|
|
|
$
|
354,117
|
|
|
|
|
|
|
Interest paid in cash on short-term and long-term debt was
$23,294 in 2010, $21,721 in 2009 and $18,512 in 2008.
|
|
NOTE 12
|
RETIREMENT
AND POSTRETIREMENT BENEFIT PLANS
|
The Corporation has a non-contributory profit-sharing plan with
a contributory 401(k) provision covering most of its United
States employees. Corporate contributions to the profit-sharing
plan were $9,338 and $5,184 for 2010 and 2008, respectively. In
addition, the Corporation, at its discretion, matches a portion
of 401(k) employee contributions. The Corporations
matching contributions were $4,787 and $4,521 for 2010 and 2008,
respectively. Based on the 2009 operating results, the
Corporation elected not to make profit-sharing or 401(k)
matching contributions for 2009.
The Corporation also participates in a multi-employer pension
plan covering certain domestic employees who are part of a
collective bargaining agreement. Total pension expense for the
multi-employer plan, representing contributions to the plan, was
$417, $511 and $554 in 2010, 2009 and 2008, respectively.
The Corporation has nonqualified deferred compensation plans
that provide certain officers and directors with the opportunity
to defer receipt of compensation and director fees,
respectively, including compensation received in the form of the
Corporations common shares. The Corporation funds these
deferred compensation liabilities by making contributions to a
rabbi trust. In accordance with ASC Topic
710-10-25,
Compensation Recognition Deferred
Compensation Rabbi Trust, both the trust
assets and the related obligation associated with deferrals of
the Corporations common shares are recorded in equity at
cost and offset each other. There were approximately
0.2 million common shares in the trust at February 28,
2010 with a cost of $2,856 compared to approximately
0.3 million common shares with a cost of $5,133 at
February 28, 2009.
In 2001, in connection with its acquisition of Gibson Greetings,
Inc. (Gibson), the Corporation assumed the
obligations and assets of Gibsons 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 2010 or 2009. The Gibson Retirement
Plan was under-funded at February 28, 2010 and 2009.
The Corporation also has an unfunded nonqualified defined
benefit pension plan (the Supplemental Executive
Retirement Plan) covering certain management employees.
The Supplemental Executive Retirement Plan has a measurement
date of February 28 or 29. The Supplemental Executive Retirement
Plan was amended in 2005 to change the twenty-year cliff-vesting
period with no minimum plan service requirements to a ten-year
cliff-vesting period with a requirement that at least five years
of that service must be as a plan participant. The plan was
amended in 2008 to authorize the Corporation to make a one-time
offer to each participant who is no longer employed by American
Greetings, but is either currently receiving payments under the
plan or has a deferred vested benefit under the plan to receive
a lump sum cash payment in 2008 in satisfaction of all future
benefit payments under the Supplemental Executive Retirement
Plan. As a result, a settlement expense of $105 was recorded
during 2008.
The Corporation also has several defined benefit pension plans
at its Canadian subsidiary. These include a defined benefit
pension plan covering most Canadian salaried employees, which
was closed to new
75
participants effective January 1, 2006, but eligible
members continue to accrue benefits and an hourly plan in which
benefits earned have been frozen and participants no longer
accrue benefits after March 1, 2000. There are also two
unfunded plans, one that covers a supplemental executive
retirement pension relating to an employment agreement and one
that pays supplemental pensions to certain former hourly
employees pursuant to a prior collective bargaining agreement.
All plans have a measurement date of February 28 or 29. During
2008, the Corporation settled a portion of its obligation under
one of the defined benefit pension plans at its Canadian
subsidiary. For the affected participants, the plan was
converted to a defined contribution plan. As a result, a
settlement expense of $1,067 was recorded. Additionally, during
2010, the Corporation settled a portion of its obligation under
the Canadian hourly plan. The Corporation made a contribution to
the plan, which was used to purchase annuities for the affected
participants. As a result, a settlement expense of $126 was
recorded.
The Corpora