NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended May 31, 2013 and May 25, 2012
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements of American Greetings Corporation and its subsidiaries (the
Corporation) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments)
considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included.
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, 2013 refers to the year ended February 28, 2013. The Corporations
subsidiary, AG Retail Cards Limited, which operates the recently acquired retail stores in the United Kingdom (also referred to herein as UK), is consolidated on a one-month lag corresponding with its fiscal year-end of February 1
for 2014. See Note 4 for further information.
The Corporations first fiscal quarter begins each year on March 1. The
Corporations fiscal quarters generally end on the last Friday of the month in which the fiscal quarter ends. In the current year, the first quarter ended on May 31, 2013 and consisted of 92 days. The prior year first quarter ended on
May 25, 2012 and consisted of 86 days. This resulted in six additional selling days in the current year first quarter. This fiscal timing will not impact the full year results as the current year fourth quarter will consist of six
less days compared to the prior year fourth quarter.
These interim financial statements should be read in conjunction with the
Corporations financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended February 28, 2013, from which the Consolidated Statement of Financial Position at February 28, 2013, presented herein,
has been derived. Certain amounts in the prior year financial statements have been reclassified to conform to the 2014 presentation. These reclassifications had no material impact on financial position, earnings or cash flows.
The Corporations investments in less than majority-owned companies in which it has the ability to exercise significant influence over the operation
and financial policies are accounted for using the equity method except when they qualify as variable interest entities (VIE) and the Corporation is the primary beneficiary, in which case, the investments are consolidated in accordance
with Accounting Standards Codification (ASC) Topic 810 (ASC 810), Consolidation. Investments that do not meet the above criteria are accounted for under the cost method.
The Corporation holds an approximately 15% equity interest in Schurman Fine Papers (Schurman), which is a VIE as defined in ASC 810. Schurman
owns and operates specialty card and gift retail stores in the United States and Canada. The stores are primarily located in malls and strip shopping centers. During the current period, the Corporation assessed the variable interests in Schurman and
determined that a third party holder of variable interests has the controlling financial interest in the VIE and thus, the third party, not the Corporation, is the primary beneficiary. In completing this assessment, the Corporation identified the
activities that it considers most significant to the future economic success of the VIE and determined that it does not have the power to direct those activities. As such, Schurman is not consolidated in the Corporations results. The
Corporations maximum exposure to loss as it relates to Schurman as of May 31, 2013 includes:
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the investment in the equity of Schurman of $1.9 million;
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¡
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the limited guaranty (Liquidity Guaranty) of Schurmans indebtedness of $10.0 million;
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¡
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normal course of business trade and other accounts receivable due from Schurman of $24.6 million, the balance of which fluctuates throughout the year
due to the seasonal nature of the business; and
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the operating leases currently subleased to Schurman, the aggregate lease payments for the remaining life of which was $10.6 million, $11.8 million and
$19.0 million as of May 31, 2013, February 28, 2013 and May 25, 2012, respectively.
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7
The Corporation provides Schurman limited credit support through the provision of a Liquidity Guaranty in
favor of the lenders under Schurmans senior revolving credit facility (the Senior Credit Facility). Pursuant to the terms of the Liquidity Guaranty, the Corporation has guaranteed the repayment of up to $10.0 million of
Schurmans borrowings under the Senior Credit Facility to help ensure that Schurman has sufficient borrowing availability under this facility. The Liquidity Guaranty is required to be backed by a letter of credit for the term of the Liquidity
Guaranty, which is currently anticipated to end in July 2016. The Corporations obligations under the Liquidity Guaranty 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 May 31, 2013 requiring the use of the Liquidity Guaranty.
In addition to the investment in the equity of Schurman, the Corporation holds an investment in the common stock of Party City Holdings, Inc. These two investments, totaling $10.8 million are accounted
for under the cost method. The Corporation is not aware of any events or changes in circumstances that had occurred during the first quarter of 2014 that the Corporation believes are reasonably likely to have had a significant adverse effect on the
carrying amount of these investments.
Note 2 Seasonal Nature of Business
A significant portion of the Corporations business is seasonal in nature. Therefore, the results of operations for interim
periods are not necessarily indicative of the results for the fiscal year taken as a whole.
Note 3 Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU)
No. 2013-02 (ASU 2013-02), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires entities to disclose additional information about changes in other comprehensive income by
component. In addition, an entity is required to present, either on the face of the statement where income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income and the income statement line
items affected. The provisions of this guidance are effective prospectively for annual and interim periods beginning after December 15, 2012. The Corporation adopted this standard on March 1, 2013. See Note 7 for further information.
In July 2012, the FASB issued ASU No. 2012-02 (ASU 2012-02), Testing Indefinite-Lived Intangible Assets for
Impairment. ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that an indefinite-lived intangible asset is impaired.
If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an
entity concludes otherwise, quantitative impairment testing is not required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Corporation adopted this standard
on March 1, 2013. The adoption of this standard did not have a material effect on the Corporations financial statements.
Note 4 Acquisition
During the first quarter of 2013, the Corporation acquired all of the outstanding senior secured debt of Clinton Cards for $56.6
million (£35 million) through Lakeshore Lending Limited (Lakeshore), a wholly-owned subsidiary of the Corporation organized under the laws of the UK. Subsequently, on May 9, 2012, Clinton Cards was placed into administration,
a procedure similar to Chapter 11 bankruptcy in the United States. Prior to entering
8
into administration, Clinton Cards had approximately 750 stores and annual revenues of approximately $600 million across its two primary retail brands, Clinton Cards and Birthdays. The legacy
Clinton Cards business had been an important customer to the Corporations international business for approximately forty years and was one of the Corporations largest customers.
As part of the administration process, the administrators (Administrators) of Clinton Cards and certain of its subsidiaries (the Sellers) conducted an auction of certain assets of
the business of the Sellers that they believed constituted a viable ongoing business. Lakeshore bid $37.2 million (£23 million) for certain of these remaining assets. The bid took the form of a credit bid, where the Corporation
used a portion of the outstanding senior secured debt owed to Lakeshore by Clinton Cards to pay the purchase price for the assets. The bid was accepted by the Administrators and on June 6, 2012 the Corporation entered into an agreement with the
Sellers and the Administrators for the purchase of certain assets and the related business of the Sellers.
Under the terms of the agreement,
the Corporation originally expected to acquire approximately 400 stores from the Sellers, together with related inventory and overhead, as well as the Clinton Cards and related brands. As of July 2, 2013, the Corporation has completed 393 lease
assignments and the final number is expected to be 396. The estimated future minimum rental payments for noncancelable operating leases related to the 396 acquired stores will be approximately $360 million.
The stores and assets not acquired by the Corporation remain part of the administration process. It is anticipated that these remaining assets not
purchased by the Corporation will be liquidated and the proceeds will be used to repay the creditors of the Sellers, including the Corporation. The Corporation will seek to recover the remaining senior secured debt claim held by it through the
liquidation process. However, based on the estimated recovery information provided by the Administrators, the Corporation recorded an aggregate charge of $8.1 million in 2013 relating to the senior secured debt it acquired in the first quarter of
the prior year. In the first quarter of 2014, based on updated estimated recovery information provided by the Administrators, the Corporation recorded an adjustment to the charge resulting in a gain of $2.0 million. The remaining balance of the
senior secured debt is $12.5 million (£8.2 million) as of May 31, 2013 and is included in Prepaid expenses and other on the Consolidated Statement of Financial Position. The liquidation process was originally expected to take
approximately twelve months from the closing of the transaction on June 6, 2012. The process is currently expected to be completed by December 31, 2013.
The prior year first quarter included charges of $31.0 million associated with the aforementioned acquisition and are reflected on the Consolidated Statement of Income as follows:
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(In millions)
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Contract asset
impairment
|
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Bad debt
expense
|
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Legal and
advisory fees
|
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Impairment of
debt purchased
|
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Total
|
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Net sales
|
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|
$4.0
|
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|
$ -
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|
$ -
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|
$ -
|
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|
$ 4.0
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Administrative and general expenses
|
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-
|
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17.2
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2.0
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-
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19.2
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Other operating (income) expense - net
|
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-
|
|
|
|
-
|
|
|
|
-
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7.8
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7.8
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$4.0
|
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|
$17.2
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|
|
$2.0
|
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$7.8
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$31.0
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These charges are reflected in the Corporations reportable segments as follows:
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(In millions)
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Contract asset
impairment
|
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Bad debt
expense
|
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Legal and
advisory fees
|
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Impairment of
debt purchased
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Total
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International Social Expression Products
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$4.0
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$17.2
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$ -
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|
$ -
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|
$ 21.2
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Unallocated
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-
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-
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2.0
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|
7.8
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9.8
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|
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|
|
|
|
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|
|
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|
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|
|
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$4.0
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$17.2
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|
|
|
$2.0
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|
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$7.8
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$31.0
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9
The total cost of the acquisition has been allocated to the assets acquired and the liabilities assumed
based upon their estimated fair values at the date of the acquisition. The estimated purchase price allocation is preliminary and subject to revision as valuation work and other analyses are still being conducted. The following represents the
preliminary purchase price allocation:
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Purchase price (in millions):
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Credit bid
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$ 37.2
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Effective settlement of pre-existing relationships with the legacy Clinton Cards business
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6.4
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Cash acquired
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(0.6)
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$ 43.0
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Allocation (in millions):
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Inventory
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$ 5.5
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Property, plant and equipment
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18.4
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Intangible assets
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22.5
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Current liabilities assumed
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(3.4)
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$ 43.0
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Note 5 Royalty Revenue and Related Expenses
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, which is recorded in Other revenue on the Consolidated Statement of Income. These license agreements may include the receipt of upfront advances, which are recorded as
deferred revenue and earned during the period of the agreement. Revenues and expenses associated with the servicing of these agreements, primarily relating to the licensing activities included in non-reportable segments, are summarized as follows:
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Three Months Ended
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(In thousands)
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May 31, 2013
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May 25, 2012
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Royalty revenue
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$ 6,506
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$ 3,729
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Royalty expenses
|
|
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|
|
|
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Material, labor and other production costs
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$ 1,947
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|
|
|
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|
|
$ 2,328
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Selling, distribution and marketing expenses
|
|
|
1,248
|
|
|
|
|
|
|
|
656
|
|
|
|
Administrative and general expenses
|
|
|
460
|
|
|
|
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 3,655
|
|
|
|
|
|
|
|
$ 3,406
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|
|
|
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|
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In addition to the expenses disclosed above, during the three months ended May 25, 2012 the Corporation incurred
charges of $2.1 million associated with our licensing business. See Note 6 for further information.
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Note 6 Other Income and Expense
|
|
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|
|
Other Operating (Income) Expense Net
|
|
|
|
|
|
Three Months Ended
|
(In thousands)
|
|
May 31, 2013
|
|
|
|
May 25, 2012
|
Clinton Cards secured debt (recovery) impairment
|
|
|
$ (2,000)
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|
|
|
|
|
|
$ 7,794
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|
Termination of certain agency agreements
|
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-
|
|
|
|
|
|
|
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2,125
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|
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(Gain) loss on asset disposal
|
|
|
(235)
|
|
|
|
|
|
|
|
156
|
|
|
|
Miscellaneous
|
|
|
(1,083)
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|
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|
|
|
|
|
(551)
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|
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|
|
|
|
|
|
|
|
|
|
Other operating (income) expense net
|
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|
$ (3,318)
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|
|
|
|
|
|
$ 9,524
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|
|
|
|
|
|
|
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|
The Corporation recorded an impairment of $7.8 million during the quarter ended May 25, 2012 related to the senior
secured debt of Clinton Cards that the Corporation acquired. During the three months ended May 31, 2013 the impairment of the secured debt of Clinton Cards was adjusted based on current estimated recovery information provided by the
Administrators, resulting in a gain of $2.0 million. See Note 4 for further information.
10
In May 2012, the Corporation recorded expenses totaling $2.1 million related to the termination of certain
agency agreements associated with its licensing business.
Other Non-Operating Income Net
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|
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|
|
|
|
|
|
|
|
Three Months Ended
|
|
(In thousands)
|
|
May 31, 2013
|
|
|
May 25, 2012
|
|
Foreign exchange gain
|
|
$
|
(915)
|
|
|
$
|
(1,456)
|
|
Rental income
|
|
|
(484)
|
|
|
|
(636)
|
|
Miscellaneous
|
|
|
26
|
|
|
|
(179)
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income net
|
|
$
|
(1,373)
|
|
|
$
|
(2,271)
|
|
|
|
|
|
|
|
|
|
|
Note 7 Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive income (loss) are as follows.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Pensions and
Other
Postretirement
Benefits
|
|
|
Unrealized
Investment
Gain
|
|
|
Total
|
|
Balance at February 28, 2013
|
|
|
$ 12,594
|
|
|
|
$ (29,731)
|
|
|
|
$ 4
|
|
|
|
$ (17,133)
|
|
Other comprehensive (loss) income before reclassifications
|
|
|
(2,155)
|
|
|
|
43
|
|
|
|
1
|
|
|
|
(2,111)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
-
|
|
|
|
334
|
|
|
|
-
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive (loss) income
|
|
|
(2,155)
|
|
|
|
377
|
|
|
|
1
|
|
|
|
(1,777)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2013
|
|
|
$ 10,439
|
|
|
|
$ (29,354)
|
|
|
|
$ 5
|
|
|
|
$ (18,910)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reclassifications out of accumulated other comprehensive income (loss) are as follows.
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
May 31, 2013
|
|
|
Consolidated Statement of Income
Classification
|
Amortization of pension and other postretirement benefits items
|
|
|
|
|
|
|
Actuarial losses, net
|
|
$
|
(704)
|
|
|
Administrative and general expenses
|
Prior service cost
|
|
|
274
|
|
|
Administrative and general expenses
|
|
|
|
|
|
|
|
|
|
|
(430)
|
|
|
|
Tax benefit
|
|
|
96
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
Total, net of tax
|
|
|
(334)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications
|
|
$
|
(334)
|
|
|
|
|
|
|
|
|
|
|
11
Note 8 Earnings Per Share
The following table sets forth the computation of earnings per share and earnings per share - assuming dilution:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
May 31, 2013
|
|
|
May 25, 2012
|
|
Numerator (in thousands):
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$33,393
|
|
|
|
$7,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
32,115
|
|
|
|
35,506
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Share-based payment awards
|
|
|
587
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution
|
|
|
32,702
|
|
|
|
36,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
$ 1.04
|
|
|
|
$ 0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share assuming dilution
|
|
|
$ 1.02
|
|
|
|
$ 0.20
|
|
|
|
|
|
|
|
|
|
|
Approximately 3.2 million and 3.7 million stock options outstanding for the three month periods ended
May 31, 2013 and May 25, 2012, respectively, were excluded from the computation of earnings per shareassuming dilution because the options exercise prices were greater than the average market price of the common shares during
the respective periods.
The Corporation issued 0.3 million and 0.1 million Class A common shares upon exercise of employee
stock options and vesting of equity awards during the three months ended May 31, 2013 and three months ended May 25, 2012, respectively.
Note 9 Customer Allowances and Discounts
Trade accounts receivable are reported net of certain allowances and discounts. The most significant of these are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
May 31, 2013
|
|
|
February 28, 2013
|
|
|
May 25, 2012
|
|
Allowance for seasonal sales returns
|
|
|
$ 29,296
|
|
|
|
$ 24,574
|
|
|
|
$ 36,719
|
|
Allowance for outdated products
|
|
|
11,971
|
|
|
|
11,156
|
|
|
|
15,355
|
|
Allowance for doubtful accounts
|
|
|
3,443
|
|
|
|
3,419
|
|
|
|
21,366
|
|
Allowance for marketing funds
|
|
|
27,305
|
|
|
|
28,610
|
|
|
|
28,987
|
|
Allowance for rebates
|
|
|
30,276
|
|
|
|
31,771
|
|
|
|
33,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$102,291
|
|
|
|
$ 99,530
|
|
|
|
$135,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $14.3 million, $13.5 million and $12.5 million as of May 31, 2013, February 28, 2013 and May 25, 2012, respectively.
During the three months ended May 25, 2012, the Corporation recorded an additional allowance for doubtful accounts of approximately $17 million
related to its unsecured accounts receivable exposure to Clinton Cards.
12
Note 10 Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
May 31, 2013
|
|
|
February 28, 2013
|
|
|
May 25, 2012
|
|
Raw materials
|
|
|
$ 25,187
|
|
|
|
$ 21,303
|
|
|
|
$ 18,290
|
|
Work in process
|
|
|
12,843
|
|
|
|
6,683
|
|
|
|
13,070
|
|
Finished products
|
|
|
265,262
|
|
|
|
278,573
|
|
|
|
243,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303,292
|
|
|
|
306,559
|
|
|
|
275,311
|
|
Less LIFO reserve
|
|
|
84,252
|
|
|
|
84,166
|
|
|
|
82,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,040
|
|
|
|
222,393
|
|
|
|
193,119
|
|
Display materials and factory supplies
|
|
|
18,784
|
|
|
|
20,054
|
|
|
|
21,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$237,824
|
|
|
|
$242,447
|
|
|
|
$214,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The valuation of inventory under the Last-In, First-Out (LIFO) method is made at the end of each fiscal year
based on inventory levels and costs at that time. Accordingly, interim LIFO calculations, by necessity, are based on estimates of expected fiscal year-end inventory levels and costs, and are subject to final fiscal year-end LIFO inventory
calculations.
Inventory held on location for retailers with scan-based trading arrangements, which is included in finished products, totaled
$68.6 million, $59.7 million and $59.0 million as of May 31, 2013, February 28, 2013 and May 25, 2012, respectively.
Note 11 Deferred Costs
Deferred costs and future payment commitments for retail supply agreements are included in the following financial statement captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
May 31, 2013
|
|
|
February 28, 2013
|
|
|
May 25, 2012
|
|
Prepaid expenses and other
|
|
|
$ 88,912
|
|
|
|
$ 93,873
|
|
|
|
$ 85,622
|
|
Other assets
|
|
|
328,063
|
|
|
|
332,159
|
|
|
|
378,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred cost assets
|
|
|
416,975
|
|
|
|
426,032
|
|
|
|
463,713
|
|
|
|
|
|
Other current liabilities
|
|
|
(63,378)
|
|
|
|
(61,282)
|
|
|
|
(45,625)
|
|
Other liabilities
|
|
|
(91,359)
|
|
|
|
(92,153)
|
|
|
|
(131,883)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred cost liabilities
|
|
|
(154,737)
|
|
|
|
(153,435)
|
|
|
|
(177,508)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred costs
|
|
|
$ 262,238
|
|
|
|
$ 272,597
|
|
|
|
$ 286,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation maintains an allowance for deferred costs related to supply agreements of $7.2 million, $7.9 million and
$9.2 million at May 31, 2013, February 28, 2013 and May 25, 2012, respectively. This allowance is included in Other assets on the Consolidated Statement of Financial Position.
Note 12 Debt
As of May 31, 2013, the Corporation was a party to a $400 million senior secured credit agreement (the Credit
Agreement), under which there was $35.1 million and $61.2 million borrowings outstanding as of May 31, 2013 and February 28, 2013, respectively. There were no borrowings under the Credit Agreement as of May 25, 2012. The
Corporation is also a party to an accounts receivable facility that provides funding of up to $50 million, under which there were no borrowings outstanding as of May 31, 2013, February 28, 2013 and May 25, 2012, respectively. The
Corporation had, in the aggregate, $27.5 million outstanding under letters of credit under these borrowing agreements, which reduces the total credit available to the Corporation thereunder.
There was no debt due within one year as of May 31, 2013, February 28, 2013 and May 25, 2012, respectively.
13
Long-term debt and their related calendar year due dates as of May 31, 2013, February 28,
2013 and May 25, 2012, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
May 31, 2013
|
|
|
February 28, 2013
|
|
|
May 25, 2012
|
|
7.375% senior notes, due 2021
|
|
|
$225,000
|
|
|
|
$225,000
|
|
|
|
$225,000
|
|
Revolving credit facility, due 2017
|
|
|
35,100
|
|
|
|
61,200
|
|
|
|
-
|
|
6.10% senior notes, due 2028
|
|
|
181
|
|
|
|
181
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$260,281
|
|
|
|
$286,381
|
|
|
|
$225,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of the Corporations publicly traded debt, which was considered a Level 1 valuation as it was
based on quoted market prices, was $227.4 million (at a carrying value of $225.2 million), $233.6 million (at a carrying value of $225.2 million) and $229.1 million (at a carrying value of $225.2 million) at May 31, 2013, February 28,
2013 and May 25, 2012, respectively.
The total fair value of the Corporations non-publicly traded debt, which was considered a
Level 2 valuation as it was based on comparable privately traded debt prices, was $35.1 million (at a carrying value of $35.1 million) and $61.2 million (at a carrying value of $61.2 million) at May 31, 2013 and February 28, 2013, respectively.
At May 31, 2013, the Corporation was in compliance with the financial covenants under its borrowing agreements.
Note 13 Retirement Benefits
The components of periodic benefit cost for the Corporations defined benefit pension and postretirement benefits plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension
|
|
|
Postretirement Benefits
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
(In thousands)
|
|
May 31, 2013
|
|
|
May 25, 2012
|
|
|
May 31, 2013
|
|
|
May 25, 2012
|
|
Service cost
|
|
|
$ 320
|
|
|
|
$ 334
|
|
|
|
$ 138
|
|
|
|
$ 213
|
|
Interest cost
|
|
|
1,742
|
|
|
|
1,844
|
|
|
|
613
|
|
|
|
800
|
|
Expected return on plan assets
|
|
|
(1,574)
|
|
|
|
(1,613)
|
|
|
|
(763)
|
|
|
|
(840)
|
|
Amortization of prior service cost (credit)
|
|
|
51
|
|
|
|
61
|
|
|
|
(325)
|
|
|
|
(519)
|
|
Amortization of actuarial loss (gain)
|
|
|
917
|
|
|
|
816
|
|
|
|
(213)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1,456
|
|
|
|
$ 1,442
|
|
|
|
$ (550)
|
|
|
|
$ (346)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation has a discretionary profit-sharing plan with a 401(k) provision covering most of its United States
employees. The profit-sharing plan expense for the three months ended May 31, 2013 was $4.0 million, compared to $3.0 million in the prior year period. The Corporation also matches a portion of 401(k) employee contributions. The expense
recognized for the 401(k) match was $1.3 million in each of the three months ended May 31, 2013 and May 25, 2012. The profit-sharing plan and 401(k) matching expenses for the three month periods are estimates as actual contributions are
determined after fiscal year-end.
At May 31, 2013, February 28, 2013 and May 25, 2012, the liability for postretirement
benefits other than pensions was $16.8 million, $15.7 million and $26.2 million, respectively, and is included in Other liabilities on the Consolidated Statement of Financial Position. At May 31, 2013, February 28, 2013
and May 25, 2012, the long-term liability for pension benefits was $81.2 million, $81.4 million and $75.6 million, respectively, and is included in Other liabilities on the Consolidated Statement of Financial Position.
14
Note 14 Fair Value Measurements
Assets and liabilities measured at fair value are classified using the fair value hierarchy based upon the transparency of inputs as
of the measurement date. The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. The three levels are defined as follows:
|
|
|
Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
|
Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
|
|
Level 3 Valuation is based upon unobservable inputs that are significant to the fair value measurement.
|
The following table summarizes the financial assets measured at fair value as of May 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
May 31, 2013
|
|
Level 1
|
|
|
Level 2
|
|
Level 3
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets
|
|
$ 11,104
|
|
|
$ 8,683
|
|
|
$ 2,421
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the financial assets measured at fair value as of February 28, 2013:
|
|
|
|
|
|
(In thousands)
|
|
February 28, 2013
|
|
Level 1
|
|
|
Level 2
|
|
Level 3
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets
|
|
$ 10,636
|
|
|
$ 9,175
|
|
|
$ 1,461
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the financial assets measured at fair value as of May 25, 2012:
|
|
|
|
|
|
(In thousands)
|
|
May 25, 2012
|
|
Level 1
|
|
|
Level 2
|
|
Level 3
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets
|
|
$ 9,505
|
|
|
$ 7,949
|
|
|
$ 1,556
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
The deferred compensation plan includes investments in mutual funds and a money market fund. Assets held in mutual funds
were recorded at fair value, which was considered a Level 1 valuation as it is based on each funds quoted market value per share in an active market. The money market fund was classified as Level 2 as substantially all of the funds
investments were determined using amortized cost. Although the Corporation is under no obligation to fund employees nonqualified accounts, the fair value of the offsetting nonqualified deferred compensation liability is based on the fair value
of the plans assets.
Note 15 Contingency
The Corporation is presently involved in various judicial, administrative, regulatory and arbitration proceedings concerning matters
arising in the ordinary course of business, including but not limited to, employment, commercial disputes and other contractual matters, some of which are described below. These matters are inherently subject to many uncertainties regarding the
possibility of a loss to the Corporation. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur, confirming the incurrence of a liability or reduction of a liability. In accordance with ASC Topic 450,
Contingencies, the Corporation accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated.
Due to this uncertainty, the actual amount of any loss may ultimately prove to be larger or smaller than the amounts reflected in the Corporations Consolidated Financial Statements. Some of these proceedings are at preliminary stages and some
of these cases seek an indeterminate amount of damages.
15
Baker/Collier Litigation
American Greetings Corporation is a defendant in two putative class action lawsuits involving corporate-owned life insurance policies (the Insurance Policies): one filed in the Northern
District of Ohio on January 11, 2012 by Theresa Baker as the personal representative of the estate of Richard Charles Wolfe (the Baker Litigation); and the other filed in the Northern District of Oklahoma on October 1, 2010 by
Keith Collier as the personal representative of the estate of Ruthie Collier (the Collier Litigation).
In the Baker Litigation,
the plaintiff claims that American Greetings Corporation (1) misappropriated its employees names and identities to benefit itself; (2) breached its fiduciary duty by using its employees identities and personal information to
benefit itself; (3) unjustly enriched itself through the receipt of corporate-owned life insurance policy benefits, interest and investment returns; and (4) improperly received insurance policy benefits for the insurable interest in
Mr. Wolfes life. The plaintiff seeks damages in the amount of all pecuniary benefits associated with the subject Insurance Policies, including investment returns, interest and life insurance policy benefits that American Greetings
Corporation received from the deaths of the former employees whose estates form the putative class.
In the Collier Litigation, the plaintiff
claims that American Greetings Corporation did not have an insurable interest when it obtained the subject Insurance Policies and wrongfully received the benefits from those policies. The plaintiff seeks damages in the amount of policy benefits
received by American Greetings Corporation from the subject Insurance Policies, as well as attorneys fees, costs and interest. On April 2, 2012, the plaintiff filed its First Amended Complaint, adding misappropriation of employee
information and breach of fiduciary duty claims as well as seeking punitive damages. On April 20, 2012, American Greetings Corporation moved to transfer the Collier Litigation to the Northern District of Ohio, where the Baker Litigation is
pending. On July 6, 2012, the Court granted American Greetings Corporations Motion to Transfer and transferred the case to the Northern District of Ohio, where the Baker Litigation is pending.
On May 22, 2013, the Court preliminarily approved a full and final settlement of all the claims of the Wolfe and Collier estates, as well as the
classes they seek to represent. As a result of the preliminary approval, the Court consolidated the two cases and certified a single class that consists of the heirs or estates of the estates and heirs of all former American Greetings Corporation
employees (i) who are deceased; (ii) who were not officers or directors of American Greetings; (iii) who were insured under one of the following corporate-owned life insurance plans: Provident Life & Accident 61153, Provident
Life & Accident 61159, Mutual Benefit Life Insurance Company 111, Connecticut General ENX219, and Hartford Life Insurance Company 361; and (iv) for whom American Greetings has received a death benefit on or before the date on which the
Court enters the Order of Preliminary Approval. Required notices to potential class members and to state attorney generals as required under the Class Action Fairness Act of 2005 were mailed on May 30, 2013. The Court will entertain final
approval of the settlement on September 20, 2013. If the settlement is finally approved by the Court, American Greetings Corporation will deposit $12.5 million into a settlement fund to be distributed in its entirety to those members of the
class who present valid claims, their counsel, and a settlement administration vendor. This amount was accrued prior to the first quarter of 2014.
Carter/Wolfe/LMPERS Litigation
On September 26, 2012, we announced that our
Board of Directors received a non-binding proposal from Zev Weiss, the Corporations Chief Executive Officer, and Jeffrey Weiss, the Corporations President and Chief Operating Officer, on behalf of themselves and certain other members of
the Weiss family and related parties to acquire all of the outstanding Class A common shares and Class B common shares of the Corporation not currently owned by them (the Going Private Proposal). On September 27, 2012, Dolores
Carter, a purported shareholder, filed a putative shareholder derivative and class action lawsuit (the Carter Action) in the Court of Common Pleas in Cuyahoga County, Ohio (the Cuyahoga County Court), against American
Greetings Corporation and all of the members of the Board of Directors (Carter Defendants). The Carter Action alleges, among other things, that the directors of the Corporation breached their fiduciary duties owed to shareholders in
evaluating and pursuing the proposal. The Carter Action further alleges claims for aiding and abetting breaches of fiduciary duty. Among other things, the Carter Action seeks declaratory relief. Subsequently, six more lawsuits were filed in the
Cuyahoga County Court purporting to advance substantially similar claims on behalf of American Greetings against the members of the Board of Directors and, in certain cases, additional direct claims against American Greetings. One lawsuit was
voluntarily dismissed. The other lawsuits, which remain pending, were consolidated by Judge Richard J. McMonagle on December 6, 2012 (amended order dated December 18, 2012) as In re American Greetings Corp. Shareholder Litigation, Lead
Case No. CV 12 792421. Lead plaintiffs and lead plaintiffs counsel also were appointed.
16
On April 30, 2013, lead plaintiffs counsel filed a Consolidated Class Action Complaint. The
Consolidated Complaint brings a single class claim against the members of the Corporations Board of Directors for alleged breaches of fiduciary duty and aiding and abetting. The plaintiffs allege that the preliminary proxy statement on
Schedule 14A filed with the Securities and Exchange Commission (SEC) on April 17, 2013 omits information necessary to permit the Corporations shareholders to determine if the Merger is in their best interest, that the
controlling shareholders have abused their control of the Corporation, that the special committee appointed to oversee the transaction is not independent, and that the other members of the Board of Directors are also not independent. On
June 13, 2013, defendants filed motions to dismiss the Consolidated Class Action Complaint based on plaintiffs failure to properly plead their claims as derivative actions, exercise their statutory appraisal rights as the sole remedy for
dissatisfaction with the proposed share price, and to overcome the business judgment rule with respect to their breach of fiduciary duty claims. The motions remain pending.
On November 6, 2012, R. David Wolfe, a purported shareholder, filed a putative class action (the Wolfe Action) in the United States District Court for the Northern District of Ohio (the
Federal Court) against certain members of the Weiss Family and the Irving I. Stone Oversight Trust, the Irving Stone Limited Liability Company, the Irving I. Stone Support Foundation, and the Irving I. Stone Foundation (Stone
Entities) alleging breach of fiduciary duties in proposing and pursuing the proposal, as well as against American Greetings, seeking, among other things, declaratory relief. Shortly thereafter, on November 9, 2012, the Louisiana Municipal
Police Employees Retirement System also filed a purported class action in the Federal Court (the LMPERS Action) asserting substantially similar claims against the same defendants and seeking substantially similar relief.
On November 30, 2012, plaintiffs in the Wolfe and LMPERS Actions filed motions (1) to consolidate the Wolfe and LMPERS Actions,
(2) for appointment as co-lead plaintiffs, (3) for appointment of co-lead counsel, and, in the Wolfe Action only, (4) for partial summary judgment. On December 14, 2012, the Corporation filed its oppositions to the motions
(a) to consolidate the Wolfe and LMPERS Actions, (b) for appointment as co-lead plaintiffs, and (c) for appointment of co-lead counsel. On the same day, the Corporation also moved to dismiss both the Wolfe and LMPERS Actions. The
Corporation answered both complaints on January 8, 2013, and on January 11, 2013, it filed its opposition to the motion for partial summary judgment. On February 14, 2013, the Federal Court dismissed both the Wolfe and LMPERS Actions
for lack of subject matter jurisdiction. On March 15, 2013, plaintiffs in both the Wolfe and LMPERS Actions filed notices of appeal with the Sixth Circuit Court of Appeals. On April 18, 2013, plaintiff Wolfe moved to dismiss his appeal,
which motion was granted on April 19, 2013. On May 8, 2013, plaintiff LMPERSs moved to dismiss its appeal as well, which motion was granted.
Plaintiffs in the Wolfe and LMPERS Actions alleged, in part, that Article Seventh of the Corporations articles of incorporation prohibited the special committee from, among other things, evaluating
the merger. The Corporation considered these allegations and concluded that the Article is co-extensive with Ohio law and thus allows the Corporation to engage in any activity authorized by Ohio law. The Corporation also has consistently construed
Article Seventh as permitting directors to approve a transaction so long as they are both disinterested and independent.
On April 17,
2013, R. David Wolfe filed a new derivative and putative class action (Wolfe Action II) in the United States District Court for the Northern District of Ohio against the Corporations directors, certain members of the Weiss Family,
and the Stone Entities, as well as the Corporation as a nominal defendant, challenging the merger as financially and procedurally unfair to the Corporation and its minority shareholders. Mr. Wolfe subsequently filed an Amended Complaint on
April 29, 2013. The Wolfe Action II seeks a declaratory judgment that Article Seventh precludes the Board of Directors and special committee from approving the merger. In addition, the Wolfe Action II includes a derivative claim for breach of
fiduciary duty against the Corporations directors for allegedly violating Article Seventh. Finally, the Wolfe Action II includes both a derivative and class action claim for breach of fiduciary duty against the Weiss Family defendants and the
Stone Entities for allegedly seeking to acquire the minority shareholders interests at an unfair price. Defendants filed their Motions to Dismiss the Wolfe Action II amended Complaint on July 8, 2013.
17
Management is unable to estimate a range of reasonably possible losses for these cases in which the damages
have not been specified and (i) the proceedings are in the early stages, (ii) there is uncertainty as to the outcome of the pending appeals or motions, and/or (iii) there are significant factual issues to be resolved. However, for
these cases, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on the Corporations financial condition, though the outcomes could be material to
the Corporations operating results for any particular period, depending, in part, upon the operating results for such period.
Note 16 Income Taxes
The Corporations provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate
against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The magnitude of the impact that discrete items have on the Corporations quarterly
effective tax rate is dependent on the level of income in the period. The effective tax rate was 36.4% and 30.4% for the three month periods ended May 31, 2013 and May 25, 2012, respectively. The lower than statutory rate for the three
months ended May 25, 2012 was due primarily to the release of reserves upon lapse of the applicable statutes.
At February 28, 2013, the
Corporation had unrecognized tax benefits of $21.7 million that, if recognized, would have a favorable effect on the Corporations income tax expense of $18.5 million. There were no significant changes to this amount during the first quarter of
2014. It is reasonably possible that the Corporations unrecognized tax positions as of February 28, 2013 could decrease $3.1 million during the next twelve months due to anticipated settlements and resulting cash payments related to open
years after 1996, which are currently under examination.
The Corporation recognizes interest and penalties accrued on unrecognized tax
benefits and refundable income taxes as a component of income tax expense. During the three months ended May 31, 2013, the Corporation recognized net expense of $0.2 million for interest and penalties on unrecognized tax benefits and refundable
income taxes. As of May 31, 2013, the total amount of gross accrued interest and penalties related to unrecognized tax benefits less refundable income taxes was a net payable of $4.7 million.
The Corporation is subject to examination by the Internal Revenue Service for tax years 2010 to the present and various U.S. state and local
jurisdictions for tax years 1996 to the present. The Corporation is also subject to tax examination in various international tax jurisdictions including Australia, Canada, New Zealand and the United Kingdom for tax years 2006 to the present.
Note 17 Business Segment Information
The Corporation has North American Social Expression Products, International Social Expression Products, Retail Operations, AG
Interactive and non-reportable segments. The North American Social Expression Products and International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through various channels of
distribution with mass merchandising as the primary channel. At May 31, 2013, the Retail Operations segment operated 396 card and gift retail stores in the United Kingdom. The stores sell products purchased from the International Social
Expression Products segment as well as products purchased from other vendors. AG Interactive distributes social expression products, including electronic greetings and a broad range of graphics and digital services and products, through a variety of
electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices. The Corporations non-reportable operating segments primarily include licensing activities and the design, manufacture and
sale of display fixtures.
18
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
Total Revenue:
|
|
May 31, 2013
|
|
|
May 25, 2012
|
|
North American Social Expression Products
|
|
|
$328,287
|
|
|
|
$308,559
|
|
|
|
|
International Social Expression Products
|
|
|
70,801
|
|
|
|
62,680
|
|
Intersegment items
|
|
|
11,092
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
59,709
|
|
|
|
62,680
|
|
|
|
|
Retail Operations
|
|
|
74,718
|
|
|
|
-
|
|
|
|
|
AG Interactive
|
|
|
14,700
|
|
|
|
15,496
|
|
|
|
|
Non-reportable segments
|
|
|
19,889
|
|
|
|
6,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$497,303
|
|
|
|
$393,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
Segment Earnings (Loss) Before Tax:
|
|
May 31, 2013
|
|
|
May 25, 2012
|
|
North American Social Expression Products
|
|
|
$ 66,347
|
|
|
|
$ 56,218
|
|
|
|
|
International Social Expression Products
|
|
|
2,544
|
|
|
|
(22,557)
|
|
Intersegment items
|
|
|
2,214
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
330
|
|
|
|
(22,557)
|
|
|
|
|
Retail Operations
|
|
|
(3,452)
|
|
|
|
-
|
|
|
|
|
AG Interactive
|
|
|
3,313
|
|
|
|
3,773
|
|
|
|
|
Non-reportable segments
|
|
|
7,382
|
|
|
|
(58)
|
|
|
|
|
Unallocated
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,312)
|
|
|
|
(4,376)
|
|
Profit-sharing expense
|
|
|
(3,981)
|
|
|
|
(2,980)
|
|
Stock-based compensation expense
|
|
|
(2,475)
|
|
|
|
(1,869)
|
|
Corporate overhead expense
|
|
|
(10,606)
|
|
|
|
(17,731)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,374)
|
|
|
|
(26,956)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 52,546
|
|
|
|
$ 10,420
|
|
|
|
|
|
|
|
|
|
|
Corporate overhead expense includes costs associated with corporate operations including, among other costs,
senior management, corporate finance, legal, and insurance programs.
Refer to Note 4 for segment information related to certain prior year
charges associated with activities and transactions in connection with Clinton Cards that do not have comparative amounts in the current year.
Termination Benefits
Termination
benefits are primarily considered part of an ongoing benefit arrangement, accounted for in accordance with ASC Topic 712, Compensation Nonretirement Postemployment Benefits, and are recorded when payment of the benefits is
probable and can be reasonably estimated.
The balance of the severance accrual was $4.5 million, $6.0 million and $5.0 million at
May 31, 2013, February 28, 2013 and May 25, 2012, respectively. The payments expected within the next twelve months are included in Accrued liabilities while the remaining payments beyond the next twelve months are
included in Other liabilities on the Consolidated Statement of Financial Position.
19
Note 18 Proposal by Members of the Weiss Family and Related Entities to Acquire the Corporation
On September 26, 2012, the Corporation announced that our Board of Directors received the Going Private Proposal.
On March 29, 2013, the Corporation signed an agreement and plan of merger (as amended on July 3, 2013, the Merger Agreement) by and
among American Greetings Corporation, Century Intermediate Holding Company (Parent), which upon the closing of the Merger (as defined below) will be indirectly owned by the Family Shareholders (as defined below), and Century Merger
Company, a wholly-owned subsidiary of Parent (Merger Sub). As more fully described in our Current Reports on Form 8-K filed with the SEC on April 1, 2013 and July 5, 2013, at the effective time of the Merger, each issued and
outstanding share of the Corporation (other than shares owned by the Corporation, Parent (which will include at the effective time of the Merger all shares currently held by the Family Shareholders), Merger Sub or holders who have properly exercised
dissenters rights under Ohio law) will be converted into the right to receive $19.00 per share, in cash, without interest and subject to any withholding taxes, and Merger Sub will merge with and into the Corporation, with the Corporation
surviving the Merger as a wholly-owned subsidiary of Parent (the Merger). The consummation of the Merger is subject to customary conditions, and is further conditioned on the favorable vote of (1) at least two-thirds of the
outstanding voting power of the Corporation represented by the Class A common shares and Class B common shares, voting together as a single class, and (2) a majority of the Class A common shares and Class B common shares held by
persons other than the Family Shareholders, the Irving I. Stone Foundation and our executive officers and directors, as more fully described in our Current Reports on Form 8-K filed with the SEC on April 1, 2013 and July 5, 2013 and in the
proxy statement on Schedule 14A filed with the SEC on July 5, 2013 (the Majority of the Minority Shareholder Approval condition). For purposes of the Majority of the Minority Shareholder Approval only, Class B common shares will be
entitled to one vote per share. Under the Merger Agreement, Family Shareholders includes: Zev Weiss, a director and the Corporations Chief Executive Officer; Morry Weiss, the Corporations Chairman of the Board of Directors;
Jeffrey Weiss, a director and the Corporations President and Chief Operating Officer; and certain other members of the Weiss family, together with the Irving I. Stone Limited Liability Company.
See Note 15 for information regarding legal proceedings related to the Going Private Proposal and Merger Agreement.
20