UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 29,November 28, 2008
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-13859
AMERICAN GREETINGS CORPORATION
(Exact name of registrant as specified in its charter)
Ohio | 34-0065325 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One American Road, Cleveland, Ohio | 44144 | ||
(Address of principal executive offices) | (Zip Code) |
(216) 252-7300
(Registrant’s telephone number, including area code)
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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ||||||
Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of October 6, 2008,January 5, 2009, the number of shares outstanding of each of the issuer’s classes of common stock was:
Class A Common 41,915,171
Class B
Class A Common | 41,916,908 | |
Class B Common | 3,495,241 |
AMERICAN GREETINGS CORPORATION
INDEX
Page Number | ||||||
PART I - FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements | 3 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||
Item 4. | Controls and Procedures | |||||
PART II - OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings | |||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||
Item 6. | Exhibits | |||||
SIGNATURES | ||||||
EXHIBITS |
PART I -– FINANCIAL INFORMATION
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOMEOPERATIONS
(Thousands of dollars except share and per share amounts)
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
August 29, 2008 | August 24, 2007 | August 29, 2008 | August 24, 2007 | November 28, 2008 | November 23, 2007 | November 28, 2008 | November 23, 2007 | |||||||||||||||||
Net sales | $372,942 | $365,878 | $798,405 | $783,894 | $ | 444,527 | $ | 475,015 | $ | 1,242,932 | $ | 1,258,909 | ||||||||||||
Other revenue | 12,893 | 11,607 | 15,730 | 13,558 | 9,557 | 10,751 | 25,287 | 24,309 | ||||||||||||||||
Total revenue | 385,835 | 377,485 | 814,135 | 797,452 | 454,084 | 485,766 | 1,268,219 | 1,283,218 | ||||||||||||||||
Material, labor and other production costs | 170,112 | 163,052 | 363,454 | 324,180 | 223,214 | 223,329 | 586,668 | 547,509 | ||||||||||||||||
Selling, distribution and marketing expenses | 154,387 | 144,586 | 305,262 | 285,280 | 159,819 | 159,420 | 465,081 | 444,700 | ||||||||||||||||
Administrative and general expenses | 57,162 | 56,351 | 119,723 | 118,586 | 50,841 | 60,875 | 170,564 | 179,461 | ||||||||||||||||
Goodwill and other intangible assets impairment | 242,889 | — | 242,889 | — | ||||||||||||||||||||
Other operating income – net | (111) | (320) | (838) | (680) | (491 | ) | (127 | ) | (1,329 | ) | (807 | ) | ||||||||||||
Operating income | 4,285 | 13,816 | 26,534 | 70,086 | ||||||||||||||||||||
Operating (loss) income | (222,188 | ) | 42,269 | (195,654 | ) | 112,355 | ||||||||||||||||||
Interest expense | 5,434 | 4,839 | 10,339 | 9,596 | 6,634 | 4,835 | 16,973 | 14,431 | ||||||||||||||||
Interest income | (898) | (2,234) | (1,888) | (3,733) | (947 | ) | (2,122 | ) | (2,835 | ) | (5,855 | ) | ||||||||||||
Other non-operating income – net | (2,617) | (1,353) | (3,518) | (2,896) | ||||||||||||||||||||
Other non-operating expense (income) – net | 792 | (4,582 | ) | (2,726 | ) | (7,478 | ) | |||||||||||||||||
(Loss) income from continuing operations before income tax (benefit) expense | (228,667 | ) | 44,138 | (207,066 | ) | 111,257 | ||||||||||||||||||
Income tax (benefit) expense | (35,356 | ) | 15,018 | (29,385 | ) | 43,499 | ||||||||||||||||||
Income from continuing operations before income tax expense | 2,366 | 12,564 | 21,601 | 67,119 | ||||||||||||||||||||
Income tax expense | 69 | 4,189 | 5,971 | 28,481 | ||||||||||||||||||||
Income from continuing operations | 2,297 | 8,375 | 15,630 | 38,638 | ||||||||||||||||||||
(Loss) income from continuing operations | (193,311 | ) | 29,120 | (177,681 | ) | 67,758 | ||||||||||||||||||
Loss from discontinued operations, net of tax | - | - | - | (213) | — | (104 | ) | — | (317 | ) | ||||||||||||||
Net income | $ 2,297 | $ 8,375 | $ 15,630 | $ 38,425 | ||||||||||||||||||||
Net (loss) income | $ | (193,311 | ) | $ | 29,016 | $ | (177,681 | ) | $ | 67,441 | ||||||||||||||
Earnings per share – basic: | ||||||||||||||||||||||||
Income from continuing operations | $ 0.05 | $ 0.15 | $ 0.32 | $ 0.69 | ||||||||||||||||||||
(Loss) earnings per share – basic: | ||||||||||||||||||||||||
(Loss) income from continuing operations | $ | (4.25 | ) | $ | 0.53 | $ | (3.75 | ) | $ | 1.23 | ||||||||||||||
Loss from discontinued operations | - | - | - | - | — | — | — | (0.01 | ) | |||||||||||||||
Net income | $ 0.05 | $ 0.15 | $ 0.32 | $ 0.69 | ||||||||||||||||||||
Net (loss) income | $ | (4.25 | ) | $ | 0.53 | $ | (3.75 | ) | $ | 1.22 | ||||||||||||||
Earnings per share – assuming dilution: | ||||||||||||||||||||||||
Income from continuing operations | $ 0.05 | $ 0.15 | $ 0.32 | $ 0.69 | ||||||||||||||||||||
(Loss) earnings per share – assuming dilution: | ||||||||||||||||||||||||
(Loss) income from continuing operations | $ | (4.25 | ) | $ | 0.52 | $ | (3.75 | ) | $ | 1.22 | ||||||||||||||
Loss from discontinued operations | - | - | - | - | — | — | — | (0.01 | ) | |||||||||||||||
Net income | $ 0.05 | $ 0.15 | $ 0.32 | $ 0.69 | ||||||||||||||||||||
Net (loss) income | $ | (4.25 | ) | $ | 0.52 | $ | (3.75 | ) | $ | 1.21 | ||||||||||||||
Average number of shares outstanding | 47,769,594 | 55,766,802 | 48,285,267 | 55,514,759 | 45,460,385 | 55,022,689 | 47,343,640 | 55,350,736 | ||||||||||||||||
Average number of shares outstanding – assuming dilution | 47,807,313 | 56,180,165 | 48,328,659 | 55,902,189 | 45,460,385 | 55,466,351 | 47,343,640 | 55,726,990 | ||||||||||||||||
Dividends declared per share | $ 0.12 | $ 0.10 | $ 0.24 | $ 0.20 | $ | 0.12 | $ | 0.10 | $ | 0.36 | $ | 0.30 |
See notes to consolidated financial statements (unaudited).
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)
(Unaudited) | (Note 1) | (Unaudited) | (Unaudited) | (Note 1) | (Unaudited) | |||||||||||||
August 29, 2008 | February 29, 2008 | August 24, 2007 | November 28, 2008 | February 29, 2008 | November 23, 2007 | |||||||||||||
ASSETS | ||||||||||||||||||
Current assets | ||||||||||||||||||
Cash and cash equivalents | $ 84,040 | $ 123,500 | $ 192,450 | $ | 55,604 | $ | 123,500 | $ | 71,117 | |||||||||
Trade accounts receivable, net | 62,918 | 61,902 | 71,199 | 163,463 | 61,902 | 205,709 | ||||||||||||
Inventories | 260,845 | 216,671 | 248,176 | 246,596 | 216,671 | 239,209 | ||||||||||||
Deferred and refundable income taxes | 54,149 | 72,280 | 66,399 | 62,490 | 72,280 | 76,568 | ||||||||||||
Prepaid expenses and other | 182,526 | 195,017 | 215,375 | 182,803 | 195,017 | 213,534 | ||||||||||||
Total current assets | 644,478 | 669,370 | 793,599 | 710,956 | 669,370 | 806,137 | ||||||||||||
Goodwill | 289,662 | 285,072 | 226,920 | 56,965 | 285,072 | 267,308 | ||||||||||||
Other assets | 437,633 | 420,219 | 405,283 | 408,677 | 420,219 | 391,460 | ||||||||||||
Deferred and refundable income taxes | 133,827 | 133,762 | 98,968 | 166,269 | 133,762 | 111,959 | ||||||||||||
Property, plant and equipment – at cost | 983,723 | 974,073 | 950,385 | 966,088 | 974,073 | 975,832 | ||||||||||||
Less accumulated depreciation | 682,025 | 678,068 | 672,642 | 671,180 | 678,068 | 684,213 | ||||||||||||
Property, plant and equipment – net | 301,698 | 296,005 | 277,743 | 294,908 | 296,005 | 291,619 | ||||||||||||
$1,807,298 | $1,804,428 | $1,802,513 | $ | 1,637,775 | $ | 1,804,428 | $ | 1,868,483 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||
Current liabilities | ||||||||||||||||||
Debt due within one year | $ 209,645 | $ 42,790 | $ 22,690 | $ | 247,945 | $ | 42,790 | $ | 46,490 | |||||||||
Accounts payable | 125,648 | 123,713 | 126,376 | 135,002 | 123,713 | 131,190 | ||||||||||||
Accrued liabilities | 66,007 | 79,345 | 70,903 | 78,607 | 79,345 | 89,818 | ||||||||||||
Accrued compensation and benefits | 39,378 | 68,669 | 50,397 | 35,184 | 68,669 | 58,969 | ||||||||||||
Income taxes payable | 7,729 | 29,037 | 1,456 | 36,686 | 29,037 | 31,255 | ||||||||||||
Other current liabilities | 113,379 | 108,867 | 97,766 | 106,436 | 108,867 | 96,896 | ||||||||||||
Total current liabilities | 561,786 | 452,421 | 369,588 | 639,860 | 452,421 | 454,618 | ||||||||||||
Long-term debt | 200,689 | 200,518 | 200,988 | 200,684 | 200,518 | 200,975 | ||||||||||||
Other liabilities | 147,906 | 181,720 | 148,721 | 148,320 | 181,720 | 151,094 | ||||||||||||
Deferred income taxes and noncurrent income taxes payable | 23,343 | 26,358 | 29,930 | 17,229 | 26,358 | 31,877 | ||||||||||||
Shareholders’ equity | ||||||||||||||||||
Common shares – Class A | 42,208 | 45,324 | 51,497 | 41,917 | 45,324 | 49,929 | ||||||||||||
Common shares – Class B | 3,494 | 3,434 | 4,291 | 3,495 | 3,434 | 3,442 | ||||||||||||
Capital in excess of par value | 447,502 | 445,696 | 439,985 | 447,958 | 445,696 | 443,326 | ||||||||||||
Treasury stock | (914,262) | (872,949) | (720,027) | (918,826 | ) | (872,949 | ) | (780,044 | ) | |||||||||
Accumulated other comprehensive (loss) income | (9,711) | 21,244 | 10,690 | (48,334 | ) | 21,244 | 22,982 | |||||||||||
Retained earnings | 1,304,343 | 1,300,662 | 1,266,850 | 1,105,472 | 1,300,662 | 1,290,284 | ||||||||||||
Total shareholders’ equity | 873,574 | 943,411 | 1,053,286 | 631,682 | 943,411 | 1,029,919 | ||||||||||||
$1,807,298 | $1,804,428 | $1,802,513 | $ | 1,637,775 | $ | 1,804,428 | $ | 1,868,483 | ||||||||||
See notes to consolidated financial statements (unaudited).
AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
(Unaudited) | (Unaudited) | |||||||||||
Six Months Ended | Nine Months Ended | |||||||||||
August 29, 2008 | August 24, 2007 | November 28, 2008 | November 23, 2007 | |||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income | $ 15,630 | $ 38,425 | ||||||||||
Net (loss) income | $ | (177,681 | ) | $ | 67,441 | |||||||
Loss from discontinued operations | - | 213 | — | 317 | ||||||||
Income from continuing operations | 15,630 | 38,638 | ||||||||||
Adjustments to reconcile income from continuing operations to cash flows from operating activities: | ||||||||||||
(Loss) income from continuing operations | (177,681 | ) | 67,758 | |||||||||
Adjustments to reconcile (loss) income from continuing operations to cash flows from operating activities: | ||||||||||||
Goodwill and other intangible assets impairment | 242,889 | — | ||||||||||
Net loss (gain) on disposal of fixed assets | 385 | (41) | 642 | (481 | ) | |||||||
Depreciation and amortization | 25,324 | 23,930 | 37,732 | 36,016 | ||||||||
Deferred income taxes | 15,394 | 14,335 | (32,726 | ) | (7,994 | ) | ||||||
Other non-cash charges | 3,379 | 3,861 | 8,053 | 5,719 | ||||||||
Changes in operating assets and liabilities, net of acquisitions and dispositions: | ||||||||||||
Trade accounts receivable | (584) | 33,389 | (115,268 | ) | (99,267 | ) | ||||||
Inventories | (47,606) | (61,980) | (45,394 | ) | (49,911 | ) | ||||||
Other current assets | (55) | (2,641) | 10,486 | 18,199 | ||||||||
Deferred costs – net | 14,654 | 28,451 | 6,023 | 29,338 | ||||||||
Accounts payable and other liabilities | (69,511) | (23,376) | (17,452 | ) | 38,419 | |||||||
Other – net | (10,684) | 2,784 | (1,468 | ) | 4,768 | |||||||
Total Cash Flows From Operating Activities | (53,674) | 57,350 | (84,164 | ) | 42,564 | |||||||
INVESTING ACTIVITIES: | ||||||||||||
Proceeds from sale of short-term investments | - | 480,630 | — | 692,985 | ||||||||
Purchases of short-term investments | - | (480,630) | — | (692,985 | ) | |||||||
Property, plant and equipment additions | (28,545) | (13,577) | (44,320 | ) | (37,394 | ) | ||||||
Cash payments for business acquisitions, net of cash acquired | (15,625) | (6,056) | (15,625 | ) | (51,256 | ) | ||||||
Cash receipts related to discontinued operations | - | 3,419 | — | 4,283 | ||||||||
Proceeds from sale of fixed assets | 275 | 1,105 | 278 | 2,656 | ||||||||
Other – net | (44,153) | - | (44,153 | ) | — | |||||||
Total Cash Flows From Investing Activities | (88,048) | (15,109) | (103,820 | ) | (81,711 | ) | ||||||
FINANCING ACTIVITIES: | ||||||||||||
Reduction of long-term debt | (22,509) | - | (22,509 | ) | — | |||||||
Net increase in short-term debt | 189,545 | - | 227,845 | 23,800 | ||||||||
Sale of stock under benefit plans | 434 | 24,250 | 494 | 26,198 | ||||||||
Purchase of treasury shares | (46,137) | (11,883) | (51,190 | ) | (74,572 | ) | ||||||
Dividends to shareholders | (11,667) | (11,115) | (17,116 | ) | (16,657 | ) | ||||||
Total Cash Flows From Financing Activities | 109,666 | 1,252 | 137,524 | (41,231 | ) | |||||||
DISCONTINUED OPERATIONS: | ||||||||||||
Operating cash flows from discontinued operations | - | (59) | — | (59 | ) | |||||||
Total Cash Flows From Discontinued Operations | - | (59) | — | (59 | ) | |||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (7,404) | 4,303 | (17,436 | ) | 6,841 | |||||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (39,460) | 47,737 | ||||||||||
DECREASE IN CASH AND CASH EQUIVALENTS | (67,896 | ) | (73,596 | ) | ||||||||
Cash and Cash Equivalents at Beginning of Year | 123,500 | 144,713 | 123,500 | 144,713 | ||||||||
Cash and Cash Equivalents at End of Period | $ 84,040 | $ 192,450 | $ | 55,604 | $ | 71,117 | ||||||
See notes to consolidated financial statements (unaudited).
AMERICAN GREETINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three and SixNine Months Ended August 29,November 28, 2008 and August 24,November 23, 2007
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 Corporation’s fiscal year ends on February 28 or 29. References to a particular year refer to the fiscal year ending in February of that year. For example, 2008 refers to the year ended February 29, 2008.
These interim financial statements should be read in conjunction with the Corporation’s financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended February 29, 2008, from which the Consolidated Statement of Financial Position at February 29, 2008, presented herein, has been derived. During the fourth quarter of 2008, it was determined that the Corporation’s entertainment development and production joint venture no longer met all of the criteria necessary to be classified as held for sale in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” As a result, this business unit has been reclassified into continuing operations for all periods presented. In addition, certain other amounts in the prior year financial statements have also been reclassified to conform to the 2009 presentation. These reclassifications had no material impact on earnings or cash flows.
During the quarter ended November 28, 2008, the Corporation incurred certain charges and recorded certain benefits that do not have comparative amounts in the prior year period. The net impact to the current quarter was additional expense of $242.7 million. The Corporation recorded an estimated goodwill and other intangible assets impairments of $232.3 million and $10.6 million, respectively, severance expense of $7.0 million associated with the elimination of approximately 275 positions as part of a cost reduction effort and fixed asset impairment charges of $3.9 million in the Retail Operations segment. Partially offsetting these charges was a reduction of variable compensation expense of $11.1 million. The fixed assets in the Retail Operations segment were tested for impairment as a result of weak performance in certain retail stores and reductions in future cash flow forecasts. The impairment charges for both the fixed assets and other intangible assets were recorded in accordance with SFAS 144. Refer to Note 9 for further information on the goodwill and other intangible assets impairment charges.
The current period net expense impacted the Consolidated Statement of Operations as follows:
(In millions) | ||||
Material, labor and other production costs | $ | 1.5 | ||
Selling, distribution and marketing expenses | 7.1 | |||
Administrative and general expenses | (8.8 | ) | ||
Goodwill and other intangible assets impairment | 242.9 | |||
$ | 242.7 | |||
The current period net expense impacted the Corporation’s reportable segments as follows:
(In millions) | ||||
North American Social Expression Products | $ | (0.1 | ) | |
International Social Expression Products | 81.8 | |||
Retail Operations | 4.3 | |||
AG Interactive | 161.2 | |||
Non-reportable | 0.5 | |||
Unallocated | (5.0 | ) | ||
$ | 242.7 | |||
Note 2 – Seasonal Nature of Business
A significant portion of the Corporation’s 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 September 2006, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements,” 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 SFAS 157 for non-financial assets and liabilities until fiscal years and interim periods beginning after November 15, 2008. SFAS 157 is still effective for the Corporation in fiscal 2009 for financial assets and liabilities. The Corporation adopted SFAS 157 for financial assets and liabilities on March 1, 2008. In October 2008, the FASB issued FASB Staff Position FAS 157-3 (“FSP 157-3”), “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 when the market for a financial asset is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective upon issuance, including prior periods for which financial statements have not been issued. See Note 12.13.
In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 allows companies to choose to measure financial instruments and certain other financial assets and financial liabilities at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Corporation adopted SFAS 159 on March 1, 2008 and elected not to measure any additional financial instruments or other items at fair value.
In April 2008, the FASB issued FASB Staff Position FAS 142-3 (“FSP 142-3”), “Determination of the Useful Life of Intangible Assets.” FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under other U.S. generally accepted accounting principles (“GAAP”). FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The guidance for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. Certain disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.
In May 2008, the FASB issued SFAS No. 162 (“SFAS 162”), “The Hierarchy of Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board’s related amendments to remove the GAAP hierarchy from auditing standards, where it has previously resided. The Corporation does not expect the adoption of SFAS 162 to have a significant impact on its consolidated financial statements.
Note 4 – Other Income and Expense
Three Months Ended | Six Months Ended | |||||||
(In thousands) | August 29, 2008 | August 24, 2007 | August 29, 2008 | August 24, 2007 | ||||
Other operating income – net | $ (111) | $ (320) | $ (838) | $ (680) | ||||
Foreign exchange gain | $ (2,343) | $ (1,149) | $ (2,880) | $ (2,269) | ||||
Rental income | (275) | (278) | (812) | (675) | ||||
Miscellaneous | 1 | 74 | 174 | 48 | ||||
Other non-operating income – net | $ (2,617) | $ (1,353) | $ (3,518) | $ (2,896) | ||||
“Miscellaneous” includes, among other things, gains and losses on asset disposals. | ||||||||
Note 5 – Earnings Per Share | ||||||||
The following table sets forth the computation of earnings per share and earnings per share - assuming dilution: | ||||||||
Three Months Ended | Six Months Ended | |||||||
August 29, 2008 | August 24, 2007 | August 29, 2008 | August 24, 2007 | |||||
Numerator (in thousands): | ||||||||
Income from continuing operations | $ 2,297 | $ 8,375 | $ 15,630 | $ 38,638 | ||||
Denominator (in thousands): | ||||||||
Weighted average shares outstanding | 47,770 | 55,767 | 48,285 | 55,515 | ||||
Effect of dilutive securities: | ||||||||
Stock options and other | 37 | 413 | 44 | 387 | ||||
Weighted average shares outstanding – assuming dilution | 47,807 | 56,180 | 48,329 | 55,902 | ||||
Income from continuing operations per share | $ 0.05 | $ 0.15 | $ 0.32 | $ 0.69 | ||||
Income from continuing operations per share – assuming dilution | $ 0.05 | $ 0.15 | $ 0.32 | $ 0.69 | ||||
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | November 28, 2008 | November 23, 2007 | November 28, 2008 | November 23, 2007 | ||||||||||||
Other operating income – net | $ | (491 | ) | $ | (127 | ) | $ | (1,329 | ) | $ | (807 | ) | ||||
Foreign exchange loss (gain) | $ | 1,207 | $ | (4,054 | ) | $ | (1,673 | ) | $ | (6,323 | ) | |||||
Rental income | (275 | ) | (274 | ) | (1,087 | ) | (949 | ) | ||||||||
Miscellaneous | (140 | ) | (254 | ) | 34 | (206 | ) | |||||||||
Other non-operating expense (income) – net | $ | 792 | $ | (4,582 | ) | $ | (2,726 | ) | $ | (7,478 | ) | |||||
Approximately 6.2“Miscellaneous” includes, among other things, gains and losses on fixed asset disposals.
Note 5 – (Loss) Earnings Per Share
The following table sets forth the computation of (loss) earnings per share and (loss) earnings per share – assuming dilution:
Three Months Ended | Nine Months Ended | |||||||||||||
November 28, 2008 | November 23, 2007 | November 28, 2008 | November 23, 2007 | |||||||||||
Numerator (in thousands): | ||||||||||||||
(Loss) income from continuing operations | $ | (193,311 | ) | $ | 29,120 | $ | (177,681 | ) | $ | 67,758 | ||||
Denominator (in thousands): | ||||||||||||||
Weighted average shares outstanding | 45,460 | 55,023 | 47,344 | 55,351 | ||||||||||
Effect of dilutive securities: | ||||||||||||||
Stock options and other | — | 443 | — | 376 | ||||||||||
Weighted average shares outstanding – assuming dilution | 45,460 | 55,466 | 47,344 | 55,727 | ||||||||||
(Loss) income from continuing operations per share | $ | (4.25 | ) | $ | 0.53 | $ | (3.75 | ) | $ | 1.23 | ||||
(Loss) income from continuing operations per share – assuming dilution | $ | (4.25 | ) | $ | 0.52 | $ | (3.75 | ) | $ | 1.22 | ||||
For the three and nine month periods ended November 28, 2008, all options outstanding (totaling approximately 6.8 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 respective periods, approximately 6.5 million and 5.96.0 million stock options outstanding in the three and sixnine month periods ended August 29,November 28, 2008, respectively, werewould have been excluded from the computation of earnings per share–assumingshare-assuming dilution because the options’ exercise prices were greater than the average market price of the common shares during the respective
periods (1.2 periods. Approximately 1.3 million and 1.91.7 million stock options outstanding in the three and sixnine month periods ended August 24,November 23, 2007, respectively).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 periods.
Note 6 – Comprehensive (Loss) Income
The Corporation’s total comprehensive (loss) income is as follows:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||||
(In thousands) | August 29, 2008 | August 24, 2007 | August 29, 2008 | August 24, 2007 | November 28, 2008 | November 23, 2007 | November 28, 2008 | November 23, 2007 | |||||||||||||||
Net income | $ 2,297 | $ 8,375 | $ 15,630 | $ 38,425 | |||||||||||||||||||
Net (loss) income | $ | (193,311 | ) | $ | 29,016 | $ | (177,681 | ) | $ | 67,441 | |||||||||||||
Other comprehensive (loss) income: | |||||||||||||||||||||||
Foreign currency translation adjustment and other | (30,983) | 4,661 | (31,256) | 11,704 | |||||||||||||||||||
Foreign currency translation adjustment | (39,544 | ) | 11,614 | (70,800 | ) | 23,318 | |||||||||||||||||
Pension and other postretirement benefit plans, net of tax | 19 | - | (206) | - | 288 | 678 | 82 | 678 | |||||||||||||||
Unrealized gain (loss) on securities, net of tax | 507 | (1) | 507 | (1) | 633 | — | 1,140 | (1 | ) | ||||||||||||||
Total comprehensive (loss) income | $ (28,160) | $ 13,035 | $ (15,325) | $ 50,128 | $ | (231,934 | ) | $ | 41,308 | $ | (247,259 | ) | $ | 91,436 | |||||||||
Note 7 – Trade Accounts Receivable, Net
Trade accounts receivable are reported net of certain allowances and discounts. The most significant of these are as follows:
(In thousands) | August 29, 2008 | February 29, 2008 | August 24, 2007 | November 28, 2008 | February 29, 2008 | November 23, 2007 | |||||||||
Allowance for seasonal sales returns | $ 28,335 | $ 59,626 | $ 32,309 | $ | 68,835 | $ | 59,626 | $ | 77,717 | ||||||
Allowance for outdated products | 22,753 | 21,435 | 26,610 | 11,895 | 21,435 | 23,135 | |||||||||
Allowance for doubtful accounts | 4,107 | 3,778 | 5,118 | 4,295 | 3,778 | 5,402 | |||||||||
Allowance for cooperative advertising and marketing funds | 32,176 | 33,662 | 30,017 | 29,166 | 33,662 | 35,939 | |||||||||
Allowance for rebates | 46,469 | 41,435 | 35,397 | 45,700 | 41,435 | 49,915 | |||||||||
$133,840 | $159,936 | $129,451 | $ | 159,891 | $ | 159,936 | $ | 192,108 | |||||||
Note 8 – Inventories | |||||||||||||||
(In thousands) | August 29, 2008 | February 29, 2008 | August 24, 2007 | ||||||||||||
Raw materials | $ 22,559 | $ 17,701 | $ 21,038 | ||||||||||||
Work in process | 13,404 | 10,516 | 16,781 | ||||||||||||
Finished products | 279,991 | 244,379 | 264,006 | ||||||||||||
315,954 | 272,596 | 301,825 | |||||||||||||
Less LIFO reserve | 83,948 | 82,085 | 81,332 | ||||||||||||
232,006 | 190,511 | 220,493 | |||||||||||||
Display materials and factory supplies | 28,839 | 26,160 | 27,683 | ||||||||||||
$260,845 | $216,671 | $248,176 | |||||||||||||
Note 8 – Inventories
(In thousands) | November 28, 2008 | February 29, 2008 | November 23, 2007 | ||||||
Raw materials | $ | 18,010 | $ | 17,701 | $ | 16,211 | |||
Work in process | 8,839 | 10,516 | 12,646 | ||||||
Finished products | 276,928 | 244,379 | 265,013 | ||||||
303,777 | 272,596 | 293,870 | |||||||
Less LIFO reserve | 84,883 | 82,085 | 81,945 | ||||||
218,894 | 190,511 | 211,925 | |||||||
Display materials and factory supplies | 27,702 | 26,160 | 27,284 | ||||||
$ | 246,596 | $ | 216,671 | $ | 239,209 | ||||
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 totaled approximately $33$45 million, $32 million and $25$36 million as of August 29,November 28, 2008, February 29, 2008 and August 24,November 23, 2007, respectively.
Note 9 – Goodwill and Other Intangible Assets
In accordance with SFAS 142, the Corporation is required to evaluate the carrying value of its goodwill for potential impairment on an annual basis or an interim basis if there are indicators of potential impairment. Due to the recent deterioration in the global economic environment and resulting significant decrease in the Corporation’s market capitalization, combined with significant decreases in reported market values of comparable, unrelated companies, indicators emerged within the AG Interactive segment, which is also the reporting unit for SFAS 142 purposes, and one reporting unit located in the United Kingdom within the International Social Expression Products segment (the “UK Reporting Unit”) that led the Corporation to conclude that a SFAS 142 impairment test was required to be performed during the third quarter for goodwill in these reporting units.
Within the AG Interactive segment, there were the following three primary indicators: (1) a substantial decline in advertising revenues; (2) the e-commerce businesses not growing as anticipated; and (3) the Corporation’s belief that the segment’s current long-term cash flow forecasts may now be unattainable based on the lengthening and deepening economic deterioration.
The following three primary indicators emerged within the UK Reporting Unit: (1) the recent bankruptcy of a major customer; (2) a major customer implementing buying freezes, including on the Corporation’s everyday products; and (3) the Corporation’s belief that current long-term cash flow forecasts may now be unattainable based on the lengthening and deepening economic deterioration.
Under SFAS 142, 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. 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. Due to the timing and complexity of step two, the Corporation has yet to complete this step. However, based upon preliminary calculations, the Corporation recorded estimated goodwill charges of $150.2 million, which includes all the goodwill for the AG Interactive segment and $82.1 million, which includes the majority of the goodwill for the UK Reporting Unit. The Corporation expects to finalize the goodwill impairment analysis and record any adjustments to the preliminary charges during the fourth quarter of 2009.
A summary of the changes in the carrying amount of the Corporation’s goodwill during the nine months ended November 28, 2008, by segment, is as follows:
(In thousands) | North American Social Expression Products | International Social Expression Products | AG Interactive | Non- Reportable Segments | Total | ||||||||||||||
Balance at February 29, 2008 | $ | 47,862 | $ | 87,050 | $ | 150,078 | $ | 82 | $ | 285,072 | |||||||||
Acquisition related | — | 11,570 | 1,449 | — | 13,019 | ||||||||||||||
Impairment | — | (82,110 | ) | (150,208 | ) | — | (232,318 | ) | |||||||||||
Currency translation | (25 | ) | (7,464 | ) | (1,319 | ) | — | (8,808 | ) | ||||||||||
Balance at November 28, 2008 | $ | 47,837 | $ | 9,046 | $ | — | $ | 82 | $ | 56,965 | |||||||||
The Corporation also tested the intangible assets of these two businesses during the third quarter in accordance with SFAS 144. Based on this testing, the Corporation recorded an impairment charge of $10.6 million in the AG Interactive segment.
At November 28, 2008, intangible assets subject to the amortization provisions of SFAS 142, net of accumulated amortization and impairment charges, were $6.6 million.
The following table presents information about other intangible assets, which are included in “Other assets” on the Consolidated Statement of Financial Position:
November 28, 2008 | ||||||||||
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||
Patents | $ | 3,885 | $ | (3,278 | ) | $ | 607 | |||
Trademarks | 29,353 | (24,742 | ) | 4,611 | ||||||
Leasehold interest | 4,824 | (4,824 | ) | — | ||||||
Other | 2,178 | (839 | ) | 1,339 | ||||||
$ | 40,240 | $ | (33,683 | ) | $ | 6,557 | ||||
Amortization expense for intangible assets totaled $5.4 million for the nine months ended November 28, 2008. Estimated annual amortization expense for the next five years will approximate $2.1 million in 2010, $1.1 million in 2011, $1.0 million in 2012, $0.9 million in 2013 and $0.7 million in 2014. The weighted average remaining amortization period is approximately 3 years.
Note 10 – Deferred Costs
Deferred costs and future payment commitments are included in the following financial statement captions:
(In thousands) | August 29, 2008 | February 29, 2008 | August 24, 2007 | November 28, 2008 | February 29, 2008 | November 23, 2007 | ||||||||||||
Prepaid expenses and other | $ 103,349 | $ 119,069 | $ 115,382 | $ | 119,982 | $ | 119,069 | $ | 135,017 | |||||||||
Other assets | 308,616 | 338,003 | 338,932 | 294,883 | 338,003 | 313,928 | ||||||||||||
Deferred cost assets | 411,965 | 457,072 | 454,314 | 414,865 | 457,072 | 448,945 | ||||||||||||
Other current liabilities | (63,083) | (68,457) | (62,290) | (61,180 | ) | (68,457 | ) | (57,607 | ) | |||||||||
Other liabilities | (27,640) | (50,491) | (29,489) | (27,391 | ) | (50,491 | ) | (28,652 | ) | |||||||||
Deferred cost liabilities | (90,723) | (118,948) | (91,779) | (88,571 | ) | (118,948 | ) | (86,259 | ) | |||||||||
Net deferred costs | $ 321,242 | $ 338,124 | $ 362,535 | $ | 326,294 | $ | 338,124 | $ | 362,686 | |||||||||
The Corporation maintains an allowance for deferred costs related to supply agreements of $27.7 million, $29.7 million and $24.6 million at November 28, 2008, February 29, 2008 and November 23, 2007, respectively. This allowance is included in “Other assets” in the Consolidated Statement of Financial Position.
Note 1011 – Debt
The Corporation is party to an amended and restated $450 million secured credit agreement and to an amended and restated receivables purchase agreement that had available financing of up to $150 million. The credit agreement includes a $350 million revolving credit facility and a $100 million delay draw term loan. The agreements were each amended on March 28, 2008. The amendment to the credit agreement extends the period during which the Corporation may borrow on the term loan until April 3, 2009 and changes the start of the amortization period from April 4, 2008 until April 3, 2009. The amendment to the accounts receivable facility decreases the amount of available financing from $150 million to $90 million. The revolving credit facility will mature on April 4, 2011 and any outstanding term loans will mature on April 4, 2013. The accounts receivable facility expires on October 23, 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 million to $325 million; (3) to authorize the Corporation to further amend its accounts receivable facility to allow its accounts receivable subsidiary, AGC Funding Corporation, 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 Corporation’s entertainment properties.
Debt due within one year is as follows:
(In thousands) | August 29, 2008 | February 29, 2008 | August 24, 2007 | November 28, 2008 | February 29, 2008 | November 23, 2007 | |||||||||
Revolving credit facility | $ 191,200 | $ 20,100 | $ - | $ | 224,500 | $ | 20,100 | $ | 12,800 | ||||||
Accounts receivable securitization facility | 18,445 | - | - | 23,445 | — | 11,000 | |||||||||
6.10% senior notes, due 2028 | - | 22,690 | 22,690 | — | 22,690 | 22,690 | |||||||||
$ 209,645 | $ 42,790 | $ 22,690 | $ | 247,945 | $ | 42,790 | $ | 46,490 | |||||||
At August 29,November 28, 2008, the balances outstanding on both the revolving credit facility and accounts receivable securitization facility bear interest at a rate of approximately 3.0%.3.4% and 3.7%, respectively. In addition to the balances outstanding under the aforementioned agreements, the Corporation has, in the aggregate, $25.7 million outstanding under letters of credit, which reduces the total credit availability thereunder.
The 6.10% senior 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, $22.5 million of these notes were repaid upon exercise of the put option. The balance of the 6.10% senior notes was reclassified to long-term.
Long-term debt and their related calendar year due dates are as follows:
(In thousands) | August 29, 2008 | February 29, 2008 | August 24, 2007 | November 28, 2008 | February 29, 2008 | November 23, 2007 | |||||||||
7.375% senior notes, due 2016 | $ 200,000 | $ 200,000 | $ 200,000 | $ | 200,000 | $ | 200,000 | $ | 200,000 | ||||||
6.10% senior notes, due 2028 | 181 | - | - | 181 | — | — | |||||||||
Other (due 2010) | 508 | 518 | 988 | 503 | 518 | 975 | |||||||||
$ 200,689 | $ 200,518 | $ 200,988 | $ | 200,684 | $ | 200,518 | $ | 200,975 | |||||||
At August 29,November 28, 2008, the Corporation was in compliance with the financial covenants under its borrowing agreements.
Note 1112 – Retirement Benefits
The components of periodic benefit cost for the Corporation’s defined benefit pension and postretirement benefit plans are as follows:
Defined Benefit Pension | ||||||||||||||||||||||||
Three Months Ended | Six Months Ended | Defined Benefit Pension | ||||||||||||||||||||||
August 29, | August 24, | August 29, | August 24, | Three Months Ended | Nine Months Ended | |||||||||||||||||||
(In thousands) | 2008 | 2007 | 2008 | 2007 | November 28, 2008 | November 23, 2007 | November 28, 2008 | November 23, 2007 | ||||||||||||||||
Service cost | $ 239 | $ 245 | $ 480 | $ 489 | $ | 245 | $ | 251 | $ | 725 | $ | 740 | ||||||||||||
Interest cost | 2,296 | 2,255 | 4,600 | 4,520 | 2,286 | 2,249 | 6,886 | 6,769 | ||||||||||||||||
Expected return on plan assets | (2,037) | (2,182) | (4,080) | (4,336) | (1,994 | ) | (2,143 | ) | (6,074 | ) | (6,479 | ) | ||||||||||||
Settlement | - | 1,067 | - | 1,067 | — | — | — | 1,067 | ||||||||||||||||
Amortization of prior service cost | 77 | 69 | 154 | 133 | 47 | 67 | 201 | 200 | ||||||||||||||||
Amortization of actuarial loss | 320 | 406 | 640 | 816 | 349 | 411 | 989 | 1,227 | ||||||||||||||||
$ 895 | $ 1,860 | $ 1,794 | $ 2,689 | $ | 933 | $ | 835 | $ | 2,727 | $ | 3,524 | |||||||||||||
Postretirement Benefit | ||||||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
August 29, | August 24, | August 29, | August 24, | |||||||||||||||||||||
(In thousands) | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||||
Service cost | $ 950 | $ 1,050 | $ 1,900 | $ 2,100 | ||||||||||||||||||||
Interest cost | 2,200 | 2,150 | 4,400 | 4,300 | ||||||||||||||||||||
Expected return on plan assets | (1,250) | (1,250) | (2,500) | (2,500) | ||||||||||||||||||||
Amortization of prior service credit | (1,850) | (1,850) | (3,700) | (3,700) | ||||||||||||||||||||
Amortization of actuarial loss | 1,075 | 1,650 | 2,150 | 3,300 | ||||||||||||||||||||
$ 1,125 | $ 1,750 | $ 2,250 | $ 3,500 | |||||||||||||||||||||
Postretirement Benefit | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | November 28, 2008 | November 23, 2007 | November 28, 2008 | November 23, 2007 | ||||||||||||
Service cost | $ | 950 | $ | 1,050 | $ | 2,850 | $ | 3,150 | ||||||||
Interest cost | 2,200 | 2,150 | 6,600 | 6,450 | ||||||||||||
Expected return on plan assets | (1,250 | ) | (1,250 | ) | (3,750 | ) | (3,750 | ) | ||||||||
Amortization of prior service credit | (1,850 | ) | (1,850 | ) | (5,550 | ) | (5,550 | ) | ||||||||
Amortization of actuarial loss | 1,075 | 1,650 | 3,225 | 4,950 | ||||||||||||
$ | 1,125 | $ | 1,750 | $ | 3,375 | $ | 5,250 | |||||||||
The Corporation has a non-contributory profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. The profit-sharing plan expense for the six months ended August 29, 2008 was $0.5 million, compared to $3.5 million in the prior year period. The profit-sharing plan expense for the sixnine month periods are estimates as actual contributions to the profit-sharing plan are made after fiscal year-end. TheIn addition, the Corporation matches a portion of 401(k) employee contributions contingent upon meeting specified annual operating results goals. As of November 28, 2008, the Corporation does not expect to meet the required 2009 operating results goals necessary to make profit-sharing or 401(k) matching contributions. As a result, no expense has been recorded during the nine months ended November 28, 2008 for either profit-sharing or 401(k) matching contributions. The profit-sharing plan expense for the nine months ended November 23, 2007 was $5.1 million. The 401(k) matching contribution expenses recognized for the three and sixnine month periods ended August 29, 2008 were $1.1November 23, 2007 was $1.0 million and $2.9$3.2 million, ($1.0 million and $2.2 million for the three and six month periods ended August 24, 2007), respectively.
At August 29,November 28, 2008, February 29, 2008 and August 24,November 23, 2007, the liability for postretirement benefits other than pensions was $66.8$70.7 million, $63.0 million and $70.3$72.7 million, respectively, and is included in “Other liabilities” on the Consolidated Statement of Financial Position.
Note 1213 – Fair Value Measurements
SFAS 157 outlines a valuation framework, which requires use of the market approach, income approach and/or cost approach when measuring fair value and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. SFAS 157 also expands disclosure requirements to include the methods and assumptions used to measure fair value.
The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. The three levels are defined as follows:
Level 1 – Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Valuation is based upon unobservable inputs that are significant to the fair value measurement.
The following table summarizes the financial assets measured at fair value on a recurring basis as of the measurement date, August 29,November 28, 2008, and the basis for that measurement, by level within the fair value hierarchy:
(In thousands) | Balance as of August 29, 2008 | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Balance as of November 28, 2008 | Quoted prices in active markets for identical assets (Level 1) | Significant unobservable inputs (Level 3) | |||||||||
Financial assets | |||||||||||||||
Debt securities (1) | $ 44,958 | $ - | $ 44,958 | $ | 45,965 | $ | — | $ | 45,965 | ||||||
Deferred compensation plan assets (2) | 6,781 | 6,781 | - | 5,313 | 5,313 | — | |||||||||
Total | $ 51,739 | $ 6,781 | $ 44,958 | $ | 51,278 | $ | 5,313 | $ | 45,965 | ||||||
(1) | All unrealized gains/losses on the debt securities are recorded as a component of accumulated other comprehensive income/loss. Through November 28, 2008, unrealized gains of $1.8 million ($1.1 million net of tax) have been recorded. See Note 6. |
(2) | There is an offsetting liability for the obligation to its employees on the Corporation’s books. |
During the second quarter of 2009, the Corporation paid approximately $44$44.2 million to acquire, at a substantial discount, debt securities of a company that is currently seeking to restructure its balance sheet.Recycled Paper Greetings, Inc. (“Recycled Paper”). The cash paid for this investment is included in “Other-net” investing activities on the Consolidated Statement of Cash Flows. TheFor the second quarter, the Corporation valuesvalued these debt securities, which are classified as available-for-sale and included in “Other assets” on
the Consolidated Statement of Financial Position, using Level 2 inputs, primarily the most recent transaction price. For the third quarter, the Corporation valued these securities using Level 3 inputs since there was no longer an active, observable market for these securities. The value of these securities takes into consideration many factors that management believes a market participant would consider, including the credit quality of the issuer, current offers by the parties to the issuer’s debt restructuring negotiation, the Corporation’s expected cash flow analysis and input from a broker-dealer in these types of securities. See Note 17 for further information.
The fair value of the mutual fund assets in the deferred compensation plan was considered a Level 1 valuation as it is based on each fund’s quoted market value per share in an active market. Although the Corporation is under no obligation to fund employees’ nonqualified accounts, the fair value of the related non-qualified deferred compensation liability is based on the fair value of the mutual fund assets.
Note 1314 – Income Taxes
The Corporation’s provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against income from continuing operations before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The effective tax rates were 2.9%15.5% and 27.6%14.2% for the three and sixnine months ended August 29,November 28, 2008, respectively, and 33.3%34.0% and 42.4%39.1% for the three and sixnine months ended August 24,November 23, 2007, respectively. SinceThe lower effective tax rate in the second quarter has seasonally low income from continuing operations before income tax expense, discrete items or changescurrent year is due primarily to the goodwill impairment charge as only a portion of the charge is deductible for tax assets and reserves on the Consolidated Statement of Financial Position have a more significant impact on the Corporation’s quarterly effective tax rate.purposes.
As of August 29,November 28, 2008, the Corporation had $25.7$24.1 million in gross unrecognized tax benefits. During the second quarterand third quarters of 2009, the Corporation’s unrecognized tax positions decreased approximately $2$2.2 million and $1.6 million, respectively, due primarily to settlements and related cash payments associated with certain state examinations.
Included in the balance of unrecognized tax benefits at August 29,November 28, 2008, was $21.0$20.8 million in unrecognized tax benefits, the recognition of which would have a favorable effect on the effective tax rate. It is reasonably possible that the Corporation’sThe Corporation does not anticipate any material changes in its unrecognized tax positions as of August 29, 2008 could decrease approximately $2 million due to anticipated settlements and resulting cash payments related to open years after 1999, which are currently under audit.during the next twelve months. As of August 29,November 28, 2008, the total amount of gross accrued interest and penalties included in the Consolidated Statement of Financial Position was $6.3 million.$3.9 million, which is a decrease from February 29, 2008 resulting primarily from interest payments related to the above mentioned settlements.
The Corporation is subject to examination by the U.S. Internal Revenue Service 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 foreign tax jurisdictions, including Canada, the United Kingdom (“U.K.”), Australia, France, Italy, Mexico and New Zealand for tax years 2003 to the present.
Note 1415 – Business Segment Information
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
(In thousands) | August 29, 2008 | August 24, 2007 | August 29, 2008 | August 24, 2007 | November 28, 2008 | November 23, 2007 | November 28, 2008 | November 23, 2007 | ||||||||||||||||
Total Revenue: | ||||||||||||||||||||||||
North American Social Expression Products | $261,296 | $258,141 | $563,714 | $558,085 | $ | 322,853 | $ | 342,487 | $ | 886,567 | $ | 900,572 | ||||||||||||
Intersegment items | (14,736) | (14,582) | (29,380) | (23,085) | (19,031 | ) | (20,337 | ) | (48,411 | ) | (43,422 | ) | ||||||||||||
Exchange rate adjustment | 262 | (279) | 775 | (2,788) | (2,661 | ) | 942 | (1,886 | ) | (1,846 | ) | |||||||||||||
Net | 246,822 | 243,280 | 535,109 | 532,212 | 301,161 | 323,092 | 836,270 | 855,304 | ||||||||||||||||
International Social Expression Products | 63,191 | 64,071 | 133,064 | 128,488 | 89,365 | 86,951 | 222,429 | 215,439 | ||||||||||||||||
Exchange rate adjustment | 133 | 576 | 1,220 | (92) | (10,797 | ) | 2,259 | (9,577 | ) | 2,167 | ||||||||||||||
Net | 63,324 | 64,647 | 134,284 | 128,396 | 78,568 | 89,210 | 212,852 | 217,606 | ||||||||||||||||
Retail Operations | 37,547 | 39,072 | 79,040 | 79,611 | 39,994 | 41,312 | 119,034 | 120,923 | ||||||||||||||||
Exchange rate adjustment | 117 | (621) | 607 | (2,232) | (1,895 | ) | 705 | (1,288 | ) | (1,527 | ) | |||||||||||||
Net | 37,664 | 38,451 | 79,647 | 77,379 | 38,099 | 42,017 | 117,746 | 119,396 | ||||||||||||||||
AG Interactive | 20,975 | 17,155 | 41,502 | 37,054 | 20,996 | 18,908 | 62,498 | 55,962 | ||||||||||||||||
Exchange rate adjustment | (3) | 2 | 31 | (1) | (321 | ) | 2 | (290 | ) | 1 | ||||||||||||||
Net | 20,972 | 17,157 | 41,533 | 37,053 | 20,675 | 18,910 | 62,208 | 55,963 | ||||||||||||||||
Non-reportable segments | 17,053 | 13,942 | 23,562 | 22,327 | 15,581 | 12,507 | 39,143 | 34,834 | ||||||||||||||||
Unallocated | - | 8 | - | 85 | — | 30 | — | 115 | ||||||||||||||||
$385,835 | $377,485 | $814,135 | $797,452 | $ | 454,084 | $ | 485,766 | $ | 1,268,219 | $ | 1,283,218 | |||||||||||||
Segment Earnings (Loss): | ||||||||||||||||||||||||
Segment (Loss) Earnings: | ||||||||||||||||||||||||
North American Social Expression Products | $ 34,364 | $ 41,984 | $ 88,059 | $130,846 | $ | 48,496 | $ | 66,022 | $ | 136,555 | $ | 196,868 | ||||||||||||
Intersegment items | (10,750) | (10,955) | (21,993) | (17,477) | (13,721 | ) | (15,172 | ) | (35,714 | ) | (32,649 | ) | ||||||||||||
Exchange rate adjustment | (14) | 101 | 45 | (1,549) | (1,222 | ) | 775 | (1,177 | ) | (774 | ) | |||||||||||||
Net | 23,600 | 31,130 | 66,111 | 111,820 | 33,553 | 51,625 | 99,664 | 163,445 | ||||||||||||||||
International Social Expression Products | (2,134) | 1,574 | 728 | 1,750 | (80,478 | ) | 10,904 | (79,750 | ) | 12,654 | ||||||||||||||
Exchange rate adjustment | (24) | 19 | (81) | 30 | 4,883 | 250 | 4,802 | 280 | ||||||||||||||||
Net | (2,158) | 1,593 | 647 | 1,780 | (75,595 | ) | 11,154 | (74,948 | ) | 12,934 | ||||||||||||||
Retail Operations | (6,669) | (6,561) | (10,076) | (9,330) | (9,596 | ) | (5,814 | ) | (19,672 | ) | (15,144 | ) | ||||||||||||
Exchange rate adjustment | (7) | 74 | (13) | 62 | 53 | 67 | 40 | 129 | ||||||||||||||||
Net | (6,676) | (6,487) | (10,089) | (9,268) | (9,543 | ) | (5,747 | ) | (19,632 | ) | (15,015 | ) | ||||||||||||
AG Interactive | 759 | 3,163 | (337) | 6,442 | (160,907 | ) | 2,222 | (161,244 | ) | 8,664 | ||||||||||||||
Exchange rate adjustment | 2 | 6 | 37 | 14 | 93 | (13 | ) | 130 | 1 | |||||||||||||||
Net | 761 | 3,169 | (300) | 6,456 | (160,814 | ) | 2,209 | (161,114 | ) | 8,665 | ||||||||||||||
Non-reportable segments | 2,541 | 1,772 | 575 | 2,335 | 1,614 | 263 | 2,189 | 2,598 | ||||||||||||||||
Unallocated | (15,558) | (18,531) | (35,191) | (45,883) | (16,926 | ) | (14,928 | ) | (52,117 | ) | (60,811 | ) | ||||||||||||
Exchange rate adjustment | (144) | (82) | (152) | (121) | (956 | ) | (438 | ) | (1,108 | ) | (559 | ) | ||||||||||||
Net | (15,702) | (18,613) | (35,343) | (46,004) | (17,882 | ) | (15,366 | ) | (53,225 | ) | (61,370 | ) | ||||||||||||
$ | (228,667 | ) | $ | 44,138 | $ | (207,066 | ) | $ | 111,257 | |||||||||||||||
$ 2,366 | $ 12,564 | $ 21,601 | $ 67,119 | |||||||||||||||||||||
Termination Benefits
Termination benefits are primarily considered part of an ongoing benefit arrangement, are accounted for in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” and are recorded when payment of the benefits is probable and can be reasonably estimated.
During the quarter ended November 28, 2008, the Corporation recorded severance expense of approximately $7 million related to a cost reduction effort that eliminated approximately 275 positions. The balance of the severance accrual was $5.9$10.8 million, $9.6 million and $5.7$6.9 million at August 29,November 28, 2008, February 29, 2008 and August 24,November 23, 2007, respectively.
Deferred Revenue
Deferred revenue, included in “Other current liabilities” on the Consolidated Statement of Financial Position, totaled $34.9$33.3 million, $37.9 million and $33.3$32.5 million at August 29,November 28, 2008, February 29, 2008 and August 24,November 23, 2007, respectively. The amounts relate primarily to the Corporation’s AG Interactive segment and the licensing activities included in non-reportable segments.
Acquisitions
In March 2008, the Corporation acquired a card publisher and franchised distributor of greeting cards in the United Kingdom (“U.K.”) for approximately $16 million. Cash paid, net of cash acquired was $15.6 million and is reflected in investing activities in the Consolidated Statement of Cash Flows. Although the allocation of the purchase price has not yet been finalized, goodwill of approximately $12 million has been recorded. The purchase agreement provides for a contingent payment of up to 2 million U.K. Pounds Sterling to be paid based on the company’s operating results over a three-year period from the date of acquisition. The financial results of this acquisition are included in the Corporation’s consolidated results from the date of acquisition. Pro forma results of operations have not been presented because the effect of this acquisition was not deemed material.
During 2009, a valuation of the intangible assets of PhotoWorks, Inc., which was acquired in the second half of 2008, was completed and the value of the intangible assets acquired was reduced approximately $5 million with a corresponding increase in goodwill.
Note 1516 – Discontinued Operations
Discontinued operations include Learning Horizons, the Corporation’s educational products business. This subsidiary meets the definition of a “component of an entity” and has been accounted for as a discontinued operation under SFAS 144. Accordingly, the Corporation’s consolidated financial statements and related notes have been presented to reflect Learning Horizons as a discontinued operation for all periods presented. Learning Horizons was previously included within the Corporation’s “non-reportable segments.”
In February 2007, the Corporation entered into an agreement to sell Learning Horizons. The sale reflects the Corporation’s strategy to focus its resources on business units closely related to its core social expression business. The sale closed in March 2007 and the Corporation received cash proceeds of $2.3$2.2 million, which is included in “Cash receipts related to discontinued operations” in the Consolidated Statement of Cash Flows.
The following summarizes the results of discontinued operations:
Total revenue Pre-tax loss from operations (Loss) gain on sale Income tax (benefit) expense Loss from discontinued operations, net of tax Note 17 – Subsequent Events On December 30, 2008, the Corporation announced that it had reached an agreement to acquire Recycled Paper. Recycled Paper is a Chicago-based creator and designer of humorous greeting cards with annual net sales of approximately $80 million. Recycled Paper’s humor cards are distributed primarily through mass retail partners, drug stores and specialty retail stores. The transaction is subject to various closing conditions including a Chapter 11 reorganization process being successfully completed for Recycled Paper and other closing conditions. The agreement providing for the acquisition contemplates that the transaction will be effected pursuant to a so-called “pre-packaged” Chapter 11 reorganization. The reorganization plan is supported by Recycled Paper’s secured creditors and its trade creditors are expected to be paid in full under the plan. Consideration for the acquisition will include a combination of $54.7 million of new 7.375% notes due in 2016 and up to $18.4 million of cash in addition to the $44.2 million investment ($67.1 million of principal) previously made by the Corporation during the second quarter. See Note 13 for further information on the $44.2 million investment. In addition, the Corporation has agreed to provide up to $10 million debtor in possession (DIP) financing to Recycled Paper. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited 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 description of the uncertainties, risks and assumptions associated with these statements. 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
During the secondthird quarter, we experienced manyour results were significantly impacted by the recent deterioration in the global economy. These economic factors led to lower consolidated total revenues and earnings during the third quarter of 2009 compared to the prior year quarter. The most significant items causing the decline in earnings compared to the prior year were the goodwill impairment charges in our AG Interactive segment and United Kingdom (“U.K.”) reporting unit. During the quarter, indicators emerged within these businesses that led us to conclude that an interim goodwill impairment test was required. As a result of the same quarter-over-quarter trends that impacted operating results duringtesting, we recorded a preliminary impairment charge to write-off substantially all of the first quarter, butgoodwill of these business units, totaling approximately $232 million. In conjunction with this testing, we also tested intangible assets within these businesses and recorded an impairment charge of approximately $11 million in the AG Interactive segment.
Within our Retail Operations segment, weak performance in certain retail stores led to a lesser extent. Our focusfixed asset impairment test. As a result of that testing, we recorded an impairment charge of approximately $4 million. Based on providing fresh products to retail continues to drive growththe recent performance in this segment, we are currently analyzing our long-term strategy, which may include significant store closures in the card business, primarilynear term.
In an effort to reduce costs, drive efficiencies throughout the Corporation and meet the continuing challenges of the economy, we eliminated approximately 275 positions throughout the organization. As a result of this action, the third quarter results included a severance charge of approximately $7 million.
As a consequence of our declining earnings, the quarter included the reversal of approximately $11 million of variable compensation expense, as we do not expect significant variable compensation payments to be made this fiscal year.
The above items are reflected in the Consolidated Statement of Operations as follows:
(In millions) | ||||
Material, labor and other production costs | $ | 1.5 | ||
Selling, distribution and marketing expenses | 7.1 | |||
Administrative and general expenses | (8.8 | ) | ||
Goodwill and other intangible assets impairment | 242.9 | |||
$ | 242.7 | |||
The decrease in total revenue, compared to the prior year third quarter, was approximately half due to the impact of foreign currency movements and half due to lower sales of gift packaging products and seasonal cards in the North American Social Expression Products segment. The level of activity, including production, distribution and merchandising needed to drive these sales provided increased costs that continue to put downward pressure on earnings. TheThese declines were slightly offset by revenue growth in the value card line continuedInternational Social Expression Products segment and the AG Interactive segment, both due to recent acquisitions. Revenues were favorably impacted by approximately $4 million related to a scan-based trading (“SBT”) implementation completed in the quarter driving down the average selling price, particularly in seasonal cards, while overall card unit sales increased comparedthat had been previously estimated.
In addition to the prior year period. The$243 million impact of the items noted above, earnings declined due to decreased sales, an unfavorable product mix and continued increases in product content costs of cards also continueddue to increase withthe growth in the sale of technology cards and changes in product design that add creative embellishments to the card line.
We experienced higher consolidated total revenues and lower earnings duringlines. These increases in content costs along with the second quarter of 2009, compared to the prior year quarter. The higher revenues were primarily the result of revenue improvement in the North American Social Expression Products segment, driven by card products, and the AG Interactive segment, specifically the result of the photo product lines that were acquired during the second half of the prior year. In the card businesses, growth in value card unit sales was partially offset by lower average selling prices caused by a higher mix of value line cards. These sales improvements were partially offset by lower sales fromcontinue to put downward pressure on our gift packaging and party goods product lines.gross margins. Supply
Our lower earnings were driven by several factors within our North American Social Expression Products segment, which experienced increased costs in the current quarter compared to the prior year period. These items included increases in product content costs and increased supply
chain, scrap and distribution costs. We experienced increases in product content costs, as also noted in the first quarter and prior year, associated with more technology cards (paper cards that include light and/or sound) and other creative content costs. These costs continue to be higher compared to the prior year second quarter as we add technology and other creative embellishments that enhance our cards. Supply chain, scrap and distribution costs were also higher during the second quarter compared tothan the prior year period as increases in card shipments outpacedoutpace increases of card net sales. In total, these two cost issuesThe bankruptcy of a major customer in the U.K. also negatively impacted pre-tax earnings by approximately $9$4 million compared to the prior year period.
In addition, lower earnings in our International Social Expression Products segment included the impact of costs associated with a long-term efficiency and cost reduction project to consolidate our brands within the United Kingdom (“U.K.”).
The AG Interactive segment also contributed to the decrease in second quarter earnings, primarily related to the two acquisitions in the online photo sharing space. We are still developing these product lines, which historically are seasonally stronger during the second half of the year, and have improved the selection of existing product categories and added several new product categories to the merchandise offerings during thethird quarter. Our overall photo strategy is designed to bring together the strength of both operations and then leverage the user across all of our existing websites.
Our effective tax rate was 2.9%15.5% for the three months ended August 29, 2008, compared to 33.3% inNovember 28, 2008. The difference between the prior year period. Sinceeffective tax rate and the second quarter has seasonally low income from continuing operations before income tax expense, discrete items or changesstatutory rate was primarily due to the tax assets and reserves onnon-deductible nature of a significant portion of the Consolidated Statement of Financial Position have a more significant impact on the quarterly effective tax rate.
Over the past several years, we have been focused on a strategy to enhance our core product lines. In continuing this strategy,goodwill impairment charge taken during the second quarter,quarter.
On December 30, 2008, we purchased the majorityannounced an agreement to acquire Recycled Paper Greetings, Inc. (“Recycled Paper”). Recycled Paper is a Chicago-based creator and designer of the distressed first-lien debt securitieshumorous greeting cards with annual net sales of another social expression companyapproximately $80 million. Recycled Paper’s humor cards are distributed primarily through mass retail partners, drug stores and specialty retail stores. The transaction is subject to various closing conditions including a Chapter 11 reorganization process being successfully completed for approximately $44 million. This investment provides us, amongRecycled Paper and other things, the ability to participate in discussions with the company and its other lenders as it seeks to restructure its balance sheet.closing conditions.
Results of Operations
Three months ended August 29,November 28, 2008 and August 24,November 23, 2007
Net incomeloss was $2.3$193.3 million, or $0.05$4.25 per share, in the secondthird quarter compared to $8.4net income of $29.0 million, or $0.15$0.52 per share, in the prior year secondthird quarter (all per-share amounts assume dilution).
Our results for the three months ended August 29,November 28, 2008 and August 24,November 23, 2007 are summarized below:
(Dollars in thousands) | 2008 | % Total | 2007 | % Total | 2008 | % Total Revenue | 2007 | % Total Revenue | ||||||||||||||
Net sales | $ 372,942 | 96.7% | $ 365,878 | 96.9% | $ | 444,527 | 97.9 | % | $ | 475,015 | 97.8 | % | ||||||||||
Other revenue | 12,893 | 3.3% | 11,607 | 3.1% | 9,557 | 2.1 | % | 10,751 | 2.2 | % | ||||||||||||
Total revenue | 385,835 | 100.0% | 377,485 | 100.0% | 454,084 | 100.0 | % | 485,766 | 100.0 | % | ||||||||||||
Material, labor and other production costs | 170,112 | 44.1% | 163,052 | 43.2% | 223,214 | 49.1 | % | 223,329 | 46.0 | % | ||||||||||||
Selling, distribution and marketing expenses | 154,387 | 40.0% | 144,586 | 38.3% | 159,819 | 35.2 | % | 159,420 | 32.8 | % | ||||||||||||
Administrative and general expenses | 57,162 | 14.8% | 56,351 | 14.9% | 50,841 | 11.2 | % | 60,875 | 12.5 | % | ||||||||||||
Goodwill and other intangible assets impairment | 242,889 | 53.5 | % | — | 0.0 | % | ||||||||||||||||
Other operating income – net | (111) | (0.0%) | (320) | (0.1%) | (491 | ) | (0.1 | )% | (127 | ) | (0.0 | )% | ||||||||||
Operating income | 4,285 | 1.1% | 13,816 | 3.7% | ||||||||||||||||||
Operating (loss) income | (222,188 | ) | (48.9 | )% | 42,269 | 8.7 | % | |||||||||||||||
Interest expense | 5,434 | 1.4% | 4,839 | 1.3% | 6,634 | 1.5 | % | 4,835 | 1.0 | % | ||||||||||||
Interest income | (898) | (0.2%) | (2,234) | (0.6%) | (947 | ) | (0.2 | )% | (2,122 | ) | (0.4 | )% | ||||||||||
Other non-operating income – net | (2,617) | (0.7%) | (1,353) | (0.3%) | ||||||||||||||||||
Other non-operating expense (income) – net | 792 | 0.2 | % | (4,582 | ) | (1.0 | )% | |||||||||||||||
Income from continuing operations before income tax expense | 2,366 | 0.6% | 12,564 | 3.3% | ||||||||||||||||||
Income tax expense | 69 | 0.0% | 4,189 | 1.1% | ||||||||||||||||||
(Loss) income from continuing operations before income tax (benefit) expense | (228,667 | ) | (50.4 | )% | 44,138 | 9.1 | % | |||||||||||||||
Income tax (benefit) expense | (35,356 | ) | (7.8 | )% | 15,018 | 3.1 | % | |||||||||||||||
Income from continuing operations | 2,297 | 0.6% | 8,375 | 2.2% | ||||||||||||||||||
(Loss) income from continuing operations | (193,311 | ) | (42.6 | )% | 29,120 | 6.0 | % | |||||||||||||||
Loss from discontinued operations, net of tax | - | 0.0% | - | 0.0% | — | 0.0 | % | (104 | ) | 0.0 | % | |||||||||||
Net income | $ 2,297 | 0.6% | $ 8,375 | 2.2% | ||||||||||||||||||
Net (loss) income | $ | (193,311 | ) | (42.6 | )% | $ | 29,016 | 6.0 | % | |||||||||||||
For the three months ended August 29,November 28, 2008, consolidated net sales were $372.9$444.5 million, updown from $365.9$475.0 million in the prior year secondthird quarter. This 1.9%6.4%, or approximately $7$30 million, increasedecrease was primarily the result of higherlower net sales in our North American Social Expression Products segment of approximately $18 million as well as an unfavorable foreign currency translation impact of approximately $19 million. These decreases were partially offset by higher net sales of approximately $2 million in both our International Social Expression Products and our AG Interactive segment.segments. The increased sales in both of these segments are primarily attributable to recent acquisitions.
Net sales of our North American Social Expression Products segment increaseddecreased approximately $3$18 million. The majority of the increasedecrease is attributable to increaseddecreased sales of our everyday and seasonal cards. This increase was partially offset by lower sales from our gift packaging and party goodsseasonal card product lines.
The AG Interactive segment increasedlines partially offset by an increase in everyday card sales of approximately $5 million and an increase of approximately $4 million duringrelated to the second quarter. This increase in netSBT implementation discussed above. Sales of our gift packaging product lines were down approximately $23 million while seasonal card sales was solely a result of the digital photography acquisitions we made in the second half of last year.decreased approximately $4 million.
Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, increased $1.3decreased $1.2 million from $11.6$10.8 million during the three months ended August 24,November 23, 2007 to $12.9$9.6 million for the three months ended August 29,November 28, 2008. On July 20, 2008, we entered into an agreement to sell the Strawberry Shortcake and Care Bears properties and our rights in the Sushi Pack property to Cookie Jar Entertainment Inc. (“Cookie Jar”) for $195.0 million in cash. The transaction was expected to close by September 30, 2008; however, with the recent disruptions in the financial markets, the transaction has not closed. As a result, under the terms of our agreement, we
now have 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 may match any third party offer up to a pre-established threshold.
Wholesale Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis) for the three months ended August 29,November 28, 2008 and August 24,November 23, 2007 are summarized below:
Increase (Decrease) From the Prior Year | Increase (Decrease) From the Prior Year | |||||||||||||||||||||||||||||
Everyday Cards | Seasonal Cards | Total Greeting Cards | Everyday Cards | Seasonal Cards | Total Greeting Cards | |||||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||
Unit volume | (0.2%) | 19.5% | 29.7% | 24.0% | 4.0% | 20.2% | 4.1 | % | 1.7 | % | 3.4 | % | 4.2 | % | 3.9 | % | 2.3 | % | ||||||||||||
Selling prices | (0.1%) | (9.6%) | (13.7%) | (12.8%) | (2.4%) | (10.1%) | (1.6 | )% | (2.5 | )% | (6.8 | )% | (3.3 | )% | (3.0 | )% | (2.7 | )% | ||||||||||||
Overall increase / (decrease) | (0.2%) | 8.1% | 12.0% | 8.2% | 1.5% | 8.1% | 2.5 | % | (0.9 | )% | (3.7 | )% | 0.8 | % | 0.8 | % | (0.4 | )% |
During the secondthird quarter, combined everyday and seasonal greeting card sales less returns improved 1.5%0.8% compared to the prior year quarter. This increase was driven by seasonal card sales, as everyday card sales, were essentially flat.partially offset by lower seasonal card sales. Overall unit growth improved 3.9%, offset by lower selling prices as a result of the continued trend toward a higher mix of value line cards compared to the prior year. The increased volume of value priced card sales is driven by expanded distribution that we have obtained over the past year. This growth in the value priced cards more than offsets the impact of the growth in higher priced technology cards.
Seasonal card sales less returns were down 3.7%, with a 3.4% improvement in unit volume increased 29.7%, driven primarilymore than offset by a 6.8% decrease in selling prices. The unit volume improvement occurred in the summer seasonal and fall programs. The lower selling prices of 13.7% arewere due to a higher mix of value priced cards across most seasonal programs in the North American Social Expression Products segment compared to the prior year period. In addition, because the second quarter has the fewest holidays, the changes in unit volume during the quarter appear large on a percentage basis.
Everyday card sales less returns for the secondthird quarter were basically flat, down 0.2%,up 2.5% compared to the prior year quarter. Improvementsquarter, with unit volume improving 4.1% and selling prices declining 1.6%. The overall improvement of 2.5% was primarily due to the impact of the SBT implementation noted earlier. Net of the SBT impact, improvements within the North American Social Expression Products segment, where continued focus on providing fresh and relevant products to consumers continues to drive unit growth, were partially offset by the International Social Expression Products segment. The lower selling prices were the result of a higher mix of value line cards compared to the prior year.
Expense Overview
During the current quarter, we experienced increased costs as a result of the recent deterioration in our effort to drive profitable sales growth.the global economy. These higher costs were primarily due to added content to our cards, including music, lightsgoodwill and other embellishments,long-lived asset impairment charges and increased shipments outpacing increased net sales.severance charges associated with a workforce reduction effort.
Material, labor and other production costs (“MLOPC”) for the three months ended August 29,November 28, 2008 were $170.1$223.2 million, an increase from $163.1 million foressentially flat with the comparable period in the prior year. As a percentage of total revenue, these costs were 44.1%49.1% in the current period compared to 43.2%46.0% for the three months ended August 24,November 23, 2007. The increasedecrease of $7.0$0.1 million is due to favorable volume variances of approximately $4 million due to the lower sales level in the current quarter and foreign currency translation impacts of approximately $8 million substantially offset by unfavorable spending productand mix of approximately $12 million. The increased spending and volume variances. The unfavorable product mix which accounted for approximately $3 million of the increase, is primarily attributablewas due to a shift toward lower margin products including products with higher scrap and content related costs such as music, lights and other embellishments. Volume variances dueembellishments in addition to $2 million related to the increased sales volume in the current quarter and increased spending each accounted for approximately $2 millionseverance charges incurred as a result of the overall increase in MLOPC.cost reduction efforts.
Selling, distribution and marketing expenses for the three months ended August 29,November 28, 2008 were $154.4$159.8 million, increasing slightly from $144.6$159.4 million for the comparable period in the prior year. The increase is due to higher spending of approximately $6$8 million on supply chain costs, specificallypartially offset by favorable foreign currency translation of approximately $7 million. The additional spending is directly attributable to the severance charges and higher freight and distribution costs, due to an increaserelated costs. Severance expense of approximately $3 million was recorded in products shipped. Costs relatedthe quarter associated with the workforce reduction announced in early December 2008. Also contributing to the photo acquisitionsincreased expense was the fixed asset impairment charge. Due to weak performance in certain of our AG Interactiveretail stores, long-lived assets within our Retail Operations segment and the brand consolidation costs in our International Social Expression Products segment also contributed to the increase.were reviewed. As a result of that review, an impairment charge of approximately $4 million was recorded.
Administrative and general expenses were $57.2$50.8 million for the three months ended August 29,November 28, 2008, an increasea decrease from $56.4$60.9 million for the three months ended August 24,November 23, 2007. The increasedecrease of $0.8$10.1 million is primarily related to higher information technology-related expenses and higher amortizationthe reversal of variable compensation expense of intangible assets attributable
approximately $11 million. Based on current operating results, we do not expect to meet the 2009 operating results required to make certain variable compensation payments. Also contributing to the digital photography acquisitions we completeddecrease in the second halfcurrent three months is lower postretirement benefit obligation expense of 2008.approximately $1 million and favorable foreign currency translation of approximately $2 million. These increasesdecreases were partially offset by lower domestic profit-sharing planapproximately $2 million of severance charges associated with the workforce reduction discussed above and approximately $3 million of higher bad debt expense due in part to the reduced incomerecent bankruptcy of a major customer in the U.K.
A goodwill and other intangible assets impairment charge of $242.9 million was recorded in the current year period.quarter as 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 the majority of the goodwill for this reporting unit. The goodwill and intangible asset impairment charges for the AG Interactive segment were $160.8 million, which includes all of the goodwill for AG Interactive. The actual amount of the goodwill impairment charges will not be finalized until we have completed our testing. See Note 9 to the consolidated financial statements for further detail of these impairment charges.
Interest expense for the three months ended August 29,November 28, 2008 was $5.4$6.6 million, up from $4.8 million for the prior year quarter. The increase of $0.6$1.8 million is attributable to increased borrowings on our revolving credit facility and the accounts receivable securitization facility in the current period.
Other non-operating incomeexpense (income) – net was $2.6$0.8 million of expense in the current year secondthird quarter compared to $1.4income of $4.6 million for the three months ended August 24,November 23, 2007. The $1.2$5.4 million increase indecrease from income to expense is due primarily to increaseda swing from a foreign exchange gainsgain in the prior year quarter to a loss in the current period.quarter.
The effective tax rate on income from continuing operations was 2.9%15.5% and 33.3%34.0% for the three months ended August 29,November 28, 2008 and August 24,November 23, 2007, respectively. The lower effective tax rate in the current quarter is due primarily to the recognitiongoodwill impairment charge as only a portion of athe charge is deductible for tax benefit from a return to provision adjustment. Since the second quarter has seasonally low income from continuing operations before income tax expense, discrete items or changes to the tax assets and reserves on the Consolidated Statement of Financial Position, such as this return to provision adjustment, have a more significant impact on the Corporation’s quarterly effective tax rate.purposes.
Results of Operations
SixNine months ended August 29,November 28, 2008 and August 24,November 23, 2007
Net incomeloss was $15.6$177.7 million, or $0.32$3.75 per share, in the sixnine months ended August 29,November 28, 2008 compared to $38.4net income of $67.4 million, or $0.69$1.21 per share, in the prior year sixnine months.
Our results for the sixnine months ended August 29,November 28, 2008 and August 24,November 23, 2007 are summarized below:
(Dollars in thousands) | 2008 | % Total | 2007 | % Total | 2008 | % Total Revenue | 2007 | % Total Revenue | ||||||||||||||
Net sales | $ 798,405 | 98.1% | $ 783,894 | 98.3% | $ | 1,242,932 | 98.0 | % | $ | 1,258,909 | 98.1 | % | ||||||||||
Other revenue | 15,730 | 1.9% | 13,558 | 1.7% | 25,287 | 2.0 | % | 24,309 | 1.9 | % | ||||||||||||
Total revenue | 814,135 | 100.0% | 797,452 | 100.0% | 1,268,219 | 100.0 | % | 1,283,218 | 100.0 | % | ||||||||||||
Material, labor and other production costs | 363,454 | 44.6% | 324,180 | 40.7% | 586,668 | 46.3 | % | 547,509 | 42.7 | % | ||||||||||||
Selling, distribution and marketing expenses | 305,262 | 37.5% | 285,280 | 35.8% | 465,081 | 36.7 | % | 444,700 | 34.6 | % | ||||||||||||
Administrative and general expenses | 119,723 | 14.7% | 118,586 | 14.9% | 170,564 | 13.4 | % | 179,461 | 14.0 | % | ||||||||||||
Goodwill and other intangible assets impairment | 242,889 | 19.1 | % | — | 0.0 | % | ||||||||||||||||
Other operating income – net | (838) | (0.1%) | (680) | (0.1%) | (1,329 | ) | (0.1 | )% | (807 | ) | (0.1 | )% | ||||||||||
Operating income | 26,534 | 3.3% | 70,086 | 8.7% | ||||||||||||||||||
Operating (loss) income | (195,654 | ) | (15.4 | )% | 112,355 | 8.8 | % | |||||||||||||||
Interest expense | 10,339 | 1.3% | 9,596 | 1.2% | 16,973 | 1.3 | % | 14,431 | 1.1 | % | ||||||||||||
Interest income | (1,888) | (0.2%) | (3,733) | (0.5%) | (2,835 | ) | (0.2 | )% | (5,855 | ) | (0.4 | )% | ||||||||||
Other non-operating income – net | (3,518) | (0.4%) | (2,896) | (0.4%) | (2,726 | ) | (0.2 | )% | (7,478 | ) | (0.6 | )% | ||||||||||
Income from continuing operations before income tax expense | 21,601 | 2.6% | 67,119 | 8.4% | ||||||||||||||||||
Income tax expense | 5,971 | 0.7% | 28,481 | 3.6% | ||||||||||||||||||
(Loss) income from continuing operations before income tax (benefit) expense | (207,066 | ) | (16.3 | )% | 111,257 | 8.7 | % | |||||||||||||||
Income tax (benefit) expense | (29,385 | ) | (2.3 | )% | 43,499 | 3.4 | % | |||||||||||||||
Income from continuing operations | 15,630 | 1.9% | 38,638 | 4.8% | ||||||||||||||||||
(Loss) income from continuing operations | (177,681 | ) | (14.0 | )% | 67,758 | 5.3 | % | |||||||||||||||
Loss from discontinued operations, net of tax | - | 0.0% | (213) | (0.0%) | — | 0.0 | % | (317 | ) | (0.0 | )% | |||||||||||
Net (loss) income | $ | (177,681 | ) | (14.0 | )% | $ | 67,441 | 5.3 | % | |||||||||||||
Net income | $ 15,630 | 1.9% | $ 38,425 | 4.8% | ||||||||||||||||||
For the sixnine months ended August 29,November 28, 2008, consolidated net sales were $798.4 million, up$1.24 billion, down from $783.9 million$1.26 billion in the prior year sixnine months. This 1.9%1.3%, or $14.5approximately $16 million, increasedecrease was primarily the result of lower net sales in our North American Social Expression Products segment of approximately $19 million and an unfavorable foreign currency translation impact of approximately $12 million. These decreases were partially offset by higher net sales in our International Social Expression Products segment of approximately $5 million,and our AG Interactive segment of approximately $4$7 million each.
Net sales of our North American Social Expression Products segment decreased approximately $19 million compared to the prior year nine months. The majority of the decrease is attributable to lower sales of our gift packaging and party goods product lines of approximately $29 million and a favorable foreign currency translation impact of approximately $8 million. These increases were$5 million, respectively. This decrease is partially offset by lower netincreased sales in our fixtures businessof everyday cards of approximately $2$14 million.
The increase in our International Social Expression Products segment’s net sales of approximately $7 million was driven by our U.K. operations where the majority of the increase was due tosolely driven by the acquisition completed in the first quarter of 2009.
Net sales of our AG Interactive segment increased approximately $4$7 million. The current year period includes approximately $7$11 million of revenue from the digital photography acquisitions completed during the second half of 2008. These revenues were partially offset by lower advertising revenues in our online product group.
Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, increased $2.2$1.0 million from $13.5$24.3 million during the sixnine months ended August 24,November 23, 2007 to $15.7$25.3 million for the sixnine months ended August 29,November 28, 2008.
Wholesale Unit and Pricing Analysis for Greeting Cards
Unit and pricing comparatives (on a sales less returns basis) for the sixnine months ended August 29,November 28, 2008 and August 24,November 23, 2007 are summarized below:
Increase (Decrease) From the Prior Year | Increase (Decrease) From the Prior Year | |||||||||||||||||||||||||||||||||
Everyday Cards | Seasonal Cards | Total Greeting Cards | Everyday Cards | Seasonal Cards | Total Greeting Cards | |||||||||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||||
Unit volume | 5.3% | 13.8% | 12.3% | 5.3% | 7.2% | 11.4% | 6.0 | % | 9.3 | % | 9.6 | % | 4.8 | % | 7.0 | % | 8.1 | % | ||||||||||||||||
Selling prices | (2.6%) | (7.2%) | (7.9%) | (3.6%) | (4.0%) | (6.2%) | (2.7 | )% | (5.5 | )% | (7.6 | )% | (3.4 | )% | (4.0 | )% | (4.9 | )% | ||||||||||||||||
Overall increase / (decrease) | 2.6% | 5.6% | 3.4% | 1.6% | 2.8% | 4.4% | 3.2 | % | 3.3 | % | 1.2 | % | 1.3 | % | 2.6 | % | 2.8 | % |
During the six month period,nine months ended November 28, 2008, combined everyday and seasonal greeting card sales less returns improved 2.8%2.6%, compared to the prior year quarter,nine months, with increases coming from both everyday and seasonal cards. Overall unit growth improved 7.0%, offset by lower selling prices as a result of the continued trend toward a higher mix of value line cards compared to the prior year. The increased volume of value priced card sales is driven by expanded distribution that we have obtained over the past year. This growth in the value priced cards more than offsets the impact of the growth in higher priced technology cards.
Everyday card sales less returns were up 2.6%3.2%, compared to the prior year sixnine months. This improvement was in the North American Social Expression Products segment where continued focus on providing fresh and relevant products to consumers continues to drive unit growth. Overall, unit volume was up 5.3%6.0% and selling prices were down 2.6%2.7%. The lower selling prices were the result of a higher mix of value line cards compared to the prior year.
Seasonal card unit volume increased 12.3%9.6%, driven by graduation, Mother’s Day and summerimprovement in most seasonal programs. Lower selling prices of 7.9%7.6% related to a higher mix of value priced cards across most programs in the North American Social Expression Products segment compared to the prior year period.
Expense Overview
During the current year period, we experienced increased costs due to both the recent deterioration in the global economy and in our effort to drive profitable sales growth. These higher costs were due to the rollout of the new single priced card line in Canada, added content to our cards, including music, lights and other embellishments, and increased shipments outpacing increased net sales. The current year period also included charges for goodwill and other long-lived asset impairments and severance.
MLOPC for the sixnine months ended August 29,November 28, 2008 were $363.5$586.7 million, an increase from $324.2$547.5 million for the comparable period in the prior year. As a percentage of total revenue, these costs were 44.6%46.3% in the current period compared to 40.7%42.7% for the sixnine months ended August 24,November 23, 2007. The increase of $39.3$39.2 million is due to unfavorable spending and product mix of approximately $22 million and $13 million, respectively.$46 million. Volume variances due to the increaseddecreased sales volume in the current year period and foreign currency translation impacts increaseddecreased MLOPC approximately $4 million.$1 million and $6 million, respectively. The increased spending and mix is primarily attributable to severance charges, higher scrap and creative content costs, including music, lights and other embellishments, as well as costs associated with the conversion to our new Canadian line of cards. The unfavorable product mix is attributable to a shift toward cards with more content, including music, lights and other embellishments.
Selling, distribution and marketing expenses for the sixnine months ended August 29,November 28, 2008 were $305.3$465.1 million, increasing from $285.3$444.7 million for the comparable period in the prior year. The increase of $20.0$20.4 million is due to unfavorablehigher spending of approximately $24 million partially offset by favorable foreign currency translation of approximately $4 million and higher spending of approximately $16 million. The additional spending is attributable to severance charges of approximately $3 million and increases in supply chain costs, specifically merchandiser, freight and
distribution costs, due to an increase in productsunits shipped. Merchandiser expense increased approximately $7$10 million and freight and distribution costs each
increased approximately $3$4 million. The fixed asset impairment charge in our Retail Operations segment of approximately $4 million also contributed to the increased expense in the current nine months.
Administrative and general expenses were $119.7$170.6 million for the sixnine months ended August 29,November 28, 2008, an increasea decrease from $118.6$179.5 million for the sixnine months ended August 24,November 23, 2007. The majority of the increasedecrease of $1.1$8.9 million is due to unfavorablethe reversal of variable compensation expense of approximately $11 million as well as favorable foreign currency translation.translation of approximately $1 million. This decrease was partially offset by an increase in bad debt expense of approximately $4 million due in part to the recent bankruptcy of a major customer in the U.K.
A goodwill and other intangible assets impairment charge of $242.9 million was recorded in the third quarter as 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. is $82.1 million, which represents the majority of the goodwill for this reporting unit. The goodwill and intangible asset impairment charges for the AG Interactive segment were $160.8 million, which includes all of the goodwill for AG Interactive. The actual amount of the goodwill impairment charges will not be finalized until we have completed our testing. See Note 9 to the consolidated financial statements for further detail of these impairment charges.
Interest expense for the sixnine months ended August 29,November 28, 2008 was $10.3$17.0 million, up from $9.6$14.4 million for the prior year period. The increase of $0.7$2.6 million is attributable to increased borrowings on the revolving credit facility and the accounts receivable securitization facility in the current period.
Other non-operating income – net was $3.5$2.7 million in the current year sixnine months compared to $2.9$7.5 million for the sixnine months ended August 24,November 23, 2007. The $0.6$4.8 million increasedecrease in income is due primarily to increaseddecreased foreign exchange gains in the current period.
The effective tax rate on income from continuing operations was 27.6%14.2% and 42.4%39.1% for the sixnine months ended August 29,November 28, 2008 and August 24,November 23, 2007, respectively. The lower effective tax rate in the current nine months is primarily related to the goodwill impairment, as only a portion of the charge is deductible for tax purposes. The higher effective tax rate in the prior sixnine months related to several discrete events during that period, primarily agreements reached with the Internal Revenue Service as it closed its audit cycle.
Segment Information
Our operations are organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. Our North American Social Expression Products and our International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through various channels of distribution, with mass retailers as the primary channel. As permitted under Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” certain operating divisions have been aggregated into both the North American Social Expression Products and International Social Expression Products segments. The aggregated operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. At August 29,November 28, 2008, we owned and operated 412415 card and gift retail stores in the United States and Canada through our Retail Operations segment. The stores are primarily located in malls and strip shopping centers. The stores sell products purchased from the North American Social Expression Products segment as well as products purchased from other vendors. AG Interactive distributes social expression products, including electronic greetings, personalized printable greeting cards and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices. AG Interactive also offers online photo sharing space and a platform to provide consumers the ability to use their own photos to create unique, high quality physical products, including greeting cards, calendars, photo albums and photo books.
We review segment results using consistent exchange rates between periods to eliminate the impact of foreign currency fluctuations.
North American Social Expression Products Segment
(Dollars in thousands) | Three Months Ended August | % Change | Six Months Ended August | % Change | Three Months Ended November | % Change | Nine Months Ended November | % Change | ||||||||||||||||||||||
29, 2008 | 24, 2007 | 29, 2008 | 24, 2007 | 28, 2008 | 23, 2007 | 28, 2008 | 23, 2007 | |||||||||||||||||||||||
Total revenue | $246,560 | $243,559 | 1.2% | $534,334 | $535,000 | (0.1%) | $ | 303,822 | $ | 322,150 | (5.7 | )% | $ | 838,156 | $ | 857,150 | (2.2 | )% | ||||||||||||
Segment earnings | 23,614 | 31,029 | (23.9%) | 66,066 | 113,369 | (41.7%) | 34,775 | 50,850 | (31.6 | )% | 100,841 | 164,219 | (38.6 | )% |
Total revenue of our North American Social Expression Products segment for the quarter ended August 29,November 28, 2008, excluding the impact of foreign exchange and intersegment items, increased $3.0decreased $18.3 million, or 1.2%5.7%, from the prior year period. The majority of the increase was driven by card products as growth in unitdecrease is attributable to decreased sales was only partially offset by lower average selling prices caused by a higher mix of value line cards. This increase was partially offset by lower sales
from our gift packaging and party goodsseasonal card product lines.lines partially offset by an increase in everyday card sales of approximately $5 million and an increase of approximately $4 million related to the SBT implementation discussed earlier. Sales of our gift packaging product lines are down approximately $23 million while seasonal card sales have decreased approximately $4 million. Total revenue of our North American Social Expression Products segment for the sixnine months ended August 29,November 28, 2008, excluding the impact of foreign exchange and intersegment items, decreased $0.7$19.0 million compared to the prior year period. The revenue reduction due to the rolloutmajority of the new Canadian card line anddecrease is attributable to lower sales of our gift packaging products and party goods was substantiallyproduct lines of approximately $29 million and $5 million, respectively. This decrease is partially offset by higherincreased sales of both everyday and seasonal cards.cards of approximately $14 million.
Segment earnings, excluding the impact of foreign exchange and intersegment items, decreased $7.4$16.1 million in the current three months compared to the three months ended August 24,November 23, 2007. Contributing to theThe decrease arewas driven by a combination of lower revenues, increased product content costs and increased supply chain costs. Increased product content costs are a result of increased cards with technology (paper cards that include light and/or sound) and other creative embellishments. Increased supply chain costs were driven by increases in card shipments, which outpaced increases of card net sales. In total, these costs along with the increased card product content costs decreased segment earnings by approximately $9 million compared to the prior year period. Segment earnings, excluding the impact of foreign exchange and intersegment items, decreased $47.3$63.4 million during the sixnine months ended August 29,November 28, 2008 compared to the prior year period. The conversion to the new Canadian card line reduced earnings by approximately $8 million in the current six months. Also contributing to the decrease for the six-monthnine-month period arewas primarily due to the combination of lower revenues, increased product content and supply chain costs as described above which impacted segment earnings by approximately $33$54 million compared to the prior year period. Also contributing to the decrease in earnings is the conversion to the new Canadian card line, which reduced earnings by approximately $8 million in the current nine months.
International Social Expression Products Segment
(Dollars in thousands) | Three Months Ended August | % Change | Six Months Ended August | % Change | Three Months Ended November | % Change | Nine Months Ended November | % Change | ||||||||||||||||||||||||
29, 2008 | 24, 2007 | 29, 2008 | 24, 2007 | 28, 2008 | 23, 2007 | 28, 2008 | 23, 2007 | |||||||||||||||||||||||||
Total revenue | $63,191 | $64,071 | (1.4%) | $133,064 | $128,488 | 3.6% | $ | 89,365 | $ | 86,951 | 2.8 | % | $ | 222,429 | $ | 215,439 | 3.2 | % | ||||||||||||||
Segment (loss) earnings | (2,134) | 1,574 | (235.6%) | 728 | 1,750 | (58.4%) | (80,478 | ) | 10,904 | — | (79,750 | ) | 12,654 | — |
Total revenue of our International Social Expression Products segment, excluding the impact of foreign exchange, decreased $0.9 million, or 1.4%, compared to the prior year quarter. Total revenue of our International Social Expression Products segment, excluding the impact of foreign exchange, increased $4.6$2.4 million, or 3.6%2.8%, and $7.0 million, or 3.2%, for the three and nine months ended November 28, 2008, respectively, compared to the respective periods in the prior year six months.year. The majority of the revenue improvement in both the six-month periodthree and nine month periods is attributable to the U.K. acquisition completed in the first quarter of this year. The current year.year three and nine months include revenue of approximately $4 million and $8 million, respectively, from the acquisition. These increases were partially offset by decreased sales in the U.K. attributable to the recent bankruptcy of a major customer and a buying freeze implemented by another major customer, including on our everyday products.
Segment earnings, excluding the impact of foreign exchange, decreased from earnings of $1.6$10.9 million in the prior year quarter to a loss of $2.1$80.5 million in the current quarter. Segment earnings, excluding the impact of foreign exchange, decreased $1.0$92.4 million in the sixnine months ended August 29,November 28, 2008 compared to the prior year sixnine months. The decrease in both the three and sixnine month periods is primarily the result of costs associated withthe goodwill impairment
charge of approximately $87 million (approximately $82 million reported above plus approximately $5 million of foreign currency based on the consistent exchange rates utilized for segment reporting purposes). The remaining decrease in earnings was driven primarily by charges taken as a long-term efficiency and cost reduction project to consolidate our brands withinresult of the U.K.bankruptcy of a major customer.
Retail Operations Segment
(Dollars in thousands) | Three Months Ended August | % Change | Six Months Ended August | % Change | Three Months Ended November | % Change | Nine Months Ended November | % Change | ||||||||||||||||||||||||||
29, 2008 | 24, 2007 | 29, 2008 | 24, 2007 | 28, 2008 | 23, 2007 | 28, 2008 | 23, 2007 | |||||||||||||||||||||||||||
Total revenue | $37,547 | $39,072 | (3.9%) | $79,040 | $79,611 | (0.7%) | $ | 39,994 | $ | 41,312 | (3.2 | )% | $ | 119,034 | $ | 120,923 | (1.6 | )% | ||||||||||||||||
Segment loss | (6,669) | (6,561) | (1.6%) | (10,076) | (9,330) | (8.0%) | (9,596 | ) | (5,814 | ) | (65.1 | )% | (19,672 | ) | (15,144 | ) | (29.9 | )% |
Total revenue, excluding the impact of foreign exchange, in our Retail Operations segment decreased $1.5$1.3 million, or 3.9%3.2%, for the three months ended August 29,November 28, 2008, compared to the prior year period due to unfavorablea 6.8% decrease in same-store sales of approximately $1 million, or 2.4%, and the reduction in store doors.sales. For the sixnine months ended August 29,November 28, 2008, total revenue decreased $0.6$1.9 million compared to the prior year period, as same-store sales decreased 0.7%, or approximately $0.5 million.2.8%. Also contributing to the decrease in both periods is the reduction in store doors. The average number of stores was approximately 4% less than in the prior year period, which accounted for the remainder of the decrease.period.
Segment earnings, excluding the impact of foreign exchange, was a loss of $6.7$9.6 million in the three months ended August 29,November 28, 2008, compared to a loss of $6.6$5.8 million during the three months ended August 24,November 23, 2007. Segment earnings were unfavorably impacted by the lower sales level and lower gross margins, which decreased by approximately 0.82.9 percentage points.points, due to increased promotional pricing in the current quarter. For the sixnine months ended August 29,November 28, 2008, segment earnings was a loss of $10.1$19.7 million compared to a loss of $9.3$15.1 million in the prior year period. Earnings in the current year sixnine months were unfavorably impacted by a weakening of gross margins as a result of more promotional pricing. Gross margins decreased by approximately 1.31.9 percentage points. Also contributing to the decrease in earnings in both the three and nine month periods was the fixed asset impairment charge. Due to weak performance in certain of our retail stores, long-lived assets within our Retail Operations segment were reviewed. As a result of that review, an impairment charge of approximately $4 million was recorded. Both the three and sixnine month periods ended August 29,November 28, 2008 were favorably impacted by lower store expenses as a result of the reduction in store doors.
AG Interactive Segment
(Dollars in thousands) | Three Months Ended August | % Change | Six Months Ended August | % Change | ||||||||
29, 2008 | 24, 2007 | 29, 2008 | 24, 2007 | |||||||||
Total revenue | $20,975 | $17,155 | 22.3% | $41,502 | $37,054 | 12.0% | ||||||
Segment earnings (loss) | 759 | 3,163 | (76.0%) | (337) | 6,442 | (105.2%) |
(Dollars in thousands) | Three Months Ended November | % Change | Nine Months Ended November | % Change | ||||||||||||||||
28, 2008 | 23, 2007 | 28, 2008 | 23, 2007 | |||||||||||||||||
Total revenue | $ | 20,996 | $ | 18,908 | 11.0 | % | $ | 62,498 | $ | 55,962 | 11.7 | % | ||||||||
Segment (loss) earnings | (160,907 | ) | 2,222 | — | (161,244 | ) | 8,664 | — |
Total revenue of AG Interactive for the three months ended August 29,November 28, 2008, excluding the impact of foreign exchange, was $21.0 million compared to $17.2$18.9 million in the prior year secondthird quarter. The increased revenue is due solely to the digital photography acquisitions completed during the second half of 2008.2008 partially offset by lower advertising revenues in our online product group. Total revenue of AG Interactive for the sixnine months ended August 29,November 28, 2008, excluding the impact of foreign exchange, was $41.5$62.5 million compared to $37.1$56.0 million in the prior year sixnine months. The current year sixnine months include approximately $7$11 million of revenue from the digital photography acquisitions. These revenues were partially offset by lower advertising revenues in our online product group. At the end of the secondthird quarter of 2009, AG Interactive had approximately 3.94.0 million online paid subscriptions versus 3.63.7 million at the prior year quarter end.
Segment earnings, excluding the impact of foreign exchange, decreased from $3.2earnings of $2.2 million during the quarter ended August 24,November 23, 2007 to $0.8a loss of $160.9 million for the quarter ended August 29,November 28, 2008. Segment earnings, excluding the impact of foreign exchange, decreased from earnings of $6.4$8.7 million in the sixnine months ended August 24,November 23, 2007 to a loss of $0.3$161.2 million in the current year sixnine months. The decrease in both the three and sixnine month periods ended August 29,November 28, 2008 compared to the prior year periods is primarily attributable to the
goodwill and intangible asset impairments of $160.8 million. The remaining earnings decrease in both periods is due to expenses incurred associated with the digital photo product line, including marketing, intangible asset amortization and technology costs.
Liquidity and Capital Resources
The seasonal nature of our business precludes a useful comparison of the current period and the fiscal year-end financial statements; therefore, a Consolidated Statement of Financial Position as of August 24,November 23, 2007, has been included.
Operating Activities
Operating activities used $53.7$84.2 million of cash during the sixnine months ended August 29,November 28, 2008, compared to providing $57.4$42.6 million of cash in the prior year period.
Accounts receivable was a use of cash of $0.6Other non-cash charges were $8.1 million duringfor the sixnine months ended August 29,November 28, 2008, compared to a source of cash of $33.4$5.7 million in the prior year six months.period. The year-over-year change in cash flow forincrease is primarily due to the six month period was caused by the historically low accounts receivable balance at February 29, 2008. So while the accounts receivable balance at August 29, 2008 and August 24, 2007 are essentially the same, the six month cash flow is considerably less infixed asset impairment charges recorded during the current period. The levelperiod in our Retail Operations segment.
Other current assets provided $10.5 million of accounts receivable at February 29, 2008 was driven by lower sales during the period and more customers moving to the scan-based trading (“SBT”) business model. In general, customers on the SBT business model tend to have shorter payment terms than non-SBT customers.
Inventory was a use of $47.6 millioncash from February 29, 2008, compared to a use of $62.0$18.2 million in the prior year period. Historically, the first halfnine months. The change is attributable to a period of inventory build, and thus a use of cash, in preparation for the fall and
winter seasonal holidays. Over the past several years, this use of cash during the first halfreceivable recorded as part of the year has gradually declined through improved inventory management. In addition,termination of several long-term supply agreements in fiscal 2007. The majority of the lower year-over-year usage of cashreceivable was collected in the current periodfourth quarter of 2007 and the balance was impacted byreceived in the higher inventory levels at February 29, 2008. The higher inventory levels at February 29, 2008 were driven by the build of the Canadian card line and technology cards during the threenine months ended February 29, 2008. The sale of these inventories during the current period was a source of cash, partially offsetting the usage of cash related to the seasonal inventory build.November 23, 2007.
Deferred costs - costs—net generally represents payments under agreements with retailers net of the related amortization of those payments. During the sixnine months ended August 29,November 28, 2008, amortization exceeded payments by $14.7$6.0 million; in the sixnine months ended August 24,November 23, 2007, amortization exceeded payments by $28.5$14.4 million. For the nine months ended November 23, 2007, deferred costs—net also included the impact of a $15 million reduction of deferred contract costs associated with the termination of a long-term supply agreement and related refund received. See Note 910 to the consolidated financial statements for further detail of deferred costs related to customer agreements.
Accounts payable and other liabilities used $69.5$17.5 million of cash during the sixnine months ended August 29,November 28, 2008, compared to $23.4providing $38.4 million in the prior year period. The increase in cash usage inchange was attributable primarily to the reversal of variable compensation expense accruals during the current year six months compared to the prior year period was attributable primarilyquarter as well as to differences in the timing of cash payments related to normal course of business accounts payable, accrued liabilities, income taxes and compensation. For example, the timing of the year-end or quarterly period in relation to payroll periods can substantially impact the amount of accrued payroll on a year-over-year basis and thus the related cash outflow in the subsequent period. In addition, incentive-based and profit-sharing accruals at February 29, 2008 were higher than at February 28, 2007 due to our improved financial results in fiscal 2008 compared to fiscal 2007, thus the cash outflow in the first half of the current period was higher than the prior year period.
Investing Activities
Investing activities used $88.0$103.8 million of cash during the sixnine months ended August 29,November 28, 2008, compared to $15.1$81.7 million in the prior year period. The use of cash in the current period is related to cash payments for marketable securities and business acquisitions as well as capital expenditures of $28.5$44.3 million. During 2009, we purchased a card publisher and franchised distributor of greeting cards in the U.K. for $15.6 million and we acquired, at a substantial discount, a majority of the distressed first-lien debt securities of another social expressions company that is currently seeking to restructure its balance sheet.Recycled Paper. We paid $44.2 million for this investment. We were able to purchase these debt securities at a substantial discount because this company has failed to make interest payments on certain of its other borrowings. It is possible that because of the financial difficulties that this company is experiencing, it may be unable to repay its obligations to us and we may lose some or all of our investment.
The use of cash in the prior sixnine months is related to capital expenditures of $13.6$37.4 million as well as cash payments for business acquisitions asof $51.3 million. During the third quarter of fiscal 2008, we purchased the assets of Webshots, an online photo and video sharing site, for $45.2 million. Also, the final payment of $6.1 million for the online greeting card business purchased in the second quarter of fiscal 2007 was made during the first quarter of
fiscal 2008. These cash outflows were partially offset by the receipt of $3.4 million uponcash receipts related to discontinued operations and proceeds from the sale of our educational products subsidiary.fixed assets.
Financing Activities
Financing activities provided $109.7$137.5 million of cash during the sixnine months ended August 29,November 28, 2008, compared to $1.3using $41.2 million during the sixnine months ended August 24,November 23, 2007. The current year source of cash relates primarily to short-term debt borrowings of $189.5$227.8 million partially offset by share repurchases and long-term debt repayments. Our receipt of the exercise price on stock options provided $24.3 million in the prior year period, but was partially offset by dividend payments and share repurchases. During the sixnine months ended August 29,November 28, 2008, $46.1$51.0 million was paid to repurchase approximately 3.13.4 million shares under our repurchase program compared to $10.4$51.8 million used in the sixnine months ended August 24,November 23, 2007 to repurchase approximately 0.42.1 million shares. We also paid $0.2 million in the current period to repurchase less than 10,000 Class B common shares, in accordance with our Amended Articles of Incorporation, compared to $22.8 million in the prior year nine months to repurchase 0.9 million Class B common shares. During the second quarter of 2009, $22.5 million was paid upon exercise of the put option on our 6.10% senior notes. During the sixnine months ended August 29,November 28, 2008 and August 24,November 23, 2007, we paid quarterly dividends of $0.12 and $0.10 per common share, respectively, which totaled $11.7$17.1 million and $11.1$16.7 million, respectively. In the prior year, our receipt of the exercise price on stock options provided $26.2 million and our additional short-term borrowings provided $23.8 million.
Credit Sources
Substantial credit sources are available to us. In total, we had available sources of approximately $540 million at August 29,November 28, 2008. This included our $450 million senior secured credit facility and our $90 million accounts receivable securitization facility. Borrowings under the accounts receivable securitization facility are limited based on our eligible receivables outstanding. We had $191.2$224.5 million outstanding under the revolving credit facility and $18.4$23.4 million outstanding under the accounts receivable securitization agreementfacility at August 29,November 28, 2008. In addition to these borrowings, we have, in the aggregate, $25.7 million outstanding under letters of credit, which reduces the total credit availability thereunder.
On September 23, 2008, the revolving credit facility was amended as follows: (1) to permit us to sell our Strawberry Shortcake, Care Bears and Sushi Pack properties; (2) to increase the permitted level of acquisitions that we may make from $200 million to $325 million; (3) to authorize further amendments to our accounts receivable facility to allow our accounts receivable subsidiary, AGC Funding Corporation, to enter into insurance and other transactions that may mitigate credit risks associated with the collection of accounts receivable; and (4) to permit us to grant certain liens to third parties engaged in connection with the production, marketing and exploitation of our entertainment properties.
Please refer to the discussion of our borrowing arrangements as disclosed in the “Credit Sources” section of our Annual Report on Form 10-K for the year ended February 29, 2008 for further information.
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.
As discussed above, on December 30, 2008, we announced that an agreement had been reached to acquire Recycled Paper. Consideration for the acquisition will include a combination of $54.7 million of new 7.375% notes due in 2016 and up to $18.4 million of cash in addition to the $44.2 million investment we previously made during the second quarter. In addition, we have agreed to provide up to $10 million debtor in possession (DIP) financing to Recycled Paper.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Please refer to the discussion of our Critical Accounting Policies as disclosed in our Annual Report on Form 10-K for the year ended February 29, 2008. As discussed in Note 9 to the consolidated financial statements, we recorded an estimated impairment charge to reduce the carrying value of our goodwill. We have not completed step two of the impairment test. As a result, an adjustment to the estimated impairment charge may be required when we finalize our analysis, which is expected to be completed during the fourth quarter of 2009.
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;environment and general economic conditions;
the ability to achieve the desired benefits associated with our cost reduction efforts;
the ability to close the acquisition of Recycled Paper, including, if we are unable to acquire Recycled Paper, whether we will be repaid our investment in its first-lien distressed debt securities;
retail consolidations, acquisitions and bankruptcies, including the possibility of resulting adverse changes to retail contract terms;
competitive terms of sale offered to customers;
if we determine additional retail store closures are necessary;
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 ability to successfully integrate acquisitions, including Recycled Paper;
the impact of technology on core product sales;
the timing and impact of converting customers to a scan-based trading model;
the escalation in the cost of providing employee health care;
the ability to successfully integrate acquisitions;
the ability to identify, complete, or achieve the desired benefits associated with productivity improvement projects;
whether we will be repaid our recent investment in the first-lien distressed debt securities of another social expressions company;
our ability to successfully implement, or achieve the desired benefits associated with, any information systems refresh that we may implement;
the ability to execute share repurchase programs or the ability to achieve the desired accretive effect from any such share repurchases;
the ability to comply with our debt covenants;
ourthe ability to successfully complete, or achieve the desired benefits associated with, dispositions, including the sale of the Strawberry Shortcake and Care Bears properties;
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 public’s acceptance of online greetings and other social expression products, and the ability to gain a leadership position in 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 our periodic filings with the Securities and Exchange Commission (“SEC”), including the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended February 29, 2008.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For further information, refer to our Annual Report on Form 10-K for the year ended February 29, 2008. There were no material changes in market risk, specifically interest rate and foreign currency exposure, for us from February 29, 2008, the end of our preceding fiscal year, to August 29,November 28, 2008, the end of our most recent fiscal quarter.
Item 4. Controls and Procedures
American Greetings maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
American Greetings carries out a variety of on-going procedures, under the supervision and with the participation of the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of American Greetings concluded that the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this report.
There has been no change in the Corporation’s internal control over financial reporting during the Corporation’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
We are involved in certain legal proceedings arising in the ordinary course of business. We, however, do not believe that any of the litigation in which we are currently engaged, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | Not applicable. |
(b) | Not applicable. |
(c) | The following table provides information with respect to our purchases of our common shares during the three months ended |
Period | Total Number of Shares Repurchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans | ||||
June 2008 | Class A – - Class B – 1,000 (1) | - $18.30 | - - | $50,935,815 | ||||
July 2008 | Class A – 1,641,445 Class B – 1,744 (1) | $13.52 (2) $12.34 | 1,641,445 (3) - | $28,741,524 | ||||
August 2008 | Class A – 1,500,000 Class B – 60 (1) | $15.85 (2) $12.90 | 1,500,000 (3) - | $4,959,240 | ||||
Total | Class A – 3,141,445 Class B – 2,804 (1) | 3,141,445 (3) - |
Period | Total Number of Shares Repurchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans | |||||||||||
September 2008 | Class A – | 294,700 | $ | 16.82 | (2) | 294,700 | (3) | $ | — | ||||||
Class B – | — | — | — | ||||||||||||
October 2008 | Class A – | — | — | — | $ | — | |||||||||
Class B – | 5,000 | (1) | $ | 17.49 | — | ||||||||||
November 2008 | Class A – | — | — | — | $ | — | |||||||||
Class B – | — | — | — | ||||||||||||
Total | Class A – | 294,700 | 294,700 | (3) | |||||||||||
Class B – | 5,000 | (1) | — |
(1) | There is no public market for the Class B common shares of the Corporation. Pursuant to our Articles of Incorporation, a holder of Class B common shares may not transfer such Class B common shares (except to permitted transferees, a group that generally includes members of the holder’s extended family, family trusts and charities) unless such holder first offers such shares to the Corporation for purchase at the most recent closing price for the Corporation’s Class A common shares. If the Corporation does not purchase such Class B common shares, the holder must convert such shares, on a share for share basis, into Class A common shares prior to any transfer. All of the shares were repurchased by American Greetings for cash pursuant to this right of first refusal. |
(2) | Excludes commissions paid, if any, related to the share repurchase transactions. |
(3) | On January 8, 2008, American Greetings announced that its Board of Directors authorized a program to repurchase up to $100 million of its Class A common shares. There |
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on June 27, 2008, at which the following proposals were put to a vote of shareholders of record as of May 1, 2008:
Proposal One – Election of Directors
The following were elected to Class I of our Board of Directors with a term expiring in 2011: Jeffrey D. Dunn, Michael J. Merriman, Jr., and Morry Weiss.
Nominee | Votes For | Votes Withheld | ||||
Jeffrey D. Dunn | 72,594,713 | 1,720,320 | ||||
Michael J. Merriman, Jr. | 52,793,615 | 21,521,418 | ||||
Morry Weiss | 54,001,608 | 20,313,425 |
The following individuals were continuing Class II directors with a term expiring 2009: Joseph S. Hardin, Jr., Jerry Sue Thornton, and Jeffrey Weiss.
The following individuals were continuing Class III directors with a term expiring in 2010: Scott S. Cowen, William E. MacDonald, III, Charles A. Ratner, and Zev Weiss.
Proposal Two – Approval of Amendments to the Articles of Incorporation
Subproposal 1 and Subproposal 3 of Proposal Two to amend our Articles of Incorporation were approved and Subproposal 2 to amend our Articles of Incorporation was not approved, in each case as follows:
Votes For | Votes Against | Abstain | Broker Non-Votes | |||
71,395,790 | 511,861 | 258,814 | 2,129,658 |
Votes For | Votes Against | Abstain | Broker Non-Votes | |||
48,063,851 | 23,857,522 | 245,091 | 2,129,659 |
Votes For | Votes Against | Abstain | ||||
73,910,447 | 150,458 | 254,130 |
Proposal Three – Approval of Amendments to the Code of Regulations
Subproposals 1, 2, 3, 4 and 5 of Proposal Three to amend our Code of Regulations were approved as follows:
Votes For | Votes Against | Abstain | ||||
73,558,922 | 503,004 | 253,109 |
Votes For | Votes Against | Abstain | ||||
71,180,884 | 2,667,138 | 467,010 |
Votes For | Votes Against | Abstain | ||||
69,815,451 | 4,188,705 | 310,876 |
Votes For | Votes Against | Abstain | Broker Non-Votes | |||
71,062,064 | 797,540 | 306,859 | 2,129,660 |
Votes For | Votes Against | Abstain | Broker Non-Votes | |||
43,529,321 | 28,220,507 | 416,635 | 2,129,660 |
Exhibits required by Item 601 of Regulation S-K
Exhibit Number | Description | |||
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| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
(31) b | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
(32) | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN GREETINGS CORPORATION | ||||||
By: | /s/ Joseph B. Cipollone | |||||
Joseph B. Cipollone | ||||||
Vice President, Corporate Controller, and Chief Accounting Officer * |
October 8, 2008January 7, 2009
* (Signing on behalf of Registrant as a duly authorized officer of the Registrant and signing as the chief accounting officer of the Registrant.)
* | (Signing on behalf of Registrant as a duly authorized officer of the Registrant and signing as the chief accounting officer of the Registrant.) |
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