Note 4 – Acquisition

During the first quarter of 2013, the Corporation acquired all of the outstanding senior secured debt of Clinton Cards for $56.6 million (£35 million) through Lakeshore Lending Limited (“Lakeshore”), a wholly-owned subsidiary of the Corporation organized under the laws of the United Kingdom. Subsequently, on May 9, 2012, Clinton Cards was placed into administration, a procedure similar to Chapter 11 bankruptcy in the United States. Prior to entering into administration, Clinton Cards had approximately 750 stores and annual revenues of approximately $600 million across its two primary retail brands, Clinton Cards and Birthdays. The legacy Clinton Cards business has been an important customer to the Corporation’s international business for approximately forty years and was one of the Corporation’s largest customers.

As part of the administration process, the administrators (“Administrators”) of Clinton Cards and certain of its subsidiaries (the “Sellers”) conducted an auction of certain assets of the business of the Sellers that they believed constituted a viable ongoing business. Lakeshore bid $37.2 million (£23 million) for certain of these remaining assets. The bid took the form of a “credit bid,” where the Corporation used a portion of the outstanding senior secured debt owed to Lakeshore by Clinton Cards to pay the purchase price for the assets. The bid was accepted by the Administrators and on June 6, 2012, through its wholly-owned subsidiaries, UK Greetings Limited and Lakeshore, the Corporation entered into an agreement with the Sellers and the Administrators for the purchase of certain assets and the related business of the Sellers.

Under the terms of the agreement, the Corporation expects to acquire approximately 400 stores from the Sellers, together with related inventory and overhead, as well as the Clinton Cards and related brands. The Corporation will operate the acquired stores through a subsidiary of Lakeshore, AG Retail Cards Limited. The asset acquisition is expected to result in a net increase in the Corporation’s annual revenues of approximately $265 million, although the final number will depend on the ultimate number of stores acquired, which is subject to further negotiations with landlords at each respective location. The landlords must generally consent to the assignment of the leases for such stores on terms that are acceptable to the Corporation. If the Corporation cannot negotiate acceptable lease assignments, or if the applicable landlord withholds consent to the assignment of its store lease, then the Corporation may close the store and the Sellers will be responsible for any further obligations under the store lease. Based on current negotiations, assuming that the remaining landlords consent to terms proposed by the Corporation, as of August 24, 2012, we anticipate the estimated future minimum rental payments for noncancelable operating leases related to acquired stores will be approximately $360 million.

The stores and assets not acquired by the Corporation remain part of the administration process. It is anticipated that these remaining assets not purchased by the Corporation will be liquidated and proceeds will be used to repay the creditors of the Sellers, including the Corporation. The Corporation will seek to recover the $19.4 million (£12 million) remaining senior secured debt claim held by it through the liquidation process. However, based on the estimated recovery information provided by the Administrators, the Corporation recorded an aggregate charge of $10.0 million, $7.8 million in the first quarter and $2.2 million in the second quarter, relating to the senior secured debt it acquired in the current year’s first fiscal quarter. The remaining balance of the secured senior debt, totaling approximately $9 million is included in “Prepaid expenses and other” on the Consolidated Statement of Financial Position. The liquidation process and the negotiations with landlords for stores included in the aforementioned acquisition, is expected to take approximately six to twelve months from the closing of the transaction on June 6, 2012.

Separate from the acquired senior secured debt, the Corporation had unsecured accounts receivable exposure to Clinton Cards. Based on the expected recovery shortfall on the senior secured debt described above, a majority of the unsecured accounts receivable is not expected to be collected. Accordingly, the Corporation recorded bad debt expense of $17.2 million relating to the unsecured accounts receivable. In addition, with the May 2012 announcement by the Administrators that all of Clinton Cards’ Birthdays branded retail stores would be liquidated, the Corporation recorded an impairment charge of $4.0 million for the deferred costs related to the Birthdays stores.

The charges incurred in the six months ended August 24, 2012 associated with the aforementioned acquisition that do not have comparative amounts in the prior year six month period are reflected on the Consolidated Statement of Operations as follows:


(In millions)	Contract asset impairment		Bad debt expense		Legal and advisory fees		Impairment of debt purchased		Total
Net sales	$	4.0	$	—	$	—	$	—	$	4.0
Administrative and general expenses		—		17.2		6.0		—		23.2
Other non-operating (income) expense		—		—		—		10.0		10.0

	$	4.0	$	17.2	$	6.0	$	10.0	$	37.2

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


(In millions)	Contract asset impairment		Bad debt expense		Legal and advisory fees		Impairment of debt purchased		Total
International Social Expression Products	$	4.0	$	17.2	$	—	$	—	$	21.2
Unallocated		—		—		6.0		10.0		16.0

	$	4.0	$	17.2	$	6.0	$	10.0	$	37.2

The total cost of the acquisition has been allocated to the assets acquired and the liabilities assumed based upon their estimated fair values at the date of the acquisition. The estimated purchase price allocation is preliminary and subject to revision as valuation work is still being conducted. The following represents the preliminary purchase price allocation:


Purchase price (in millions):
Credit bid	$	37.2
Effective settlement of pre-existing supply agreement with the legacy Clinton Cards business		6.2
Cash acquired		(0.6	)

	$	42.8

Allocation (in millions):
Inventory	$	16.2
Property, plant and equipment		20.0
Intangible assets		7.1
Current liabilities assumed		(0.5	)

	$	42.8

The financial results of this acquisition are included in the Corporation’s consolidated results from the date of acquisition. Pro forma results of operations have not been presented because the effect of this acquisition was not deemed material. The acquired business is included in the Corporation’s Retail Operations segment.