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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 THESECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended May 31, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number 1-13859
 AMERICAN GREETINGS CORPORATION 
  Ohio
    
    34-0065325(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)One American Road, Cleveland, Ohio
    
    44144(Address of principal executive offices)
    
    (Zip Code)(216) 252-7300Registrant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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ] As of July 2, 2004, the date of this report, the number of shares outstanding
of each of the issuers classes of common stock was:  Class A Common 63,603,525
Class B Common 4,604,634




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AMERICAN GREETINGS CORPORATION
INDEX PageNumberPART I - FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II - OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    26Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    27Item 3. Default Upon Senior Securities
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 5. Other Information
    
    
    27Item 6. Exhibits and Reports on Form 8-K
    
    
    28SIGNATURES
    
    
    29EXHIBITS
    
    
    30Credit AgreementFirst Supplemental IndentureSection 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEO and CFO




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PART I - FINANCIAL INFORMATION 
 Item 1. Financial Statements AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Thousands of dollars except share and per share amounts) (Unaudited)Three Months EndedMay 31,2004
    
    2003Net sales
    
    $
    445,671
    
    
    $
    454,306Costs and expenses:Material, labor and other production costs
    
    
    187,212
    
    
    
    184,983Selling, distribution and marketing
    
    
    150,278
    
    
    
    149,858Administrative and general
    
    
    65,499
    
    
    
    66,125Interest expense
    
    
    52,694
    
    
    
    22,800Other (income)  net
    
    
    (16,925
    )
    
    
    (2,138
    )Total costs and expenses
    
    
    438,758
    
    
    
    421,628Income before income tax expense
    
    
    6,913
    
    
    
    32,678Income tax expense
    
    
    2,675
    
    
    
    12,973Net income
    
    $
    4,238
    
    
    $
    19,705Earnings per share
    
    $
    0.06
    
    
    $
    0.30Earnings per share  assuming dilution
    
    $
    0.06
    
    
    $
    0.27Average number of shares outstanding
    
    
    68,000,691
    
    
    
    65,913,680Average number of shares outstanding -assuming dilution
    
    
    68,846,170
    
    
    
    79,003,300
 See notes to condensed consolidated financial statements (unaudited). 1




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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Thousands of dollars) (Unaudited)
    
    (Note 1)
    
    (Unaudited)May 31, 2004
    
    Feb. 29, 2004
    
    May 31, 2003ASSETSCurrent assetsCash and cash equivalents
    
    $
    115,850
    
    
    $
    285,450
    
    
    $
    113,274Trade accounts receivable, less allowances for sales
returns of $86,773, $85,638 and $82,963,
respectively, and for doubtful accounts of $20,562
$18,183 and $27,480, respectively
    
    
    258,450
    
    
    
    250,554
    
    
    
    293,730Inventories
    
    
    263,118
    
    
    
    246,171
    
    
    
    312,362Deferred and refundable income taxes
    
    
    155,517
    
    
    
    158,689
    
    
    
    173,365Prepaid expenses and other
    
    
    222,356
    
    
    
    236,104
    
    
    
    224,687Total current assets
    
    
    1,015,291
    
    
    
    1,176,968
    
    
    
    1,117,418Goodwill
    
    
    225,574
    
    
    
    228,955
    
    
    
    213,501Other assets
    
    
    665,101
    
    
    
    708,957
    
    
    
    768,403Property,
plant and equipment - at cost
    
    
    1,015,265
    
    
    
    1,019,478
    
    
    
    1,054,544Less accumulated depreciation
    
    
    657,518
    
    
    
    650,345
    
    
    
    671,696Property,
plant and equipment - net
    
    
    357,747
    
    
    
    369,133
    
    
    
    382,848$
    2,263,713
    
    
    $
    2,484,013
    
    
    $
    2,482,170LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesDebt due within one year
    
    $
    
    
    
    $
    
    
    
    $
    5,352Accounts payable
    
    
    115,186
    
    
    
    129,362
    
    
    
    135,136Accrued liabilities
    
    
    113,391
    
    
    
    129,785
    
    
    
    157,050Accrued compensation and benefits
    
    
    62,921
    
    
    
    70,896
    
    
    
    56,936Income taxes
    
    
    15,732
    
    
    
    14,513
    
    
    
    66,545Other current liabilities
    
    
    78,404
    
    
    
    78,407
    
    
    
    96,758Total current liabilities
    
    
    385,634
    
    
    
    422,963
    
    
    
    517,777Long-term debt
    
    
    483,783
    
    
    
    665,874
    
    
    
    726,930Other liabilities
    
    
    94,149
    
    
    
    96,325
    
    
    
    107,113Deferred income taxes
    
    
    28,916
    
    
    
    31,311
    
    
    
    10,715Shareholders equity
    
    
    1,271,231
    
    
    
    1,267,540
    
    
    
    1,119,635$
    2,263,713
    
    
    $
    2,484,013
    
    
    $
    2,482,170
 See notes to condensed consolidated financial statements (unaudited). 2




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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of dollars) (Unaudited)Three Months EndedMay 31,2004
    
    2003OPERATING ACTIVITIES:Net income
    
    $
    4,238
    
    
    $
    19,705Adjustments to reconcile to net cash
provided by operating activities:Restructuring
    
    
    (277
    )
    
    
    (823
    )Gain on sale of investment
    
    
    (3,090
    )
    
    
    (Gain) loss on sale of fixed assets
    
    
    (21
    )
    
    
    732Loss on extinguishment of debt
    
    
    39,024
    
    
    
    4,639Depreciation and amortization
    
    
    15,161
    
    
    
    15,980Deferred income taxes
    
    
    (7,192
    )
    
    
    (281
    )Changes in operating assets and liabilities:(Increase) decrease in trade accounts receivable
    
    
    (9,454
    )
    
    
    18,799Increase in inventories
    
    
    (18,700
    )
    
    
    (29,596
    )Decrease in other current assets
    
    
    6,533
    
    
    
    32,412Decrease (increase) in deferred costs  net
    
    
    33,543
    
    
    
    (2,140
    )Decrease in accounts payable and other liabilities
    
    
    (33,302
    )
    
    
    (31,299
    )Other  net
    
    
    (4,882
    )
    
    
    (3,199
    )Cash Provided by Operating Activities
    
    
    21,581
    
    
    
    24,929INVESTING ACTIVITIES:Property, plant & equipment additions
    
    
    (5,334
    )
    
    
    (5,334
    )Proceeds from sale of fixed assets
    
    
    104
    
    
    
    36Investment in corporate-owned life insurance
    
    
    2,570
    
    
    
    11,445Other  net
    
    
    26,981
    
    
    
    1,551Cash Provided by Investing Activities
    
    
    24,321
    
    
    
    7,698FINANCING ACTIVITIES:Reduction of long-term debt
    
    
    (216,417
    )
    
    
    (2,322
    )Decrease in short-term debt
    
    
    
    
    
    
    (128,226
    )Sale of stock under benefit plans
    
    
    12,035
    
    
    
    766Purchase of treasury shares
    
    
    (9,299
    )
    
    
    (92
    )Cash Used by Financing Activities
    
    
    (213,681
    )
    
    
    (129,874
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (1,821
    )
    
    
    2,058DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (169,600
    )
    
    
    (95,189
    )Cash and Cash Equivalents at Beginning of Year
    
    
    285,450
    
    
    
    208,463Cash and Cash Equivalents at End of Period
    
    $
    115,850
    
    
    $
    113,274
 See notes to condensed consolidated financial statements (unaudited). 3




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AMERICAN GREETINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) Three Months Ended May 31, 2004 and 2003 Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements 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 period have been included. These interim statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-K for the
year ended February 29, 2004 of American Greetings Corporation, from which the
Condensed Consolidated Statement of Financial Position at February 29, 2004,
presented herein, has been derived. Certain amounts in the prior year
financial statements have been reclassified to conform with the 2005
presentation. 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, 2004 refers to the year ended February 29, 2004. 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. 4




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Note 3 - Recent Accounting Pronouncements: In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. FIN 46 provides guidance for identifying a controlling interest in
a Variable Interest Entity (VIE) established by means other than voting
interests. FIN 46 also requires consolidation of a VIE by an enterprise that
holds such a controlling interest. On December 17, 2003, the FASB completed
deliberations of the proposed modifications to FIN 46 (Revised
Interpretation); the decisions reached include:  (1)
    
    Deferral of the effective date;(2)
    
    Provisions for additional scope exceptions for certain other
variable interests; and(3)
    
    Clarification of the impact of troubled debt restructurings
on the requirement with respect to VIEs. Based on the FASBs decisions, all public companies must apply the provisions
of the Interpretation or the Revised Interpretation to variable interests in a
special purpose entity (SPE) created before February 1, 2003 no later than
periods ending after December 15, 2003. Companies are required to apply the
revised provisions to variable interests in non-SPEs held in the entity no
later than the end of the first interim or annual reporting period ending after
March 15, 2004. The Statement had no material impact on the consolidated
financial statements of the Corporation relative to SPEs or non-SPEs. On May 19, 2004, the FASB issued FASB Staff Position 106-2 (FSP 106-2),
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. FSP 106-2, which requires
measures of the Accumulated Postretirement Benefit Obligation (APBO) and net
periodic postretirement benefit cost to reflect the effects of The Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act),
supersedes FSP 106-1, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP
106-2 is effective for interim or annual periods beginning after June 15, 2004.
The Corporation is currently unable to determine the impact of FSP 106-2 and
the Act on its consolidated financial statements. See Note 11 for further
discussion. Note 4  Other
(Income)  Net During the three months ended May 31, 2004, Other (income)  net included
$10.5 million of royalty revenue and $3.1 million of income on the sale of an
investment. The agency fee expenses related to the royalty revenue are included
in Selling, distribution and marketing,  on the Condensed Consolidated
Statement of Operations. The amount of proceeds received from the sale of the
investment of $19.1 million is included in Other - net investing activities
in the Condensed Consolidated Statement of Cash Flows for the period. 5




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Note 5  Restructure Reserves In Fiscal 2002, the Corporation undertook a restructure of the Corporations
domestic and foreign manufacturing and distribution operations and recorded a
charge of $56.7 million. All activities required to complete the restructure
were substantially completed by February 28, 2002, with the exception of
ongoing termination benefit payments, which will not be completed until 2007.
The following table summarizes the remaining reserve associated with the 2002
restructure charge: Termination(In thousands)
    
    BenefitsBalance at March 1, 2004
    
    $
    1,504Cash expenditures
    
    
    (277
    )Balance at May 31, 2004
    
    $
    1,227
 Included in Accrued liabilities at May 31, 2004 is $1.2 million representing
the portion of severance costs not yet disbursed. 6




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Note 6  Earnings Per Share The following table set forth the computation of earnings per share and
earnings per share - assuming dilution: Three Months EndedMay 31,2004
    
    2003Numerator (thousands):Net income for earnings per share
    
    $
    4,238
    
    
    $
    19,705Add-back  interest on convertible subordinated notes,
net of tax
    
    
    
    
    
    
    1,851Net income for earnings per share  assuming dilution
    
    $
    4,238
    
    
    $
    21,556Denominator (thousands):Denominator for earnings per share  weighted
average shares outstanding
    
    
    68,001
    
    
    
    65,914Effect of dilutive securities:Stock options
    
    
    845
    
    
    
    498Convertible debt
    
    
    
    
    
    
    12,591Denominator for earnings per share  assuming dilution 
adjusted weighted average shares outstanding
    
    
    68,846
    
    
    
    79,003Earnings per share
    
    $
    0.06
    
    
    $
    0.30Earnings per share  assuming dilution
    
    $
    0.06
    
    
    $
    0.27
 Certain stock options have been excluded for the periods presented because the
effect would have been antidilutive. In addition, the effect of the
convertible subordinated notes has been excluded for the three months ended May
31, 2004, because the effect would have been antidilutive. See Note 10 for
further discussion. 7




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Note 7  Comprehensive (Loss) Income The Corporations total comprehensive (loss) income is as follows: (In thousands) Three Months EndedMay 31,2004
    
    2003Net income
    
    $
    4,238
    
    
    $
    19,705Other comprehensive (loss) income:Foreign currency translation adjustments
    
    
    (7,047
    )
    
    
    21,655Total comprehensive (loss) income
    
    $
    (2,809
    )
    
    $
    41,360
 Note 8  Inventories (In thousands) May 31, 2004
    
    February 29, 2004
    
    May 31, 2003Raw materials
    
    $
    42,721
    
    
    $
    43,870
    
    
    $
    62,797Work in process
    
    
    25,332
    
    
    
    30,216
    
    
    
    35,278Finished products
    
    
    234,568
    
    
    
    212,560
    
    
    
    256,885302,621
    
    
    
    286,646
    
    
    
    354,960Less LIFO reserve
    
    
    71,440
    
    
    
    73,213
    
    
    
    78,696231,181
    
    
    
    213,433
    
    
    
    276,264Display materials and factory supplies
    
    
    31,937
    
    
    
    32,738
    
    
    
    36,098Inventories
    
    $
    263,118
    
    
    $
    246,171
    
    
    $
    312,362
 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. 8




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Note 9 - Deferred Costs In the normal course of its business, the Corporation enters into agreements
with certain customers for the supply of greeting cards and related products.
Under these agreements, the customer typically receives from the Corporation a
combination of cash payments, credits, discounts, allowances and other
incentive considerations to be earned by the customer as product is purchased
from the Corporation over the effective time period of the agreement to meet a
minimum purchase volume commitment. The Corporation periodically reviews the
progress toward the commitment and adjusts the estimated amortization period
accordingly to match the costs with the revenue associated with the agreement.
In the event a contract is not completed, the Corporation has a claim for
unearned advances under the agreement. The agreements may or may not specify
the Corporation as the sole supplier of social expression products to the
customer. The Corporation classifies the total contractual amount of the incentive
consideration committed to the customer but not yet earned as a deferred cost
asset at the inception of an agreement, or any future amendments. Deferred
costs estimated to be earned by the customer and charged to operations during
the next twelve months are classified as Prepaid expenses and other in the
Consolidated Statement of Financial Position, and the remaining amounts to be
charged beyond the next twelve months are classified as Other assets. A portion of the total consideration may be payable by the Corporation at the
time the agreement is consummated. All future payment commitments are
classified as liabilities at inception until paid. The payments that are
expected to be made in the next twelve months are classified as Other current
liabilities in the Consolidated Statement of Financial Position, and the
remaining payment commitments beyond the next twelve months are classified as
Other liabilities. The Corporation maintains adequate reserves for deferred
costs related to supply agreements and does not expect that the non-completion
of any particular contract would result in a material loss. 9




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As of May 31, 2004, February 29, 2004 and May 31, 2003, deferred costs and
future payment commitments are included in the following financial statement
captions: (In thousands) May 31, 2004
    
    February 29, 2004
    
    May 31, 2003Prepaid expenses and other
    
    $
    175,043
    
    
    $
    189,246
    
    
    $
    175,062Other assets
    
    
    606,921
    
    
    
    631,912
    
    
    
    700,730Deferred cost assets
    
    
    781,964
    
    
    
    821,158
    
    
    
    875,792Other current liabilities
    
    
    (54,873
    )
    
    
    (58,210
    )
    
    
    (73,366
    )Other liabilities
    
    
    (68,154
    )
    
    
    (69,493
    )
    
    
    (77,646
    )Deferred cost liabilities
    
    
    (123,027
    )
    
    
    (127,703
    )
    
    
    (151,012
    )Net deferred costs
    
    $
    658,937
    
    
    $
    693,455
    
    
    $
    724,780
 Note 10  Debt On May 11, 2004, the Corporation amended and restated its senior secured credit
facility. This facility was originally entered into on August 9, 2001, as a
$350 million facility and was amended on July 22, 2002 to a $320 million
facility. With the repayment of the term loan on April 7, 2003, the facility
had a borrowing capacity of $195 million. At that date, the Corporation
recorded a charge of $4.6 million for the write off of the related deferred
financing costs and a premium payment associated with the repayment of the term
loan. The amended and restated senior secured credit facility consists of a
$200 million revolving facility maturing on May 10, 2008. At May 31, 2004,
there were no outstanding balances under this facility. The amended facility is secured by the domestic assets of the Corporation and a
65% interest in the common stock of its foreign subsidiaries. The facility
contains various restrictive covenants. Some of these restrictions require that
the Corporation meet specified periodic financial ratios, minimum net worth,
maximum leverage, and interest coverage. The credit facility places certain
restrictions on the Corporations ability to incur additional indebtedness, to
engage in acquisitions of other businesses, to repurchase its own capital stock
and allows payments of shareholder dividends up to a maximum of $20 million per year. These covenants are less restrictive than
the covenants previously in place. The Corporation is also party to a three-year Accounts Receivable
Securitization Financing agreement that provides for financing up to $200
million and is secured by certain trade accounts receivable. Under the terms
of the agreement, the Corporation transfers receivables to a
wholly-owned
consolidated subsidiary that in turn utilizes the receivables to secure
borrowings through a credit facility with a financial institution. The
agreement matures in August 2004. At May 31, 2004, there were no outstanding
balances under this agreement. During the three months ended May 31, 2004, the Corporation commenced a cash
tender offer for all of its outstanding 11.75% senior subordinated notes due
July 15, 10




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2008. As a result of this tender offer, a total of $186.2 million of these
senior subordinated notes were repurchased and the Corporation recorded a
charge of $39.0 million, included in interest expense on the Condensed
Consolidated Statement of Operations, for the payment of the premium associated
with the notes repurchased as well as for the write-off of related deferred
financing costs. At May 31, 2004, approximately $10 million of these notes
remained outstanding. As part of this transaction, substantially all
restrictive covenants were eliminated from the remaining outstanding notes. At May 31, 2004, the Corporation was in compliance with its debt covenants. At May 31, 2004, February 29, 2004 and May 31, 2003, debt due within one year
consisted of the following: (In thousands) May 31, 2004
    
    February 29, 2004
    
    May 31, 2003Current maturities of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    Other short-term debt
    
    
    
    
    
    
    
    
    
    
    5,352$
    
    
    
    $
    
    
    
    $
    5,352
 At May 31, 2004, February 29, 2004 and May 31, 2003, long-term debt consisted
of the following: (In thousands) May 31, 2004
    
    February 29, 2004
    
    May 31, 20036.10% Senior Notes, due July 2028
    
    $
    298,215
    
    
    $
    298,122
    
    
    $
    297,85111.75% Senior Subordinated Notes,
due July 2008
    
    
    9,978
    
    
    
    192,162
    
    
    
    253,4637.00% Convertible Subordinated
Notes, due July 2006
    
    
    175,000
    
    
    
    175,000
    
    
    
    175,000Other
    
    
    590
    
    
    
    590
    
    
    
    616$
    483,783
    
    
    $
    665,874
    
    
    $
    726,930Less Current Maturities
    
    
    
    
    
    
    
    
    
    
    $
    483,783
    
    
    $
    665,874
    
    
    $
    726,930
 The 7.00% convertible subordinated notes are convertible at the option of the
holders into shares of the Corporations common stock at any time before the
close of business on July 15, 2006, at a conversion rate of 71.9466 common
shares per $1 thousand principal amount of notes. 11




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Note 11  Retirement Benefits The components of periodic benefit cost for the Corporations defined benefit
pension and postretirement benefit plans for the quarter ended May 31, are as
follows: Defined Benefit Pension
    
    Postretirement Benefit(In thousands)
    
    2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    112
    
    
    $
    98
    
    
    $
    628
    
    
    $
    475Interest cost
    
    
    1,841
    
    
    
    1,705
    
    
    
    2,221
    
    
    
    1,775Expected return on plan assets
    
    
    (1,415
    )
    
    
    (1,320
    )
    
    
    (1,336
    )
    
    
    (1,125
    )Amortization of prior service
cost
    
    
    
    
    
    
    
    
    
    
    (1,559
    )
    
    
    (1,400
    )Amortization of actuarial loss
    
    
    
    
    
    
    
    
    
    
    1,546
    
    
    
    1,525$
    538
    
    
    $
    483
    
    
    $
    1,500
    
    
    $
    1,250
 The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act) was signed into law on December 8, 2003. The Act will provide plan
sponsors a federal subsidy for certain qualifying prescription drug benefits
covered under the sponsors postretirement health care plans. Under FASB Staff
Position 106-1 (FSP 106-1), Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
issued on January 12, 2004, the Corporation has elected to defer accounting for
the effects of the Act until further authoritative guidance is issued. As a
result, the reported postretirement benefit cost for the quarter ended May 31,
2004, does not reflect the effects of the Act on the Corporations
postretirement benefit plan. On May 19, 2004, the FASB issued FSP 106-2, (FSP
106-2), Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-2,
which requires measures of the APBO and net periodic postretirement benefit
cost to reflect the effects of the Act, supersedes FSP 106-1. FSP 106-2 is
effective for interim or annual periods beginning after June 15, 2004. Note 12 - Stock-Based Compensation The Corporation has elected to continue to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations in accounting for its stock options granted to employees and
directors. Because the exercise price of the Corporations employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized. The Corporation has adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. 12




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##### Table of Contents



The following illustrates the pro forma effect on net income and earnings per
share if the Corporation had applied the fair value recognition provisions of
SFAS 123: (In thousands, except per share amounts) Three months endedMay 31,2004
    
    2003Net income as reported
    
    $
    4,238
    
    
    $
    19,705Employee stock-based compensation
expense determined under fair value
based method, net of tax
    
    
    1,330
    
    
    
    1,463Pro forma net income
    
    $
    2,908
    
    
    $
    18,242Earnings per share:As reported
    
    $
    0.06
    
    
    $
    0.30Pro forma
    
    $
    0.04
    
    
    $
    0.28Earnings per share  assuming dilution:As reported
    
    $
    0.06
    
    
    $
    0.27Pro forma
    
    $
    0.04
    
    
    $
    0.25
 During the quarter, shares held in trust related to a deferred compensation
plan were withdrawn from the trust. This transaction had no impact on the
Corporations results of operations during the quarter ended May 31, 2004. 13




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##### Table of Contents



Note 13 - Business Segment Information The Social Expression Products segment primarily designs, manufactures and
sells greeting cards and other related products through various channels of
distribution, with mass retailers as the primary channel, and is managed by
geographic location. The Corporation owns and operates approximately 590 card and gift retail stores
in the United States and Canada through its Retail Operations segment. The
stores are primarily located in malls and strip shopping centers. The stores
sell products purchased from the Social Expression Products segment and
products purchased from other vendors. AG Interactive, formerly AmericanGreetings.com, is an electronic provider of
social expression content through the Internet and wireless platforms. Non-reportable operating segments include the design, manufacture and sale of
non-prescription reading glasses and display fixtures. Segment results are reported and evaluated at consistent exchange rates between
years to isolate the impact of foreign currency fluctuations. An exchange rate
adjustment is included in the reconciliation of the segment results to the
consolidated results; this adjustment represents the impact on the segment
results of the difference between the constant exchange rates used for segment
reporting and evaluation and the actual exchange rates for the periods
presented. Centrally-incurred and managed costs are not allocated to the operating
segments. The unallocated items include interest expense on centrally-incurred
debt and domestic profit-sharing expense. In addition, the costs associated
with corporate operations including the senior management, corporate finance,
legal and human resource functions, among other costs, are included in the
unallocated items. 14




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##### Table of Contents



(In thousands) Net Sales
    
    Segment EarningsThree Months Ended
    
    Three Months EndedMay 31,
    
    May 31,2004
    
    2003
    
    2004
    
    2003Social Expression Products
    
    $
    375,715
    
    
    $
    386,658
    
    
    $
    94,289
    
    
    $
    92,611Intersegment items
    
    
    (14,825
    )
    
    
    (17,074
    )
    
    
    (10,937
    )
    
    
    (12,802
    )Exchange rate adjustment
    
    
    6,225
    
    
    
    (4,608
    )
    
    
    831
    
    
    
    (642
    )Net
    
    
    367,115
    
    
    
    364,976
    
    
    
    84,183
    
    
    
    79,167Retail Operations
    
    
    50,818
    
    
    
    56,225
    
    
    
    (4,144
    )
    
    
    (914
    )Exchange rate adjustment
    
    
    217
    
    
    
    (815
    )
    
    
    15
    
    
    
    (63
    )Net
    
    
    51,035
    
    
    
    55,410
    
    
    
    (4,129
    )
    
    
    (977
    )AG Interactive
    
    
    9,445
    
    
    
    8,248
    
    
    
    363
    
    
    
    393Non-reportable segments
    
    
    18,021
    
    
    
    27,142
    
    
    
    (4,764
    )
    
    
    3,430Exchange rate adjustment
    
    
    4
    
    
    
    (14
    )
    
    
    1
    
    
    
    4Net
    
    
    18,025
    
    
    
    27,128
    
    
    
    (4,763
    )
    
    
    3,434Unallocated
items - net
    
    
    51
    
    
    
    (1,456
    )
    
    
    (68,748
    )
    
    
    (49,242
    )Exchange rate adjustment
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (97
    )Net
    
    
    51
    
    
    
    (1,456
    )
    
    
    (68,741
    )
    
    
    (49,339
    )Consolidated
    
    $
    445,671
    
    
    $
    454,306
    
    
    $
    6,913
    
    
    $
    32,678
 Note 14 - Subsequent Event In early June 2004, the Corporation substantially modified certain agreements relating to its licensing activities resulting in
the receipt of a one-time payment for past performance of approximately $10 million that will be recorded in other income net
during the quarter ended August 31, 2004. 15




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##### Table of Contents



Part 1, Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Overview During the three months ended May 31, 2004, the Corporation recognized net
income of $4.2 million compared to $19.7 million in the prior year quarter.
The current year included pretax costs of $39.0 million associated with the
early retirement of $186.2 million of its 11.75% Senior Subordinated Notes, an
action taken by the Corporation to reduce its future interest expense and
increase its financial flexibility. The prior year quarter included pretax
costs of $4.6 million associated with the early retirement of a term loan. Compared to the prior year, the current quarter results were favorably impacted
by the addition of approximately 1,400 stores of a major retailer, and strong
performance from the party goods and licensing businesses, partially offset by
lower performance in gift wrap, the retail and display fixture businesses, and
the drug store channel. Cash flow generation remained strong with $21.6 million and $24.3 million
provided by operating activities and investing activities, respectively. In
addition, with the early retirement of the 11.75% Senior Subordinated Notes,
the Corporation was able to reduce its ratio of debt to total capital from
34.4% to 27.6% during the quarter. 16




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##### Table of Contents



Results of Operations Net income was $4.2 million, or $0.06 per share, in the quarter compared to net
income of $19.7 million, or $0.27 per diluted share, in the prior year. The
effect of the Corporations convertible subordinated notes have been excluded
from the determination of diluted earnings per share for the quarter ended May
31, 2004, because the effect would have been antidilutive. The Corporations results for the three months ended May 31, 2004 and 2003 are
summarized below: (In thousands) 2004
    
    % Net Sales
    
    2003
    
    % Net Sales
    
    Fav (Unfav)Net sales
    
    $
    445,671
    
    
    
    100.0
    %
    
    $
    454,306
    
    
    
    100.0
    %
    
    
    (1.9
    %)Material, labor and other
production costs
    
    
    187,212
    
    
    
    42.0
    %
    
    
    184,983
    
    
    
    40.7
    %
    
    
    (1.2
    %)Selling, distribution and
marketing
    
    
    150,278
    
    
    
    33.7
    %
    
    
    149,858
    
    
    
    33.0
    %
    
    
    0.3
    %Administrative and general
    
    
    65,499
    
    
    
    14.7
    %
    
    
    66,125
    
    
    
    14.6
    %
    
    
    (0.9
    %)Interest expense
    
    
    52,694
    
    
    
    11.8
    %
    
    
    22,800
    
    
    
    5.0
    %
    
    
    (131.1
    %)Other (income) expense
    
    
    (16,925
    )
    
    
    (3.8
    %)
    
    
    (2,138
    )
    
    
    (0.5
    %)
    
    
    Total deductions
    
    
    438,758
    
    
    
    98.4
    %
    
    
    421,628
    
    
    
    92.8
    %
    
    
    (4.1
    %)Income before tax expense
    
    
    6,913
    
    
    
    1.6
    %
    
    
    32,678
    
    
    
    7.2
    %
    
    
    (78.8
    %)Income tax expense
    
    
    2,675
    
    
    
    0.6
    %
    
    
    12,973
    
    
    
    2.9
    %
    
    
    79.4
    %Net income
    
    $
    4,238
    
    
    
    1.0
    %
    
    $
    19,705
    
    
    
    4.3
    %
    
    
    (78.5
    %)
 For the three months ended May 31, 2004, consolidated net sales were $445.7
million, down from $454.3 million in the prior year first quarter. This 1.9%
decrease was the result of a 4.5% decline in net sales from ongoing operations
at constant exchange rates offset by foreign currency exchange fluctuations,
which improved sales comparisons by 2.6%. The Corporation experienced modest
sales growth in its U.S. seasonal card and party goods businesses as well as in
its U.K. and Internet businesses. These improvements were more than offset by
lower performance in gift wrap, a continued downward trend in the retail
business due to fewer stores and reduced comparative store sales, and a decline
in the display fixture business due to the prior years completion of specific
customer orders. 17




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##### Table of Contents



Unit and Pricing Analysis Unit and pricing comparatives for the three months ended May 31, 2004 and 2003
are summarized below: Increase (Decrease)From the Prior YearEveryday Cards
    
    Seasonal Cards
    
    Total Greeting Cards2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Unit volume
    
    
    0.5
    %
    
    
    -9.0
    %
    
    
    1.2
    %
    
    
    -8.0
    %
    
    
    0.7
    %
    
    
    -8.6
    %Selling prices
    
    
    -1.9
    %
    
    
    -2.0
    %
    
    
    0.4
    %
    
    
    -5.0
    %
    
    
    -1.0
    %
    
    
    -3.1
    %Overall Increase /
(Decrease)
    
    
    -1.4
    %
    
    
    -11.0
    %
    
    
    1.6
    %
    
    
    -13.0
    %
    
    
    -0.3
    %
    
    
    -11.7
    %
 Expense Overview Material, labor and other production costs for the three months ended May 31,
2004 were $187.2 million, an increase from $185.0 million for the same period
in the prior year. As a percentage of net sales, these costs were 42.0% in the
current period and 40.7% for the three months ended May 31, 2003. The 130
basis point increase from the prior year is due to an approximate 300 basis
point increase in costs, including retail markdowns at company owned stores,
higher markdown sales and program closeout costs in the gift wrap and seasonal
card businesses and higher production costs in the fixtures business. These
decreases were partially offset by a favorable business mix of approximately
170 basis points as the lower margin retail and display fixture business
contributed a lower percentage of the Corporations sales in the quarter. Selling, distribution and marketing costs for the three months ended May 31,
2004 were $150.3 million, up slightly from the $149.9 million for the same
period in the prior year. As a percentage of net sales, these costs increased
from 33.0% for the three months ended May 31, 2003 to 33.7% in the three months
ended May 31, 2004. Of the 80 basis point increase, increased licensing agency
fees, as a result of higher licensing revenue, increased 100 basis points. This
increase was partially offset by supply chain related cost savings including
freight, field service, consulting, and marketing. Administrative and general expenses were $65.5 million for the three months
ended May 31, 2004, virtually flat, in both dollars and percent of sales, with
the $66.1 million for the same period in the prior year. The continued
wind-down of the Corporations corporate-owned life insurance program
positively impacted the quarter compared to the prior year period. Interest expense increased by $29.9 million to $52.7 million for the three
months ended May 31, 2004 from $22.8 million for the same period in the prior
year. This increase is due to $39.0 million of premium payments and the
write-off of deferred financing costs associated with the repurchase of $186.2
million of the Corporations 11.75% Senior 18




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##### Table of Contents



Subordinated Notes, partially offset by interest savings from the
extinguishment of the $118.0 million term loan during the quarter ended May 31,
2003 and the repurchase of $63.6 million of 11.75% Senior Subordinated Notes
during the quarter ended November 30, 2003. Other income  net increased to $16.9 million for the three months ended May
31, 2004, from $2.1 million in the same period in the prior year. The $14.8
million improvement included increased royalty revenue of $8.0 million, a
foreign exchange improvement of $5.5 million and a $3.1 million gain on the
sale of an investment in the current year. The effective tax rates for the three months ending May 31, 2004 and 2003 were
38.7% and 39.7%, respectively. In the current year, the reduction in the
effective tax rate is the result of the utilization of net operating loss
carryforwards and the settlement of the Corporations COLI obligations. Restructuring Activities In Fiscal 2002, the Corporation undertook a restructure of the Corporations
domestic and foreign manufacturing and distribution operations and recorded a
charge of $56.7 million. All activities required to complete the restructure
were substantially completed by February 28, 2002, with the exception of
ongoing termination benefit payments, which will not be completed until 2007.
The following table summarizes the remaining reserve associated with the 2002
restructure charge: (In thousands) Termination(In thousands of dollars)
    
    BenefitsBalance at March 1, 2004
    
    $
    1,504Cash expenditures
    
    
    (277
    )Balance at May 31, 2004
    
    $
    1,227
 Included in Accrued liabilities at May 31, 2004 is $1.2 million representing
the portion of severance costs not yet disbursed. Segment Information The Corporation is organized and managed according to a number of factors,
including product categories, geographic locations and channels of
distribution. The Social Expression Products segment primarily designs,
manufactures and sells greeting cards and other related products through
various channels of distribution with mass retailers as the primary channel and
is managed by geographic location. 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 the
Social Expression Products segment. These operating divisions 19




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##### Table of Contents



have similar economic characteristics, products, production processes, types of
customers and distribution methods. The Corporation owns and operates
approximately 590 card and gift retail stores in the United States and Canada
through its Retail Operations segment. The stores are primarily located in
malls and strip shopping centers. The stores sell products purchased from the
Social Expression Products segment and products purchased from other vendors.
AG Interactive, formerly AmericanGreetings.com, is an electronic provider of
social expression content through the Internet and wireless platforms. The Corporation reviews segment results using consistent exchange rates between
periods to eliminate the impact of foreign currency fluctuations. Social Expression Product Segment Three Months Ended May 31,(In thousands)
    
    2004
    
    2003
    
    % ChangeNet Sales
    
    $
    360,890
    
    
    $
    369,584
    
    
    
    (2.4
    %)Segment Earnings
    
    
    83,352
    
    
    
    79,809
    
    
    
    4.4
    %
 Net sales excluding the impact of foreign exchange and intersegment items of
the Social Expression Products segment, for the three months ended May 31,
2004, decreased $8.7 million or 2.4% from the same period in the prior year.
This decrease was primarily due to weak performance in gift wrap partially
offset by strong sales in party goods and seasonal cards. Segment earnings excluding the impact of foreign exchange and intersegment
items for the three months ended May 31, 2004, increased by $3.5 million in the
current year. The segment earnings were negatively affected by lower net
sales, which was more than offset by higher royalty income, lower field service
costs and related benefits associated with the Corporations supply chain
transformation initiative. Retail Operations Three Months Ended May 31,(In thousands)
    
    2004
    
    2003
    
    % ChangeNet Sales
    
    $
    50,818
    
    
    $
    56,225
    
    
    
    (9.6
    %)Segment Loss
    
    
    (4,144
    )
    
    
    (914
    )
    
    
    (354.0
    %)
 Net sales excluding the impact of foreign exchange in the Retail Operations
segment decreased $5.4 million or 9.6% as comparable same-store sales decreased
8.3% for the three months ended May 31, 2004 compared to the same period in the
prior year. This decrease was due to disappointing results in sales of
seasonal cards, gift wrap and 20




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##### Table of Contents



candles. The Corporation had 19 fewer stores than in the prior year quarter
and ended the period with 589 operating outlets. Segment earnings excluding the impact of foreign exchange was a loss of $4.1
million in the three months ending May 31, 2004, deteriorating $3.2 million
from a loss of $0.9 million in the three months ending May 31, 2003. The
decrease in earnings is mainly due to the reduced net sales and higher
markdowns to clear slow moving inventories partially offset by savings in
operating expenses, mainly store rent and payroll. AG Interactive Segment Three Months Ended May 31,(In thousands)
    
    2004
    
    2003
    
    % ChangeNet Sales
    
    $
    9,445
    
    
    $
    8,248
    
    
    
    14.5
    %Segment Earnings
    
    
    363
    
    
    
    393
    
    
    
    (7.6
    %)
 Net sales of AG Interactive increased $1.2 million for the three months ended
May 31, 2004 compared to the same period in the prior year due to higher
subscription revenue. Segment earnings of $0.4 million for the three months ended May 31, 2004, was
flat compared to the prior year quarter as the impact of the sales increase was
offset by higher technology costs and the costs of new business initiatives. Liquidity and Capital Resources The seasonal nature of the Corporations business precludes a useful comparison
of the current period and the fiscal year-end financial statements; therefore,
a Statement of Financial Position for May 31, 2003 has been included. During the quarter ended May 31, 2004, the Corporation continued the initiative
to enhance its financial position. Cash provided by operating and investing
activities was $45.9 million and the Corporation paid down debt of $186.2
million during the quarter, improving its debt to total capital ratio from
34.4% at February 29, 2004 to 27.6% at May 31, 2004. Total debt less cash at
May 31, 2004 was $367.9 million, compared to $619.0 million at May 31, 2003. Operating Activities Operating activities provided $21.6 million in cash during the three months
ended May 31, 2004, compared to $24.9 million in the prior year quarter. Accounts receivable increased $9.5 million from February 29, 2004, compared to
a decrease of $18.8 million in the same period in the prior year. The increase
during the current year quarter relates to the timing of payments from several
major customers. The change from the prior year quarter relates to improved
collections during the year ended February 29, 2004, as compared to the year
ended February 28, 2003. The 21




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##### Table of Contents



prior year quarters performance included the impact of ramped up collection
efforts, primarily in the seasonal gift wrap business. As a percentage of the
prior twelve months net sales, net accounts receivable were 12.9% at May 31,
2004 compared to 14.9% at May 31, 2003, reflecting continued improved
collections. Inventories increased $18.7 million from February 29, 2004, compared to an
increase of $29.6 million in the same period in the prior year. The lower
inventory build in the three months ending May 31, 2004 as compared to the same
period in the prior year is mainly due to efforts to better manage inventory
levels in all businesses and lower inventory levels in the Retail Operations
due to less stores and markdowns taken to move slower moving inventory.
Inventories as a percentage of the prior twelve months material, labor and
other production costs were 28.0% at May 31, 2004 compared to 35.5% at May 31,
2003. Other current assets decreased $6.5 million from February 29, 2004, compared to
a decrease of $32.4 in the prior year quarter. The difference relates to a
refund of a tax overpayment in the prior year. Deferred costs  net represents payments under agreements with retailers net of
the related amortization of those payments. During the three months ended May
31, 2004, amortization exceeded payments by $33.5 million; in the three months
ended May 31, 2003, payments exceeded amortization by $2.1 million. The current
quarter amount reflects a lower level of additions for new or amended contracts
than in the prior year quarter. See Note 9 to the Condensed Consolidated
Financial Statements for further discussion of deferred costs related to
customer agreements. See Critical Accounting Policies below for further
discussion related to the accounting treatment of customer agreements. Investing Activities Investing activities provided $24.3 million during the three months ended May
31, 2004, compared to $7.7 million in the same period in the prior year. The
current year amount is primarily from the proceeds received from the sale of
the marketable security investment of $19.1 million. The prior year was mainly
the result of the surrender of several corporate owned life insurance plans in
accordance with the settlement agreement with the Internal Revenue Service. Financing Activities Financing activities used $213.7 million during the three months ended May 31,
2004, compared to $129.9 million in the same period of the prior year. The
current year amount relates primarily to the repurchase of the Corporations
11.75% Senior Subordinated Notes and the prior year amount relates primarily to
the early retirement of the Corporations term loan. Stock activity also provided and used a significant amount of cash during the
current year quarter. There was a high amount of employee option exercises in
the quarter due 22




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##### Table of Contents



to a tranche of options nearing their expiration date. The receipt by the
Corporation of the strike price on these options provided approximately $12
million during the quarter. In addition, the Corporation repurchased shares at
a cost of approximately $9 million, primarily B shares, into its Treasury. Credit Sources Substantial credit sources are available to the Corporation. In total, the
Corporation had available sources of approximately $400 million at May 31,
2004. This includes the Corporations $200 million Senior Secured Revolving
Facility and its $200 million Accounts Receivable Securitization Financing.
There were no outstanding balances under either of these arrangements at May
31, 2004. On May 11, 2004, the Corporation amended and restated its senior secured credit
facility. This facility was originally entered into on August 9, 2001, as a
$350 million facility and was amended on July 22, 2002 to a $320 million
facility. With the repayment of the term loan on April 7, 2003, the facility
had a borrowing capacity of $195 million. At that date, the Corporation
recorded a charge of $4.6 million for the write off of the related deferred
financing costs and a premium payment associated with the repayment of the term
loan. The amended and restated senior secured credit facility consists of a
$200 million revolving facility maturing on May 10, 2008. The amended facility
is secured by the domestic assets of the Corporation and a 65% interest in the
common stock of its foreign subsidiaries. The facility contains various
restrictive covenants. Some of these restrictions require that the Corporation
meet specified periodic financial ratios, minimum net worth, maximum leverage,
and interest coverage. The credit facility places certain restrictions on the
Corporations ability to incur additional indebtedness, to engage in
acquisitions of other businesses, to repurchase its own capital stock and allows payments of shareholder dividends up to a maximum of $20 million per year. These covenants are less restrictive than the
covenants previously in place. The Accounts Receivable Securitization Financing agreement matures in August
2004. The Corporation currently intends to renew this agreement prior to
maturity. During the three months ended May 31, 2004, the Corporation commenced a cash
tender offer for all of its outstanding 11.75% senior subordinated notes due
July 15, 2008. As a result of this tender offer, a total of $186.2 million of
these senior subordinated notes were repurchased and the Corporation recorded a
charge of $39.0 million for the payment of the premium associated with the
notes repurchased as well as for the write-off of related deferred financing
costs. At May 31, 2004, approximately $10 million of these notes remained
outstanding. As part of this transaction, substantially all restrictive
covenants were eliminated from the remaining outstanding notes. 23




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##### Table of Contents



There were no material changes in the financial condition, liquidity or capital
resources of the Corporation from February 29, 2004, the end of its preceding
fiscal year, to May 31, 2004, the end of its last fiscal quarter and the date
of the most recent balance sheet included in this report, nor from May 31,
2003, the end of the corresponding fiscal quarter last year, to May 31, 2004,
except for the changes discussed above and aside from normal seasonal
fluctuations. The Corporations future operating cash flow and existing credit
facilities are expected to meet currently anticipated funding requirements. Critical Accounting Policies Please refer to the discussion of the Corporations Critical Accounting
Policies as disclosed in the Corporations Form 10-K for the year ended
February 29, 2004. Prospective Information The statements contained in this document that are not historical facts are
forward-looking statements. Actual results may differ materially from those
projected in the forward-looking statements. These forward-looking statements
involve risks and uncertainties, including but not limited to retail
bankruptcies and consolidations, successful integration of acquisitions, a weak
retail environment, consumer acceptance of products as priced and marketed, the
impact of technology on core product sales and competitive terms of sale
offered to customers. Risks pertaining specifically to AG Interactive include
the viability of Internet advertising as a generator of revenue, and the
publics continued acceptance of paid electronic greetings and other social
expression products. 24




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##### Table of Contents



Part 1, Item 3. Quantitative and Qualitative Disclosure about Market Risk For further information, refer to the Corporations annual report on Form 10-K
for the year ended February 29, 2004. There were no material changes in market
risk, specifically interest rate and foreign currency exposure, for the Corporation from February 29, 2004, the end of its preceding
fiscal year, to May 31, 2004, the end of its most recent fiscal quarter except
for the repurchase of $186.2 million in 11.75% senior subordinated notes during
the fiscal quarter ended May 31, 2004. 
 Part 1, Item 4. Controls and Procedures The Corporations management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Corporations disclosure controls and procedures as of May 31, 2004.
Based on that evaluation, the Corporations Chief Executive Officer and Chief
Financial Officer concluded that the Corporations disclosure controls and
procedures were effective as of May 31, 2004. There were no material changes
in the Corporations internal control over financial reporting during the first
quarter of 2005. 25




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings  The Corporation is involved in certain legal actions and claims
arising in the ordinary course of business. The Corporation, however,
does not believe that any of the litigation in which it is currently
engaged, either individually or in the aggregate, will have a material
adverse effect on its business, consolidated financial position or
results of operations.1.
    
    Flavia Group Inc. et al. v. Kinkos, Inc.
US District Court, Central District of California  Case No.
03-1796 RMTThis matter was previously disclosed in the Form 10-K for the period
ending February 29, 2004. This case was settled with no material
impact to the Corporation.2.
    
    149 New Montgomery LLC v. Egreetings Network, Inc.   San
Francisco Superior Court  Case No. CGC 03427518This matter was previously disclosed in the Form 10-K for the period
ending February 29, 2004. This case was settled with no material
impact to the Corporation. 26




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##### Table of Contents



Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities The following table provides information with respect to purchases of common
stock of the Corporation made during the three months ended May 31, 2004, by
American Greetings Corporation. TotalNumber of
    
    MaximumShares
    
    Number ofPurchased
    
    Shares thatas Part of
    
    May Yet BeAverage
    
    Publicly
    
    PurchasedTotal Number of
    
    Price Paid
    
    Announced
    
    Under thePeriod
    
    Shares Repurchased
    
    per Share
    
    Plans
    
    PlansMarch 2004
    
    Class A  55,501 (1)
    
    $
    22.26
    
    
    
    
    
    
    
    Class B  242,082 (2)
    
    $
    22.26
    
    
    
    
    
    
    
    April 2004
    

    
    $
    
    
    
    
    
    
    
    
    May 2004
    
    Class B  123,865 (2)
    
    $
    21.59
    
    
    
    
    
    
    
    Total
    
    Class A  55,501 (1)
    
    $
    22.26
    
    
    
    
    
    
    
    Class B  365,947 (2)
    
    $
    22.04
    
    
    
    
    
    
    
    
 (1) All of the Class A Common Shares were delivered to the Corporation by
holders of options to purchase Class A Common Shares to satisfy the exercise
price or tax obligations in connection with the exercise of options. (2) All of the Class B Common Shares were repurchased by the Corporation for
cash pursuant to its right of first refusal with respect to Class B Common
Shares set forth in the Corporations Articles of Incorporation. 
 Item 3. Default Upon Senior Securities Not applicable 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable 
 Item 5. Other Information Not applicable 27




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits required by Item 601 of Regulation S-K(4) a  Credit Agreement dated May 11, 2004, among the following: (i)
the Registrant, (ii) National City Bank , as a LC issuer, swing line
lender and as the lead arranger and global agent, (iii) KeyBank National
Association, as lender and syndication agent, (iv) LaSalle Bank National
Association, as lender, LC issuer and documentation agent, (v) Bank One,
NA, as lender, (vi) PNC Bank, National Association, as lender, (vii) The

Bank of Nova Scotia, as lender, (viii) The Northern Trust Company, as
lender, (ix) The Bank of New York, as lender, and (x) Barclays Bank PLC,
as lender. Certain exhibits and schedules to the credit agreement have been excluded and will be furnished to the Securities and Exchange Commission upon request.(4) b  First supplemental indenture, dated May 12, 2004, to the
Indenture dated June 29, 2001, with respect in the Registrants 11.75%
Senior Subordinated Notes due 2008, between the Registrant, as issuer,
and The Huntington National Bank, as Trustee.(31) a  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 18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002(b)
    
    Reports on Form 8-KOn March 31, 2004, the Corporation filed Form 8-K with the Securities and
Exchange
Commission. This filing reported that the Corporation announced its
earning for the
fourth quarter and year ended February 29, 2004.On March 31, 2004, the Corporation filed Form 8-K with the Securities and
Exchange
Commission. This filing reported that the Corporation announced its
intent to make
a tender offer for all of its outstanding 11.75% senior subordinated
notes, due July
15, 2008, and a consent solicitation to amend the related note indenture.On June 29, 2004, the Corporation filed Form 8-K with the Securities and
Exchange
Commission. This filing reported that the Corporation announced its earnings
for the
first quarter ended May 31, 2004. 28




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##### Table of Contents



SIGNATURES 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 CORPORATIONBy:
    
    /s/Joseph B. CipolloneJoseph B. Cipollone
Vice President
Corporate Controller
Chief Accounting Officer
 July 9, 2004 29