##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period
ended May 31, 2005 OR o
    
    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   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  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    Yes
þ          
No o  Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
    Yes
þ          
No o As of July 5, 2005, the number of shares outstanding of each of the issuers classes of common
stock was: Class A Common
    
    
    62,976,982Class B Common
    
    
    4,214,886
    Table of Contents  AMERICAN GREETINGS CORPORATION
INDEX PageNumberPART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    
    26PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    
    27Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    
    27Item 3.
    
    Defaults Upon Senior Securities
    
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    
    27Item 5.
    
    Other Information
    
    
    
    27Item 6.
    
    Exhibits
    
    
    
    28SIGNATURES
    
    
    
    29EX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32 Section 906 Certifications
    Table of Contents  PART I 
FINANCIAL INFORMATION 
 Item 1. Financial
Statements AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME (Thousands of dollars except share and per share amounts) (Unaudited)Three Months EndedMay 31,2005
    
    
    
    2004Net sales
    
    $
    443,276
    
    
    $
    433,541Costs and expenses:Material, labor and other production costs
    
    
    180,473
    
    
    
    181,615Selling, distribution and marketing
    
    
    155,274
    
    
    
    146,652Administrative and general
    
    
    63,128
    
    
    
    64,137Interest expense
    
    
    9,682
    
    
    
    52,694Other income  net
    
    
    (8,371
    )
    
    
    (16,346
    )Total costs and expenses
    
    
    400,186
    
    
    
    428,752Income from continuing operations before income tax expense
    
    
    43,090
    
    
    
    4,789Income tax expense
    
    
    16,676
    
    
    
    1,853Income from continuing operations
    
    
    26,414
    
    
    
    2,936Income from discontinued operations, net of tax
    
    
    
    
    
    
    1,302Net income
    
    $
    26,414
    
    
    $
    4,238Earnings per share  basic:Income from continuing operations
    
    $
    0.39
    

    
    $
    0.04Income from discontinued operations
    
    
    
    
    
    
    0.02Net income
    
    $
    0.39
    
    
    $
    0.06Earnings per share  assuming dilution:Income from continuing operations
    
    $
    0.35
    
    
    $
    0.04Income from discontinued operations
    
    
    
    
    
    
    0.02Net income
    
    $
    0.35
    
    
    $
    0.06Average number of shares outstanding
    
    
    68,595,786
    
    
    
    68,000,691Average number of shares outstanding  assuming dilution
    
    
    81,952,895
    
    
    
    68,846,170Dividends declared per share
    
    $
    0.08
    
    
    $
    
 See notes to condensed consolidated financial statements (unaudited). 3
    Table of Contents  AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Thousands of dollars) (Unaudited)
    
    
    (Note 1)
    
    
    (Unaudited)May 31, 2005
    
    
    February 28, 2005
    
    
    May 31, 2004ASSETSCurrent assetsCash and cash equivalents
    
    $
    214,273
    
    
    $
    250,267
    
    
    $
    115,850Short-term investments
    
    
    208,750
    
    
    
    208,740
    
    
    
    Trade accounts receivable, net
    
    
    196,210
    
    
    
    188,987
    
    
    
    241,656Inventories
    
    
    233,933
    
    
    
    222,874
    
    
    
    254,035Deferred and refundable income taxes
    
    
    165,123
    
    
    
    193,497
    
    
    
    154,713Assets of businesses held for sale
    
    
    
    
    
    
    
    
    
    
    37,905Prepaid expenses and other
    
    
    210,043
    
    
    
    204,253
    
    
    
    220,773Total current assets
    
    
    1,228,332
    
    
    
    1,268,618
    
    
    
    1,024,932Goodwill
    
    
    263,823
    
    
    
    270,057
    
    
    
    220,316Other assets
    
    
    625,847
    
    
    
    644,140
    
    
    
    663,449Property, plant and equipment  at cost
    
    
    989,983
    
    
    
    995,281
    
    
    
    987,875Less accumulated depreciation
    
    
    658,749
    
    
    
    653,889
    
    
    
    641,337Property, plant and equipment  net
    
    
    331,234
    
    
    
    341,392
    
    
    
    346,538$
    2,449,236
    
    
    $
    2,524,207
    
    
    $
    2,255,235LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesDebt due within one year
    
    $
    10,184
    
    
    $
    
    
    
    $
    Accounts payable
    
    
    117,247
    
    
    
    143,041
    
    
    
    112,294Accrued liabilities
    
    
    120,192
    
    
    
    118,090
    
    
    
    113,329Accrued compensation and benefits
    
    
    65,514
    
    
    
    96,789
    
    
    
    62,921Income taxes
    
    
    31,178
    
    
    
    38,777
    
    
    
    15,731Liabilities of businesses held for sale
    
    
    
    
    
    
    
    
    
    
    4,635Other current liabilities
    
    
    112,575
    
    
    
    79,549
    
    
    
    69,862Total current liabilities
    
    
    456,890
    
    
    
    476,246
    
    
    
    378,772Long-term debt
    
    
    476,159
    
    
    
    486,099
    
    
    
    483,783Other liabilities
    
    
    124,058
    
    
    
    137,868
    
    
    
    94,149Deferred income taxes
    
    
    34,612
    
    
    
    37,214
    
    
    
    27,300Shareholders equity
    
    
    1,357,517
    
    
    
    1,386,780
    
    
    
    1,271,231$
    2,449,236
    
    
    $
    2,524,207
    
    
    $
    2,255,235
 See notes to condensed consolidated financial statements (unaudited). 4
    Table of Contents  AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of dollars) (Unaudited)Three Months EndedMay 31,2005
    
    
    2004OPERATING ACTIVITIES:Net income
    
    $
    26,414
    
    
    $
    4,238Income from discontinued operations
    
    
    
    
    
    
    1,302Income from continuing operations
    
    
    26,414
    
    
    
    2,936Adjustments to reconcile to net cash provided by operating activities:Gain on sale of investment
    
    
    
    
    
    
    (3,090
    )Loss (gain) on sale of fixed assets
    
    
    944
    
    
    
    (21
    )Loss on extinguishment of debt
    
    
    862
    
    
    
    39,024Depreciation and amortization
    
    
    14,646
    
    
    
    14,091Deferred income taxes
    
    
    7,740
    
    
    
    (7,192
    )Changes in operating assets and liabilities, net of acquisitions:Increase in trade accounts receivable
    
    
    (10,895
    )
    
    
    (13,216
    )Increase in inventories
    
    
    (13,947
    )
    
    
    (17,174
    )Decrease in other current assets
    
    
    14,360
    
    
    
    7,946Decrease in deferred costs  net
    
    
    25,147
    
    
    
    33,274Decrease in accounts payable and other liabilities
    
    
    (48,193
    )
    
    
    (28,145
    )Other  net
    
    
    654
    
    
    
    (4,882
    )Cash Provided by Operating Activities
    
    
    17,732
    
    
    
    23,551INVESTING ACTIVITIES:Proceeds from sale of short-term investments
    
    
    575,785
    
    
    
    Purchases of short-term investments
    
    
    (575,795
    )
    
    
    Property, plant & equipment additions
    
    
    (8,607
    )
    
    
    (4,403
    )Proceeds from sale of fixed assets
    
    
    36
    
    
    
    104Investment in corporate-owned life insurance
    
    
    1,614
    
    
    
    1,098Other  net
    
    
    (1,205
    )
    
    
    26,879Cash (Used) Provided by Investing Activities
    
    
    (8,172
    )
    
    
    23,678FINANCING ACTIVITIES:Reduction of long-term debt
    
    
    
    
    
    
    (216,417
    )Sale of stock under benefit plans
    
    
    8,511
    
    
    
    12,035Purchase of treasury shares
    
    
    (45,533
    )
    
    
    (9,299
    )Dividends to shareholders
    
    
    (5,500
    )
    
    
    Cash Used by Financing Activities
    
    
    (42,522
    )
    
    
    (213,681
    )CASH USED BY DISCONTINUED OPERATIONS
    
    
    
    
    
    
    (1,342
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (3,032
    )
    
    
    (1,806
    )DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (35,994
    )
    
    
    (169,600
    )Cash and Cash Equivalents at Beginning of Year
    
    
    250,267
    
    
    
    285,450Cash and Cash Equivalents at End of Period
    
    $
    214,273
    
    
    $
    115,850
 See notes to condensed consolidated financial statements (unaudited). 5
    Table of Contents  AMERICAN GREETINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) Three Months Ended May 31, 2005 and 2004 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 financial 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 28, 2005 of
American Greetings Corporation (the Corporation), from which the Condensed Consolidated Statement
of Financial Position at February 28, 2005, presented herein, has been derived. Certain amounts in
the prior year financial statements have been reclassified to conform to the 2006 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, 2005 refers to the year ended
February 28, 2005. For 2005, the Corporations subsidiary, AG Interactive, was consolidated on a
two-month lag corresponding with its fiscal year-end of December 31. For 2006, AG Interactive has
changed its year-end to coincide with the Corporations fiscal year-end. As a result, the fiscal
quarter ended May 31, 2005 includes five months of AG Interactives operations. The additional two
months of activity generated revenues of approximately $11 million, but had no impact on segment
earnings. 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 November 2004, the Financial Accounting Standards Board (the FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151 (SFAS 151), Inventory Costs  an amendment of
ARB No. 43, Chapter 4. SFAS 151 seeks to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material (spoilage) in the determination of
inventory carrying costs. The statement requires such costs to be treated as a current period
expense. SFAS 6
    Table of Contents  151 also establishes the concept of normal capacity and requires the allocation of fixed
production overhead to inventory based on the normal capacity of the production facilities. Any
unallocated overhead would be treated as a current period expense in the period incurred. This
statement is effective for fiscal years beginning after July 15, 2005. The Corporation does not
believe that the adoption of SFAS 151 will have a significant impact on the Corporations
consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS 123(R)), Share-Based
Payment. SFAS 123(R) requires that compensation cost relating to share-based payment transactions
be recognized in financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. SFAS 123(R) eliminates the alternative to use the
intrinsic value method of accounting in accordance with Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees. The Corporation is in the process of
evaluating the impact that the adoption of this statement will have on the consolidated financial
statements. It is, however, expected to reduce consolidated net income. This statement is
effective for the first interim or annual period beginning after June 15, 2005. In April 2005, the
Securities and Exchange Commission amended the compliance date of SFAS 123(R) through an amendment
of Regulation S-X. The new effective date for the Corporation is
March 1, 2006. Refer to Note 12
for the Corporations current accounting for stock-based compensation. Note 4  Other Income  Net Three Months Ended May 31,(In thousands)
    
    2005
    
    
    2004Royalty revenue
    
    $
    (5,679
    )
    
    $
    (10,483
    )Foreign exchange loss (gain)
    
    
    1,239
    
    
    
    (305
    )Interest income
    
    
    (2,640
    )
    
    
    (706
    )Gain on sale of investment
    
    
    
    
    
    
    (3,090
    )Other
    
    
    (1,291
    )
    
    
    (1,762
    )$
    (8,371
    )
    
    $
    (16,346
    )
 Other includes, among other things, gains and losses on asset disposals and rental income.
Proceeds of $19.1 million received from the sale of an investment in the prior year are included in
Other  net investing activities in the Condensed Consolidated Statement of Cash Flows for the
period. 7
    Table of Contents  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 May 31,2005
    
    
    2004Numerator (in thousands):Income from continuing operations
    
    $
    26,414
    
    
    $
    2,936Add-back  interest on convertible subordinated
notes, net of tax
    
    
    1,875
    
    
    
    Income from continuing operations  assuming dilution
    
    $
    28,289
    
    
    $
    2,936Denominator (in thousands):Weighted average shares outstanding
    
    
    68,596
    
    
    
    68,001Effect of dilutive securities:Stock options
    
    
    756
    
    
    
    845Deferred shares
    
    
    10
    
    
    
    Convertible debt
    
    
    12,591
    
    
    
    Weighted average shares outstanding  assuming dilution
    
    
    81,953
    
    
    
    68,846Income from continuing operations per share
    
    $
    0.39
    
    
    $
    0.04Income from continuing operations
per share  assuming dilution
    
    $
    0.35
    
    
    $
    0.04
 Approximately 2.7 million and 4.0 million stock options outstanding in the three month periods
ended May 31, 2005 and 2004, respectively, were excluded 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. Note 6  Comprehensive Income (Loss) The Corporations total comprehensive income (loss) is as follows: Three Months Ended May 31,(In thousands)
    
    2005
    
    
    2004Net income
    
    $
    26,414
    
    
    $
    4,238Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (14,144
    )
    
    
    (7,047
    )Unrealized loss on securities
    
    
    (1
    )
    
    
    Total comprehensive income (loss)
    
    $
    12,269
    
    
    $
    (2,809
    )
 8
    Table of Contents  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)
    
    May 31, 2005
    
    
    February 28, 2005
    
    
    May 31, 2004Allowance for seasonal
sales returns
    
    $
    85,425
    
    
    $
    94,672
    
    
    $
    86,773Allowance for doubtful accounts
    
    
    17,040
    
    
    
    16,684
    
    
    
    20,250Allowance for cooperative
advertising
    
    
    19,145
    
    
    
    23,571
    
    
    
    20,914Allowance for rebates
    
    
    59,308
    
    
    
    48,240
    
    
    
    38,726$
    180,918
    
    
    $
    183,167
    
    
    $
    166,663
 Note 8  Inventories (In thousands)
    
    May 31, 2005
    
    
    February 28, 2005
    
    
    May 31, 2004Raw materials
    
    $
    27,316
    
    
    $
    23,241
    
    
    $
    35,377Work in process
    
    
    24,139
    
    
    
    19,719
    
    
    
    25,165Finished products
    
    
    234,655
    
    
    
    228,088
    
    
    
    234,344286,110
    
    
    
    271,048
    
    
    
    294,886Less LIFO reserve
    
    
    76,673
    
    
    
    75,890
    
    
    
    71,440209,437
    
    
    
    195,158
    
    
    
    223,446Display materials and
factory supplies
    
    
    24,496
    
    
    
    27,716
    
    
    
    30,589Inventories
    
    $
    233,933
    
    
    $
    222,874
    
    
    $
    254,035
 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. 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. In the event a contract is not completed, the Corporation has a claim for
unearned advances under the agreement. 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. The agreements may or may not specify the Corporation
as the sole supplier of social expression products to the customer. 9
    Table of Contents  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 Condensed
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 Condensed Consolidated Statement of Financial Position, and the
remaining payment commitments beyond the next twelve months are classified as Other liabilities.
The Corporation believes that it 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. As of May 31, 2005, February 28, 2005 and May 31, 2004, deferred costs and future payment
commitments are included in the following financial statement captions: (In thousands)
    
    May 31, 2005
    
    
    February 28, 2005
    
    
    May 31, 2004Prepaid expenses and other
    
    $
    158,055
    
    
    $
    156,665
    
    
    $
    173,710Other assets
    
    
    567,175
    
    
    
    582,401
    
    
    
    605,755Deferred cost assets
    
    
    725,230
    
    
    
    739,066
    
    
    
    779,465Other current liabilities
    
    
    (92,568
    )
    
    
    (65,944
    )
    
    
    (54,809
    )Other liabilities
    
    
    (81,921
    )
    
    
    (95,452
    )
    
    
    (68,154
    )Deferred cost liabilities
    
    
    (174,489
    )
    
    
    (161,396
    )
    
    
    (122,963
    )Net deferred costs
    
    $
    550,741
    
    
    $
    577,670
    
    
    $
    656,502
 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. The amended and restated senior secured credit
facility consists of a $200 million revolving facility maturing on May 10, 2008. There were no
outstanding balances under this facility at May 31, 2005, February 28, 2005 or May 31, 2004. The amended and restated credit facility is secured by the domestic assets of the Corporation and a
65% interest in the common stock of its foreign subsidiaries. The Corporation pays an annual
commitment fee of 25 basis points on the undrawn portion of the facility. 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 to 10
    Table of Contents  pay shareholder dividends. These covenants are less restrictive than the covenants previously in
place. In April 2005, the Corporation amended its amended and restated senior secured credit facility
dated May 11, 2004. The amendment, among other things, increases the maximum amount of dividends
that the Corporation may pay to its shareholders, increases the maximum amount of its own capital
stock that it may repurchase and extends the period during which the Corporation may repurchase its
11.75% senior subordinated notes due July 15, 2008. The Corporation is also party to a three-year accounts receivable securitization financing
agreement that provides for up to $200 million of financing 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. On August 2, 2004, the agreement was
amended to extend the maturity date to August 1, 2007. The related interest rate is commercial
paper-based. The Corporation pays an annual commitment fee of 25 basis points on the undrawn
portion of the accounts receivable facility. There were no outstanding balances under this
agreement at May 31, 2005, February 28, 2005 or May 31, 2004. 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, included in Interest expense on the Condensed
Consolidated Statement of Income, for the payment of the premium and other fees associated with the
notes repurchased as well as for the write-off of related deferred financing costs. At May 31,
2005, approximately $10 million of these notes remained outstanding. As part of this transaction,
substantially all restrictive covenants were eliminated from the remaining outstanding notes. During the three months ended May 31, 2005, the Corporation issued formal notification that the
remaining 11.75% senior subordinated notes will be called on July 15, 2005. As a result, the
balance of the outstanding notes was reclassified to short-term on the Condensed Consolidated
Statement of Financial Position and a charge of $0.9 million, included in Interest expense on the
Condensed Consolidated Statement of Income, was recorded during the three months ended May 31,
2005, for the premium associated with the notes as well as for the write-off of related deferred
financing costs. At May 31, 2005, the Corporation was in compliance with its financial covenants. 11
    Table of Contents  At May 31, 2005, February 28, 2005 and May 31, 2004, long-term debt and their related calendar
year due dates were as follows: (In thousands)
    
    May 31, 2005
    
    
    February 28, 2005
    
    
    May 31, 20046.10% Senior Notes, due 2028
    
    $
    298,603
    
    
    $
    298,503
    
    
    $
    298,21511.75% Senior Subordinated
Notes, due 2008
    
    
    10,184
    
    
    
    10,016
    
    
    
    9,9787.00% Convertible Subordinated
Notes, due 2006
    

    
    175,000
    
    
    
    175,000
    
    
    
    175,000Other (due 2007-2011)
    
    
    2,556
    
    
    
    2,580
    
    
    
    590486,343
    
    
    
    486,099
    
    
    
    483,783Less: Current maturities of
long-term debt
    
    
    10,184
    
    
    
    
    
    
    
    $
    476,159
    
    
    $
    486,099
    
    
    $
    483,783
 The 7.00% convertible subordinated notes are convertible at the option of the holders into
shares of the Corporations class A common shares 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. 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)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    128
    
    
    $
    112
    
    
    $
    711
    
    
    $
    628Interest cost
    
    
    1,811
    
    
    
    1,841
    
    
    
    1,872
    
    
    
    2,221Expected return on plan assets
    
    
    (1,721
    )
    
    
    (1,415
    )
    
    
    (1,201
    )
    
    
    (1,336
    )Amortization of prior service cost
    
    
    23
    
    
    
    
    
    
    
    (1,849
    )
    
    
    (1,559
    )Amortization of actuarial loss
    
    
    358
    
    
    
    
    
    
    
    1,771
    
    
    
    1,546$
    599
    
    
    $
    538
    
    
    $
    1,304
    
    
    $
    1,500
 On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Act) was signed into law. The Act provides plan sponsors a federal subsidy for certain
qualifying prescription drug benefits covered under the sponsors postretirement health care plans.
FASB Staff Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, (FSP 106-2) was issued on May 19,
2004. FSP 106-2 provides guidance on accounting for the effects of the new Medicare prescription
drug legislation by employers whose prescription drug benefits are actuarially equivalent to the
drug benefit under Medicare Part D. FSP 106-2 also contains basic guidance on related income tax
accounting and complex rules for transition that permit various alternative prospective and
retroactive transition approaches. The Corporation adopted the provisions of FSP 106-2 effective
September 1, 2004. The effect of the adoption of FSP 106-2 was a reduction of the net periodic
postretirement benefit cost for the three months ended May 31, 2005 of approximately $0.2 million. 12
    Table of Contents  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 three months
ended May 31, 2005 was $3.2 million, compared to $2.5 million in the prior year period. The
profit-sharing plan expense for the three month periods are estimates as actual contributions to
the profit-sharing plan are made after fiscal year end and are contingent upon final year end
results. The Corporation matches a portion of 401(k) employee contributions contingent upon
meeting specified annual operating results goals. The expenses recognized for the three month
periods ended May 31, 2005 and 2004 were $0.7 million and $1.2 million, respectively. Note 12  Stock-Based Compensation The Corporation follows APB Opinion No. 25 and related Interpretations in accounting for its stock
options granted to employees and directors. Because the exercise price of the Corporations 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. Refer to Note 3 for information regarding recent
changes to the accounting guidance for stock-based compensation. 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: Three Months Ended May 31,(In thousands, except per share amounts)
    
    2005
    
    
    2004Net income as reported
    
    $
    26,414
    
    
    $
    4,238Deduct: Stock-based compensation expense determined
under fair value based method, net of tax
    
    
    1,029
    
    
    
    1,330Pro forma net income
    
    $
    25,385
    
    
    $
    2,908Earnings per share:As reported
    
    $
    0.39
    
    
    $
    0.06Pro forma
    
    
    0.37
    
    
    
    0.04Earnings per share  assuming dilution:As reported
    
    $
    0.35
    
    
    $
    0.06Pro forma
    
    
    0.33
    
    
    
    0.04
 During the three months ended May 31, 2004, 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
    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. At May 31, 2005, the
Corporation owned and operated 534 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 is an electronic provider of social expression content through the Internet and
wireless platforms. Non-reportable operating segments primarily include the design, manufacture and sale of display
fixtures. Segment results are internally reported and evaluated at consistent exchange rates between years to
eliminate 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 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 back 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
    Table of Contents  Operating Segment Information Net Sales
    
    
    Segment Earnings (Loss)Three Months Ended May 31,
    
    
    Three Months Ended May 31,(In thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Social Expression Products
    
    $
    372,068
    
    
    $
    381,549
    
    
    $
    84,965
    
    
    $
    94,962Intersegment items
    
    
    (11,675
    )
    
    
    (14,824
    )
    
    
    (8,534
    )
    
    
    (10,936
    )Exchange rate adjustment
    
    
    4,562
    
    
    
    390
    
    
    
    752
    
    
    
    157Net
    
    
    364,955
    
    
    
    367,115
    
    
    
    77,183
    
    
    
    84,183Retail Operations
    
    
    42,860
    
    
    
    51,323
    
    
    
    (6,238
    )
    
    
    (4,144
    )Exchange rate adjustment
    
    
    1,382
    
    
    
    216
    
    
    
    (42
    )
    
    
    15Net
    
    
    44,242
    
    
    
    51,539
    
    
    
    (6,280
    )
    
    
    (4,129
    )AG Interactive
    
    
    28,047
    
    
    
    9,445
    
    
    
    330
    
    
    
    363Exchange rate adjustment
    
    
    214
    
    
    
    
    
    
    
    (95
    )
    
    
    Net
    
    
    28,261
    
    
    
    9,445
    
    
    
    235
    
    
    
    363Non-reportable segments
    
    
    4,770
    
    
    
    5,391
    
    
    
    474
    
    
    
    (6,906
    )Unallocated items  net
    
    
    1,048
    
    
    
    51
    
    
    
    (28,620
    )
    
    
    (68,714
    )Exchange rate adjustment
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    (8
    )Net
    
    
    1,048
    
    
    
    51
    
    
    
    (28,522
    )
    
    
    (68,722
    )Consolidated Total
    
    $
    443,276
    
    
    $
    433,541
    
    
    $
    43,090
    
    
    $
    4,789
 Other During 2005, the Corporation recorded a severance accrual of $18.3 million related to an overhead
reduction program that eliminated approximately 300 associates and the Franklin, Tennessee plant
closure. Substantially all of the associates receiving payments separated from the Corporation on
or prior to February 28, 2005. Approximately 70% of the severance will be paid prior to February
28, 2006, with the remaining payments extending through 2008. The remaining balance of the
severance accrual was $11.1 million at May 31, 2005. In connection with the plant closing, the Social Expression Products segment recorded an additional
charge of $3.2 million during the three months ended May 31, 2005 for the remaining shutdown and
relocation costs incurred during the period. 15
    Table of Contents  Note 14  Discontinued Operations On July 30, 2004, the Corporation announced it had signed a letter of agreement to sell its
Magnivision nonprescription reading glasses business to AAiFosterGrant, a unit of sunglasses maker
Foster Grant. 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 the third quarter
of fiscal 2005 although an additional amount may be recorded during the next six months based on
closing balance sheet adjustments. This adjustment is not expected to exceed ten percent of the
cash proceeds. During the third quarter of fiscal 2005, the Corporation received cash proceeds of
$77.0 million and recorded a gain of $35.5 million for the sale of Magnivision. Magnivision meets the definition of a component of an entity and has been accounted for as a
discontinued operation under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Accordingly, the Corporations condensed consolidated financial statements and related
notes have been presented to reflect Magnivision as a discontinued operation for all periods
presented. Magnivision was previously included within the Corporations non-reportable segments. The following summarizes the results of discontinued operations for the three months ended May 31,
2004: (In thousands)Net sales
    
    $
    12,634Pretax income from operations
    
    
    2,124Income tax expense
    
    
    822Income from discontinued operations
    
    $
    1,302
 Assets of businesses held for sale and Liabilities of businesses held for sale in the
Condensed Consolidated Statement of Financial Position include the following: (In thousands)
    
    May 31, 2004Assets of businesses held for sale:Current assets
    
    $
    19,786Other assets
    
    
    6,911Fixed assets
    
    
    11,208$
    37,905Liabilities of businesses held for sale:Current liabilities
    
    $
    3,019Noncurrent liabilities
    
    
    1,616$
    4,635
 16
    Table of Contents  Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations Overview During the first quarter of 2006, the Corporation believes
that its North American operations
began to realize the benefit of the initiatives focused on achieving a better understanding of
consumer needs and improving the shopping experience. New products are driving increased sales and
earnings in North America from everyday cards due to both an improved product mix and higher
sell-through at retail. However, consolidated sales of everyday cards remained flat compared to
the prior year as a soft international market, particularly in the
U.K., offset the successes in the
North American market. Consolidated sales of seasonal cards were down compared to the prior year,
however a substantial portion of the decrease is based on timing and is not expected to impact
full year comparative results. As expected, the Retail segment contributed lower sales and earnings as it continued its turnaround
plan by closing low performing stores. However, improvements in the quality and mix of the product
offering and lower promotional activity contributed to a significantly higher gross margin
percentage than in the prior year quarter. Continued cost savings initiatives and operational improvements contributed to significant
improvements in the display fixtures business, which generated unfavorable production variances and
inventory rationalization costs in the prior year. During the three months ended May 31, 2005, the Corporation recognized net income of $26.4 million
compared to $4.2 million in the prior year quarter. For 2006, AG Interactive changed its year-end to coincide with the Corporations fiscal year end.
As a result, the quarter ended May 31, 2005 includes five months of AG Interactives operations. The current year quarter included $3.2 million for shutdown and relocation costs incurred during
the period in connection with the closure of the Corporations Franklin, Tennessee manufacturing
facility. The Corporation also recorded a charge of $0.9 million for the costs associated with the
commitment to repurchase the Corporations remaining outstanding 11.75% senior subordinated
notes. The Corporation issued formal notification during the quarter that the remaining 11.75%
senior subordinated notes will be called on July 15, 2005. The prior year quarter included a charge of $39.0 million for costs associated with the repurchase
of $186.2 million of the Corporations 11.75% senior subordinated notes and a gain of $3.1 million
on the sale on an investment. 17
    Table of Contents  Results of Operations Three months ended May 31, 2005 and 2004 Net income was $26.4 million, or $0.35 per share, in the quarter compared to $4.2 million, or $0.06
per share, in the prior year first quarter (all per-share amounts assume dilution). The Corporations results for the three months ended May 31, 2005 and 2004 are summarized below: % Net
    
    
    
    
    
    
    % Net
    
    
    Fav(Dollars in thousands)
    
    2005
    
    
    Sales
    
    
    2004
    
    
    Sales
    
    
    (Unfav)Net sales
    
    $
    443,276
    
    
    
    100.0
    %
    
    $
    433,541
    
    
    
    100.0
    %
    
    
    2.2
    %Material, labor and other
production costs
    
    
    180,473
    
    
    
    40.7
    %
    
    
    181,615
    
    
    
    41.9
    %
    
    
    0.6
    %Selling, distribution and marketing
    
    
    155,274
    
    
    
    35.0
    %
    
    
    146,652
    
    
    
    33.8
    %
    
    
    (5.9
    )%Administrative and general
    
    
    63,128
    
    
    
    14.3
    %
    
    
    64,137
    
    
    
    14.8
    %
    
    
    1.6
    %Interest expense
    
    
    9,682
    
    
    
    2.2
    %
    
    
    52,694
    
    
    
    12.2
    %
    
    
    81.6
    %Other income  net
    
    
    (8,371
    )
    
    
    (1.9
    )%
    
    
    (16,346
    )
    
    
    (3.8
    )%
    
    
    (48.8
    )%Total costs and expenses
    
    
    400,186
    
    
    
    90.3
    %
    
    
    428,752
    
    
    
    98.9
    %
    
    
    6.7
    %Income from continuing operations
before income tax expense
    
    
    43,090
    
    
    
    9.7
    %
    
    
    4,789
    
    
    
    1.1
    %
    
    
    799.8
    %Income tax expense
    
    
    16,676
    
    
    
    3.7
    %
    
    
    1,853
    
    
    
    0.4
    %
    
    
    (800.0
    )%Income from continuing operations
    
    
    26,414
    
    
    
    6.0
    %
    
    
    2,936
    
    
    
    0.7
    %
    
    
    799.7
    %Income from discontinued operations,
net of tax
    
    
    
    
    
    
    0.0
    %
    
    
    1,302
    
    
    
    0.3
    %
    
    
    (100.0
    )%Net income
    
    $
    26,414
    
    
    
    6.0
    %
    
    $
    4,238
    
    
    
    1.0
    %
    
    
    523.3
    %
 For the three months ended May 31, 2005, consolidated net sales were $443.3 million, up from
$433.5 million in the prior year first quarter. This 2.2% increase was primarily the result of
increased sales of approximately $7 million due to the two AG Interactive acquisitions in the prior
year second quarter as well as approximately $11 million from the additional two months of activity
from the AG Interactive business due to the change in its fiscal year-end. A strong performance in
the North American everyday card business, aided by improved product sell through, was offset by a
soft international market. Foreign exchange accounted for approximately $6 million or 1.3% of the
2.2% increase. Partially offsetting these increases were lower sales in the Corporations retail
and U.K. businesses. The retail business was down approximately $5 million due to fewer stores and
same-store sales decreased approximately $3 million or 7.1% from the prior year period. The U.K.
business was down approximately $7 million compared to the prior year due to lower seasonal card
sales related to the timing of spring holidays and lower everyday product sales related to
unfavorable results at several large retailers. 18
    Table of Contents  Unit and Pricing Analysis Unit and pricing comparatives for the three months ended May 31, 2005 and 2004 are summarized
below: Increase (Decrease) From the Prior YearEveryday Cards
    
    
    Seasonal Cards
    
    
    Total Greeting Cards2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Unit volume
    
    
    (0.3
    )%
    
    
    0.5
    %
    
    
    (12.6
    )%
    
    
    1.2
    %
    
    
    (4.9
    )%
    
    
    0.7
    %Selling prices
    
    
    1.1
    %
    
    
    (1.9
    )%
    
    
    4.3
    %
    
    
    0.4
    %
    
    
    1.8
    %
    
    
    (1.0
    )%Overall Increase /
(Decrease)
    
    
    0.8
    %
    
    
    (1.4
    )%
    
    
    (8.9
    )%
    
    
    1.6
    %
    
    
    (3.1
    )%
    
    
    (0.3
    )%
 Seasonal card unit volume decreased 12.6% in the current year quarter. Approximately half of
this decrease is due to the new merchandising strategy for seasonal space management announced in
the second half of the prior year. In the prior year, these programs were sold on an outright
basis while in the current year they are sold with full return privileges. As such, the current
year includes an accrual for the estimated returns recorded at the time the sales are recognized.
The remaining decrease is due primarily to lower unit sales of Mothers Day, Fathers Day and
Graduation cards. Approximately 3 percentage points of the lower unit sales are expected to be
recovered during the second quarter, as this decrease relates to timing differences on sales of
Fathers Day and Graduation cards with customers that implemented scan-based trading subsequent to
the prior year first quarter. The 4.3% increase in selling prices of seasonal cards is primarily
due to product mix of Mothers Day cards, with a lower volume of value priced cards than in the
prior year. Sales of everyday card units decreased 0.3% compared to the prior year as a 4.7% improvement in
North American unit sales, due to product mix enhancements, was more than offset by soft
international everyday card unit sales, particularly in the U.K. The 1.1% increase in selling
prices of everyday cards was driven by the international business units as the mix of cards sold
shifted to higher priced units. Expense Overview Material, labor and other production costs for the three months ended May 31, 2005 were $180.5
million, a decrease from $181.6 million for the same period in the prior year. As a percentage of
net sales, these costs were 40.7% in the current period compared to 41.9% for the three months
ended May 31, 2004. The $1.1 million decrease from the prior year is due to a decrease in costs of
approximately $12 million, primarily related to lower sales and lower markdown costs in our retail
business and lower sales and production improvements in our fixtures business. Also, the fixtures
business recorded inventory adjustments in the prior year first quarter. These decreases were
partially offset by approximately $11 million due to shutdown and relocation costs for the plant
closure, foreign exchange rate impacts and the AG Interactive prior year acquisitions and
additional two months of activity. 19
    Table of Contents  Selling, distribution and marketing costs for the three months ended May 31, 2005 were $155.3
million, increasing from the $146.7 million for the same period in the prior year. As a percentage
of net sales, these costs increased from 33.8% for the three months ended May 31, 2004 to 35.0% for
the three months ended May 31, 2005. Of the $8.6 million increase, approximately $10 million was
attributable to the two months of additional activity related to the change in fiscal year-end for
AG Interactive as well as the expenses incurred by the AG Interactive acquisitions. Foreign
exchange accounted for approximately $2 million of the increase. These increases were partially
offset by approximately $3 million due to reduced costs in the retail segment stores arising from
fewer stores. Administrative and general expenses were $63.1 million for the three months ended May 31, 2005, a
decrease from $64.1 million for the same period in the prior year. The $1.0 million decrease is
due to lower consulting fees and bad debt expense offset by increased costs from the AG Interactive
acquisitions. Interest expense decreased by $43.0 million to $9.7 million for the three months ended May 31, 2005
from $52.7 million for the same period in the prior year. This decrease is due to the repurchase
of $186.2 million of the Corporations 11.75% senior subordinated notes during the quarter ended
May 31, 2004. Interest expense in the three months ended May 31, 2005 was $4.5 million lower than
the prior period due to savings related to the repurchase. Interest expense in the quarter ended
May 31, 2004 included $39.0 million for the premium payment, fees and the write-off of deferred
financing costs associated with the repurchase. Other income  net decreased to $8.4 million for the three months ended May 31, 2005, from $16.3
million in the same period in the prior year. The $7.9 million decrease is due to $4.8 million
less royalty revenue and $1.5 million more foreign exchange losses offset by a $1.9 million
increase in interest income. The prior year three months also included a $3.1 million gain on sale
of investment. The effective tax rate was 38.7% for both the three months ended May 31, 2005 and 2004. During the
first quarter of fiscal 2006, the Corporation established additional tax reserves to cover anticipated
examination adjustments. In addition, the Corporation adjusted its valuation
allowances against deferred tax assets due to improved earnings at certain foreign locations. These adjustments essentially offset. 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 have
similar economic characteristics, products, production processes, types of customers and
distribution methods. The Corporation owns and operates 534 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. 20
    Table of Contents  The stores sell products purchased from the Social Expression Products segment and products
purchased from other vendors. AG Interactive 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 Products Segment Three Months Ended May 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % ChangeNet sales
    
    $
    360,393
    
    
    $
    366,725
    
    
    
    (1.7
    )%Segment earnings
    
    
    76,431
    
    
    
    84,026
    
    
    
    (9.0
    )%
 Net sales of the Social Expression Products segment excluding the impact of foreign exchange
and intersegment items, for the three months ended May 31, 2005, decreased $6.3 million or 1.7%
from the same period in the prior year due primarily to decreases in our U.K. business. In North
America, improved product mix and better sell-through of everyday cards was offset by lower sales
of seasonal cards, primarily due to the revised strategy for seasonal space management and lower
sales of both Fathers Day and Graduation cards in the quarter. Segment earnings excluding the impact of foreign exchange and intersegment items for the three
months ended May 31, 2005, decreased $7.6 million compared to the prior year period. These results
include approximately $3 million of shutdown and relocation costs associated with the plant closure
and the impact of the lower sales in the U.K. business. Retail Operations Segment Three Months Ended May 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % ChangeNet sales
    
    $
    42,860
    
    
    $
    51,323
    
    
    
    (16.5
    )%Segment loss
    
    
    (6,238
    )
    
    
    (4,144
    )
    
    
    (50.5
    )%
 Net sales excluding the impact of foreign exchange in the Retail Operations segment decreased
$8.5 million or 16.5% as same-store sales decreased approximately $3 million or 7.1% for the three
months ended May 31, 2005 compared to the same period in the prior year. The average number of
stores was approximately 9.8% less than in the prior year quarter, which accounted for
approximately $5 million of the decrease in net sales. Segment earnings excluding the impact of foreign exchange was a loss of $6.2 million in the three
months ended May 31, 2005, compared to a loss of $4.1 million in the three months ended May 31,
2004. Earnings were unfavorably impacted by certain noncapitalizable implementation costs
associated with a systems infrastructure upgrade in the stores. The impact of lower sales on
earnings was softened due to a lower level of promotional activity and improved product mix that
improved the gross margins by approximately 4.3 percentage points. Segment earnings benefited from
lower store rent and associate costs due to fewer stores. 21
    Table of Contents  AG Interactive Segment Three Months Ended May 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % ChangeNet sales
    
    $
    28,047
    
    
    $
    9,445
    
    
    
    197.0
    %Segment earnings
    
    
    330
    
    
    
    363
    
    
    
    (9.1
    )%
 For 2006, AG Interactive changed its year-end to coincide with the Corporations fiscal year
end. As a result, the quarter ended May 31, 2005 includes five months of AG Interactives
operations. Net sales excluding the impact of foreign exchange of AG Interactive increased $18.6 million for
the quarter ended May 31, 2005, compared to the same period in the prior year. The additional two
months of activity accounted for approximately $11 million of the increase while the prior year
acquisitions within the AG Mobile wireless division contributed $7 million to the net sales
increase. Net sales for the core online greeting card business improved by approximately $1
million compared to the prior year period. Segment earnings decreased less than $0.1 million for the quarter ended May 31, 2005, compared to
the prior year period as the impact of sales increases were offset by acquisition costs, higher
technology costs and the cost of new business initiatives. Segment earnings for the core online
greeting card business improved by approximately $1 million, more than offset by the cost of new
business initiatives in the acquired businesses. 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 Condensed Consolidated Statement
of Financial Position for May 31, 2004 has been included. Operating Activities Operating activities provided $17.7 million in cash during the three months ended May 31, 2005,
compared to providing $23.6 million of cash in the same period in the prior year. Accounts receivable used $10.9 million of cash from February 28, 2005, compared to a use of $13.2
million in the same period in the prior year. As a percentage of the prior twelve months net
sales, net accounts receivable were 10.3% at May 31, 2005, compared to 12.9% at May 31, 2004. Inventory was a use of $13.9 million from February 28, 2005, compared to a use of $17.2 million in
the same period in the prior year. As a percentage of the prior twelve months material, labor and
other production costs, inventories were 25.9% at May 31, 2005, compared to 27.7% at May 31, 2004. Other current assets were a source of $14.4 million in cash from February 28, 2005, compared to a
source of $7.9 million in the same period in the prior year. The difference relates to the current
year tax refund of payments partially offset by payments for insurance premiums. 22
    Table of Contents  Deferred costs  net represents payments under agreements with retailers net of the related
amortization of those payments. During the three months ended May 31, 2005, amortization exceeded
payments by $25.1 million; in the three months ended May 31, 2004, amortization exceeded payments
by $33.3 million. Payments for new or amended contracts are flat compared to the prior year while
the related amortization has decreased by $9.4 million compared to the prior year three months.
See Note 9 to the condensed consolidated financial statements for further discussion of deferred
costs related to customer agreements. Accounts payable and other liabilities were a use of $48.2 million during the three months ended
May 31, 2005, compared to a use of $28.1 million in the prior year period. The increase from the
prior year is due to higher bonuses and profit sharing payments as well as payments related to the
headcount reduction and plant closure and tax payments. Investing Activities Investing activities used $8.2 million in cash during the three months ended May 31, 2005, compared
to providing $23.7 million in the same period in the prior year. The decrease of $31.9 million is
primarily due to increased capital expenditures in the three months ended May 31, 2005 and the
proceeds received from the sale of the marketable security investment of $19.1 million during the
three months ended May 31, 2004. Financing Activities Financing activities used $42.5 million of cash during the three months ended May 31, 2005,
compared to $213.7 million in the same period in the prior year. The current year amount relates
primarily to the Corporations program to repurchase up to $200 million of its Class A common
shares announced on April 5, 2005. During the three months ended May 31, 2005, $45.5 million was
paid to repurchase approximately 1.9 million shares under the repurchase program. The prior year
amount relates primarily to the repurchase of the Corporations 11.75% senior subordinated notes. Stock activity provided and used a significant amount of cash during both the current and prior
year three months. The receipt by the Corporation of the exercise price on stock options provided
$8.5 million and $12.0 million during the three months ended May 31, 2005 and 2004, respectively.
During the three months ended May 31, 2005, $45.5 million was paid to repurchase approximately 1.9
million Class A common shares under the Corporations $200 million repurchase program. In
addition, in accordance with its articles of incorporation, the Corporation repurchased Class B
common shares at a cost of approximately $9.3 million into its Treasury in the prior year quarter. During the quarter ended May 31, 2005, the Corporation paid a quarterly dividend of $0.08 per
common share, which totaled $5.5 million. 23
    Table of Contents  Credit Sources Substantial credit sources are available to the Corporation. In total, the Corporation had
available sources of approximately $400 million at May 31, 2005. This includes the Corporations
$200 million senior secured revolving credit facility and its $200 million accounts receivable
securitization financing. There were no outstanding balances under either of these arrangements at
May 31, 2005. On May 11, 2004, the Corporation amended and restated its senior secured revolving 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. The amended and restated senior secured
revolving 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 Corporation pays an annual commitment fee of 25 basis
points on the undrawn portion of the facility. 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 to pay
shareholder dividends. These covenants are less restrictive than the covenants previously in
place. The accounts receivable securitization financing agreement was amended on August 2, 2004, to extend
the maturity date to August 1, 2007. The Corporation pays an annual commitment fee of 25 basis
points on the undrawn portion of the accounts receivable facility. 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 and other fees
associated with the notes repurchased as well as for the write-off of related deferred financing
costs. At May 31, 2005, approximately $10 million of these notes remained outstanding. As part of
this transaction, substantially all restrictive covenants were eliminated from the remaining
outstanding notes. During the quarter ended May 31, 2005, the Corporation issued formal notification that the
remaining 11.75% senior subordinated notes will be called on July 15, 2005. There were no material changes in the financial condition, liquidity or capital resources of the
Corporation from February 28, 2005, the end of its preceding fiscal year, to May 31, 2005, the end
of its latest fiscal quarter and the date of the most recent balance sheet included in this report,
nor from May 31, 2004, the end of the corresponding fiscal quarter last year, to May 31, 2005,
except for the changes discussed above and aside from normal seasonal fluctuations. The
Corporations future operating cash flow and borrowing availability under existing credit
facilities and its accounts receivable securitization financing program are expected to meet
currently anticipated funding requirements. 24
    Table of Contents  Critical Accounting Policies Please refer to the discussion of the Corporations Critical Accounting Policies as disclosed in
the Corporations Annual Report on Form 10-K for the year ended February 28, 2005. Prospective Information 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 the Corporations operations and business
environment, which are difficult to predict and may be beyond the control of the Corporation.
Important factors that could cause actual results to differ materially from those suggested by
these forward-looking statements, and that could adversely affect the Corporations future
financial performance, include, but are not limited to, the following: retail bankruptcies and
consolidations; successful integration of acquisitions; successful transition of management; a weak
retail environment; consumer acceptance of products as priced and marketed; the impact of
technology on core product sales; competitive terms of sale offered to customers; successfully
implementing supply chain improvements and achieving projected cost savings from those
improvements; the Corporations ability to generate revenues from licensing activities and maximize
the value of its intellectual property; the Corporations ability to comply with its debt
covenants; fluctuations in the value of currencies in major areas where the Corporation operates,
including the U.S. Dollar, Euro, U.K. Pound Sterling, and Canadian Dollar; escalation in the cost
of providing employee health care; and the outcome of any legal claims known or unknown. Risks
pertaining specifically to AG Interactive include the viability of online advertising and
subscriptions as revenue generators, the publics acceptance of online greetings and other social
expression products, and the ability of the mobile division to compete effectively in the wireless
content aggregation market. The risks and uncertainties identified above are not the only risks the Corporation faces.
Additional risks and uncertainties not presently known to the Corporation or that it believes to be
immaterial also may adversely affect the Corporation. 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 the Corporations business, financial condition
and results of operations. 25
    Table of Contents  Item 3. Quantitative and Qualitative Disclosures About Market Risk For further information, refer to the Corporations annual report on Form 10-K for the year ended
February 28, 2005. There were no material changes in market risk, specifically interest rate and
foreign currency exposure, for the Corporation from February 28, 2005, the end of its preceding
fiscal year, to May 31, 2005, the end of its most recent fiscal quarter. 
 Item 4. Controls and Procedures The Corporation maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Corporations 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 Principal
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. The Corporation carries out a variety of on-going procedures, under the supervision and with the
participation of the Corporations management, including the Corporations Chief Executive Officer
and principal financial officer, to evaluate the effectiveness of the design and operation of the
Corporations disclosure controls and procedures. Based on the foregoing, the Corporations Chief
Executive Officer and principal financial officer 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. 26
    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 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
consolidated financial condition 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 purchases of common shares of the
Corporation made during the three months ended May 31, 2005, by American Greetings Corporation. Total Number
    
    
    Maximum Numberof Shares
    
    
    of Shares (orPurchased as
    
    
    ApproximatePart of
    
    
    Dollar Value) thatAverage Price
    
    
    Publicly
    
    
    May Yet BeTotal Number of
    
    
    Paid per
    
    
    Announced
    
    
    Purchased UnderPeriod
    
    Shares Repurchased
    
    
    Share (1)
    
    
    Plans
    
    
    the PlansMarch 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    April 2005
    
    Class A -     940,000
    
    $
    23.44
    
    
    
    940,000
    (2)
    
    $
    177,966,561May 2005
    
    Class A -     965,000
    
    $
    24.29
    
    
    
    965,000
    (2)
    
    $
    154,524,482Total
    
    Class A -  1,905,000
    
    $
    23.87
    
    
    
    1,905,000
    (2)
    
    
    
 
 (1)
    
    Excludes commissions paid, if any, related to the share repurchase transactions.(2)
    
    On April 5, 2005, American Greetings announced that its Board of Directors authorized a program
to repurchase up to $200 million of its Class A Common Shares over a 12-month period, which will
expire in April 2006. These repurchases will be made through a 10b5-1 program in open market or
privately negotiated transactions in compliance with the SECs Rule 10b-18, subject to market
conditions, applicable legal requirements and other factors. 
 Item 3. Defaults 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
    Table of Contents  Item 6. Exhibits Exhibits required by Item 601 of Regulation S-K (31) a  Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (31) b  Certification of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (32) 
Certification of Chief Executive Officer and Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 28
    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. CipolloneVice President
Corporate Controller
Chief Accounting Officer July 8, 2005 (Signing on behalf of Registrant as a duly authorized officer of Registrant and signing as the
principal accounting officer of Registrant.) 29