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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 November 30, 2004 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 Noo Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ Noo As of January 3, 2005, the number of shares outstanding of each of the issuers classes of common
stock was: Class A Common
    
    64,815,448Class B Common
    
    4,160,806




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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
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34EXHIBITS
    
    
    40SUPPLEMENTAL EXECUTIVE RETIREMENT PLANCERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICERCERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER




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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 Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Net sales
    
    $
    586,165
    
    
    $
    603,754
    
    
    $
    1,411,790
    
    
    $
    1,435,542Costs and expenses:Material, labor and other production costs
    
    
    292,737
    
    
    
    290,363
    
    
    
    661,069
    
    
    
    665,080Selling, distribution and marketing
    
    
    173,735
    
    
    
    167,362
    
    
    
    466,690
    
    
    
    463,773Administrative and general
    
    
    64,476
    
    
    
    55,564
    
    
    
    186,118
    
    
    
    174,511Interest expense
    
    
    8,744
    
    
    
    30,587
    
    
    
    70,601
    
    
    
    70,924Other (income)  net
    
    
    (19,341
    )
    
    
    (13,459
    )
    
    
    (52,917
    )
    
    
    (25,576
    )Total costs and expenses
    
    
    520,351
    
    
    
    530,417
    
    
    
    1,331,561
    
    
    
    1,348,712Income from continuing operations before
income tax expense
    
    
    65,814
    
    
    
    73,337
    
    
    
    80,229
    
    
    
    86,830Income tax expense
    
    
    25,470
    
    
    
    28,246
    
    
    
    31,049
    
    
    
    33,603Income from continuing operations
    
    
    40,344
    
    
    
    45,091
    
    
    
    49,180
    
    
    
    53,227Income from discontinued operations, net of
tax
    
    
    22,417
    
    
    
    1,271
    
    
    
    24,729
    
    
    
    3,145Net income
    
    $
    62,761
    
    
    $
    46,362
    
    
    $
    73,909
    
    
    $
    56,372Earnings per share  basic:Income from continuing operations
    
    $
    0.58
    
    
    $
    0.68
    
    
    $
    0.72
    
    
    $
    0.80Income from discontinued operations
    
    
    0.33
    
    
    
    0.02
    
    
    
    0.36
    
    
    
    0.05Net income
    
    $
    0.91
    
    
    $
    0.70
    
    
    $
    1.08
    
    
    $
    0.85Earnings per share  assuming dilution:Income from continuing operations
    
    $
    0.51
    
    
    $
    0.58
    
    
    $
    0.67
    
    
    $
    0.74Income from discontinued operations
    
    
    0.27
    
    
    
    0.02
    
    
    
    0.30
    
    
    
    0.04Net income
    
    $
    0.78
    
    
    $
    0.60
    
    
    $
    0.97
    
    
    $
    0.78Average number of shares outstanding
    
    
    68,753,922
    
    
    
    66,699,848
    
    
    
    68,391,128
    
    
    
    66,309,827Average number of shares outstanding 
assuming dilution
    
    
    82,397,633
    
    
    
    80,478,413
    
    
    
    81,874,590
    
    
    
    79,817,702Dividends declared per share
    
    $
    0.06
    
    
    $
    
    
    
    $
    0.06
    
    
    $
    
 See notes to condensed consolidated financial statements (unaudited). 3




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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Thousands of dollars) (Unaudited)
    
    
    (Note 1)
    
    
    (Unaudited)November 30, 2004
    
    
    February 29, 2004
    
    
    November 30, 2003ASSETSCurrent assetsCash and cash equivalents
    
    $
    221,744
    
    
    $
    285,450
    
    
    $
    51,694Trade accounts receivable, less allowances for
seasonal sales returns of $83,169, $85,638 and
$91,271, respectively, and for doubtful accounts of
$17,419, $17,871 and $23,519, respectively
    
    
    415,113
    
    
    
    238,473
    
    
    
    453,374Inventories
    
    
    263,482
    
    
    
    238,612
    
    
    
    299,267Deferred and refundable income taxes
    
    
    165,810
    
    
    
    157,886
    
    
    
    181,029Assets of businesses held for sale
    
    
    
    
    
    
    40,815
    
    
    
    39,204Prepaid expenses and other
    
    
    213,692
    
    
    
    234,392
    
    
    
    244,740Total current assets
    
    
    1,279,841
    
    
    
    1,195,628
    
    
    
    1,269,308Goodwill
    
    
    247,836
    
    
    
    223,697
    
    
    
    217,982Other assets
    
    
    606,985
    
    
    
    706,898
    
    
    
    696,236Property, plant and equipment  at cost
    
    
    981,814
    
    
    
    993,024
    
    
    
    1,042,239Less accumulated depreciation
    
    
    648,536
    
    
    
    635,234
    
    
    
    680,700Property, plant and equipment  net
    
    
    333,278
    
    
    
    357,790
    
    
    
    361,539$
    2,467,940
    
    
    $
    2,484,013
    
    
    $
    2,545,065LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesDebt due within one year
    
    $
    
    
    
    $
    
    
    
    $
    85,414Accounts payable
    
    
    138,073
    
    
    
    125,816
    
    
    
    138,179Accrued liabilities
    
    
    118,519
    
    
    
    129,773
    
    
    
    156,215Accrued compensation and benefits
    
    
    78,463
    
    
    
    70,896
    
    
    
    69,871Income taxes
    
    
    55,020
    
    
    
    14,513
    
    
    
    51,114Liabilities of businesses held for sale
    
    
    
    
    
    
    5,338
    
    
    
    5,046Other current liabilities
    
    
    80,197
    
    
    
    78,243
    
    
    
    69,218Total current liabilities
    
    
    470,272
    
    
    
    424,579
    
    
    
    575,057Long-term debt
    
    
    483,988
    
    
    
    665,874
    
    
    
    665,554Other liabilities
    
    
    102,216
    
    
    
    96,325
    
    
    
    110,026Deferred income taxes
    
    
    26,963
    
    
    
    29,695
    
    
    
    8,434Shareholders equity
    
    
    1,384,501
    
    
    
    1,267,540
    
    
    
    1,185,994$
    2,467,940
    
    
    $
    2,484,013
    
    
    $
    2,545,065
 See notes to condensed consolidated financial statements (unaudited). 4




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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of dollars) (Unaudited)Nine Months EndedNovember 30,2004
    
    
    2003OPERATING ACTIVITIES:Net income
    
    $
    73,909
    
    
    $
    56,372Income from discontinued operations
    
    
    24,729
    
    
    
    3,145Income from continuing operations
    
    
    49,180
    
    
    
    53,227Adjustments to reconcile to net cash provided (used)
by operating activities:Gain on sale of investment
    
    
    (3,095
    )
    
    
    Loss on sale of fixed assets
    
    
    1,817
    
    
    
    1,191Loss on extinguishment of debt
    
    
    39,056
    
    
    
    18,389Depreciation and amortization
    
    
    42,425
    
    
    
    44,680Deferred income taxes
    
    
    (18,953
    )
    
    
    (8,110
    )Changes in operating assets and liabilities,
net of acquisitions and divestitures:Increase in trade accounts receivable
    
    
    (169,293
    )
    
    
    (151,429
    )Increase in inventories
    
    
    (19,852
    )
    
    
    (19,755
    )Decrease in other current assets
    
    
    8,972
    
    
    
    27,600Decrease in deferred costs  net
    
    
    98,314
    
    
    
    25,718Increase (decrease) in accounts payable and other liabilities
    
    
    21,765
    
    
    
    (28,829
    )Other  net
    
    
    3,469
    
    
    
    (12,751
    )Cash Provided (Used) by Operating Activities
    
    
    53,805
    
    
    
    (50,069
    )INVESTING ACTIVITIES:Proceeds from the sale of discontinued operations
    
    
    77,000
    
    
    
    Property, plant & equipment additions
    
    
    (25,745
    )
    
    
    (23,595
    )Proceeds from sale of fixed assets
    
    
    3,545
    
    
    
    2,140Investment in corporate-owned life insurance
    
    
    (2,142
    )
    
    
    8,943Other  net
    
    
    31,903
    
    
    
    3,446Cash Provided (Used) by Investing Activities
    
    
    84,561
    
    
    
    (9,066
    )FINANCING ACTIVITIES:Reduction of long-term debt
    
    
    (216,417
    )
    
    
    (68,673
    )Decrease in short-term debt
    
    
    
    
    
    
    (47,135
    )Sale of stock under benefit plans
    
    
    35,875
    
    
    
    10,478Purchase of treasury shares
    
    
    (18,263
    )
    
    
    (439
    )Dividends to shareholders
    
    
    (4,125
    )
    
    
    Cash Used by Financing Activities
    
    
    (202,930
    )
    
    
    (105,769
    )CASH (USED) PROVIDED BY DISCONTINUED OPERATIONS
    
    
    (2,395
    )
    
    
    4,046EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    3,253
    
    
    
    4,089DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (63,706
    )
    
    
    (156,769
    )Cash and Cash Equivalents at Beginning of Year
    
    
    285,450
    
    
    
    208,463Cash and Cash Equivalents at End of Period
    
    $
    221,744
    
    
    $
    51,694
 See notes to condensed consolidated financial statements (unaudited). 5




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AMERICAN GREETINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) Three and Nine Months Ended November 30, 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 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 29, 2004 of
American Greetings Corporation (the 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 to 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. The Corporations subsidiary, AG Interactive (formerly AmericanGreetings.com),
is consolidated on a two-month lag corresponding with its fiscal year-end of December 31. During the quarter ended November 30, 2004, the Corporation incurred certain charges that do not
have comparative charges in the prior year period. Net sales of the Social Expression Products
segment were reduced approximately $13 million related to the implementation of a new merchandising
strategy for seasonal space management. In addition, the quarter included pre-tax expenses of
$16.6 million associated with an overhead reduction program that eliminated approximately 300
positions and $8.2 million related to a plant to be closed during the fourth quarter.
Substantially all of the remaining plant closing costs of approximately $7 million will be recorded
during the fourth quarter. The current period expenses impacted the Condensed Consolidated Statement of Operations as follows: (In millions)Material, labor and other production costs
    
    $
    9.2Selling, distribution and marketing
    
    
    6.3Administrative and general
    
    
    9.3$
    24.8
 6




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The $24.8 million of current period expenses impacted the Corporations business segments as
follows: (In millions)Social Expression Products
    
    $
    21.2Retail Operations
    
    
    0.5Non-reportable
    
    
    0.4Unallocated
    
    
    2.7$
    24.8
 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 January 2003, the Financial Accounting Standards Board (the 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, 7




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Improvement and Modernization Act of 2003. FSP 106-2 is effective for the first interim or annual
period beginning after June 15, 2004. The Corporation adopted FSP 106-2 effective September 1,
2004. See Note 11 for further discussion. In October 2004, the American Jobs Creation Act of 2004 was signed into law. The Corporation is in
the process of evaluating the impact of the new law on the Corporations tax provision for the
fiscal year ending February 28, 2005. On November 24, 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 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. 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. On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), 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. This statement eliminates the alternative to use the intrinsic value
method of accounting per Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. The Corporation is in the process of evaluating the impact adoption of this
statement will have on the consolidated financial statements. This statement is effective for the
first interim or annual period beginning after June 15, 2005. Refer to Note 12 for the
Corporations current accounting for stock-based compensation. Note 4  Other (Income)  Net During the three months ended November 30, 2004, Other (income)  net included $12.3 million of
royalty revenue, $5.3 million of foreign exchange gain and $1.0 million of interest income. In the
prior year third quarter, Other (income)  net included $8.4 million of royalty revenue and $2.0
million of foreign exchange gain. During the nine months ended November 30, 2004, Other (income)  net included $24.2 million of
royalty revenue, a $10.0 million one-time receipt related to licensing activities, $5.7 million of
foreign exchange gain and $3.2 million of interest income. Income of $3.1 million on the sale of
an equity investment was also recorded during the nine months ended November 30, 2004. The
proceeds received from the sale of the investment totaled $19.1 million and are included in Other
- net investing activities in the Condensed Consolidated Statement of Cash Flows for the period.
In the prior year nine months, Other (income)  net included $14.7 million of royalty revenue and
$1.6 million of interest income. The agency fee expenses related to the royalty revenue are
included in Selling, distribution and marketing on the Condensed Consolidated Statement of
Operations. The agency fee expenses totaled $9.7 million and $5.0 million in the nine months ended
November 30, 2004 and 2003, respectively. 8




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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 and other
    
    
    (955
    )Balance at November 30, 2004
    
    $
    549
 Included in Accrued liabilities at November 30, 2004 is $0.5 million, representing the portion of
severance costs not yet disbursed. Note 6  Earnings Per Share The following table sets forth the computation of earnings per share and earnings per share -
assuming dilution: Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Numerator (in thousands):Income from continuing operations
    
    $
    40,344
    
    
    $
    45,091
    
    
    $
    49,180
    
    
    $
    53,227Add-back  interest on convertible subordinated
notes, net of tax
    
    
    1,881
    
    
    
    1,881
    
    
    
    5,644
    
    
    
    5,644Income from continuing operations 
assuming dilution
    
    $
    42,225
    
    
    $
    46,972
    
    
    $
    54,824
    
    
    $
    58,871Denominator (in thousands):Weighted average shares outstanding
    
    
    68,754
    
    
    
    66,700
    
    
    
    68,391
    
    
    
    66,310Effect of dilutive securities:Stock options
    
    
    1,053

    
    
    
    1,187
    
    
    
    893
    
    
    
    917Convertible debt
    
    
    12,591
    
    
    
    12,591
    
    
    
    12,591
    
    
    
    12,591Weighted average shares outstanding 
assuming dilution
    
    
    82,398
    
    
    
    80,478
    
    
    
    81,875
    
    
    
    79,818Income from continuing operations per share
    
    $
    0.58
    
    
    $
    0.68
    
    
    $
    0.72
    
    
    $
    0.80Income from continuing operations
per share  assuming dilution
    
    $
    0.51
    
    
    $
    0.58
    
    
    $
    0.67
    
    
    $
    0.74
 Approximately 1.6 million and 3.2 million stock options outstanding in the three and nine
month periods ended November 30, 2004, respectively, were excluded because the effect would have
been antidilutive (4.0 million and 4.5 million stock options outstanding in the three and nine
month periods ended November 30, 2003, respectively). 9




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Note 7  Comprehensive Income The Corporations total comprehensive income is as follows: Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,(In thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Net income
    
    $
    62,761
    
    
    $
    46,362
    
    
    $
    73,909
    
    
    $
    56,372Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    32,612
    
    
    
    28,184
    
    
    
    22,046
    
    
    
    39,540Unrealized gains (losses) on securities
    
    
    (134
    )
    
    
    
    
    
    
    119
    
    
    
    Total comprehensive income
    
    $
    95,239
    
    
    $
    74,546
    
    
    $
    96,074
    
    
    $
    95,912
 Note 8  Inventories (In thousands)
    
    November 30, 2004
    
    
    February 29, 2004
    
    
    November 30, 2003Raw materials
    
    $
    30,768
    
    
    $
    37,514
    
    
    $
    40,351Work in process
    
    
    22,201
    
    
    
    30,047
    
    
    
    27,308Finished products
    
    
    251,592
    
    
    
    212,252
    
    
    
    273,710304,561
    
    
    
    279,813
    
    
    
    341,369Less LIFO reserve
    
    
    70,297
    
    
    
    73,213
    
    
    
    75,656234,264
    
    
    
    206,600
    
    
    
    265,713Display materials and
factory supplies
    
    
    29,218
    
    
    
    32,012
    
    
    
    33,554Inventories
    
    $
    263,482
    
    
    $
    238,612
    
    
    $
    299,267
 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. 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 10




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##### Table of Contents



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 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 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 November 30, 2004, February 29, 2004 and November 30, 2003, deferred costs and future payment
commitments are included in the following financial statement captions: (In thousands)
    
    November 30, 2004
    
    
    February 29, 2004
    
    
    November 30, 2003Prepaid expenses and other
    
    $
    166,608
    
    
    $
    187,844
    
    
    $
    195,116Other assets
    
    
    547,393
    
    
    
    630,445
    
    
    
    629,549Deferred cost assets
    
    
    714,001
    
    
    
    818,289
    
    
    
    824,665Other current liabilities
    
    
    (58,833
    )
    
    
    (58,047
    )
    
    
    (48,650
    )Other liabilities
    
    
    (62,944
    )
    
    
    (69,493
    )
    
    
    (78,514
    )Deferred cost liabilities
    
    
    (121,777
    )
    
    
    (127,540
    )
    
    
    (127,164
    )Net deferred costs
    
    $
    592,224
    
    
    $
    690,749
    
    
    $
    697,501
 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. There were
no outstanding balances under this facility at November 30, 2004, February 29, 2004 or November 30,
2003. 11




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##### Table of Contents



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 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. There were no outstanding balances under
this agreement at November 30, 2004, February 29, 2004 or November 30, 2003. 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 $39.1 million, included in Interest expense on the Condensed
Consolidated Statement of Operations, 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
November 30, 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 November 30, 2004, the Corporation was in compliance with its financial covenants. At November 30, 2004, February 29, 2004 and November 30, 2003, debt due within one year consisted
of the following: (In thousands)
    
    November 30, 2004
    
    
    February 29, 2004
    
    
    November 30, 2003Current maturities of
long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    1,185Other short-term debt
    
    
    
    
    
    
    
    
    
    
    84,229$
    
    
    
    $
    
    
    
    $
    85,414
 12




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##### Table of Contents



At November 30, 2004, February 29, 2004 and November 30, 2003, long-term debt consisted of the
following: (In thousands)
    
    November 30, 2004
    
    
    February 29, 2004
    
    
    November 30, 20036.10% Senior Notes,
due July 2028
    
    $
    298,406
    
    
    $
    298,122
    
    
    $
    298,03011.75% Senior Subordinated
Notes, due July 2008
    
    
    10,003
    
    
    
    192,162
    
    
    
    191,9197.00% Convertible
Subordinated
Notes, due July 2006
    
    
    175,000
    
    
    
    175,000
    
    
    
    175,000Other
    
    
    579
    
    
    
    590
    
    
    
    1,790$
    483,988
    
    
    $
    665,874
    
    
    
    666,739Less Current Maturities
    
    
    
    
    
    
    
    
    
    
    1,185$
    483,988
    
    
    $
    665,874
    
    
    $
    665,554
 The 7.00% convertible subordinated notes are convertible at the option of the holders into
shares of the Corporations class A 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. Note 11  Retirement Benefits The components of periodic benefit cost for the Corporations defined benefit pension and
postretirement benefit plans are as follows: Defined Benefit PensionThree Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,(In thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Service cost
    
    $
    185
    
    
    $
    97
    
    
    $
    409
    
    
    $
    292Interest cost
    
    
    1,865
    
    
    
    2,204
    
    
    
    5,557
    
    
    
    5,614Expected return on plan assets
    
    
    (1,422
    )
    
    
    (1,322
    )
    
    
    (4,265
    )
    
    
    (3,962
    )Amortization of prior service cost
    
    
    70
    
    
    
    
    
    
    
    70
    
    
    
    Amortization of actuarial loss
    
    
    27
    
    
    
    
    
    
    
    49
    
    
    
    $
    725
    
    
    $
    979
    
    
    $
    1,820
    
    
    $
    1,944
 Postretirement BenefitThree Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,(In thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Service cost
    
    $
    572
    
    
    $
    575
    
    
    $
    1,828
    
    
    $
    1,525Interest cost
    
    
    1,474
    
    
    
    1,900
    
    
    
    5,916
    
    
    
    5,450Expected return on plan assets
    
    
    (1,323
    )
    
    
    (1,125
    )
    
    
    (3,995
    )
    
    
    (3,375
    )Amortization of prior service cost
    
    
    (1,656
    )
    
    
    (1,690
    )
    
    
    (4,774
    )
    
    
    (4,490
    )Amortization of actuarial loss
    
    
    2,230
    
    
    
    2,590
    
    
    
    5,322
    
    
    
    5,640$
    1,297
    
    
    $
    2,250
    
    
    $
    4,297
    
    
    $
    4,750
 13




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##### Table of Contents



The Medicare Prescription Drug, Improvement and Modernization Act of 2003 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 FSP
106-1 issued on January 12, 2004, the Corporation elected to defer accounting for the effects of
the Act until further authoritative guidance was issued. On May 19, 2004, the FASB issued FSP
106-2. 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 the first
interim or annual period beginning after June 15, 2004. The guidance in FSP 106-2 applies only to the sponsor of a single-employer defined benefit
postretirement health plan for which the employer has concluded that prescription drug benefits
under the plan are actuarially equivalent and thus qualify for the subsidy under the Act and the
expected subsidy will offset or reduce the employers share of the costs of postretirement
prescription drug coverage provided by the plan. The Corporation determined that the prescription
drug benefits under its plan were actuarially equivalent and elected to adopt the provisions of FSP
106-2 at September 1, 2004. As a result, the Corporations APBO was reduced by approximately $6
million, the effects of which are being accounted for prospectively beginning September 1, 2004.
The effect of the adoption of FSP 106-2 on the periodic postretirement benefit cost for the three
and nine months ended November 30, 2004 was a reduction of $0.2 million. The total reduction of
periodic postretirement benefit cost for the year ending February 28, 2005 is expected to be $0.4
million. 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 nine months
ended November 30, 2004 was $2.5 million, compared to $3.4 million in the prior year period. The
profit-sharing plan expense for the nine 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 and nine month
periods ended November 30, 2004 were $1.2 million and $3.5 million ($1.3 million and $3.9 million
for the three and nine month periods ended November 30, 2003), respectively. Note 12  Stock-Based Compensation The Corporation has elected to continue to follow 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. 14




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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 Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income as reported
    
    $
    62,761
    
    
    $
    46,362
    
    
    $
    73,909
    
    
    $
    56,372Deduct: Stock-based compensation
expense determined under fair
value based method, net of tax
    
    
    1,533
    
    
    
    1,527
    
    
    
    4,598
    
    
    
    4,502Pro forma net income
    
    $
    61,228
    
    
    $
    44,835
    
    
    $
    69,311
    
    
    $
    51,870Earnings per share:As reported
    
    $
    0.91
    
    
    $
    0.70
    
    
    $
    1.08
    
    
    $
    0.85Pro forma
    
    
    0.89
    
    
    
    0.67
    
    
    
    1.01
    
    
    
    0.78Earnings per share  assuming dilution:As reported
    
    $
    0.78
    
    
    $
    0.60
    
    
    $
    0.97
    
    
    $
    0.78Pro forma
    
    
    0.77
    
    
    
    0.58
    
    
    
    0.92
    
    
    
    0.72
 During the first quarter of fiscal 2005, 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 nine months ended November 30, 2004. 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 583 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 include the design, manufacture and sale of 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. 15




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##### Table of Contents



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. Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,(In thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Net Sales:Social Expression Products
    
    $
    521,861
    
    
    $
    548,563
    
    
    $
    1,232,587
    
    
    $
    1,274,370Intersegment items
    
    
    (18,868
    )
    
    
    (23,083
    )
    
    
    (51,016
    )
    
    
    (63,364
    )Exchange rate adjustment
    
    
    9,306
    
    
    
    168
    
    
    
    21,089
    
    
    
    (5,797
    )Net
    
    
    512,299
    
    
    
    525,648
    
    
    
    1,202,660
    
    
    
    1,205,209Retail Operations
    
    
    46,908
    
    
    
    56,448
    
    
    
    146,470
    
    
    
    166,910Exchange rate adjustment
    
    
    1,531
    
    
    
    359
    
    
    
    2,148
    
    
    
    (570
    )Net
    
    
    48,439
    
    
    
    56,807
    
    
    
    148,618
    
    
    
    166,340AG Interactive
    
    
    16,239
    
    
    
    8,826
    
    
    
    38,643
    
    
    
    25,773Exchange rate adjustment
    
    
    133
    
    
    
    
    
    
    
    133
    
    
    
    Net
    
    
    16,372
    
    
    
    8,826
    
    
    
    38,776
    
    
    
    25,773Non-reportable segments
    
    
    9,004
    
    

    
    12,421
    
    
    
    22,582
    
    
    
    39,171Unallocated items - net
    
    
    51
    
    
    
    52
    
    
    
    (846
    )
    
    
    (951
    )Consolidated Total
    
    $
    586,165
    
    
    $
    603,754
    
    
    $
    1,411,790
    
    
    $
    1,435,542Segment Earnings:Social Expression Products
    
    $
    106,330
    
    
    $
    136,429
    
    
    $
    260,889
    
    
    $
    263,053Intersegment items
    
    
    (13,926
    )
    
    
    (15,846
    )
    
    
    (37,157
    )
    
    
    (44,905
    )Exchange rate adjustment
    
    
    2,118
    
    
    
    (226
    )
    
    
    3,675
    
    
    
    (1,042
    )Net
    
    
    94,522
    
    
    
    120,357
    
    
    
    227,407
    
    
    
    217,106Retail Operations
    
    
    (6,549
    )
    
    
    (4,290
    )
    
    
    (22,069
    )
    
    
    (13,806
    )Exchange rate adjustment
    
    
    74
    
    
    
    (5
    )
    
    
    85
    

    

    
    (35
    )Net
    
    
    (6,475
    )
    
    
    (4,295
    )
    
    
    (21,984
    )
    
    
    (13,841
    )AG Interactive
    
    
    1
    

    
    
    1,249
    
    
    
    (1,682
    )
    
    
    3,379Exchange rate adjustment
    
    
    (53
    )
    
    
    
    
    
    
    (53
    )
    
    
    Net
    
    
    (52
    )
    
    
    1,249
    
    
    
    (1,735
    )
    
    
    3,379Non-reportable segments
    
    
    (1,863
    )
    
    
    265
    
    
    
    (10,912
    )
    
    
    (1,733
    )Unallocated items - net
    
    
    (20,259
    )
    
    
    (44,256
    )
    
    
    (112,503
    )

    
    
    (118,011
    )Exchange rate adjustment
    
    
    (59
    )
    
    
    17
    
    
    
    (44
    )
    
    
    (70
    )Net
    
    
    (20,318
    )
    
    
    (44,239
    )
    
    
    (112,547
    )
    
    
    (118,081
    )Consolidated Total
    
    $
    65,814
    
    
    $
    73,337
    
    
    $
    80,229
    
    
    $
    86,830
 16




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##### Table of Contents



During the second quarter of 2005, the AG Interactive segment acquired 100% of the equity
interests of MIDIRingTones, LLC and K-MOBILE S.A. The financial results of these two acquisitions
are included in the Corporations consolidated results from their respective dates of acquisition.
The pro forma results of operations have not been presented because the effects of these
acquisitions were not deemed material. MIDIRingTones is a mobile entertainment company that creates, licenses and sells mobile content for
cellular phones including polyphonic ringtones and color graphics. AG Interactive acquired the net
assets of MIDIRingTones valued at approximately $1 million and recorded goodwill of approximately
$3 million. The purchase agreement also provides for an Earn-Out Payment, a contingent payment
based on MIDIRingTones operating results for calendar year 2005. No liability for this contingent
payment is included in the Corporations condensed consolidated financial statements. The Earn-Out
Payment to be paid to the selling stockholders, which is estimated to be $0 to $10
million, will be treated as additional purchase price and recorded as goodwill. K-MOBILE is an established European mobile content provider. AG Interactive issued shares to
acquire the net assets of K-MOBILE valued at approximately $2 million and recorded goodwill of
approximately $17 million. As the K-MOBILE acquisition was a non-cash transaction, it is not
reflected in the Condensed Consolidated Statement of Cash Flows. As a result of AG Interactives
acquisition of K-MOBILE, the Corporations ownership interest in AG Interactive decreased from 92%
to 83%. 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, 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. 17




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##### Table of Contents



The following summarizes the results of discontinued operations for the periods presented: Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,(In thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Net sales
    
    $
    5,307
    
    
    $
    12,871
    
    
    $
    30,965
    
    
    $
    39,030Pretax income from operations
    
    
    1,045
    
    
    
    2,023
    
    
    
    4,816
    
    
    
    5,131Gain on sale
    
    
    35,525
    
    
    
    
    
    
    
    35,525
    
    
    
    36,570
    
    
    
    2,023
    
    
    
    40,341
    
    
    
    5,131Income tax expense
    
    
    14,153
    
    
    
    752
    
    
    
    15,612
    
    
    
    1,986Income from discontinued operations
    
    $
    22,417
    
    
    $
    1,271
    
    
    $
    24,729
    
    
    $
    3,145
 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)
    
    February 29, 2004
    
    
    November 30, 2003Assets of businesses held for sale:Current assets
    
    $
    22,154
    
    
    $
    19,436Other assets
    
    
    7,318
    
    
    
    7,630Fixed assets
    
    
    11,343
    
    
    
    12,138$
    40,815
    
    
    $
    39,204Liabilities of businesses held for sale:Current liabilities
    
    $
    3,722
    
    
    $
    3,587Noncurrent liabilities
    
    
    1,616
    
    
    
    1,459$
    5,338
    
    
    $
    5,046
 Note 15  Termination Benefits During the quarter ended November 30, 2004, the Corporation recorded a severance accrual of $18.5
million related to the overhead reduction program and the Franklin, Tennessee plant closure.
Virtually all of the associates receiving payments will separate from the Corporation during the
quarter ending February 28, 2005. Approximately 70% of the severance will be paid during the next
15 months with the remaining payments extending out an additional 21 months. 18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations Overview During the three months ended November 30, 2004, the Corporation recognized net income of $62.8
million compared to $46.4 million in the prior year quarter. During the quarter, the Corporation
incurred certain charges and recognized certain gains that do not have comparative charges and
gains in the prior year period. First, net sales were reduced approximately $13 million to
recognize the implementation of a new merchandising strategy for seasonal space management. In the
past, the Corporation sold everyday card products on an outright basis to fill seasonal space
during off-season periods. Going forward, the Corporation will improve the overall productivity of
its display space and merchandising workforce by supplying a combination of various card and
non-card programs, all sold with the right of return. The estimated returns will be recorded in
conjunction with the sales recognition, consistent with the Corporations policy on seasonal sales
with full return privileges. The current period net sales reduction represents the estimated
expense for product currently in stores that may now be returned to the Corporation. Second, the Corporation continued its ongoing efforts to reduce overhead costs and drive
efficiencies with the elimination of approximately 300 positions throughout the business. As a
result of this action, the Corporation recorded a charge of $16.6 million, primarily for severance
costs. Third, to leverage the fixed costs of seasonal gift wrap production, the Corporation is
consolidating seasonal gift wrap production into one plant and eliminating approximately 250
full-time equivalent positions with the closure of the Corporations Franklin, Tennessee
manufacturing facility. A charge of $8.2 million was recorded for severance pay, asset disposals
and other costs associated with this action. The Corporation expects an additional $7 million in
charges during the fourth quarter, primarily for the cost to move equipment. The Condensed Consolidated Statement of Operations reflects the above items as follows: (In millions)Net sales (reduction)
    
    $
    13.0Material, labor and other production costs
    
    
    9.2Selling, distribution and marketing
    
    
    6.3Administrative and general
    
    
    9.3Total reduction to pre-tax income
    
    $
    37.8
 Included in the above charges is $18.5 million of severance costs, of which approximately 70% will
be paid during the next fifteen months with the remaining payments extending out an additional 21
months. The prior year quarter included a charge in interest expense of $13.8 million for costs associated
with the repurchase of $63.3 million of 11.75% senior subordinated notes. 19




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##### Table of Contents



During the third quarter, the Corporation sold its Magnivision nonprescription reading glasses
business and recorded a pre-tax gain of $35.5 million. This transaction reflects the Corporations
strategy to focus on resources closely related to its core social expression business.
Accordingly, the results of Magnivision are presented as a discontinued operation for all periods
presented in the Corporations condensed consolidated financial statements. For further
information on the discontinued operations, refer to the notes to the condensed consolidated
financial statements No.14, Discontinued Operations. Cash flow generation remained strong during the third quarter with operating and investing
activities providing $58.6 million. During the nine months ended November 30, 2004, cash flow
provided by operating and investing activities was $138.4 million compared to a usage of $59.1
million in the prior year nine month period. Results of Operations Three months ended November 30, 2004 and 2003 Net income was $62.8 million, or $0.78 per share, in the quarter compared to $46.4 million, or
$0.60 per share, in the prior year third quarter (all per-share amounts assume dilution). The Corporations results for the three months ended November 30, 2004 and 2003 are summarized
below: % Net
    
    
    
    
    
    
    % Net
    
    
    Fav(Dollars in thousands)
    
    2004
    
    
    Sales
    
    
    2003
    
    
    Sales
    
    
    (Unfav)Net sales
    
    $
    586,165
    
    
    
    100.0
    %
    
    $
    603,754
    
    
    
    100.0
    %
    
    
    (2.9
    %)Material, labor and other
production costs
    
    
    292,737
    
    
    
    50.0
    %
    
    
    290,363
    
    
    
    48.1
    %
    
    
    (0.8
    %)Selling, distribution and marketing
    
    
    173,735
    
    
    
    29.6
    %
    
    
    167,362
    
    
    
    27.7
    %
    
    
    (3.8
    %)Administrative and general
    
    
    64,476
    
    
    
    11.0
    %
    
    
    55,564
    
    
    
    9.2
    %
    
    
    (16.0
    %)Interest expense
    
    
    8,744
    
    
    
    1.5
    %
    
    
    30,587
    
    
    
    5.0
    %
    
    
    71.4
    %Other
(income) - net
    
    
    (19,341
    )
    
    
    (3.3
    %)
    
    
    (13,459
    )
    
    
    (2.2
    %)
    
    
    43.7

    %Total costs and expenses
    
    
    520,351
    
    
    
    88.8
    %
    
    
    530,417
    
    
    
    87.8
    %
    
    
    1.9
    %Income from continuing operations
before income tax expense
    
    
    65,814
    
    
    
    11.2
    %
    
    
    73,337
    
    
    
    12.2
    %
    
    
    (10.3
    %)Income tax expense
    
    
    25,470
    
    
    
    4.3
    %
    
    
    28,246
    
    
    
    4.7
    %
    
    
    9.8
    %Income from continuing operations
    
    
    40,344
    
    
    
    6.9
    %
    
    
    45,091
    
    
    
    7.5
    %
    
    
    (10.5
    %)Income from discontinued operations,
net of tax
    
    
    22,417
    
    
    
    3.8
    %
    
    
    1,271
    
    
    
    0.2
    %
    
    
    1,663.7
    %Net income
    
    $
    62,761
    
    
    
    10.7
    %
    
    $
    46,362
    
    
    
    7.7
    %
    
    
    35.4
    %
 20




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##### Table of Contents



For the three months ended November 30, 2004, consolidated net sales were $586.2 million, down
from $603.8 million in the prior year third quarter. This 2.9% decrease was the result of a 4.6%
decline in net sales from ongoing operations partially offset by foreign currency exchange
fluctuations, which improved sales comparisons by 1.7%. The 4.6% decrease was due to the charge
related to the implementation of a new merchandising strategy for seasonal space management, the
continued downward trend in the retail business due to fewer stores and reduced comparative store
sales and reduced sales in the seasonal gift wrap business due to lower Christmas reorder rates.
These decreases were partially offset by growth in the AG Interactive business, formerly
AmericanGreetings.com, due to the two acquisitions in the second quarter. Unit and Pricing Analysis Unit and pricing comparatives for the three months ended November 30, 2004 and 2003 are summarized
below: Increase (Decrease)From the Prior YearEveryday Cards
    
    
    Seasonal Cards
    
    
    Total Greeting Cards2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Unit volume
    
    
    (9.1
    %)
    
    
    14.3
    %
    
    
    9.4
    %
    
    
    9.6
    %
    
    
    (4.0
    %)
    
    
    9.4
    %Selling prices
    
    
    0.4
    %
    
    
    (1.0
    %)
    
    
    (6.6
    %)
    
    
    (11.1
    %)
    
    
    (1.6
    %)
    
    
    (2.3
    %)Overall Increase /
(Decrease)
    
    
    (8.7
    %)
    
    
    13.3
    %
    
    
    2.3
    %
    
    
    (1.5
    %)
    
    
    (5.5
    %)
    
    
    7.1
    %
 The significant decrease in everyday card unit volume in the current year quarter is primarily
due to the reduction of net sales related to the implementation of a new merchandising strategy,
which resulted in the return of everyday product to the Corporation as well as overlapping the
initial load of a new major account in the prior year period. The variances in seasonal card unit
volume and selling prices reflect the impact of general timing differences and varying customer
delivery date requests. As noted in the Corporations second quarter Form 10-Q, the increase in
unit volume and the decrease in selling prices reflect the reversal of the second quarter timing
variances for seasonal product. Expense Overview Material, labor and other production costs for the three months ended November 30, 2004 were $292.7
million, an increase from $290.4 million for the same period in the prior year. As a percentage of
net sales, these costs were 50.0% in the current period compared to 48.1% for the three months
ended November 30, 2003. The 190 basis point increase from the prior year is due to an approximate
240 basis point increase in costs, primarily related to plant closing and severance costs as
previously discussed as well as creative content costs. A favorable business mix partially offset
these increased costs by approximately 50 basis points due primarily to lower sales in the gift
wrap and fixtures businesses and higher sales in the AG Interactive business. Selling, distribution and marketing costs for the three months ended November 30, 2004 were $173.7
million, increasing from the $167.4 million for the same period in the prior year. As a 21




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##### Table of Contents



percentage of net sales, these costs increased from 27.7% for the three months ended November 30,
2003 to 29.6% for the three months ended November 30, 2004. Of
the 190 basis point increase, approximately 230 basis points related to severance costs, increased costs
due to the AG Interactive acquisitions and higher licensing fees (as a result of higher licensing
revenue). These increases were partially offset by an approximately 40 basis point improvement due
to reduced costs in the retail segment stores arising from fewer stores and reduced product
merchandising costs. Administrative and general expenses were $64.5 million for the three months ended November 30,
2004, an increase from $55.6 million for the same period in the prior year. The $8.9 million
increase is due to $8.8 million of severance costs primarily related to the overhead reduction
program that eliminated approximately 300 positions. Interest expense decreased by $21.9 million to $8.7 million for the three months ended November 30,
2004 from $30.6 million for the same period in the prior year. This decrease is due to the
interest savings from the repurchase of $186.2 million of the Corporations 11.75% senior
subordinated notes during the quarter ended May 31, 2004 and the repurchase of $63.6 million of
11.75% senior subordinated notes during the quarter ended November 30, 2003. In addition,
interest expense in the prior year quarter included $13.8 million for a premium payment and the
write-off of deferred financing costs associated with the $63.6 million repurchase. Other income  net increased to $19.3 million for the three months ended November 30, 2004, from
$13.5 million in the same period in the prior year. The $5.8 million improvement included $3.9 million of
incremental royalty revenue and a $3.3 million increase in foreign exchange gains. The effective tax rates for the three months ended November 30, 2004 and 2003 were 38.7% and 38.5%,
respectively. The prior year amount reflected a reduction in the effective tax rate, from 39.7% in
the first six months, as a result of the utilization of net operating loss carryforwards and the
settlement of the Corporations corporate-owned life insurance (COLI) obligations in the second
half of fiscal 2004. 22




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##### Table of Contents



Nine months ended November 30, 2004 and 2003 Net income was $73.9 million, or $0.97 per share, in the nine months ended November 30, 2004,
compared to net income of $56.4 million, or $0.78 per share, in the prior year period. The Corporations results for the nine months ended November 30, 2004 and 2003 are summarized
below: % Net
    
    
    
    
    
    
    % Net
    
    
    Fav(Dollars in thousands)
    
    2004
    
    
    Sales
    
    
    2003
    
    
    Sales
    
    
    (Unfav)Net sales
    
    $
    1,411,790
    
    
    
    100.0
    %
    
    $
    1,435,542
    
    
    
    100.0
    %
    
    
    (1.7
    %)Material, labor and other
production costs
    
    
    661,069
    
    
    
    46.8
    %
    
    
    665,080
    
    
    
    46.3
    %
    
    
    0.6
    %Selling, distribution and marketing
    
    
    466,690
    
    
    
    33.1
    %
    
    
    463,773
    
    
    
    32.3
    %
    
    
    (0.6
    %)Administrative and general
    
    
    186,118
    
    
    
    13.2
    %
    
    
    174,511
    
    
    
    12.2
    %
    
    
    (6.7
    %)Interest expense
    
    
    70,601
    
    
    
    5.0
    %
    
    
    70,924
    
    
    
    5.0
    %
    
    
    0.5
    %Other
(income) - net
    
    
    (52,917
    )
    
    
    (3.8
    %)
    
    
    (25,576
    )
    
    
    (1.8
    %)
    
    
    106.9
    %Total costs and deductions
    
    
    1,331,561
    
    
    
    94.3
    %
    
    
    1,348,712
    
    
    
    94.0
    %
    
    
    1.3
    %Income from continuing operations
before income tax expense
    
    
    80,229
    
    
    
    5.7
    %
    
    
    86,830
    
    
    
    6.0
    %
    
    
    (7.6
    %)Income tax expense
    
    
    31,049
    
    
    
    2.2
    %
    
    
    33,603
    
    
    
    2.3
    %
    
    
    7.6
    %Income from continuing operations
    
    
    49,180
    
    
    
    3.5
    %
    
    
    53,227
    
    
    
    3.7
    %
    
    
    (7.6
    %)Income from discontinued operations,
net of tax
    
    
    24,729
    
    
    
    1.7
    %
    
    
    3,145
    
    
    
    0.2
    %
    
    
    686.3
    %Net income
    


    $
    73,909
    
    
    
    5.2
    %
    
    $
    56,372
    
    
    
    3.9
    %
    
    
    31.1
    %
 For the nine months ended November 30, 2004, consolidated net sales were $1,412 million, down
from $1,436 million in the same period in the prior year. This 1.7% decrease was the result of a
3.7% decline in net sales from ongoing operations offset by foreign currency exchange fluctuations,
which improved sales comparisons by 2.1%. The 3.7% decrease was due to the reduction in net sales
related to the implementation of a new merchandising strategy for seasonal space management, the
continued downward trend in the retail business due to fewer stores and reduced comparative store
sales, reduced order sales in the seasonal gift wrap business due to lower Christmas order rates,
the decline in the display fixtures business due to lower sales to unrelated customers and
decreased sales of everyday cards primarily due to the overlap of the gains from a new major
customer acquired in the prior year third quarter. Sales in the AG Interactive segment increased
due to the two acquisitions in the second quarter. 23




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##### Table of Contents



Unit and Pricing Analysis Unit and pricing comparatives for the nine months ended November 30, 2004 and 2003 are summarized
below: Increase (Decrease)From the Prior YearEveryday Cards
    
    
    Seasonal Cards
    
    
    Total Greeting Cards2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Unit volume
    
    
    (3.5
    %)
    
    
    4.9
    %
    
    
    1.5
    %
    
    
    (4.4
    %)
    
    
    (2.3
    %)
    
    
    1.3
    %Selling prices
    
    
    (0.6
    %)
    
    
    (0.9
    %)
    
    
    (1.6
    %)
    
    
    (3.1
    %)
    
    
    (0.7
    %)
    
    
    (1.5
    %)Overall Increase /
(Decrease)
    
    
    (4.1
    %)
    
    
    4.0
    %
    
    
    (0.1
    %)
    
    
    (7.5
    %)
    
    
    (3.0
    %)
    
    
    (0.2
    %)
 Expense Overview Material, labor and other production costs for the nine months ended November 30, 2004 were $661.1
million, a decrease from $665.1 million for the same period in the prior year. As a percentage of
net sales, these costs were 46.8% in the current period and 46.3% for the nine months ended
November 30, 2003. Of the 50 basis point increase, approximately 120 basis points related to an
increase in costs, resulting primarily from plant closing and severance costs as previously
discussed as well as creative content costs. A favorable business mix partially offset these
increased costs by approximately 70 basis points due primarily to lower sales in the gift wrap and fixtures businesses and higher sales in the AG
Interactive business. Selling, distribution and marketing costs for the nine months ended November 30, 2004 were $466.7
million, up from the $463.8 million for the same period in the prior year. As a percentage of net
sales, these costs increased from 32.3% for the nine months ended November 30, 2003 to 33.1% for
the nine months ended November 30, 2004. Of the 80 basis point increase, approximately 150 basis
points related to severance costs, increased costs due to AG Interactive acquisitions and higher
licensing fees (as a result of higher licensing revenue). These increases were partially offset by
an approximately 70 basis point improvement due to reduced costs in the retail segment stores
arising from fewer stores and reduced product merchandising costs. Administrative and general expenses were $186.1 million for the nine months ended November 30,
2004, an increase from $174.5 million for the same period in the prior year. The $11.6 million
increase is due to severance expense and reduced benefits related to the wind-down of the COLI
program. Interest expense of $70.6 million for the nine months ended November 30, 2004 was flat compared to
$70.9 million for the same period in the prior year. The prior year expense included $4.6 million
for the write-off of deferred financing fees and a premium payment associated with the
extinguishment of the $118.0 million term loan during the quarter ended May 31, 2003, and $13.8
million for a premium payment and the write-off of deferred financing costs associated with the
repurchase of $63.6 million of 11.75% senior subordinated notes during the quarter ended November
30, 2003. The current year expense includes $39.1 24




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##### Table of Contents



million associated with the repurchase of $186.2 million of the Corporations 11.75% senior
subordinated notes during the quarter ended May 31, 2004, offset by interest savings of $19.0
million related to the debt reductions. Other income  net increased to $52.9 million for the nine months ended November 30, 2004, from
$25.6 million in the same period in the prior year. The $27.3 million improvement included the
receipt of a one-time payment of $10.0 million as a result of the Corporation substantially
modifying certain agreements related to its licensing activities, increased royalty revenue of $9.5
million, a foreign exchange improvement of $5.3 million and a $3.1 million gain on the sale of an
investment in the current year. The effective tax rate for the nine months ended November 30, 2004 and 2003 was 38.7%. 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 583 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. 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
    
    
    
    
    
    
    Nine Months EndedNovember 30,
    
    
    
    
    
    
    November 30,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    % ChangeNet sales
    
    $
    502,993
    
    
    $
    525,480
    
    
    
    (4.3
    %)
    
    $
    1,181,571
    
    
    $
    1,211,006
    
    
    
    (2.4
    %)Segment earnings
    
    
    92,404
    
    
    
    120,583
    
    
    
    (23.4
    %)
    
    
    223,732
    
    
    
    218,148
    
    
    
    2.6
    %
 Net sales of the Social Expression Products segment excluding the impact of foreign exchange
and intersegment items, for the three months ended November 30, 2004, decreased $22.5 million or
4.3% from the same period in the prior year. This decrease was due to the reduction in net sales
related to the implementation of a new merchandising strategy for seasonal space management,
reduced sales in the seasonal gift wrap business due to lower Christmas order rates, and lower
sales in the international greeting card businesses. For the nine months ended November 30, 2004,
net sales decreased $29.4 25




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##### Table of Contents



million or 2.4% from the prior year period. This decrease is primarily related to reduced order
rates in the seasonal gift wrap business, decreased sales of everyday cards primarily due to the
overlap of the gains from a new major customer acquired in the prior year third quarter and the
reduction in net sales related to the implementation of a new merchandising strategy for seasonal
space management. Segment earnings excluding the impact of foreign exchange and intersegment items for the three
months ended November 30, 2004, decreased $28.2 million compared to the prior year period. These
results include $32.3 million for the impact of the implementation of the new merchandising strategy
for seasonal space management, severance costs and plant closure costs, partially offset by lower
field service costs related to the prior year integration of a new major customer and higher
royalty income. Segment earnings during the nine months ended November 30, 2004, improved $5.6
million compared to the prior year period. This improvement is primarily the result of higher
licensing income, lower bad debt expense, reduced costs of implementing supply chain improvements,
and lower field service costs related to the prior year integration of a new major customer,
substantially offset by the impact of the implementation of the new merchandising strategy for
seasonal space management, severance costs and plant closure costs. Retail Operations Segment Three Months Ended
    
    
    
    
    
    
    Nine Months EndedNovember 30,
    
    
    
    
    
    
    November 30,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    % ChangeNet sales
    
    $
    46,908
    
    
    $
    56,448

    
    
    
    (16.9
    %)
    
    $
    146,470
    
    
    $
    166,910
    
    
    
    (12.2
    %)Segment earnings
    
    
    (6,549
    )
    
    
    (4,290
    )
    
    
    (52.7
    %)
    
    
    (22,069
    )
    
    
    (13,806
    )
    
    
    (59.9
    %)
 Net sales excluding the impact of foreign exchange in the Retail Operations segment decreased
$9.5 million or 16.9% as same-store sales decreased 10.4% for the three months ended November 30,
2004 compared to the same period in the prior year. The average number of stores was
approximately 5.0% less than in the prior year quarter. For the nine months ended November 30,
2004, net sales decreased $20.4 million or 12.2% as same-store sales decreased 8.8% compared to the
same period in the prior year. This decrease was due to decreased sales across product categories,
particularly gifting product as this category was de-emphasized. The average number of stores
during the nine month period ended November 30, 2004, was approximately 4.8% less than in the prior
year period. Segment earnings excluding the impact of foreign exchange was a loss of $6.5 million in the three
months ended November 30, 2004, compared to a loss of $4.3 million in the three months ended
November 30, 2003. For the nine months ended November 30, 2004, segment earnings was a loss of
$22.1 million, compared to a loss of $13.8 million in the prior year period. The increased loss is
mainly due to lower net sales, partially offset by savings in operating expenses, mainly store rent
and payroll, due to operating efficiencies and fewer stores. For the nine month period, markdowns
to reduce inventory levels were, as a percent to sales, 1.7 percentage points higher than in the
prior year period. 26




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##### Table of Contents



AG Interactive Segment Three Months Ended
    
    
    
    
    
    
    Nine Months EndedNovember 30,
    
    
    
    
    
    
    November 30,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    % Change
    
    
    2004
    
    
    2003
    
    
    % ChangeNet sales
    
    $
    16,239
    
    
    $
    8,826
    
    
    
    84.0
    %
    
    $
    38,643
    
    
    $
    25,773
    
    
    
    49.9
    %Segment earnings
    
    
    1
    
    
    
    1,249
    
    
    
    (99.9
    %)
    
    
    (1,682
    )
    
    
    3,379
    
    
    
    (149.8
    %)
 Net sales of AG Interactive increased $7.4 million for the three months ended November 30,
2004, compared to the same period in the prior year. For the nine months ended November 30, 2004,
net sales increased $12.9 million compared to the same period in
the prior year. These substantial increases are the result of business acquisitions within the AG Mobile wireless
division during the second quarter and higher subscription revenue. Segment earnings decreased $1.2 million and $5.1 million for the three months and nine months ended
November 30, 2004, respectively, compared to the prior year periods as the impact of sales
increases were offset by acquisition costs, higher technology costs and the cost 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 Condensed Consolidated Statement
of Financial Position for November 30, 2003 has been included. During the nine months ended November 30, 2004, the Corporation continued its efforts to enhance
its financial position and as a result, generated cash from operating and investing activities of
$138.4 million, including $77.0 million for the sale of its Magnivision business. With the early
retirement of $186.2 million of debt, the Corporation improved its debt to total capital ratio from
34.4% to 25.9% during the nine month period. Total debt less cash at November 30, 2004 was $262.2
million, compared to $699.3 million at November 30, 2003. Operating Activities Operating activities provided $53.8 million in cash during the nine months ended November 30, 2004,
compared to using $50.1 million of cash in the same period in the prior year. Accounts receivable used $169.3 million of cash from February 29, 2004, compared to a use of $151.4
million in the same period in the prior year. The prior year used less cash due to improvements in
the cash collection process during fiscal 2004. As a percentage of the prior twelve months net
sales, net accounts receivable were 21.5% at November 30, 2004, compared to 23.1% at November 30,
2003, reflecting continued improved collections. Inventory was a use of $19.9 million from February 29, 2004, compared to a use of $19.8 million in
the same period in the prior year. Compared to the prior year, higher inventories in the greeting
card business, due to lower sales, were offset by lower display fixture inventory in the current
year related to the integration of a new major customer in the prior year and lower inventory
levels in the Retail Operations segment due to less stores. 27




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##### Table of Contents



Other current assets were a source of $9.0 million in cash from February 29, 2004, compared to a
source of $27.6 million in the same period in the prior year. The difference relates to the prior year tax
refund of estimated payments and COLI benefits due to policy surrenders made in the prior year. Deferred costs - net represents payments under agreements with retailers net of the related
amortization of those payments. During the nine months ended November 30, 2004, amortization
exceeded payments by $98.3 million; in the nine months ended November 30, 2003, amortization
exceeded payments by $25.7 million. The current year amount reflects a lower level of payments for
new or amended contracts as well as a lower level of payments due on existing contracts compared to
the prior year nine 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 source of $21.8 million during the nine months ended
November 30, 2004, compared to a use of $28.8 million in the prior year period. The increase from
the prior year is due to increased trade payables, severance and income tax accruals and
approximately $24 million of state income tax payments related to the Corporations liability
associated with its COLI program in the prior year. Investing Activities Investing activities provided $84.6 million in cash during the nine months ended November 30, 2004,
compared to using $9.1 million in the same period in the prior year. The increase of $93.7 million
is primarily due to the proceeds received from the sale of the Magnivision business of $77.0
million and the sale of the marketable security investment of $19.1 million. Included in investing
activities in the current year is a payment of $3.8 million related to the MIDIRingTones, LLC
acquisition. As the K-MOBILE acquisition was a non-cash transaction, it is not reflected
in the Condensed Consolidated Statement of Cash Flows. Financing Activities Financing activities used $202.9 million of cash during the nine months ended November 30, 2004,
compared to $105.8 million in the same period in the prior year. The current year amount relates
primarily to the repurchase of the Corporations 11.75% senior subordinated notes in the first
quarter and the prior year amount relates primarily to the early retirement of the Corporations
term loan in the first quarter and the repurchase of the Corporations 11.75% senior subordinated
notes in the third quarter. Stock activity also provided and used a significant amount of cash during the current year nine
months. There was a high amount of employee option exercises due to a tranche of options nearing
their expiration date. The receipt by the Corporation of the strike price on these options
provided approximately $36 million during the nine months. In addition, in accordance with its
articles of incorporation, the Corporation repurchased shares, primarily B shares, at a cost of
approximately $18 million into its Treasury. 28




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During the quarter ended November 30, 2004, the Corporation paid a quarterly dividend of $0.06 per
common share, which totaled $4.1 million. Credit Sources Substantial credit sources are available to the Corporation. In total, the Corporation had
available sources of approximately $400 million at November 30, 2004. 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 November 30, 2004. 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. 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 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 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 was amended on August 2, 2004, to extend
the maturity date to August 1, 2007. 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 $39.1 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 November 30, 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. 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 November 30, 2004, the
end of its latest fiscal quarter and the date of the most recent balance sheet included in this
report, nor from November 30, 2003, the end of the corresponding fiscal quarter last year, to
November 30, 2004, 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. 29




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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. Forward-looking statements are generally identified by words such as believes,
anticipates, expects, plans, should, estimates and similar expressions. These
forward-looking statements involve risks and uncertainties. Actual results may differ materially
from those projected in the forward-looking statements. Factors that could cause actual results
to differ materially from those stated or implied in the
Corporations forward-looking statements, include but
are not limited to: 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 and the Corporations ability to comply
with its debt covenants. Risks pertaining specifically to the
Corporations AG Interactive business
segment include the viability of online advertising and subscriptions as revenue generators and the
publics acceptance of online greetings and other social expression products. 30




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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 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 November 30, 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. 
 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 Chief
Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. 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 Chief Financial Officer, to evaluate the effectiveness of the design and operation of the
Corporations disclosure controls and procedures. Based on the foregoing, the Corporations Chief
Executive Officer and Chief Financial Officer concluded that the Corporations disclosure controls
and procedures were effective at a reasonable assurance level as of the end of the period covered
by this report. There has been no change in the Corporations internal controls 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 controls over financial reporting. 31




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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) Non-employee directors of the Corporation receive annual retainer fees together with fees for
each Board or committee meeting attended. Pursuant to the 1995 Director Stock Plan, non-employee
directors may make an election prior to the beginning of each fiscal year to receive the
Corporations Class A and/or Class B common shares in lieu of all or a portion of the fees due to
such Director as compensation for serving on the Corporations Board of Directors. For purposes of
determining the number of shares to be issued in lieu of such fees, the shares are valued based on
the closing price of the Class A common shares on the last trading day of the calendar quarter
prior to the payment of such fees. On September 3, 2004, the Corporation issued an aggregate of 253 Class A common shares and 2,796
Class B common shares from treasury in lieu of approximately $70,676 in cash fees due to six of the
Corporations non-employee directors who previously elected to receive shares in lieu of cash fees.
The shares were issued at a price of $23.18 per share, the closing price of the Class A common
shares as of June 30, 2004. During the three year period ended November 30, 2004, the Corporation
issued an aggregate of 1,815 Class A common shares and 31,271 Class B common shares from treasury
in lieu of approximately $584,300 in cash fees due to those non-employee directors who
previously elected to receive shares in lieu of cash fees. There is no public market for the Class B common shares of the Corporation. Pursuant to the
Corporations Amended Articles of Incorporation, each Class B common share is convertible at the
option of the holder to one Class A common share; provided, however, that the holder must first
tender the Class B common share to the Corporation pursuant to its right of first refusal to
repurchase the share at the then market value for the Class A common shares. Class B common shares may
only be transferred by the holder to the Corporation or certain permitted transferees, a group
which generally includes members of the holders extended family, family trusts and certain
charities. The foregoing transactions were exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933 in that the transactions were not conducted for the purpose of raising capital and
involved private placements of securities solely to directors of the Corporation who are accredited
investors. (b) Not applicable 32




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(c) The following table provides information with respect to purchases of common stock of the
Corporation made during the three months ended November 30, 2004, by American Greetings
Corporation. TotalNumber of
    
    
    MaximumShares
    
    
    Number ofPurchased
    
    
    Shares thatas Part of
    
    
    May Yet BeAverage Price
    
    
    Publicly
    
    
    PurchasedTotal Number of
    
    
    
    Paid per
    
    
    Announced
    
    
    Under thePeriod
    
    
    Shares Repurchased
    
    
    
    Share
    
    
    Plans
    
    
    PlansSeptember 2004
    
    
    Class B 
    
    
    
    307,776
    (1)
    
    
    $25.32
    
    
    
    
    
    October 2004
    
    
    Class B 
    
    
    
    4,500
    (1)
    
    
    $25.54
    
    
    
    
    
    November 2004
    
    
    Class B 
    
    
    
    36,336
    (1)
    
    
    $27.28
    
    
    
    
    
    Total
    
    
    Class B 
    
    
    
    348,612
    (1)
    
    
    $25.53
    
    
    
    
    
    
 (1) All of the Class B common shares were repurchased by the Corporation for cash pursuant to
its right of first refusal to repurchase Class B common shares set forth in the Corporations Amended
Articles of Incorporation. The Corporations senior secured revolving credit facility allows payments of shareholder dividends
up to a maximum of $20 million per year. 
 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 
 Item 6. Exhibits Exhibits required by Item 601 of Regulation S-K (10)  Supplemental Executive Retirement Plan (As Amended and Restated Effective March 1, 2004) (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
Section 906 of the Sarbanes-Oxley Act of 2002 33




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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 January 7, 2005 (Signing on behalf of Registrant as a duly authorized officer of Registrant and signing as the
principal accounting officer of Registrant.) 34