##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended August 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-13859
 AMERICAN GREETINGS CORPORATION
  Ohio
    
    34-0065325(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)One American Road, Cleveland, Ohio
    
    44144(Address of principal executive offices)
    
    (Zip Code)
 (216) 252-7300
 
  Yes þ No o
 Yes þ No o
 Yes o No þ
  Class A Common
    
    61,496,467Class B Common
    
    4,221,126




---



AMERICAN GREETINGS CORPORATION
INDEX
 PART
I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition
and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEXHIBITSExhibit 10.1 Executive Deferred Comp PlanExhibit 10.2 Amendment 1 to Executive Deferred Comp PlanExhibit 10.3 Amendment 2 to Executive Deferred Comp PlanExhibit 10.4 Amendment 3 to Executive Deferred Comp PlanExhibit 10.5 Form of Agreement for Deferred Comp benefitsExhibit 10.6 Form of Agrmt Under Amend 3 to Exec Deferred CompExhibit 10.7 Performance Share Grant Agreement/Zev WeissExhibit 10.8 Performance Share Grant Agreement/Jeffrey WeissExhibit 31(a) Section 302 Certification of CEOExhibit 31(b) Section 302 Certification of CFOExhibit 32 Section 906 Certification of CEO and CFO




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
 (Thousands of dollars except share and per share amounts)
 (Unaudited)Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    387,556
    
    
    $
    392,084
    
    
    $
    830,832
    
    
    $
    825,625Costs and expenses:Material, labor and other production costs
    
    
    176,316
    
    
    
    186,717
    
    
    
    356,789
    
    
    
    368,332Selling, distribution and marketing
    
    
    147,328
    
    
    
    146,303
    
    
    
    302,602
    
    
    
    292,955Administrative and general
    
    
    58,970
    
    
    
    57,505
    
    
    
    122,098
    
    
    
    121,642Interest expense
    
    
    8,587
    
    
    
    9,163
    
    
    
    18,269
    
    
    
    61,857Other income
 net
    
    
    (11,932
    )
    
    
    (17,230
    )
    
    
    (20,303
    )
    
    
    (33,576
    )Total costs and expenses
    
    
    379,269
    
    
    
    382,458
    
    
    
    779,455
    
    
    
    811,210Income from continuing operations
before income tax expense
    
    
    8,287
    
    
    
    9,626
    
    
    
    51,377
    
    
    
    14,415Income tax expense
    
    
    5,046
    
    
    
    3,726
    
    
    
    21,722
    
    
    
    5,579Income from continuing operations
    
    
    3,241
    
    
    
    5,900
    
    
    
    29,655
    
    
    
    8,836Income from discontinued operations, net of
tax
    
    
    
    
    
    
    1,010
    
    
    
    
    
    
    
    2,312Net income
    
    $
    3,241
    
    
    $
    6,910
    
    
    $
    29,655
    
    
    $
    11,148Earnings
per share  basic:Income from continuing operations
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    0.44
    
    
    $
    0.13Income from discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.03Net income
    
    $
    0.05
    
    
    $
    0.10
    
    
    $
    0.44
    
    
    $
    0.16Earnings
per share  assuming dilution:Income from continuing operations
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    0.41
    
    
    $
    0.13Income from discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.03Net income
    
    $
    0.05
    
    
    $
    0.10
    
    
    $
    0.41
    
    
    $
    0.16Average number of common shares outstanding
    
    
    67,101,944
    
    
    
    68,418,773
    
    
    
    67,848,865
    
    
    
    68,209,732Average
number of common shares outstanding 
assuming dilution
    
    
    67,913,912
    
    
    
    69,265,799
    
    
    
    81,240,972
    
    
    
    69,057,063Dividends declared per share
    
    $
    0.08
    
    
    $
    
    
    
    $
    0.16
    
    
    $
    
  3




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##### Table of Contents



AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
 (Thousands of dollars)
 (Unaudited)
    
    
    (Note 1)
    
    
    (Unaudited)August 31, 2005
    
    
    February 28, 2005
    
    
    August 31, 2004ASSETSCurrent assetsCash and cash equivalents
    
    $
    163,807
    
    
    $
    250,267
    
    
    $
    152,763Short-term investments
    
    
    208,750
    
    
    
    208,740
    
    
    
    Trade accounts receivable, net
    
    
    172,020
    
    
    
    188,987
    
    
    
    232,054Inventories
    
    
    296,133
    
    
    
    222,874
    
    
    
    308,977Deferred and refundable income taxes
    
    
    176,265
    
    
    
    193,497
    
    
    
    152,143Assets of businesses held for sale
    
    
    
    
    
    
    
    
    
    
    40,390Prepaid expenses and other
    
    
    219,244
    
    
    
    204,253
    
    
    
    218,931Total current assets
    
    
    1,236,219
    
    
    
    1,268,618
    
    
    
    1,105,258Goodwill
    
    
    260,276
    
    
    
    270,057
    
    
    
    231,886Other assets
    
    
    603,757
    
    
    
    644,140
    
    
    
    628,619Property,
plant and equipment  at cost
    
    
    976,308
    
    
    
    995,281
    
    
    
    992,348Less accumulated depreciation
    
    
    657,361
    
    
    
    653,889
    
    
    
    652,049Property,
plant and equipment  net
    
    
    318,947
    
    
    
    341,392
    
    
    
    340,299$
    2,419,199
    
    
    $
    2,524,207
    
    
    $
    2,306,062LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    132,978
    
    
    $
    143,041
    
    
    $
    150,513Accrued liabilities
    
    
    118,980
    
    
    
    118,090
    
    
    
    101,951Accrued compensation and benefits
    
    
    76,933
    
    
    
    96,789
    
    
    
    65,891Income taxes
    
    
    21,462
    
    
    
    38,777
    
    
    
    15,012Liabilities of businesses held for sale
    
    
    
    
    
    
    
    
    
    
    4,462Other current liabilities
    
    
    116,564
    
    
    
    79,549
    
    
    
    68,201Total current liabilities
    
    
    466,917
    
    
    
    476,246
    
    
    
    406,030Long-term debt
    
    
    476,222
    
    
    
    486,099
    
    
    
    483,876Other liabilities
    
    
    121,467
    
    
    
    137,868
    
    
    
    105,480Deferred income taxes
    
    
    37,077
    
    
    
    37,214
    
    
    
    27,427Shareholders EquityCommon shares  Class A
    
    
    62,170
    
    
    
    64,867
    
    
    
    64,022Common shares  Class B
    
    
    4,221
    
    
    
    4,160
    
    
    
    4,603Capital in excess of par value
    
    
    391,174
    
    
    
    368,777
    
    
    
    348,474Treasury stock
    
    
    (536,249
    )
    
    
    (445,618
    )
    
    
    (435,107
    )Accumulated other comprehensive income
    
    
    12,853
    
    
    
    29,039
    
    
    
    10,325Retained earnings
    
    
    1,383,347
    
    
    
    1,365,555
    
    
    
    1,290,932Total shareholders equity
    
    
    1,317,516
    
    
    
    1,386,780
    
    
    
    1,283,249$
    2,419,199
    
    
    $
    2,524,207
    
    
    $
    2,306,062
  4




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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 (Thousands of dollars)
 (Unaudited)Six Months EndedAugust 31,2005
    
    
    2004OPERATING ACTIVITIES:Net income
    
    $
    29,655
    
    
    $
    11,148Income from discontinued operations
    
    
    
    
    
    
    2,312Income from continuing operations
    
    
    29,655
    
    
    
    8,836Adjustments to reconcile to net cash provided by operating activities:Gain on sale of investment
    
    
    
    
    
    
    (3,095
    )Loss on sale of fixed assets
    
    
    1,628
    
    
    
    1,127Loss on extinguishment of debt
    
    
    863
    
    
    
    39,056Depreciation and amortization
    
    
    28,426
    
    
    
    28,321Deferred income taxes
    
    
    25,773
    
    
    
    (5,787
    )Other non-cash charges
    
    
    1,749
    
    
    
    1,038Changes in operating assets and liabilities, net of acquisitions:Decrease (increase) in trade accounts receivable
    
    
    11,685
    
    
    
    (238
    )Increase in inventories
    
    
    (75,697
    )
    
    
    (72,229
    )(Increase) decrease in other current assets
    
    
    (17,865
    )
    
    
    8,590Decrease in deferred costs  net
    
    
    52,774
    
    
    
    71,006(Decrease) increase in accounts payable and other liabilities
    
    
    (29,901
    )
    
    
    2,358Other  net
    
    
    4,580
    
    
    
    2,672Cash Provided by Operating Activities
    
    
    33,670
    
    
    
    81,655INVESTING ACTIVITIES:Proceeds from sale of short-term investments
    
    
    1,070,480
    
    
    
    Purchases of short-term investments
    
    
    (1,070,490
    )
    
    
    Property, plant and equipment additions
    
    
    (18,780
    )
    
    
    (15,019
    )Proceeds from sale of fixed assets
    
    
    7,369
    
    
    
    115Cash payments for business acquisitions
    
    
    
    
    
    
    (3,894
    )Investment in corporate owned life insurance
    
    
    (2,219
    )
    
    
    (2,861
    )Other  net
    
    
    (5,893
    )
    
    
    19,783Cash Used by Investing Activities
    
    
    (19,533
    )
    
    
    (1,876
    )FINANCING ACTIVITIES:Reduction of long-term debt
    
    
    (10,782
    )
    
    
    (216,417
    )Sale of stock under benefit plans
    
    
    21,302
    
    
    
    18,739Purchase of treasury shares
    
    
    (98,026
    )
    
    
    (9,363
    )Dividends to shareholders
    
    
    (10,906
    )
    
    
    Cash Used by Financing Activities
    
    
    (98,412
    )
    
    
    (207,041
    )CASH USED BY DISCONTINUED OPERATIONS
    
    
    
    
    
    
    (2,789
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (2,185
    )
    
    
    (2,636
    )DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (86,460
    )
    
    
    (132,687
    )Cash and Cash Equivalents at Beginning of Year
    
    
    250,267
    
    
    
    285,450Cash and Cash Equivalents at End of Period
    
    $
    163,807
    
    
    $
    152,763
  5




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AMERICAN GREETINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Three and Six Months Ended August 31, 2005 and 2004
 Note 1  Basis of Presentation
    Note 2  Seasonal Nature of Business
  6




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Note 3  Recent Accounting Pronouncements
   Note 4  Other Income  Net
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,(In thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Royalty revenue
    
    $
    (9,481
    )
    
    $
    (1,408
    )
    
    $
    (15,160
    )
    
    $
    (11,891
    )Foreign exchange (gain) loss
    
    
    (720
    )
    
    
    (112
    )
    
    
    519
    
    
    
    (417
    )Interest income
    
    
    (2,694
    )
    
    
    (1,530
    )
    
    
    (5,334
    )
    
    
    (2,236
    )Gain on sale of investment
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (3,095
    )Other
    
    
    963
    
    
    
    (14,175
    )
    
    
    (328
    )
    
    
    (15,937
    )$
    (11,932
    )
    
    $
    (17,230
    )
    
    $
    (20,303
    )
    
    $
    (33,576
    )
  7




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Note 5  Earnings Per Share
  Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator (in thousands):Income from continuing operations
    
    $
    3,241
    
    
    $
    5,900
    
    
    $
    29,655
    
    
    $
    8,836Add back  interest on convertible subordinated
notes, net of tax
    
    
    
    
    
    
    
    
    
    
    3,750
    
    
    
    Income from continuing operations
    
    $
    3,241
    
    
    $
    5,900
    
    
    $
    33,405
    
    
    $
    8,836Denominator (in thousands):Weighted average shares outstanding
    
    
    67,102
    
    
    
    68,419
    
    
    
    67,849
    
    
    
    68,210Effect of dilutive securities:Convertible debt
    
    
    
    
    
    
    
    
    
    
    12,591
    
    
    
    Stock options and other
    
    
    812
    
    
    
    847
    
    
    
    801
    
    
    
    847Weighted average shares outstanding 
assuming dilution
    
    
    67,914
    
    
    
    69,266
    
    
    
    81,241
    
    
    
    69,057Income from continuing operations per share
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    0.44
    
    
    $
    0.13Income from continuing operations
per share  assuming dilution
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    0.41
    
    
    $
    0.13
  Note 6  Comprehensive Income
  (In thousands)
    
    Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    3,241
    
    
    $
    6,910
    
    
    $
    29,655
    
    
    $
    11,148Other comprehensive (loss) income:Foreign currency translation adjustments
    
    
    (2,043
    )
    
    
    (3,519
    )
    
    
    (16,187
    )
    
    
    (10,566
    )Unrealized gains on securities
    
    
    2
    
    
    
    253
    
    
    
    1
    
    
    
    253Total comprehensive income
    
    $
    1,200
    
    
    $
    3,644
    
    
    $
    13,469
    
    
    $
    835
 8




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Note 7  Trade Accounts Receivable, Net
  (In thousands)
    
    August 31, 2005
    
    
    February 28, 2005
    
    
    August 31, 2004Allowance for seasonal
sales returns
    
    $
    39,595
    
    
    $
    94,672
    
    
    $
    39,329Allowance for doubtful accounts
    
    
    17,255
    
    
    
    16,684
    
    
    
    17,398Allowance for cooperative
advertising and marketing
funds
    
    
    28,394
    
    
    
    30,288
    
    
    
    20,295Allowance for rebates
    
    
    46,077
    
    
    
    50,638
    
    
    
    44,570$
    131,321
    
    
    $
    192,282
    
    
    $
    121,592
 Note 8  Inventories
 (In thousands)
    
    August 31, 2005
    
    
    February 28, 2005
    
    
    August 31, 2004Raw materials
    
    $
    33,320
    
    
    $
    23,241
    
    
    $
    38,142Work in process
    
    
    23,502
    
    
    
    19,719
    
    
    
    25,792Finished products
    
    
    291,687
    
    
    
    228,088
    
    
    
    286,454348,509
    
    
    
    271,048
    
    
    
    350,388Less LIFO reserve
    
    
    77,444
    
    
    
    75,890
    
    
    
    70,606271,065
    
    
    
    195,158
    
    
    
    279,782Display materials and
factory supplies
    
    
    25,068
    
    
    
    27,716
    
    
    
    29,195Inventories
    
    $
    296,133
    
    
    $
    222,874
    
    
    $
    308,977
  Note 9  Deferred Costs
  9




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(In thousands)
    
    August 31, 2005
    
    
    February 28, 2005
    
    
    August 31, 2004Prepaid expenses and other
    
    $
    161,689
    
    
    $
    156,665
    
    
    $
    169,770Other assets
    
    
    540,121
    
    
    
    582,401
    
    
    
    568,247Deferred cost assets
    
    
    701,810
    
    
    
    739,066
    
    
    
    738,017Other current liabilities
    
    
    (96,653
    )
    
    
    (65,944
    )
    
    
    (52,621
    )Other liabilities
    
    
    (80,905
    )
    
    
    (95,452
    )
    
    
    (67,549
    )Deferred cost liabilities
    
    
    (177,558
    )
    
    
    (161,396
    )
    
    
    (120,170
    )Net deferred costs
    
    $
    524,252
    
    
    $
    577,670
    
    
    $
    617,847
 Note 10  Debt
   10




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(In thousands)
    
    August 31, 2005
    
    
    February 28, 2005
    
    
    August 31, 20046.10% Senior Notes, due 2028
    
    $
    298,703
    
    
    $
    298,503
    
    
    $
    298,31011.75% Senior Subordinated
Notes, due 2008
    
    
    
    
    
    
    10,016
    
    
    
    9,9907.00% Convertible Subordinated
Notes, due 2006
    
    
    175,000
    
    
    
    175,000
    
    
    
    175,000Other (due 2007-2011)
    
    
    2,519
    
    
    
    2,580
    
    
    
    576$
    476,222
    
    
    $
    486,099
    
    
    $
    483,876
 11




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Note 11  Retirement Benefits
  Defined Benefit PensionThree Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,(In thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    128
    
    
    $
    112
    
    
    $
    256
    
    
    $
    224Interest cost
    
    
    1,811
    
    
    
    1,851
    
    
    
    3,622
    
    
    
    3,692Expected return on plan assets
    
    
    (1,721
    )
    
    
    (1,428
    )
    
    
    (3,442
    )
    
    
    (2,843
    )Amortization of prior service cost
    
    
    23
    
    
    
    
    
    
    
    46
    
    
    
    Amortization of actuarial loss
    
    
    358
    
    
    
    22
    
    
    
    716
    
    
    
    22$
    599
    
    
    $
    557
    
    
    $
    1,198
    
    
    $
    1,095
 Postretirement BenefitThree Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,(In thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    711
    
    
    $
    628
    
    
    $
    1,422
    
    
    $
    1,256Interest cost
    
    
    1,872
    
    
    
    2,221
    
    
    
    3,744
    
    
    
    4,442Expected return on plan assets
    
    
    (1,201
    )
    
    
    (1,336
    )
    
    
    (2,402
    )
    
    
    (2,672
    )Amortization of prior service cost
    
    
    (1,849
    )
    
    
    (1,559
    )
    
    
    (3,698
    )
    
    
    (3,118
    )Amortization of actuarial loss
    
    
    1,771
    
    
    
    1,546
    
    
    
    3,542
    
    
    
    3,092$
    1,304
    
    
    $
    1,500
    
    
    $
    2,608
    
    
    $
    3,000
  12




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Note 12  Stock-Based Compensation
   (In thousands, except per share amounts)
    
    Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income as reported
    
    $
    3,241
    
    
    $
    6,910
    
    
    $
    29,655
    
    
    $
    11,148Add: Stock-based compensation expense
included in net income, net of tax
    
    
    451
    
    
    
    
    
    
    
    451
    
    
    
    Deduct: Stock-based compensation
expense determined under fair value
based method, net of tax
    
    
    1,849
    
    
    
    1,735
    
    
    
    2,878
    
    
    
    3,065Pro forma net income
    
    $
    1,843
    
    
    $
    5,175
    
    
    $
    27,228
    
    
    $
    8,083Earnings per share:As reported
    
    $
    0.05
    
    
    $
    0.10
    
    
    $
    0.44
    
    
    $
    0.16Pro forma
    
    
    0.03
    
    
    
    0.08
    
    
    
    0.40
    
    
    
    0.12Earnings per share  assuming dilution:As reported
    
    $
    0.05
    
    
    $
    0.10
    
    
    $
    0.41
    
    
    $
    0.16Pro forma
    
    
    0.03
    
    
    
    0.07
    
    
    
    0.38
    
    
    
    0.12
  13




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Note 13  Business Segment Information
       14




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##### Table of Contents



Operating Segment Information
 (In thousands)
    
    Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net Sales:Social Expression Products
    
    $
    336,129
    
    
    $
    340,374
    
    
    $
    708,197
    
    
    $
    721,923Intersegment items
    
    
    (13,879
    )
    
    
    (17,324
    )
    
    
    (25,554
    )
    
    
    (32,148
    )Exchange rate adjustment
    
    
    956
    
    
    
    196
    
    
    
    5,518
    
    
    
    586Net
    
    
    323,206
    
    
    
    323,246
    
    
    
    688,161
    
    
    
    690,361Retail Operations
    
    
    39,085
    
    
    
    48,239
    
    
    
    81,945
    
    
    
    99,562Exchange rate adjustment
    
    
    1,557
    
    
    
    401
    
    
    
    2,939
    
    
    
    617Net
    
    
    40,642
    
    
    
    48,640
    
    
    
    84,884
    
    
    
    100,179AG Interactive
    
    
    19,583
    
    
    
    12,959
    
    
    
    47,630
    
    
    
    22,404Exchange rate adjustment
    
    
    (98
    )
    
    
    
    
    
    
    116
    
    
    
    Net
    
    
    19,485
    
    
    
    12,959
    
    
    
    47,746
    
    
    
    22,404Non-reportable segments
    
    
    3,156
    
    
    
    8,187
    
    
    
    7,926
    
    
    
    13,578Unallocated items  net
    
    
    1,067
    
    
    
    (948
    )
    
    
    2,115
    
    
    
    (897
    )Consolidated
    
    $
    387,556
    
    
    $
    392,084
    
    
    $
    830,832
    
    
    $
    825,625Segment Earnings:Social Expression Products
    
    $
    50,413
    
    
    $
    60,795
    
    
    $
    135,378
    
    
    $
    155,757Intersegment items
    
    
    (10,163
    )
    
    
    (12,295
    )
    
    
    (18,697
    )
    
    
    (23,231
    )Exchange rate adjustment
    
    
    603
    
    
    
    202
    
    
    
    1,355
    
    
    
    359Net
    
    
    40,853
    
    
    
    48,702
    
    
    
    118,036
    
    
    
    132,885Retail Operations
    
    
    (11,049
    )
    
    
    (11,376
    )
    
    
    (17,287
    )
    
    
    (15,520
    )Exchange rate adjustment
    
    
    (133
    )
    
    
    (4
    )
    
    
    (175
    )
    
    
    11Net
    
    
    (11,182
    )
    
    
    (11,380
    )
    
    
    (17,462
    )
    
    
    (15,509
    )AG Interactive
    
    
    485
    
    
    
    (2,046
    )
    
    
    815
    
    
    
    (1,683
    )Exchange rate adjustment
    
    
    41
    
    
    
    
    
    
    
    (54
    )
    
    
    Net
    
    
    526
    
    
    
    (2,046
    )
    
    
    761
    
    
    
    (1,683
    )Non-reportable segments
    
    
    167
    
    
    
    (2,150
    )
    
    
    641
    
    
    
    (9,056
    )Unallocated items  net
    
    
    (22,280
    )
    
    
    (23,496
    )
    
    
    (50,900
    )
    
    
    (92,210
    )Exchange rate adjustment
    
    
    203
    
    
    
    (4
    )
    
    
    301
    
    
    
    (12
    )Net
    
    
    (22,077
    )
    
    
    (23,500
    )
    
    
    (50,599
    )
    
    
    (92,222
    )Consolidated
    
    $
    8,287
    
    
    $
    9,626
    
    
    $
    51,377
    
    
    $
    14,415
 15




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Other
   Note 14  Discontinued Operations
    Three Months
    
    
    Six MonthsEnded
    
    
    EndedAugust 31, 2004
    
    
    August 31, 2004(In thousands)Net sales
    
    $
    13,024
    
    
    $
    25,658Pretax income from operations
    
    
    1,647
    
    
    
    3,771Income tax expense
    
    
    637
    
    
    
    1,459Income from discontinued operations
    
    $
    1,010
    
    
    $
    2,312
 16




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##### Table of Contents



(In thousands)
    
    August 31, 2004Assets of businesses held for sale:Current assets
    
    $
    23,077Other assets
    
    
    6,566Fixed assets
    
    
    10,747$
    40,390Liabilities of businesses held for sale:Current liabilities
    
    $
    2,844Noncurrent liabilities
    
    
    1,618$
    4,462
 17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Overview
       18




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##### Table of Contents



Results of Operations
 Three months ended August 31, 2005 and 2004
   % Net
    
    
    
    
    
    
    % Net(Dollars in thousands)
    
    2005
    
    
    Sales
    
    
    2004
    
    
    SalesNet sales
    
    $
    387,556
    
    
    
    100.0
    %
    
    $
    392,084
    
    
    
    100.0
    %Material, labor and other production costs
    
    
    176,316
    
    
    
    45.5
    %
    
    
    186,717
    
    
    
    47.6
    %Selling, distribution and marketing
    
    
    147,328
    
    
    
    38.0
    %
    
    
    146,303
    
    
    
    37.3
    %Administrative and general
    
    
    58,970
    
    
    
    15.2
    %
    
    
    57,505
    
    
    
    14.7
    %Interest expense
    
    
    8,587
    
    
    
    2.2
    %
    
    
    9,163
    
    
    
    2.3
    %Other income  net
    
    
    (11,932
    )
    
    
    (3.0
    %)
    
    
    (17,230
    )
    
    
    (4.4
    %)Total costs and expenses
    
    
    379,269
    
    
    
    97.9
    %
    
    
    382,458
    
    
    
    97.5
    %Income from continuing operations
before income tax expense
    
    
    8,287
    
    
    
    2.1
    %
    
    
    9,626
    
    
    
    2.5
    %Income tax expense
    
    
    5,046
    
    
    
    1.3
    %
    
    
    3,726
    
    
    
    1.0
    %Income from continuing operations
    
    
    3,241
    
    
    
    0.8
    %
    
    
    5,900
    
    
    
    1.5
    %Income from discontinued operations,
net of tax
    
    
    
    
    
    
    0.0
    %
    
    
    1,010
    
    
    
    0.3
    %Net income
    
    $
    3,241
    
    
    
    0.8
    %
    
    $
    6,910
    
    
    
    1.8
    %
  19




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##### Table of Contents



Unit and Pricing Analysis
  Increase (Decrease) From the Prior YearEveryday Cards
    
    Seasonal Cards
    
    Total Greeting Cards2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004Unit volume
    
    
    0.5
    %
    
    
    (2.1
    %)
    
    
    42.6
    %
    
    
    (19.7
    %)
    
    
    4.4
    %
    
    
    (3.9
    %)Selling prices
    
    
    (0.9
    %)
    
    
    
    
    
    
    (5.7
    %)
    
    
    5.8
    %
    
    
    (1.1
    %)
    
    
    0.3
    %Overall Increase/
(Decrease)
    
    
    (0.4
    %)
    
    
    (2.1
    %)
    
    
    34.5
    %
    
    
    (15.0
    %)
    
    
    3.2
    %
    
    
    (3.6
    %)
   Expense Overview
  20




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21




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Results of Operations
 Six months ended August 31, 2005 and 2004
   % Net
    
    
    
    
    
    
    % Net(In thousands)
    
    2005
    
    
    Sales
    
    
    2004
    
    
    SalesNet sales
    
    $
    830,832
    
    
    
    100.0
    %
    
    $
    825,625
    
    
    
    100.0
    %Material, labor and other production costs
    
    
    356,789
    
    
    
    42.9
    %
    
    
    368,332
    
    
    
    44.6
    %Selling, distribution and marketing
    
    
    302,602
    
    
    
    36.4
    %
    
    
    292,955
    
    
    
    35.5
    %Administrative and general
    
    
    122,098
    
    
    
    14.7
    %
    
    
    121,642
    
    
    
    14.7
    %Interest expense
    
    
    18,269
    
    
    
    2.2
    %
    
    
    61,857
    
    
    
    7.5
    %Other income  net
    
    
    (20,303
    )
    
    
    (2.4
    %)
    
    
    (33,576
    )
    
    
    (4.1
    %)Total costs and expenses
    
    
    779,455
    
    
    
    93.8
    %
    
    
    811,210
    
    
    
    98.2
    %Income from continuing operations
before income tax expense
    
    
    51,377
    
    
    
    6.2
    %
    
    
    14,415
    
    
    
    1.8
    %Income tax expense
    
    
    21,722
    
    
    
    2.6
    %
    
    
    5,579
    
    
    
    0.7
    %Income from continuing operations
    
    
    29,655
    
    
    
    3.6
    %
    
    
    8,836
    
    
    
    1.1
    %Income from discontinued operations,
net of tax
    
    
    
    
    
    
    0.0
    %
    
    
    2,312
    
    
    
    0.3
    %Net income
    
    $
    29,655
    
    
    
    3.6
    %
    
    $
    11,148
    
    
    
    1.4
    %
  22




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##### Table of Contents





Unit and Pricing Analysis




Increase (Decrease) From the Prior YearEveryday Cards
    
    Seasonal Cards
    
    Total Greeting Cards2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004Unit volume
    
    
    0.1
    %
    
    
    (0.8
    %)
    
    
    (4.0
    %)
    
    
    (3.7
    %)
    
    
    (0.9
    %)
    
    
    (1.5
    %)Selling prices
    
    
    0.1
    %
    
    
    (0.9
    %)
    
    
    2.0
    %
    
    
    2.3
    %
    
    
    0.5
    %
    
    
    (0.2
    %)Overall Increase /
(Decrease)
    
    
    0.2
    %
    
    
    (1.8
    %)
    
    
    (2.0
    %)
    
    
    (1.5
    %)
    
    
    (0.5
    %)
    
    
    (1.7
    %)






Expense Overview


23




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24




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Segment Information
   Social
Expression Products Segment
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedAugust 31,
    
    
    
    
    
    
    August 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % ChangeNet sales
    
    $
    322,250
    
    
    $
    323,050
    
    
    
    (0.2
    %)
    
    $
    682,643
    
    
    $
    689,775
    
    
    
    (1.0
    %)Segment earnings
    
    
    40,250
    
    
    
    48,500
    
    
    
    (17.0
    %)
    
    
    116,681
    
    
    
    132,526
    
    
    
    (12.0
    %)
   25




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##### Table of Contents



Retail
Operations Segment
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedAugust 31,
    
    
    
    
    
    
    August 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % ChangeNet sales
    
    $
    39,085
    
    
    $
    48,239
    
    
    
    (19.0
    %)
    
    $
    81,945
    
    
    $
    99,562
    
    
    
    (17.7
    %)Segment loss
    
    
    (11,049
    )
    
    
    (11,376
    )
    
    
    2.9
    %
    
    
    (17,287
    )
    
    
    (15,520
    )
    
    
    (11.4
    %)
   AG
Interactive Segment
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedAugust 31,
    
    
    
    
    
    
    August 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % ChangeNet sales
    
    $
    19,583
    
    
    $
    12,959
    
    
    
    51.1
    %
    
    $
    47,630
    
    
    $
    22,404
    
    
    
    112.6
    %Segment earnings
(loss)
    
    
    485
    
    
    
    (2,046
    )
    
    
    123.7
    %
    
    
    815
    
    
    
    (1,683
    )
    
    
    148.4
    %
   26




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##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
      27




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##### Table of Contents



Investing Activities
  Financing Activities
    28




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##### Table of Contents



Credit Sources
       29




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##### Table of Contents



Critical Accounting Policies
  Prospective Information
   30




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
    31




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    Not applicable(b)
    
    Not applicable(c)
    
    The following table provides information with respect to purchases of common shares of the
Corporation made during the three months ended August 31, 2005, by American Greetings
Corporation.
 Total Number
    
    
    Maximum Number ofShares of
    
    
    Shares (orPurchased as
    
    
    Approximate DollarAverage
    
    
    Part of Publicly
    
    
    Value) that May Yet BeTotal Number of
    
    
    Price Paid
    
    
    Announced
    
    
    Purchased UnderPeriod
    
    Shares Repurchased
    
    
    per Share
    
    
    Plans
    
    
    the PlansJune 2005
    
    Class A  520,000
    
    $
    26.55
    (2)
    
    
    520,000
    (3)
    
    $
    140,716,271Class B  500(1)
    
    $
    26.97
    
    
    
    
    
    
    
    July 2005
    
    Class A  630,000
    
    $
    25.93
    (2)
    
    
    630,000
    (3)
    
    $
    124,383,348Class B  52,153(1)
    
    $
    26.84
    
    
    
    
    
    
    
    August 2005
    
    Class A  835,000
    
    $
    25.00
    (2)
    
    
    835,000
    (3)
    
    $
    103,509,237Class B  208(1)
    
    $
    25.52
    
    
    
    
    
    
    
    Total
    
    Class A  1,985,000
    
    $
    25.70
    (2)
    
    
    1,985,000
    (3)Class B  52,861(1)
    
    $
    26.83
    
    
    
    
 
 (1)
    
    There is no public market for the Class B common shares of the Corporation. Pursuant to the
Corporations Articles of Incorporation, all of the Class B common shares were repurchased by
the Corporation for cash pursuant to its right of first refusal.(2)
    
    Excludes commissions paid, if any, related to the share repurchase transactions.(3)
    
    On April 5, 2005, American Greetings announced that its Board of Directors authorized a
program to repurchase up to $200 million of its Class A common shares over a 12-month period,
which will expire in April 2006. These repurchases will be made through a 10b5-1 program in
open market or privately negotiated transactions in compliance with the SECs Rule 10b-18,
subject to market conditions, applicable legal requirements and other factors. 32




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    The Annual Meeting of Shareholders of the Corporation was held on June 24, 2005.(b)
    
    The following individuals were elected at the Annual Meeting of Shareholders to Class I of
the Corporations Board of Directors with a term expiring in 2008: Morry Weiss and Stephen R.
Hardis.
   (c)
    
    The voting result at the Annual Meeting of Shareholders for the election of
Class I directors was as follows:
 Nominee
    
    
    Votes For
    
    
    Votes WithheldMorry Weiss
    
    
    
    97,529,580
    
    
    
    
    3,338,205Stephen Hardis
    
    
    
    78,667,529
    
    
    
    
    22,200,256
 
 Item 5. Other Information
  33




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##### Table of Contents



Item 6. Exhibits
  ExhibitNumber
    
    Description10.1
    
    American Greetings Corporation Executive Deferred
Compensation Plan, Effective October 26, 199310.2
    
    Amendment One to American Greetings Corporation Executive
Deferred Compensation Plan, Effective January 1, 199610.3
    
    Amendment Two to American Greetings Corporation Executive
Deferred Compensation Plan, Effective November 1, 200010.4
    

Amendment Number Three to the American Greetings
Corporation Executive Deferred Compensation Plan  American
Greetings Corporation Executive Third Party Option Plan,
Dated March 27, 200210.5
    
    Form of Agreement for Deferred Compensation Benefits10.6
    
    Form of Agreement under Amendment Number Three to the
American Greetings Corporation Executive Deferred
Compensation Plan  American Greetings Corporation
Executive Third Party Option Plan10.7
    
    Performance Share Grant Agreement dated August 2, 2005,
between American Greetings Corporation and Zev Weiss10.8
    
    Performance Share Grant Agreement dated August 2, 2005,
between American Greetings Corporation and Jeffrey Weiss(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
 34




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##### Table of Contents



SIGNATURES
  AMERICAN GREETINGS CORPORATIONBy:
    
    /s/ Joseph B. CipolloneJoseph B. CipolloneVice President, Corporate Controller,
and Chief Accounting Officer *October 7, 2005
   35