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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended February 28, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .
 Commission File No. 1-13859 American Greetings Corporation(Exact name of registrant as specified in its charter)
 Ohio
    
    34-0065325(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)One American Road, Cleveland, Ohio
    
    44144(Address of principal executive offices)
    
    (Zip Code)Registrants telephone number, including area code: (216) 252-7300Securities registered pursuant to Section 12(b) of the Act:Title of Each Class
    
    Name of Each Exchange on Which RegisteredClass A Common Shares, Par Value $1.00
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: Class B Common Shares, Par Value $1.00(Title of Class)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES
þ NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). YES þ NO o State the aggregate market value of the voting stock held by non-affiliates of the registrant as of
the last business day of the registrants most recently completed second fiscal quarter, August 31,
2004 - $1,565,326,570. Number of shares outstanding as of May 2, 2005: CLASS A COMMON  64,356,935
CLASS B COMMON  4,163,102 DOCUMENTS INCORPORATED BY REFERENCE Portions of the American Greetings Corporation Definitive Proxy Statement for the Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission within 120 days after the
close of the registrants fiscal year (incorporated into
Part III). The Report of the Compensation
Committee on Executive Compensation, the Report of the Audit Committee and the Performance Graph
contained in the registrants Definitive Proxy Statement shall not be deemed incorporated by
reference herein.




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AMERICAN GREETINGS CORPORATION
INDEX PageNumberPART IItem 1. Business
    
    
    1Item 2. Properties
    
    
    7Item 3. Legal Proceedings
    
    
    9Item 4. Submission of Matters to a Vote of Security Holders
    
    
    9PART IIItem 5. Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    
    12Item 6. Selected Financial Data
    
    
    14Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    15Item 7A. Quantitative and Qualitative Disclosures
About Market Risks
    
    
    37Item 8. Financial Statements and Supplementary Data
    
    
    38Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    78Item 9A. Controls and Procedures
    
    
    78Item 9B. Other Information
    
    
    79PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    79Item 11. Executive Compensation
    
    
    79Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    80Item 13. Certain Relationships and Related Transactions
    
    
    81Item 14.
Principal Accounting Fees and Services
    
    
    81PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    82SIGNATURESEX-4.III Amendment No. 1 to Credit AgreementEX-4.IV Amendment No. 2 to Credit AgreementEX-4.IX 5th Amendment to Receivables Purchase AgreementEX-10.XXII Retirement AgreementEX-10.XXIII Severance AgreementEX-10.XXIV Consulting AgreementEX-10.XXV Severance Agreement and Mutual ReleaseEX-10.XXVII Key Management Annual Incentive Plan 2005EX-10.XXVIII Key Management Annual Incentive Plan 2005EX-10.XXX Form of Employee Stock Option AgreementEX-10.XXXI Form of Director Stock Option AgreementEX-10.XXXII Form of Restricted Shares Grant AgreementEX-10.XXXIII Form of Deferred Shares Grant AgreementEX-10.XXXIV Spira Employment AgreementEX-10.XXXV Bonus Letter Dated October 4, 2000EX-10.XXXVI Johnston Employment AgreementEX-21 Subsidiaries of the CorporationEX-23 Consent of Independent Registered Public Account FirmEX-31(A) Certification of Principal Executive OfficerEX-31(B) Certification of Principal Financial OfficerEX-32(A) Certification Pursuant to 18 USC Sect 1350




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PART I 
 Item 1. Business OVERVIEW Founded in 1906, American Greetings Corporation and its subsidiaries (the Corporation or
American Greetings) operate predominantly in a single industry: the design, manufacture and sale
of everyday and seasonal greeting cards and other social expression products. Greeting cards, gift
wrap, party goods, candles, balloons, stationery and giftware are manufactured or sold by American
Greetings and/or its subsidiaries in the United States and throughout the world, primarily in
Canada, the United Kingdom, Mexico, Australia, New Zealand and South Africa. In addition, AG
Interactive, Inc. (89.9% owned by the Corporation and formerly known as AmericanGreetings.com,
Inc.) markets e-mail greetings, personalized printable greeting cards and other social expression
products through the Corporations Web sites www.americangreetings.com, www.bluemountain.com, and
www.egreetings.com; co-branded Web sites and on-line services. In 2005, AG Interactive launched
its AG Mobile unit, which specializes in the distribution of ringtones for cellular telephones,
graphics, games, alerts, and other social messaging products and applications to mobile devices.
In connection with its May 2004 acquisition of Paris-based K-Mobile, S.A., AG Mobile has recently
expanded its mobile content business to the European market. American Greetings subsidiary,
Learning Horizons, Inc. distributes supplemental educational products. Design licensing and
character licensing are done primarily by the Corporations subsidiaries, A.G.C. Inc. and Those
Characters From Cleveland, Inc., respectively. The Hatchery, LLC (50% owned by the Corporation)
also develops and produces original family and childrens entertainment for all media. The
Corporations A.G. Industries, Inc. subsidiary manufactures custom display fixtures for the
Corporations products and products of others. As of February 28, 2005, the Corporation also owned
and operated 542 card and gift shops throughout North America. The Corporations fiscal year ends on February 28 or 29. References to a particular year refer to
the fiscal year ending in February of that year. For example, 2005 refers to the year ended
February 28, 2005. The Corporations AG Interactive subsidiary is consolidated on a two-month lag
corresponding with its fiscal year-end of December 31. In fiscal 2006, AG Interactive is changing
its year end to coincide with the Corporations fiscal year end. Fiscal 2006 will include fourteen
months of AG Interactives operations as a result of the change. The Corporation does not expect
this change to materially impact fiscal 2006 consolidated results of operations. BUSINESS STRATEGY In 2005, American Greetings continued to focus primarily on improving its core greeting card
business by continuing its supply chain transformation, an initiative designed to improve
the way it develops, manufactures, distributes and services 1




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its products. The Corporation believes that this initiative, which it introduced in
February 2003, has resulted in substantial annual benefits as of the end of 2005. In addition to the transformation of its supply chain, three other initiatives that the
Corporation introduced two years ago  category innovation, strategic account management,
and human capital development  continue to provide focus for the Corporations efforts
throughout 2006. Category innovation focuses on driving improvements in the core greeting
card business, extending the Corporations existing competencies and evolving the
Corporations product line beyond the core greeting card business to create new
opportunities. Strategic account management will continue to focus on the most efficient
alignment of the Corporations resources with the differentiated needs of customer accounts
and their consumers. Finally, human capital development entails the continued training and
development of associates in alignment with the Corporations operating objectives. PRODUCTS The Corporation creates, manufactures and distributes social expression products including greeting
cards, gift wrap, party goods, calendars, candles, balloons, and stationery as well as educational
products and custom display fixtures. Prior to the sale of its subsidiary, Magnivision, Inc. in
October 2004, the Corporation also produced and sold prescription reading glasses and eyewear
accessories. The Corporations major domestic greeting card brands are American Greetings, Carlton
Cards, and Gibson, and other domestic products include DesignWare party goods, Guildhouse candles,
Plus Mark gift wrap and boxed cards, DateWorks calendars, Learning Horizons educational products
and AGI Schutz display fixtures. Online greeting card offerings and other digital content are
available through the Corporations subsidiary, AG Interactive, Inc. Information concerning sales
by major product classifications is included in Part II, Item 7. BUSINESS SEGMENTS At February 28, 2005, the Corporation operated in four business segments: Social Expression
Products, Retail Operations, AG Interactive and non-reportable operating segments. For information
regarding the various business segments comprising the Corporations business, see the discussion
included in Part II, Item 7, and in Note 16 to the Consolidated Financial Statements included in
Part II, Item 8. CONCENTRATION OF CREDIT RISKS Net sales to the Corporations five largest customers, which include mass merchandisers and
major drug stores, accounted for approximately 30% of net sales in each of 2005, 2004 and
2003. Net sales to Wal-Mart Stores, Inc. accounted for approximately 13%, 11%, and 11% of
net sales in 2005, 2004 and 2




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2003, respectively. No other customer accounted for 10% or more of the Corporations net
sales. CONSUMERS The Corporation believes that women purchase 89% of all greeting cards sold, that the median
age of the Corporations consumers is approximately 54 and that women over the age of 35
account for approximately 84% of all greeting cards sold. The Corporation also believes
that the average American household purchases about 17 greeting cards per year, the average
number of greeting cards purchased per transaction is approximately two, and consumers make
approximately seven card purchasing trips per year. COMPETITION The greeting card and gift wrap industry is intensely competitive. Competitive factors
include quality, design, customer service and terms, which may include payments and other
concessions to retail customers under long-term agreements. These agreements are discussed
in greater detail below. There are an estimated 3,000 greeting card publishers in the
United States, ranging from small family-run organizations to major corporations. The
Corporations principal competitor is Hallmark Cards, Inc. Based upon its general
familiarity with the greeting card and gift wrap industry and limited information as to its
competitors, the Corporation believes that it is the second-largest company in the industry
and the largest publicly owned greeting card company. PRODUCTION AND DISTRIBUTION In 2005, the Corporations major channel of distribution continued to be mass retail, which is
comprised of mass merchandisers, chain drug stores and supermarkets. Other major channels of
distribution included card and gift shops, department stores, military post exchanges, variety
stores and combo stores (stores combining food, general merchandise and drug items). The
Corporation also sells its products through its card and gift retail stores. As of February 28,
2005, the Corporation owned and operated 542 card and gift retail stores in the United States and
Canada through its Retail Operations segment, which are primarily located in malls and strip
shopping centers. From time to time, the Corporation also sells its products to independent,
third-party distributors. The Corporation services more than 70,000 retail stores in the United
States and more than 125,000 outlets worldwide. The Corporations distribution centers are located
near its manufacturing facilities. The Corporation has developed an automated distribution system
whereby it is able to replenish retailers shelves promptly following the initiation of a re-order. Many of the Corporations products are manufactured at common production facilities and
marketed by a common sales force. The Corporations manufacturing operations involve
complex processes including printing, die 3




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cutting, hot stamping and embossing. The Corporation employs modern printing techniques
which allow it to perform short run, multi-color printing, have a quick changeover and
utilize direct-to-plate technology, which minimizes time to market. The Corporations
products are manufactured globally at facilities located in North America, the United
Kingdom, Australia, and South Africa. The Corporation also sources products from domestic
and foreign third party suppliers. Additionally, information by geographic area is included
in Note 16 to the Consolidated Financial Statements included in Part II, Item 8. Production of the Corporations products is generally on a level basis throughout the year.
Everyday inventories (such as birthday and anniversary related products) remain relatively
constant throughout the year, while seasonal inventories peak in advance of each major
holiday season, including Christmas, Valentines Day, Easter, Mothers Day, Fathers Day and
Graduation. Payments for seasonal shipments are generally received during the month in
which the major holiday occurs, or shortly thereafter. Extended payment terms may also be
offered in response to competitive situations with individual customers. Payments for both
everyday and seasonal sales from customers that have been converted to a scan-based trading
model are received generally within 10 to 15 days of the product being sold by those
customers at their retail locations. As of February 28, 2005, three of the Corporations
five largest customers in 2005 have converted, or are in the process of converting, to a
scan-based trading model. The core of this business model rests with the Corporation
providing product to the customer on a consignment basis with the Corporation recording
sales at the time a product is electronically scanned through the retailers cash register.
The Corporation and many of its competitors sell seasonal greeting cards with the right of
return. Sales credits for non-seasonal product are issued at the Corporations sole
discretion for damaged, obsolete and outdated products. Sales of non-seasonal products are
generally sold without the right of return. Information regarding the return of product is
included in Note 1 to the Consolidated Financial Statements included in Part II, Item 8. During the year, the Corporation experienced no material difficulties in obtaining raw
materials from suppliers. INTELLECTUAL PROPERTY RIGHTS The Corporation has a number of copyrights, patents, trademarks and service marks, which are
used in connection with its products and services. The Corporations designs, artwork and
verse are protected by copyright. Although the licensing of intellectual property produces
additional revenue, in the opinion of the Corporation, the Corporations operations are not
dependent upon any individual patent, trademark, service mark, copyright or intellectual
property license. The collective value of the Corporations intellectual property is
substantial and the Corporation follows an aggressive policy of protecting its rights in all
patents, copyrights, trademarks, service marks, and intellectual property licenses. 4




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EMPLOYEES At February 28, 2005, the Corporation employed approximately 8,300 full-time employees and
approximately 18,600 part-time employees which, when jointly considered, equate to
approximately 17,600 full-time equivalent employees. Approximately 3,200 of the
Corporations hourly plant employees are unionized, of which approximately 2,600 are covered
by the following collective bargaining agreements: ContractUnion
    
    Plant Location
    
    Expiration DateInternational Brotherhood
    
    Bardstown, Kentucky;
    
    03/23/08of Teamsters
    
    Kalamazoo, Michigan;
    
    04/30/10Cleveland, Ohio
    
    03/31/10Union of Needle Trades,
    
    Greeneville, Tennessee
    
    10/19/05Industrial, & Textile
    
    (Plus Mark)EmployeesFiremen & Oilers
    
    Berea, Kentucky
    
    08/31/06
 Other locations with unions are the United Kingdom, Mexico, Australia, New Zealand, and
South Africa. The Corporations headquarters and other manufacturing locations are not
unionized. Labor relations at each location have generally been satisfactory. SUPPLY AGREEMENTS In the normal course of its business, the Corporation enters into agreements with certain
customers for the supply of greeting cards and related products. The Corporation views the
use of such agreements as advantageous in developing and maintaining business with its
retail customers. 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 agreements are negotiated individually to meet competitive
situations and, therefore, while some aspects of the agreements may be similar, important
contractual terms vary. The agreements may or may not specify the Corporation as the sole
supplier of social expression products to the customer. In the event an agreement is not
completed, the Corporation has a claim for unearned advances under the agreement. 5




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Although risk is inherent in the granting of advances, the Corporation subjects such
customers to its normal credit review. The Corporation maintains a general reserve for
deferred costs based on estimates developed by using standard quantitative measures
incorporating historical write-offs. In instances where the Corporation is aware of a
particular customers inability to meet its performance obligation, the Corporation records
a specific reserve to reduce the deferred cost asset to the Corporations estimate of the
value of future cash flows based upon expected performance. These agreements are accounted
for as deferred costs. Losses attributed to these specific events have historically not
been material. The balances and movement of the valuation reserve accounts are disclosed on
Schedule II of this Annual Report on Form 10-K. See Note 10 to the Consolidated Financial
Statements in Part II, Item 8, and the discussion under the Deferred Costs heading in the
Critical Accounting Policies section of Item 7 for further information and discussion of
deferred costs. ENVIRONMENTAL REGULATIONS The operations of the Corporation, like those of other companies in our industry, are
subject to various federal, state and local environmental laws and regulations. These laws
and regulations may give rise to claims, uncertainties or possible loss contingencies for
future environmental remediation liabilities and costs. The Corporation has implemented
various programs designed to protect the environment and comply with applicable
environmental laws and regulations. The costs associated with these compliance and
remediation efforts have not and are not expected to have a material adverse effect on the
financial condition, cash flows, or operating results of the Corporation. AVAILABLE INFORMATION The Corporation makes available, free of charge, on or through its
www.corporate.americangreetings.com, investor relations Web site, its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to
those reports as soon as reasonably practicable after such material is electronically filed with
or furnished to the Securities and Exchange Commission (SEC). Copies of the Corporations
filings with the SEC also can be obtained at the SECs Internet site, www.sec.gov. The Corporations Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the
charters of the Boards Audit Committee, Compensation and Management Development Committee, and
Nominating and Governance Committee are available on or through the Companys
www.corporate.americangreetings.com, investor relations Web site, and will be made available in
print upon request by any shareholder to the Corporations Secretary. 6




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Item 2. Properties As of February 28, 2005, the Corporation owns or leases approximately 12.2 million square feet of
plant, warehouse and office space, of which approximately 1.1 million square feet are leased. The
Corporation believes its manufacturing and distribution facilities are well maintained and are
suitable and adequate, and have sufficient productive capacity to meet its current needs. The following table summarizes the principal plants and materially important physical properties of
the Corporation. All of the Corporations domestic property secures indebtedness outstanding from
time to time under its revolving credit facility and its 6.10% senior notes. *     Indicates calendar year ExpirationApproximate Square
    
    Date ofFeet Occupied
    
    Material
    
    PrincipalLocation
    
    Owned
    
    Leased
    
    Leases*
    
    ActivityWorld Headquarters:Cleveland, Ohio
    
    
    1,700,000
    
    
    
    
    
    
    
    
    
    
    General offices of North American Greeting Card
Division, Plus Mark, Inc., Carlton Cards
Retail, Inc., Learning Horizons, Inc., AG
Interactive, Inc., and A.G.C., Inc.; creation
and design of greeting cards, gift wrap, party
goods, candles, stationery and giftware;
marketing of electronic greetingsBardstown,
Kentucky
    
    
    413,500
    
    
    
    
    
    
    
    
    
    
    Cutting, folding, finishing, and packaging
of greeting cardsBerea,
Kentucky
    
    
    
    
    
    
    552,000
    
    
    
    2013
    
    
    Production and distribution of candlesDanville,
Kentucky
    
    
    1,374,000
    
    
    
    
    
    
    
    
    
    
    Distribution of everyday products
including greeting cardsLafayette,
Tennessee
    
    
    194,000
    
    
    
    
    
    
    
    
    
    
    Manufacture of envelopes for greeting
cards, cutting, folding, finishing and
packaging of cellos and stationery cardsBurgaw,
North Carolina
    
    
    
    
    
    
    59,000
    
    
    
    2006
    
    
    Manufacture of plastic molded party wareOsceola,
Arkansas
    
    
    2,552,000
    
    
    
    
    
    
    
    
    
    
    Cutting, folding, finishing and packaging
of greeting cards and warehousing;
distribution of seasonal products
 7




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ExpirationApproximate Square
    
    Date ofFeet Occupied
    
    Material
    
    PrincipalLocation
    
    Owned
    
    Leased
    
    Leases*
    
    ActivityPhiladelphia,
Mississippi
    
    
    
    
    
    
    120,000
    
    
    
    2005
    
    
    Hand finishing of greeting cardsRipley,
Tennessee
    
    
    165,000
    
    
    
    
    
    
    
    
    
    
    Greeting card printing (lithography)Kalamazoo,
Michigan
    
    
    602,500
    
    
    
    
    
    
    
    
    
    
    Manufacture and distribution of party goodsForest City,
North Carolina
2 Locations
    
    
    498,000
    
    
    
    262,500
    
    
    
    2006
    
    
    Manufacture of the Corporations display
fixtures and other custom display fixtures by
A.G. Industries, Inc.Greeneville,
Tennessee
2 Locations
    
    
    1,410,000
    
    
    
    
    
    
    
    
    
    
    Printing and packaging of seasonal
greeting cards and wrapping items and order
filling and shipping for Plus Mark, Inc.Franklin,
Tennessee
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    Manufacture of gift wrap and related items
for Plus Mark, Inc. (operations were
discontinued in 2005)Toronto, Ontario
Canada
    
    
    
    
    
    
    87,000
    
    
    
    2008
    
    
    General office of Carlton Cards Limited
(Canada)Clayton, Australia
    
    
    208,000
    
    
    
    
    
    
    
    
    
    
    General offices of John Sands companies;
manufacture greeting cards and related productsDewsbury, England
2 Locations
    
    
    394,000
    
    
    
    
    
    
    
    
    
    
    General offices of Carlton Cards Limited
(U.K.); manufacture greeting cards and related
productsCroydon, Hull,
Leicester and Oxford,
England
3 Locations
    
    
    116,500
    
    
    
    31,000
    
    
    
    2007
    
    
    Manufacture and distribution of greeting
cards and related productsStafford Park,
England
2 Locations
    
    
    219,000
    
    
    
    29,000
    
    
    
    2010
    
    
    General offices and warehouse for Gibson
Hanson Graphics
 8




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ExpirationApproximate Square
    
    Date ofFeet Occupied
    
    Material
    
    PrincipalLocation
    
    Owned
    
    Leased
    
    Leases*
    
    ActivityMexico City,
Mexico
    
    
    89,000
    
    
    
    
    
    
    
    
    
    
    General offices of Carlton Mexico, S.A. de
C.V. and distribution of greeting cards and
related productsJohannesburg,
Ladysmith and Durban,
South Africa
    
    
    166,000
    
    
    
    
    
    
    
    
    
    
    General offices of S.A. Greetings
Corporation (Pty.) Ltd; manufacture and
distribution of greeting cards and related
products
 
 Item 3. Legal Proceedings The Corporation is involved in certain legal proceedings arising in the ordinary course of
business. The Corporation, however, does not believe that any of the litigation in which it is
currently engaged, either individually or in the aggregate, will have a material adverse effect on
its business, consolidated financial position or results of operations. 
 Item 4. Submission of Matters to Vote of Security Holders None Executive Officers of the Registrant The following is a list of the Corporations executive officers, their ages as of April 30, 2005,
their positions and offices, and number of years in executive office: Years asName
    
    Age
    
    Executive Officer
    
    Current Position and OfficeMorry Weiss
    
    
    64
    
    
    
    32
    
    
    ChairmanZev Weiss
    
    
    38
    
    
    
    4
    
    
    Chief Executive OfficerJeffrey Weiss
    
    
    41
    
    
    
    7
    
    
    President and Chief Operating OfficerCatherine M. Kilbane
    
    
    42
    
    
    
    1
    
    
    Senior Vice President, General
Counsel and SecretaryMichael L. Goulder
    
    
    45
    
    
    
    2
    
    
    Senior Vice President, Executive
Supply Chain OfficerThomas H. Johnston
    
    
    57
    
    
    
    
    
    
    Senior Vice President, Creative and
Merchandising; President, Carlton
Cards RetailWilliam R. Mason
    
    
    60
    
    
    
    23
    
    
    Senior Vice President, Wal-Mart Team
 9




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Years asName
    
    Age
    
    Executive Officer
    
    Current Position and OfficeErwin Weiss
    
    
    56
    
    
    
    15
    
    
    Senior Vice President, Specialty BusinessSteven S. Willensky
    
    
    50
    
    
    
    2
    
    
    Senior Vice President, Executive
Sales and Marketing OfficerJoseph B. Cipollone
    
    
    46
    
    
    
    4
    
    
    Vice President, Corporate ControllerBrian T. McGrath
    
    
    54
    
    
    
    
    
    
    Vice President, Human ResourcesDouglas W. Rommel
    
    
    49
    
    
    
    
    
    
    Vice President, Information ServicesStephen J. Smith
    
    
    41
    
    
    
    2
    
    
    Vice President, Treasurer and
Investor Relations
 Morry Weiss and Erwin Weiss are brothers. Jeffrey Weiss and Zev Weiss are the sons of Morry Weiss.
The Board of Directors annually elects all executive officers; however, executive officers are
subject to removal, with or without cause, at any time; provided, however, that the removal of an
executive officer would be subject to the terms of their respective employment agreements, if any. Except as otherwise described below, all of the executive officers listed above have served in the
capacity shown or similar capacities with the Corporation (or major subsidiary) over the past five
years, with the following exceptions:  
    Zev Weiss was Regional Sales Director for the Corporations Carlton Cards Retail, Inc.
unit from July 1994 to May 1995; Regional Sales Manager for the Corporations U.S. Greeting
Card Division from May 1995 to May 1997; Executive Director of National Accounts for the
Corporations U.S. Greeting Card Division from May 1997 until March 2000; Vice President,
Strategic Business Units from March 2000 until March 2001; Senior Vice President from March
2001 until December 2001; and Executive Vice President from December 2001 until June 2003
when he was named Chief Executive Officer.
    Jeffrey Weiss was Vice President, Materials Management of the Corporations U.S.
Greeting Card Division from October 1996 until May 1997; Vice President, Product Management
of the Corporations U.S. Greeting Card Division from May 1997 until January 1998; Senior
Vice President from January 1998 until March 2000; and Executive Vice President, North
American Greeting Card Division of the Corporation from March 2000 until June 2003 when he
was named President and Chief Operating Officer.
    Catherine M. Kilbane was a partner with the law firm of Baker & Hostetler LLP. She
became Senior Vice President, General Counsel and Secretary in October 2003.
    Michael L. Goulder was a Vice President in the management consulting firm of Booz Allen
Hamilton from October 1998 until September 2002. He became a 10




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Senior Vice President of the Corporation in November 2002 and is currently the Senior Vice
President, Executive Supply Chain Officer.
    Thomas H. Johnston was Chairman, President and Chief Executive Officer of Sutton Place
Gourmet, a Gourmet food retailer, from July 1995 until July 2000, where he remained as
Chairman until February 2001. He was Managing Director of Gruppo, Levey & Co., an
investment banking firm focused on the direct marketing and specialty retail industries,
from November 2001 until May 2004, when he became Senior Vice President and President of
Carlton Retail. Mr. Johnston became Senior Vice President, Creative & Merchandising in
December 2004.
    William R. Mason was Senior Vice President, General Sales Manager from June 1991 until
becoming Senior Vice President, Wal-Mart Team in September 2002.
    Steven S. Willensky was President of Medex, a medical products subsidiary of The Furon
Company, from 1997 to 2000, and President and Chief Executive Officer of Westec
Interactive, a provider of interactive security and remote monitoring systems, from 2000 to
2002. He became Senior Vice President, Executive Sales and Marketing Officer of the
Corporation in September 2002.
    Joseph B. Cipollone was Director, Corporate Financial Planning of the Corporation from
July 1994 until December 1997; and Executive Director, International Finance of the
Corporation from December 1997 until becoming Vice President and Corporate Controller in
April 2001.
    Douglas W. Rommel was Manager of Customer Support Services within the Information
Services division until January 1996; Director of Applications Development within the
Information Services division from January 1996 until July 2000; Executive Director of
e-business within the Information Services division from July 2000 until becoming the
Corporations Vice President of Information Services in November 2001.
    Stephen J. Smith was Treasurer and Officer from 1998 to 1999 and Vice President,
Treasurer and Assistant Secretary in 1999 of Insilco Holding Company, an industrial holding
company. He was Vice President and Treasurer of General Cable Corporation, a wire and cable
company, from 1999 to 2002. He became Vice President and Treasurer of the Corporation in
April 2003. 11




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##### Table of Contents



PART II 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities (a) Market Information. The Corporations Class A common shares are listed on the New York Stock
Exchange under the symbol AM. The high and low sales prices, as reported in the New York Stock
Exchange listing, for the years ended February 28, 2005 and February 29, 2004, were as follows: 2005
    
    
    2004High
    
    
    Low
    
    
    High
    
    
    Low1st
Quarter
    
    $
    23.45
    
    
    $
    19.09
    
    
    $
    17.73
    
    
    $
    12.652nd
Quarter
    
    
    24.18
    
    
    
    20.87
    
    
    
    20.22
    
    
    
    17.003rd
Quarter
    
    
    28.16
    
    
    
    23.98
    
    
    
    22.14
    
    
    
    18.334th
Quarter
    
    
    27.92
    
    
    
    23.19
    
    
    
    23.00
    
    
    
    20.19
 There is no public market for the Class B common shares of the Corporation. Pursuant to the
Corporations Amended Articles of Incorporation, a holder of Class B common shares may not transfer
such Class B common shares (except to permitted transferees, a group that generally includes
members of the holders extended family, family trusts and charities) unless such holder first
offers such shares to the Corporation for purchase at the most recent closing price for the
Corporations Class A common shares. If the Corporation does not purchase such Class B common
shares, the holder must convert such shares, on a share for share basis, into Class A common shares
prior to any transfer. National City Bank, Cleveland, Ohio, is the Corporations registrar and transfer agent. Shareholders. At February 28, 2005, there were approximately 44,000 holders of Class A common
shares and 160 holders of Class B common shares of record and individual participants in security
position listings. Dividends. The following table sets forth the dividends paid by the Corporation in 2005 and 2004. Dividends per share declared in
    
    2005
    
    
    20043rd Quarter (paid October 29, 2004)
    
    $
    0.06
    
    
    4th Quarter (paid January 24, 2005)
    
    
    0.06
    
    
    $
    0.12
    
    
    
 The Corporation did not pay cash dividends on its common shares during 2004, but began paying
dividends again in the third quarter of 2005. Although the Corporation expects to continue paying
dividends, payment of future dividends will be determined by the Board of Directors in light of
appropriate business conditions. In addition, the 12




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##### Table of Contents



Corporations senior secured credit facility restricts the Corporations ability to incur
additional indebtedness, to engage in acquisitions of other businesses and entities, and to pay
shareholder dividends. These restrictions are subject to customary baskets and financial covenant
tests. For a further description of the limitations imposed by the Corporations senior secured
credit facility, see the discussion in Part II, Item 7, under the heading Liquidity and Capital
Resources, and Note 11 to the Consolidated Financial Statements included in Part II, Item 8. Securities Authorized for Issuance Under Equity Compensation Plans.Please refer to the
information set forth under the heading Equity Compensation Plan Information included in Item 12
of this Annual Report on Form 10-K. (b) Not Applicable (c) The following table provides information with respect to the Corporations purchases of its
common shares made during the three months ended February 28, 2005. Total Number of
    
    MaximumShares
    
    Number ofPurchased as
    
    Shares that MayAverage
    
    
    Part of Publicly
    
    Yet BeTotal Number of
    
    
    Price Paid
    
    
    Announced
    
    PurchasedPeriod
    
    Shares Repurchased
    
    
    per Share
    
    
    Plans
    
    Under the PlansDecember 2004
    
    Class B  207,653 (1)
    
    $
    27.91
    
    
    
    
    January 2005
    
    Class B  882 (1)
    
    $
    24.05
    
    
    
    
    February 2005
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    Class B  208,535 (1)
    
    $
    27.89
    
    
    
    
    
   (1)
    
    There is no public market for the Class B common shares of the Corporation. Pursuant to the
Corporations Amended Articles of Incorporation, all of the Class B common shares were repurchased
by the Corporation for cash pursuant to its right of first refusal. 13




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##### Table of Contents



Item 6. Selected Financial Data Thousands of dollars except share and per share amounts 2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Summary
of OperationsNet sales
    
    $
    1,902,727
    
    
    $
    1,953,729
    
    
    $
    1,953,654
    
    
    $
    1,868,813
    
    
    $
    2,050,955Gross profit
    
    
    997,526
    
    
    
    1,041,024
    
    
    
    1,082,444
    
    
    
    961,352
    
    
    
    1,146,525Restructure and other charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,715
    
    
    
    Interest expense
    
    
    79,526
    
    
    
    85,828
    
    
    
    79,095
    
    
    
    78,599
    
    
    
    55,387Income (loss) from continuing operations
    
    
    70,550
    
    
    
    97,989
    
    
    
    113,538
    
    
    
    (126,761
    )
    
    
    (98,588
    )Income from discontinued operations, net of tax
    
    
    24,729
    
    
    
    6,682
    
    
    
    7,568
    
    
    
    4,451
    
    
    
    5,915Cumulative effect of accounting changes, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,141
    )Net income (loss)
    
    
    95,279
    
    
    
    104,670
    
    
    
    121,106
    
    
    
    (122,310
    )
    
    
    (113,814
    )Earnings (loss) per share:Income (loss) from continuing operations
    
    
    1.03
    
    
    
    1.47
    
    
    
    1.73
    
    
    
    (1.99
    )
    
    
    (1.55
    )Income from discontinued operations, net of tax
    
    
    0.36
    
    
    
    0.10
    
    
    
    0.12
    
    
    
    0.07
    
    
    
    0.09Cumulative effect of accounting changes, net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.33
    )Earnings (loss) per share
    
    
    1.39
    
    
    
    1.57
    
    
    
    1.85
    
    
    
    (1.92
    )
    
    
    (1.79
    )Earnings (loss) per share  assuming dilution
    
    
    1.25
    
    
    
    1.40
    
    
    
    1.63
    
    
    
    (1.92
    )
    
    
    (1.79
    )Cash dividends per share
    
    
    0.12
    
    
    
    
    
    
    
    
    
    
    
    0.20
    
    
    
    0.62Fiscal year end market price per share
    
    
    24.63
    
    
    
    22.67
    
    
    
    13.12
    
    
    
    13.77
    
    
    
    13.06Average number of shares outstanding

    
    
    68,545,432
    
    
    
    66,509,332
    
    
    
    65,636,621
    
    
    
    63,615,193
    
    
    
    63,646,405Financial
PositionAccounts receivable  net
    
    $
    200,408
    
    
    $
    238,473
    
    
    $
    294,109
    
    
    $
    277,388
    
    
    $
    374,820Inventories
    
    
    222,874
    
    
    
    238,612
    
    
    
    271,187
    
    
    
    280,805
    
    
    
    356,705Working capital
    
    
    793,972
    
    
    
    774,466
    
    
    
    554,363
    
    
    
    373,381
    
    
    
    119,062Total assets
    
    
    2,535,628
    
    
    
    2,484,013
    
    
    
    2,584,120
    
    
    
    2,614,995
    
    
    
    2,712,074Property, plant and equipment additions
    
    
    47,497
    
    
    
    32,544
    
    
    
    28,053
    
    
    
    24,436
    
    
    
    69,743Long-term debt
    
    
    486,099
    
    
    
    665,874
    
    
    
    726,531
    
    
    
    853,113
    
    
    
    380,129Shareholders equity
    
    
    1,386,780
    
    
    
    1,267,540
    
    
    
    1,077,464
    
    
    
    902,419
    
    
    
    1,047,190Shareholders equity per share
    
    
    20.09
    
    
    
    18.79
    
    
    
    16.35
    
    
    
    14.15
    
    
    
    16.49Net return on average shareholders equity
from continuing operations
    
    
    5.3
    %
    
    
    8.4
    %
    
    
    11.5
    %
    
    
    (13.0
    )%
    
    
    (8.6
    )%
 14




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations The Corporations discussion and analysis of its financial condition and results of operations
should be read in conjunction with the audited consolidated financial statements. This discussion
and analysis, and other statements made in this Report, contain forward-looking statements, see
Factors That May Affect Future Results at the end of this discussion and analysis for a
discussion of the uncertainties, risks and assumptions associated with these statements. OVERVIEW Founded in 1906, the Corporation is the worlds largest publicly owned creator, manufacturer and
distributor of social expression products. Headquartered in Cleveland, Ohio, the Corporation
employs approximately 17,600 associates around the world, is home to one of the worlds largest
creative studios and services more than 70,000 retail stores in the United States and more than
125,000 outlets worldwide. The Corporations major domestic greeting card brands are American Greetings, Carlton Cards and
Gibson and other domestic products include DesignWare party goods, GuildHouse candles, Plus Mark
gift wrap and boxed cards, DateWorks calendars, Learning Horizons educational products and AGI
Schutz display fixtures. The Internet and wireless business unit, AG Interactive, is a leading
provider of electronic greetings, ringtones for cellular telephones and other content for the
digital marketplace. As of February 28, 2005, the Retail Operations segment owned and operated 542
card and gift shops throughout North America. The Corporations international operations include wholly owned subsidiaries in the United Kingdom,
Canada, Australia, New Zealand, Mexico and South Africa as well as licensees in approximately 50
other countries. The business exhibits seasonality, which is typical for most companies in the retail industry.
Sales are much stronger in the second half of the year than the first half of the year due to the
concentration of major holidays during the second half of the year. Net earnings are highest during
the months of September through December when sales volumes provide significant operating leverage.
Working capital requirements needed to finance operations fluctuate during the year and reach
their highest levels during the second and third fiscal quarters as inventory is increased in
preparation for the peak selling season. The Corporation recognized net income of $95.3 million in 2005 compared to $104.7 million in 2004.
Included in the results this year is the net income from discontinued operations of $24.7 million
resulting primarily from the Corporations divestiture of its Magnivision reading glasses
subsidiary completed in October 2004. 15




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##### Table of Contents



Despite the reduction in net income, the Corporation experienced a record year in the generation of
cash as management remained focused on improving asset utilization and debt reduction to increase
the combined balance of cash and cash equivalents and short-term investments to $459.0 million in
2005 compared to $285.5 million in 2004. In addition, the pre-tax contribution from outbound
licensing activities nearly doubled over prior year to $43.3 million and management continues to
explore opportunities for the Corporation to maximize the value of its intellectual property
assets. As part of an effort begun three years earlier, the current year operating results include certain
costs to stabilize the infrastructure of the business and strengthen its financial position. The
Corporations modifications to its infrastructure represent a proactive strategy to align its cost
structure with significant changes taking place in the domestic markets. Strong acceptance of the
Corporations scan-based trading business model, increased consumer preference for value, continued
consolidation of retailers and expanded opportunities for store specific data mining have prompted
the Corporation to modify its business processes relative to product development, sourcing, and
delivery systems. The current year results include the following costs as part of the above actions. 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 year net sales
reduction represents the estimated expense for product currently in stores that may now be returned
to the Corporation. In addition, 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. Finally, 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 $14.9 million was recorded for severance pay, asset disposals
and other costs associated with this action. The Corporation expects approximately $3 million in
additional charges during the first half of 2006 to complete this action. The Corporation believes that the success of these and other efforts over the past three years has
provided the Corporation with a sustainable business model to proactively identify and implement
cost reduction projects for the rapidly changing marketplace. 16




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##### Table of Contents



Additionally, in the current year, the Corporation undertook a major initiative to address
disappointing performance in its Retail Operations segment. With new divisional management in
place, the Corporation executed initiatives to revise merchandising strategies, close underperforming stores and invest in point-of-sale (POS) infrastructure upgrades. Results in 2005 also included the impact of the conversion of two accounts to scan-based trading,
which reduced net sales by approximate $32 million and pre-tax income by approximately $30 million.
In addition, the Retail Operations segment reviewed its accounting for leases and recorded a
pre-tax charge of $4.9 million during the fourth quarter to correct certain errors that were
identified. This correction relates solely to accounting treatment and did not impact historic or
future cash flows and did not have a material impact on current or prior year consolidated
financial statements. RESULTS OF OPERATIONS Comparison of the years ended February 28, 2005 and February 29, 2004 Net income was $95.3 million, or $1.25 per diluted share, in 2005 compared to net income of $104.7
million, or $1.40 per diluted share, in 2004. The Corporations results for 2005 and 2004 are summarized below: % Net
    
    
    
    
    
    
    % Net
    
    
    Fav(Dollars in thousands)
    
    2005
    
    
    Sales
    
    
    2004
    
    
    Sales
    
    
    (Unfav)Net sales
    
    $
    1,902,727
    
    
    
    100.0
    %
    
    $
    1,953,729
    
    
    
    100.0
    %
    
    
    (2.6
    %)Material, labor and other
production costs
    
    
    905,201
    
    
    
    47.5
    %
    
    
    912,705
    
    
    
    46.7
    %
    
    
    0.8
    %Selling, distribution and marketing
    
    
    654,402
    
    
    
    34.4
    %
    
    
    635,224
    
    
    
    32.5
    %
    
    
    (3.0
    %)Administrative and general
    
    
    252,622
    
    
    
    13.3
    %
    
    
    219,369
    
    
    
    11.2
    %
    
    
    (15.2
    %)Interest expense
    
    
    79,526
    
    
    
    4.2
    %
    
    
    85,828
    
    
    
    4.4
    %
    
    
    7.3
    %Other income  net
    
    
    (97,272
    )
    
    
    (5.1
    %)
    
    
    (59,248
    )
    
    
    (3.0
    %)
    
    
    64.2
    %1,794,479
    
    
    
    94.3
    %
    
    
    1,793,878
    
    
    
    91.8
    %
    
    
    (0.0
    %)Income from continuing operations
before income tax expense
    
    
    108,248
    
    
    
    5.7
    %
    
    
    159,851
    
    
    
    8.2
    %
    
    
    (32.3
    %)Income tax expense
    
    
    37,698
    
    
    
    2.0
    %
    
    
    61,862
    
    
    
    3.2
    %
    
    
    39.1
    %Income from continuing operations
    
    
    70,550
    
    
    
    3.7
    %
    
    
    97,989
    
    
    
    5.0
    %
    
    
    (28.0
    %)Income from discontinued
operations, net of tax
    
    
    24,729
    
    
    
    1.3
    %
    
    
    6,681
    
    
    
    0.3
    %
    
    
    270.1
    %Net income
    
    $
    95,279
    
    
    
    5.0
    %
    
    $
    104,670
    
    
    
    5.3
    %
    
    
    (9.0
    %)
 17




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##### Table of Contents



Net Sales Overview Consolidated net sales in 2005 were $1.90 billion, a decrease of $51 million from the prior year.
This decrease includes $45 million of sales reductions associated with the scan-based trading
buyback ($32 million) which occurred in the fourth quarter, as well as returns costs for a revised
merchandising strategy ($13 million) implemented in the third quarter. The remaining decrease is
the result of reduced sales in the Corporations Retail Operations segment ($35 million)
approximately half of which is the result of reduced store count and half from declining same store
sales, combined with reduced third party sales ($22 million) in the Corporations display fixture
business, partially offset by favorable foreign currency translation ($38 million) and additional
revenues from two acquisitions completed mid-year by AG Interactive ($16 million). The contribution of each major product category as a percent of net sales for the past two fiscal
years was as follows: 2005
    
    
    2004Everyday greeting cards
    
    
    36
    %
    
    
    38
    %Seasonal greeting cards
    
    
    20
    %
    
    
    19
    %Gift wrapping and wrap accessories
    
    
    17
    %
    
    
    17
    %All other products*
    
    
    27
    %
    
    
    26
    %
   *
    
    The all other products classification includes giftware, party goods, candles, balloons,
calendars, custom display fixtures, educational products, stickers, online greeting cards and other
digital products. Unit and Pricing Analysis Unit and pricing comparisons for 2005 and 2004 are summarized below: Increase (Decrease)From the Prior YearEveryday Cards
    
    
    Seasonal Cards
    
    
    Total Greeting Cards2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004Unit volume
    
    
    (5.5
    %)
    
    
    1.5
    %
    
    
    4.6
    %
    
    
    (0.7
    %)
    
    
    (2.6
    %)
    
    
    0.9
    %Selling prices
    
    
    (0.6
    %)
    

    
    (0.3
    %)
    
    
    (3.7
    %)
    
    
    (3.5
    %)
    
    
    (1.4
    %)
    
    
    (1.4
    %)Overall Increase /
(Decrease)
    
    
    (6.0
    %)
    
    
    1.2
    %
    
    
    0.7
    %
    
    
    (4.2
    %)
    
    
    (4.0
    %)
    
    
    (0.6
    %)
 During 2005, combined everyday and seasonal greeting card sales less returns fell 4.0%
compared to 2004. The shortfall was heavily skewed toward everyday cards where the impact of the
scan-based trading buyback and revised merchandising strategy drove net unit volume down 3.9%. The
remaining everyday card business was down 2.1% to prior year. The entire decrease in average
selling prices for everyday is the result of a shift in product mix driven by accelerated growth
rates in the value card market. 18




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##### Table of Contents



Seasonal card sales less returns improved 0.7% over 2004 levels reflecting some success in the
Corporations seasonal marketing initiatives. A combination of specific caption refinements by
holiday combined with a broader offering of value priced products resulted in a strong unit volume
increase of 4.6%. In addition, average return rates fell 0.6% driving additional benefits
throughout the supply chain. The reduction in average selling price of 3.7% is entirely the result
of expansion of value cards in the overall mix. Expense Overview Material, labor and other production costs for 2005 were 47.5% of net sales, an increase from 46.7%
in 2004. Virtually the entire change, as a percentage of sales, is the result of the impact of the
scan-based trading buyback and the implementation of a new merchandising strategy for seasonal
space management. The decrease in dollars from the prior year was the result of reduced spending
due to successful supply chain initiatives ($22 million) and overlapping prior year inventory costs
($13 million), partially offset by increased costs related primarily to a plant closure ($13
million), higher product content costs ($12 million) and incremental costs due to acquisitions ($5
million). Selling, distribution and marketing expenses were 34.4% of net sales for 2005 compared to 32.5% in
2004, a 1.9 percentage point increase. Spending increases consisted of agency fees for licensing
($10 million), incremental costs due to acquisitions ($14 million), correction for operating lease
accounting in the Retail Operations segment ($5 million) and severance ($6 million), partially
offset by savings in supply chain initiatives ($6 million) and reduced store operating expenses in
the Retail Operations segment ($9 million) as a result of fewer store locations. Administrative and general expenses were $252.6 million in 2005, compared to $219.4 million in
2004. The $33.2 million increase in expense in 2005 is due primarily to increased employee-related
costs ($20 million), severance charges ($9 million) and increased spending on systems development
($5 million). Interest expense was $79.5 million in 2005, compared to
$85.8 million in 2004. Interest expense over the two
year period was impacted by interest savings from the extinguishment of the
$118.0 million term loan in the first quarter of 2004 and
the repurchase of $63.6 million and $186.2 million of 11.75% senior
subordinated notes during the third quarter of 2004 and first quarter of 2005,
respectively. The current year expense includes $39.1 million
for the write-off of deferred financing fees and a premium payment and other fees associated with
the notes repurchase. The prior year expense includes $18.4 million for the write-off of
deferred financing fees and a premium payment associated with the
term loan extinguishment and notes repurchase. Other income  net was income of $97.3 million in 2005 compared to income of $59.2 million in 2004.
The 2005 results were due to increased revenue from licensing royalties of Care Bear and
Strawberry Shortcake products ($19 million), a one-time receipt related to royalty agreements
($10 million), increased interest income ($2 million) and a gain on the sale of an investment ($3
million). 19




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##### Table of Contents



The effective tax rates for 2005 and 2004 were 34.8% and 38.7%, respectively. These rates reflect
the United States statutory rate of 35% combined with the additional net impact of the various
foreign, state and local income tax rates. In 2005, the reduction in the effective tax rate is
primarily the result of the favorable benefits associated with recent tax law changes, which
allowed the Corporation to reduce valuation allowances against certain deferred tax assets. See
Note 17 to the Consolidated Financial Statements for causes of the differences between tax expense
at the federal statutory rate and actual tax expense. Segment Results The Corporations management reviews segment results using consistent exchange rates between years
to eliminate the impact of foreign currency fluctuations. For additional segment information, see
Note 16 to the Consolidated Financial Statements. Social Expression Products Segment (Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % ChangeNet Sales
    
    $
    1,536,019
    
    
    $
    1,594,467
    
    
    
    (3.7
    %)Segment Earnings
    
    
    274,133
    
    
    
    317,819
    
    
    
    (13.8
    %)
 In 2005, net sales excluding the impact of foreign exchange and intersegment items of the Social
Expression Products segment decreased $58.4 million, or 3.7%, from 2004. This decrease includes
$44.6 million of sales reductions associated with the scan-based trading buyback at a major
customer account ($31.6 million) which occurred in the fourth quarter, as well as returns costs for
a revised merchandising strategy ($13.0 million) implemented in the third quarter. The remaining
decrease was primarily due to reduced sales of everyday cards. Segment earnings excluding the impact of foreign exchange and intersegment items decreased $43.7
million, or 13.8%, in 2005 compared to the prior year. This decrease is due to the scan-based
trading buyback ($30 million), implementation of the new merchandising strategy ($13 million),
severance costs ($13 million) and plant closure costs ($15 million), partially offset by lower
field service costs related to the prior year integration of a new major customer ($9 million) and
higher royalty income ($19 million). Retail Operations Segment (Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % ChangeNet Sales
    
    $
    238,159
    
    
    $
    272,917
    
    
    
    (12.7
    %)Segment Earnings (Loss)
    
    
    (20,685
    )
    
    
    4,269
    
    
    
    (584.5
    %)
 The Retail Operations segment exhibits considerable seasonality, which is typical for most retail
store operations. A significant amount of the net sales and segment earnings occur during the
fourth quarter in conjunction with the major holiday season. 20




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##### Table of Contents



Net sales excluding the impact of foreign exchange in the Retail Operations segment decreased $34.8
million, or 12.7%, in 2005 from 2004, as sales of both everyday and seasonal cards were lower. Net
sales at stores open one year or more were down approximately 7.3% in 2005 from 2004 and the
average number of stores decreased 5.7% compared to the prior year. In addition, the average
number of transactions per store was down from the prior year by approximately 6%, in part a
reflection of continued reduced overall consumer traffic in retail shopping malls. Segment earnings excluding the impact of foreign exchange decreased $25.0 million in 2005 from the
prior year. This decrease was due to lower net sales and a $4.9 million charge for a correction in
the accounting treatment for certain operating leases. For the year, markdowns to reduce inventory
levels were, as a percent of sales, 3.3 percentage points higher than in the prior year. During 2005, the Corporation undertook a major initiative to address the disappointing performance
in its retail operations. With new divisional management in place, the Corporation executed
initiatives to revise merchandising strategies, close marginally performing stores and invest in
POS infrastructure upgrades. The Retail Operation segment is a reporting unit as defined by Statement of Financial Accounting
Standards (SFAS) No. 142 (SFAS 142), Goodwill and Other Intangible Assets, and, as such, is
the level that is tested for impairment of goodwill. Due primarily to declining results in the
past two years, the fair value of the Retail Operations segment, determined for the purpose of
testing goodwill for impairment, has declined. As a result, corporate management is closely
monitoring the short-term performance of this segment. To enable this monitoring, the Corporation
has established performance indicators within the Retail Operations segment in order to assess the
progress of the business throughout 2006. Should the segment fail to meet the established
performance indicators, the goodwill in the Retail Operations segment may require testing for
impairment prior to the annual impairment test. AG Interactive Segment (Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % ChangeNet Sales
    
    $
    57,514
    
    
    $
    36,427
    
    
    
    57.9
    %Segment Earnings (Loss)
    
    
    (955
    )
    
    
    4,540
    
    
    
    (121.0
    %)
 Net sales excluding the impact of foreign exchange in the AG Interactive segment increased $21.1
million, or 57.9%, in 2005 over 2004. This substantial increase is the result of the business
acquisitions of MIDIRingTones, LLC and K-Mobile S.A. ($16 million) and increased subscription
revenue ($5 million). At the end of 2005, the Corporation had approximately 2.2 million paid
subscribers versus 2.1 million in 2004. Segment earnings excluding the impact of foreign exchange of $4.5 million in 2004 decreased to a
loss of $1.0 million in 2005. This decrease is primarily the result of 21




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##### Table of Contents



acquisition costs, new business integration costs, higher technology costs and the cost of new
business initiatives, which more than offset the benefits from increased sales. Unallocated Items Centrally incurred and managed costs are not allocated back to the operating segments. The
unallocated items include interest expense of $79.5 million and $85.8 million in 2005 and
2004, respectively, for centrally incurred debt and domestic profit-sharing expense of $11.3
million and $7.1 million in 2005 and 2004, respectively. In addition, unallocated items
include costs associated with corporate operations including the senior management staff,
corporate finance, legal, and human resource functions, as well as insurance programs and
other strategic costs. These costs totaled $48.9 million and $66.6 million in 2005 and
2004, respectively. Comparison of the years ended February 29, 2004 and February 28, 2003 Net income was $104.7 million, or $1.40 per diluted share, in 2004 compared to net income of $121.1
million, or $1.63 per diluted share, in 2003. The Corporations results for 2004 and 2003 are summarized below: % Net
    
    
    
    
    
    
    % Net
    
    
    Fav(Dollars in thousands)
    
    2004
    
    
    Sales
    
    
    2003
    
    
    Sales
    
    
    (Unfav)Net sales
    
    $
    1,953,729
    
    
    
    100.0
    %
    
    $
    1,935,654
    
    
    
    100.0
    %
    
    
    0.9
    %Material, labor and other
production costs
    
    
    912,705
    
    
    
    46.7
    %
    
    
    853,210
    
    
    
    44.1
    %
    
    
    (7.0
    %)Selling, distribution and marketing
    
    
    635,224
    
    
    
    32.5
    %
    
    
    607,031
    
    
    
    31.4
    %
    
    
    (4.6
    %)Administrative and general
    
    
    219,369
    
    
    
    11.2
    %
    
    
    234,940
    
    
    
    12.1
    %
    
    
    6.6
    %Interest expense
    
    
    85,828
    
    
    
    4.4
    %
    
    
    79,095
    
    
    
    4.1
    %
    
    
    (8.5
    %)Other income  net
    
    
    (59,248
    )
    
    
    (3.0
    %)
    
    
    (26,487
    )
    
    
    (1.4
    %)
    
    
    123.7
    %1,793,878
    
    
    
    91.8
    %
    
    
    1,747,789
    
    
    
    90.3
    %
    
    
    (2.6
    %)Income from continuing operations
before income tax expense
    
    
    159,851
    
    
    
    8.2
    %
    
    
    187,865
    
    
    
    9.7
    %
    
    
    (14.9
    %)Income tax expense
    
    
    61,862
    
    
    
    3.2
    %
    
    
    74,327
    
    
    
    3.8
    %
    
    
    16.8
    %Income from continuing operations
    
    
    97,989
    
    
    
    5.0
    %
    
    
    113,538
    
    
    
    5.9
    %
    
    
    (13.7
    %)Income from discontinued operations,
net of tax
    
    
    6,681
    
    
    
    0.3
    %
    
    
    7,568
    
    
    
    0.4
    %
    
    
    (11.7
    %)Net income
    
    $
    104,670
    
    
    
    5.3
    %
    
    $
    121,106
    
    
    
    6.3
    %
    
    
    (13.6
    %)
 22




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##### Table of Contents



Net Sales Overview Consolidated net sales in 2004 were $1.95 billion, an increase of $18.1 million over the prior
year. The year over year increase in net sales of 0.9% was primarily the result of foreign
currency exchange fluctuations, which improved the sales comparisons by 2.5% while net sales from
ongoing operations at constant exchange rates declined approximately 1.6%. The Corporation
experienced strong sales growth in its U.K. business of 5.2% as well as significant growth in its
domestic party goods and candle businesses. These gains were more than offset by downturns in the
seasonal card and gift wrap offerings, the effects of increased customer incentives for greeting
cards, and soft demand in its Retail Operation segment. The contribution of each major product category as a percent of net sales for 2004 and 2003 was as
follows: 2004
    
    2003Everyday greeting cards
    
    
    38
    %
    
    
    39
    %Seasonal greeting cards
    
    
    19
    %
    
    
    18
    %Gift wrapping and wrap accessories
    
    
    17
    %
    
    
    19
    %All other products*
    
    
    26
    %
    
    
    24
    %
    Unit and Pricing Analysis During 2004, combined everyday and seasonal greeting card sales less returns fell by approximately
0.6% compared to 2003. Overall unit sales increased approximately 0.9% over the prior year, while
average prices declined by approximately 1.4% for the same period. Unit and pricing comparisons for 2004 and 2003 are summarized below: Increase (Decrease)From the Prior YearEveryday Cards
    
    
    Seasonal Cards
    
    
    Total Greeting Cards2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Unit volume
    
    
    1.5
    %
    
    
    5.6
    %
    
    
    (0.7
    %)
    
    
    (2.5
    %)
    
    
    0.9
    %
    
    
    2.9
    %Selling prices
    
    
    (0.3
    %)
    
    
    (2.1
    %)
    
    
    (3.5
    %)
    
    
    (2.8
    %)
    
    
    (1.4
    %)
    
    
    (2.3
    %)Overall Increase /
(Decrease)
    
    
    1.2
    %
    
    
    3.5
    %
    
    
    (4.2
    %)
    
    
    (5.3
    %)
    
    
    (0.6
    %)
    
    
    0.5
    %
 23




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##### Table of Contents



The Corporation had an increase in everyday card sales of approximately 1.2% during 2004
compared to 2003. Increased unit volume of approximately 1.5% was driven primarily by new business
in the U.S. and U.K. markets, but was partially offset by a reduction in average selling prices of
approximately 0.3%. The marginal reduction in average selling prices is indicative of a continuing
shift in product mix to more value priced products. In 2004, the Corporations seasonal card sales less returns declined approximately 4.2% from the
prior year. Unit sales of seasonal greeting cards less returns were down approximately 0.7%. The
unit volume decrease is due to a reduction in gross shipments in an effort to reduce return rates.
The average selling price of seasonal cards declined approximately 3.5%, driven primarily by
product mix. Expense Overview Material, labor and other production costs for 2004 were 46.7% of net sales, an increase from 44.1%
in 2003. Of this 2.6 percentage point increase, approximately 1.5% reflects the write-down of
inventories related to seasonal performance and product discontinuances with the remaining 1.1%
cost increase split approximately equally between higher spending on material and creative greeting
card content and a shift in mix to relatively higher cost products, including party goods and
candles. These expense increases were partially offset by sustainable cost improvements from the
supply chain transformation, which were mostly offset by implementation costs that occurred earlier
in the year. Selling, distribution and marketing expenses were 32.5% of net sales in 2004 compared to 31.4% in
2003, a 1.1 percentage point increase. Virtually all of the increase resulted from higher field
service costs associated with the new account rollout and broker commission payments related to
Care Bear and Strawberry Shortcake licensing. Administrative and general expenses were $219.4 million in 2004, compared to $234.9 million in
2003. The $15.5 million decrease in expenses in 2004 compared to 2003 is due primarily to lower
employee-related costs, including executive compensation and profit-sharing. Interest expense was $85.8 million in 2004, compared to $79.1 million in 2003. The increase in
interest expense from 2003 to 2004 was due to the accelerated write-down of deferred financing
costs and premium charges from the repurchase of $63.6 million of 11.75% senior subordinated notes
and costs related to the early retirement of the term loan of $118.0 million under the
Corporations senior secured credit facility. The increase in interest expense, however, was
partially offset by the savings from the early retirement of the term loan in April 2003. Other income  net was income of $59.2 million in 2004 compared to income of $26.5 million in 2003.
The 2004 results were due to income from licensing royalties of Care 24




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##### Table of Contents



Bear and Strawberry Shortcake products of $44.9 million, interest income of $2.7 million and
foreign exchange gain of $5.2 million. The 2003 results included a pre-tax gain of $12.0 million
(total proceeds of $17 million) on the sale of a marketable security investment held by the
Corporations U.K. subsidiary, royalty income of $6.7 million and interest income of $4.8 million. The effective tax rates for 2004 and 2003 were 38.7% and 39.6%, respectively. These rates reflect
the United States statutory rate of 35% combined with the additional net impact of the various
foreign, state and local income tax rates. In 2004, the reduction in the effective tax rate is the
result of the utilization of net operating loss carryforwards and the settlement of the
Corporations company owned life insurance (COLI) obligations in 2003. See Note 17 to the
Consolidated Financial Statements for details of the differences between taxes at the federal
statutory rate and actual tax expense. Segment Results The Corporations management reviews segment results using consistent exchange rates between years
to eliminate the impact of foreign currency fluctuations. For additional segment information, see
Note 16 to the Consolidated Financial Statements. Social Expression Products Segment (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    % ChangeNet Sales
    
    $
    1,594,467
    
    
    $
    1,624,535
    
    
    
    (1.9
    %)Segment Earnings
    
    
    317,819
    
    
    
    316,256
    
    
    
    0.5
    %
 In 2004, net sales excluding the impact of foreign exchange and intersegment items of the Social
Expression Products segment decreased $30.1 million, or 1.9%, from 2003. Sales benefited in the
Corporations U.S. market due to the addition of a major mass retailer and strong performance from
its candle and party goods businesses. The U.K. business experienced increased sales due to market
share gains. However, these increases were more than offset by weak seasonal performance,
primarily in the domestic greeting card and gift wrap businesses, and increased customer
incentives. During 2004, combined everyday and seasonal greeting card sales less returns fell by approximately
0.6% compared to 2003. Overall unit sales increased approximately 0.9% over the prior year, while
average prices declined by approximately 1.4% for the same period. In 2004, seasonal card sales less returns declined approximately 4.2% from the prior year. Unit
sales of seasonal greeting cards less returns were down approximately 0.7% due to a reduction in
gross shipments in an effort to reduce return rates. The average selling prices of seasonal cards
declined approximately 3.5% driven primarily by product mix. 25




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##### Table of Contents



Segment earnings excluding the impact of foreign exchange increased $1.6 million in 2004 compared
to 2003. Improvements in the U.K. and Australia were partially offset by a decline in the United
States. In addition, costs of the Corporations supply chain transformation initiative continued,
but were offset by expense savings during the year. Retail Operations Segment (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    % ChangeNet Sales
    
    $
    272,917
    
    
    $
    275,296
    
    
    
    (0.9
    %)Segment Earnings
    
    
    4,269
    
    
    
    19,128
    
    
    
    (77.7
    %)
 The Retail Operations segment exhibits considerable seasonality, which is typical for most retail
store operations. A significant amount of the net sales and segment earnings occur during the
fourth quarter in conjunction with the major holiday season. Net sales excluding the impact of foreign exchange in the Retail Operations segment decreased $2.4
million, or 0.9%, in 2004 from 2003, as sales of both everyday and seasonal cards were lower. The
average number of transactions per store was down from the prior year by approximately 4%,
reflecting reduced overall consumer traffic in retail shopping malls. Net sales at stores open one
year or more were down approximately 4% in 2004 from 2003. Segment earnings excluding the impact of foreign exchange were $4.3 million in 2004, a decrease of
$14.9 million, or 77.7%, from the prior year. The decrease reflected increased promotional pricing
and reduced sales as a result of reduced consumer traffic in retail shopping malls. AG Interactive Segment (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    % ChangeNet Sales
    
    $
    36,427
    
    
    $
    34,615
    
    
    
    5.2
    %Segment Earnings
    
    
    4,540
    
    
    
    477
    
    
    
    851.8
    %
 Net sales of the AG Interactive segment increased $1.8 million, or 5.2%, in 2004 over 2003,
reflecting an increase in advertising revenues and an approximately 10% rise in subscription
membership. At the end of 2004, the Corporation had approximately 2.1 million paid subscribers
versus 1.9 million in 2003. In 2004, earnings increased to $4.5 million from $0.5 million in 2003, reflecting the increase in
membership revenues as well as cost reductions implemented by the segment during the year. Unallocated Items Centrally incurred and managed costs are not allocated back to the operating segments. The
unallocated items include interest expense of $85.8 million and 26




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##### Table of Contents



$79.1 million in 2004 and 2003, respectively, for centrally incurred debt and domestic
profit-sharing expense of $7.1 million and $13.6 million in 2004 and 2003, respectively. In
addition, unallocated items include costs associated with corporate operations including the
senior management staff, corporate finance, legal, and human resource functions, as well as
insurance programs and other strategic costs. These costs totaled $66.6 million and $55.2
million in 2004 and 2003, respectively. Liquidity and Capital Resources The Corporation experienced a record year in the generation of cash as management remained focused
on improving asset utilization and debt reduction and also increased the combined balance of cash
and cash equivalents and short-term investments to $459.0 million in 2005 compared to $285.5
million in 2004. In the past two years, the Corporation has reduced its debt by approximately $374
million, improving its debt to total capital ratio from 44.4% in 2003 to 26.0% in 2005. With the
additional cash on hand, the Corporation announced a $200 million share repurchase program and an
increase in its quarterly dividend. Operating Activities During the year, cash flow from operating activities provided cash of $358.4 million compared to
$283.1 million in 2004, an improvement of $75.3 million. This improvement was primarily the result
of the reduction of net deferred costs as amortization exceeded payments by approximately $73
million. Cash flow from operating activities for 2004 compared to 2003 resulted in an improvement of $220.2
million, from $62.9 million in 2003. The overall increase reflects concentrated cash collection
efforts on trade accounts receivable and reduced tax payments driven by the settlement of the
Corporations COLI obligations in 2003, partially offset by reductions in trade and other payables. Accounts receivable, net of the effect of acquisitions, provided a source of cash of $50.6 million
in 2005, compared to $65.5 million in 2004 and a use of cash of $11.4 million in 2003. The
decrease of $14.9 million in 2005 from the 2004 level relates to the strong collections during
2004, partially offset by the impact of converting a large customer to scan-based trading. The
improvement of $76.9 million in 2004 over 2003 reflected a concentrated cash collection effort
during 2004. Inventories, net of the effect of acquisitions, provided a source of cash of $23.3 million in 2005,
compared to $42.5 million in 2004 and $15.9 million in 2003. The decrease in inventory during 2005
was primarily related to lower inventory levels in the Retail Operations segment, due to fewer
store locations and efforts to reduce average in-store inventory levels, and the display fixtures
business primarily due to reduced levels of sales. The decrease in inventory during 2004 reflected
the write-down of approximately $28 million in inventory for excess seasonal product and product
discontinuances. The 27




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##### Table of Contents



2003 results reflect the favorable impacts of plant consolidations and SKU reductions undertaken in
that year as well as reduced seasonal card production as gross outbound shipments were reduced in
an effort to control return rates. Other current assets, net of the effect of acquisitions, were a use of cash of $15.2 million in
2005 compared to a source of $6.6 million and $5.8 million in 2004 and 2003, respectively. The
decrease in cash flow is the result of an increase in refundable taxes, related to current year
estimated tax payments. Deferred costs  net represents payments under agreements with retailers net of the related
amortization of those payments. During 2005, 2004 and 2003, amortization exceeded payments by
$107.7 million, $34.9 million and $39.5 million, respectively. These results reflect the success
of the Corporations modified contract management strategies. None of the Corporations major
customer agreements are set to expire in fiscal 2006. Accounts payable and other liabilities, net of the effect of acquisitions, were a source of cash of
$31.8 million in 2005 and a use of cash of $99.5 million and $124.9 million in 2004 and 2003,
respectively. The increase in the liability balances in 2005 was primarily due to higher trade
payables, severance and plant closing accruals and higher profit-sharing and executive compensation
liabilities in the current year. The decrease in 2004 was due to reduced trade payables, continued
reduction of acquisition liabilities and lower severance, profit-sharing and executive compensation
liabilities. The decrease in 2003 was due primarily to payments to settle the income tax liability
associated with the Corporations COLI program. Investing Activities Cash used in investing activities was $187.0 million during 2005, compared to $30.2 million in 2004
and a source of cash of $19.4 million in 2003. The current year usage included net outflows of
$208.7 million for the purchase of short-term, highly liquid auction rate securities and $25.2
million related to the acquisitions of MIDIRingTones, LLC, Collage Designs Limited and The
Hatchery, LLC and the buyout of a portion of the minority interest of AG Interactive. Inflows in
the current year included $77.0 million of proceeds from the sale of Magnivision, $19.1 million of
proceeds from the sale of an equity investment and $5.8 million proceeds from the sale of fixed
assets. Capital expenditures totaled $47.5 million, $32.5 million and $28.1 million in 2005, 2004 and 2003,
respectively. The Corporation continues to limit capital expenditures only to projects with either
a high internal rate of return or which are critical for operating activities. Cash inflows in 2004 and 2003 also included the wind-down of the Corporations COLI program, which
generated cash inflows of $7.8 million in 2004 and $10.0 million in 2003, and the sale of a
marketable security in 2003, which generated proceeds of $17.0 million. 28




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##### Table of Contents



Financing Activities In 2005, the Corporation used $208.6 million for financing activities including $216.4 million
related to the repurchase of the Corporations 11.75% senior subordinated notes in the first
quarter. In addition, stock activity provided and used a significant amount of cash during the
current year. 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 exercise price on these
options provided approximately $40 million during the year. In addition, in accordance with its
Amended Articles of Incorporation, the Corporation repurchased shares into its Treasury, primarily
Class B shares related to options that were exercised, at a cost of approximately $24 million.
During 2005, the Corporation paid dividends totaling $8.3 million. In 2004, cash used by financing activities was $192.0 million related primarily to the early
retirement of the Corporations term loan in the first quarter and the repurchase of some of the
Corporations 11.75% senior subordinated notes in the third quarter. Stock option activity
generated cash of approximately $18 million during 2004. Net cash provided by financing activities was $13.3 million in 2003, of which $21.5 million was
provided by the exercise of stock options under employee stock option plans. The net increase of
$116.7 million in short-term debt and the reduction of $124.8 million in long-term debt reflects
the reclassification of the term loan. Credit Sources Substantial credit sources are available to the Corporation. In total, the Corporation had
available sources of approximately $400 million at February 28, 2005. This includes the
Corporations $200 million senior secured revolving credit facility and its $200 million accounts
receivable securitization financing. There were no outstanding balances under either of these
arrangements at February 28, 2005. On May 11, 2004, the Corporation amended and restated its senior secured credit facility.
This facility was originally entered into on August 9, 2001, as a $350 million facility and
was amended on July 22, 2002, to a $320 million facility. The amended and restated senior
secured credit facility currently consists of a $200 million revolving facility maturing on
May 10, 2008. The amended facility is secured by the domestic assets of the Corporation and
a 65% interest in the common stock of its foreign subsidiaries. The Corporation pays an
annual commitment fee of 25 basis points on the undrawn portion of the facility. The
facility contains various restrictive covenants. Some of these restrictions require that
the Corporation meet specified periodic financial ratios, minimum net worth, maximum
leverage, and interest coverage. The credit facility places certain restrictions on the
Corporations ability to incur additional indebtedness, to engage in acquisitions of other
businesses, to repurchase its own capital stock and pay 29




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##### Table of Contents



shareholder dividends. These covenants are less restrictive than the covenants previously
in place. In April 2005, the Corporation amended its amended and restated senior secured credit
facility dated May 11, 2004. The amendment, among other things, increases the maximum
amount of dividends that the Corporation may pay to its shareholders, increases the maximum
amount of its own capital stock that it may repurchase and extends the period during which
the Corporation may repurchase its 11.75% senior subordinated notes. The Corporation is also party to a three-year accounts receivable securitization financing
agreement that provides for up to $200 million of financing and is secured by certain trade
accounts receivable. Under the terms of the agreement, the Corporation transfers
receivables to a wholly owned consolidated subsidiary that in turn utilizes the receivables
to secure borrowings through a credit facility with a financial institution. On August 2,
2004, the agreement was amended to extend the maturity date to August 1, 2007. The related
interest rate is commercial paper-based. The Corporation pays an annual commitment fee of
25 basis points on the undrawn portion of the accounts receivable facility. During 2005, the Corporation commenced a cash tender offer for all of its outstanding 11.75%
senior subordinated notes. 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 February
28, 2005, approximately $10 million of these notes remained outstanding. As part of this
transaction, substantially all restrictive covenants were eliminated from the remaining
outstanding notes. 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. The seasonal nature of the business
results in peak working capital requirements that may be financed through short-term
borrowings. In an effort to return value to its shareholders, the Corporation announced on
April 5, 2005, a program to repurchase up to $200 million of its Class A common shares over
the subsequent twelve months. These repurchases will be made through a 10b5-1 program in
open market or privately negotiated transactions in compliance with the Securities and
Exchange Commissions Rule 10b-18, subject to market conditions, applicable legal
requirements and other factors. 30




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##### Table of Contents



Contractual Obligations The following chart reflects the Corporations known contractual obligations as of February 28,
2005: (Dollars in Thousands) PaymentCommitmentsUnder
    
    
    PaymentObligations
    
    Long-
    
    
    
    
    
    
    Agreements
    
    
    Commitmentsdue by
    
    Term
    
    
    Operating
    
    
    with
    
    
    Under RoyaltyPeriod
    
    Debt
    
    
    Leases
    
    
    Customers
    
    
    Agreements
    
    
    Severance
    
    
    Total2006
    
    $
    
    
    
    $
    45,508
    
    
    $
    65,944
    
    
    $
    15,131
    
    
    $
    12,316
    
    
    $
    138,8992007
    
    
    176,082
    
    
    
    35,622
    
    
    
    28,981
    
    
    
    2,936
    
    
    
    2,130
    
    
    
    245,7512008
    
    
    335
    
    
    
    29,156
    
    
    
    24,357
    
    
    
    1,494
    
    
    
    1,200
    
    
    
    56,5422009
    
    
    10,230
    
    
    
    23,652
    
    
    
    21,314
    
    
    
    143
    
    
    
    
    
    
    
    55,3392010
    
    
    183
    
    
    
    17,974
    
    
    
    20,800
    
    
    
    
    
    
    
    
    
    
    
    38,957Thereafter
    
    
    299,269
    
    
    
    33,433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    332,702$
    486,099
    
    
    $
    185,345
    
    
    $
    161,396
    
    
    $
    19,704
    
    
    $
    15,646
    
    
    $
    868,190
 In addition to the contracts noted in the table, the Corporation issues purchase orders for
products, materials and supplies used in the ordinary course of business. These purchase orders
typically do not include long-term volume commitments, are based on pricing terms previously
negotiated with vendors and are generally cancelable with the appropriate notice prior to receipt
of the materials or supplies. Accordingly, the foregoing table excludes open purchase orders for
such products, materials and supplies as of February 28, 2005. Although the Corporation does not anticipate that contributions will be required in 2006 to the
defined benefit pension plan that it assumed in connection with the Corporations acquisition of
Gibson Greetings, Inc. in 2001, it may make contributions in excess of the legally required minimum
contribution level. Refer to Note 12 to the Consolidated Financial Statements. Critical Accounting Policies The consolidated financial statements of the Corporation are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. Refer to Note 1 to the Consolidated Financial Statements.
The following paragraphs include a discussion of the critical areas that required a higher degree
of judgment or are considered complex. 31




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Allowance for Doubtful Accounts The Corporation evaluates the collectibility of its accounts receivable based on a combination of
factors. In circumstances where the Corporation is aware of a customers inability to meet its
financial obligations (evidenced by such events as bankruptcy or insolvency proceedings), a
specific reserve for bad debts against amounts due is recorded to reduce the receivable to the
amount the Corporation reasonably expects will be collected. In addition, the Corporation
recognizes reserves for bad debts based on estimates developed by using standard quantitative
measures incorporating historical write-offs and current economic conditions. The establishment of
reserves requires the use of judgment and assumptions regarding the potential for losses on
receivable balances. Although the Corporation considers these balances adequate and proper,
changes in economic conditions in the retail markets in which the Corporation operates could have a
material effect on the required reserve balances. Goodwill Goodwill represents the excess of purchase price over the estimated fair value of net assets
acquired in business combinations accounted for by the purchase method. On March 1, 2002, the
Corporation adopted SFAS 142. SFAS 142 presumes that goodwill and certain intangible assets have
indefinite useful lives. Accordingly, goodwill and certain intangibles are not amortized, but
subject to at least an annual review for impairment. Upon adoption, the Corporation ceased
amortization of goodwill and performs an impairment test annually. To test for goodwill
impairment, the Corporation is required to estimate the fair market value of each of its reporting
units. The Corporation estimates future cash flows and allocations of certain assets using
estimates for future growth rates and managements judgment regarding the applicable discount
rates. Changes to managements judgments and estimates could result in a significantly different
estimate of the fair market value of the reporting units, which could result in an impairment of
goodwill. The annual review for goodwill impairment was completed in the fourth quarter of 2005
and resulted in no impairment. The Retail Operations segment is a reporting unit as defined by SFAS 142 and, as such, is the level
that is tested for impairment of goodwill. Due primarily to declining results and cash flows in
the past two years, the fair value of the Retail Operations segment and one international reporting
unit, determined for the purpose of testing goodwill for impairment, has declined. As a result,
corporate management is closely monitoring the short-term performance of these businesses. To
enable this monitoring, the Corporation has taken actions in these businesses to improve results of
operations and cash flows, and established performance indicators within each of these businesses
in order to assess the progress of the businesses throughout 2006. Should either of these
businesses fail to meet the established performance indicators, the goodwill in these businesses
may require testing for impairment prior to the annual impairment test. 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. The 32




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Corporation views such agreements as advantageous in developing and maintaining business with its
retail customers. The customer typically receives a combination of cash payments, credits,
discounts, allowances and other incentive considerations to be earned as product is purchased from
the Corporation over the stated time period of the agreement to meet a minimum purchase volume
commitment. These agreements are negotiated individually to meet competitive situations and
therefore, while some aspects of the agreements may be similar, important contractual terms may
vary. In addition, the agreements may or may not specify the Corporation as the sole supplier of
social expression products to the customer. Although risk is inherent in the granting of advances, the Corporation subjects such customers to
its normal credit review. The Corporation maintains a general reserve for deferred costs based on
estimates developed by using standard quantitative measures incorporating historical write-offs.
In instances where the Corporation is aware of a particular customers inability to meet its
performance obligation, the Corporation records a specific reserve to reduce the deferred cost
asset to an estimate of the value of future cash flows based upon expected performance. The
Corporation maintains reserves for deferred costs related to these agreements of $37.5 million and
$40.1 million at February 28, 2005 and February 29, 2004, respectively. Losses attributed to
these specific events have historically not been material. For contractual arrangements that are based upon a minimum purchase volume commitment, the
Corporation periodically reviews the progress toward the volume commitment and estimates future
sales expectations for each customer. Factors that can affect the Corporations estimate include
store door openings and closings, retail industry consolidation, amendments to the agreements,
consumer shopping trends, addition or deletion of participating products and product productivity.
Based upon its review, the Corporation may modify the remaining amortization periods of individual
agreements to reflect the changes in the estimates for the attainment of the minimum volume
commitment in order to align amortization expense with the periods benefited. The Corporation does
not make retroactive expense adjustments to prior fiscal years. The aggregate average remaining
life of the Corporations contract base is 6.3 years. The accuracy of the Corporations assessments of the performance-related value of a deferred cost
asset related to a particular agreement and of the estimated time period of the completion of a
volume commitment is based upon managements ability to accurately predict certain key variables
such as product demand at retail, product pricing, customer viability and other economic factors.
Predicting these key variables involves uncertainty about future events; however, the assumptions
used are consistent with the Corporations internal planning. If the deferred cost assets are
assessed to be recoverable, they are amortized over the periods benefited. If the carrying value
of these assets is considered to not be recoverable through performance, such assets are written
down as appropriate. 33




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Deferred Income Taxes Deferred income taxes are recognized at currently enacted tax rates for temporary
differences between the financial reporting and income tax bases of assets and liabilities
and operating loss and tax credit carryforwards. As of February 28, 2005, the Corporation
has approximately $154.0 million of deferred tax assets related to deductible temporary
differences and tax loss and credit carryforwards, which will reduce taxable income in
future years. In assessing the realizability of deferred tax assets, the Corporation assesses whether it
is more likely than not that a portion or all of the deferred tax assets will not be
realized. The Corporation considers the scheduled reversal of deferred tax liabilities, tax
planning strategies and projected future taxable income in making this assessment. At
February 28, 2005, a valuation allowance of $49.3 million has been recorded against these
deferred tax assets based on this assessment and is primarily against certain foreign net
operating loss carryforwards. The Corporation believes it is more likely than not that the
tax benefit of the remaining net deferred tax assets will be realized. The amount of net
deferred tax assets considered realizable could be increased or decreased in the future if
the Corporations assessment of future taxable income or tax planning strategies change. Sales Returns

The Corporation provides for estimated returns of seasonal cards in the same period as the
related revenues are recorded. These estimates are based upon historical sales returns, the
amount of current year seasonal sales and other known factors. Estimated return rates
utilized for establishing estimated returns reserves have approximated actual returns
experience. However, actual returns may differ significantly, either favorably or
unfavorably, from these estimates if factors such as the historical data the Corporation
used to calculate these estimates do not properly reflect future returns or as a result of
changes in economic conditions of the customer and/or its market. The Corporation regularly
monitors its actual performance to estimated rates and the losses attributable to any
changes have historically not been material. New Accounting Pronouncements On November 24, 2004, the Financial Accounting Standards Board, (FASB) issued SFAS No. 151 (SFAS
151), Inventory Costs  an amendment of ARB No. 43, Chapter 4. SFAS 151 seeks to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage) in the determination of inventory carrying costs. The statement requires such
costs to be treated as a current period expense. SFAS 151 also establishes the concept of normal
capacity and requires the allocation of fixed production overhead to inventory based on the normal
capacity of the production facilities. Any unallocated overhead would be treated as a current
period expense in the period incurred. This statement is effective for fiscal years beginning
after July 15, 2005. The Corporation does not believe that the adoption 34




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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) (SFAS 123(R)), Share-Based
Payment. SFAS 123(R) requires that compensation cost relating to share-based payment transactions
be recognized in financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. SFAS 123(R) eliminates the alternative to use the
intrinsic value method of accounting in accordance with Accounting Principles Board 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 Corporation on March 1, 2006. Refer to Note 1 for the Corporations
current accounting for stock-based compensation. Factors That May Affect Future Results The Corporation continually monitors its business environment and adjusts strategies to enable it
to strengthen its position in the social expression industry. However, other potential challenges
in the economic environment in which it operates may have negative consequences to the Corporation
and its operating results in the future. These challenges include a potential decrease or
deterioration of the sales levels of greeting cards, both in price and volume, purchased by the
ultimate consumer at the Corporations customers retail locations. The Corporation has maintained a strong customer base in a wide variety of distribution channels
through, among other things, its investment in deferred costs related to agreements with certain
retailers and other competitive arrangements. The agreements have mitigated the adverse impact to
the Corporation from lost business from increased retailer consolidations in recent years. These
agreements have been a strategic element of the Corporations growth and the financial condition of
the Corporations retail customers is continually monitored and evaluated to reduce risk. Certain statements in this report may constitute forward-looking statements within the meaning of
the Federal securities laws. These statements can be identified by the fact that they do not relate
strictly to historic or current facts. They use such words as anticipate, estimate, expect,
project, intend, plan, believe, and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. These forward-looking
statements are based on currently available information, but are subject to a variety of
uncertainties, unknown risks and other factors concerning the Corporations operations and business
environment, which are difficult to predict and may be beyond the control of the Corporation.
Important factors that could cause actual results to differ materially from those suggested by
these forward-looking statements, and that could adversely affect the Corporations future
financial performance, include, but are not limited to, the following: retail bankruptcies and
consolidations; successful integration of acquisitions; successful transition of management; a weak
retail environment; consumer acceptance of products as priced 35




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and marketed; the impact of technology on core product sales; competitive terms of sale offered to
customers; successfully implementing supply chain improvements and achieving projected cost savings
from those improvements; the Corporations ability to generate revenues from licensing activities
and maximize the value of its intellectual property; the Corporations ability to comply with its
debt covenants; fluctuations in the value of currencies in major areas where the Corporation
operates, including the U.S. Dollar, Euro, U.K. Pound Sterling, and Canadian Dollar; escalation in
the cost of providing employee health care; and the outcome of any legal claims known or unknown.
Risks pertaining specifically to AG Interactive include the viability of online advertising and
subscriptions as revenue generators, the publics acceptance of online greetings and other social
expression products, and the ability of the mobile division to compete effectively in the wireless
content aggregation market. The risks and uncertainties identified above are not the only risks the Corporation faces.
Additional risks and uncertainties not presently known to the Corporation or that it
believes to be immaterial also may adversely affect the Corporation. Should any known or
unknown risks or uncertainties develop into actual events, or underlying assumptions prove
inaccurate, these developments could have material adverse effects on the Corporations
business, financial condition and results of operations. 36




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk Derivative Financial Instruments  The Corporation does not hold or issue derivative
financial instruments, other financial instruments or derivative commodity instruments for trading
purposes. Interest Rate Exposure  The Corporation manages interest rate exposure through a mix of
fixed and floating rate debt. Currently, the majority of the Corporations debt is carried at
fixed interest rates. Therefore, the Corporations overall interest rate exposure risk is
minimal. Based on the Corporations interest rate exposure on its non-fixed rate debt as of and
during the year ended February 28, 2005, a hypothetical 10% movement in interest rates would not
have had a material impact on interest expense. Foreign Currency Exposure  The Corporations international operations expose it to
translation risk when the local currency financial statements are translated into U.S. dollars. As
currency exchange rates fluctuate, translation of the statements of operations of international
subsidiaries to U.S. dollars could affect comparability of results between years. Approximately
25%, 21% and 18% of the Corporations 2005, 2004 and 2003 net sales, respectively, were generated
from operations outside the United States. Operations in Australasia, Canada, Mexico, South Africa
and the United Kingdom are denominated in currencies other than United States dollars. No
assurance can be given that future results will not be affected by significant changes in foreign
currency exchange rates. 37




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data PageIndex to Consolidated Financial Statements and Supplementary Financial Data
    
    
    NumberReport of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
    
    
    39Report of Independent Registered Public Accounting Firm
    
    
    41Consolidated Statement of Income  Years ended February 28,
2005, February 29, 2004, and February 28, 2003
    
    
    42Consolidated Statement of Financial Position  February 28,
2005 and February 29, 2004
    
    
    43Consolidated Statement of Cash Flows  Years ended February 28,
2005, February 29, 2004, and February 28, 2003
    
    
    45Consolidated Statement of Shareholders Equity  Years ended
February 28, 2005, February 29, 2004, and February 28, 2003
    
    
    46Notes to Consolidated Financial Statements  Years ended
February 28, 2005, February 29, 2004, and February 28, 2003
    
    
    47Supplementary Financial Data:Quarterly Results of Operations (Unaudited)
    
    
    76
 38




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING Board of Directors and Shareholders
American Greetings Corporation We have audited managements assessment, included in the accompanying Report of Management on
Internal Control Over Financial Reporting, that American Greetings Corporation maintained effective
internal control over financial reporting as of February 28, 2005, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). American Greetings Corporations management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of 39




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changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. In our opinion, managements assessment that American Greetings Corporation maintained effective
internal control over financial reporting as of February 28, 2005, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, American Greetings
Corporation maintained, in all material respects, effective internal control over financial
reporting as of February 28, 2005, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of financial position of American Greetings
Corporation as of February 28, 2005 and February 29, 2004, and the related consolidated statements
of income, shareholders equity, and cash flows for each of the three years in the period ended
February 28, 2005 of American Greetings Corporation and our report dated April 15, 2005 expressed
an unqualified opinion thereon. /s/ Ernst & Young LLP
 Cleveland, Ohio
April 15, 2005 40




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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders
American Greetings Corporation We have audited the
accompanying consolidated statements of financial position of American Greetings
Corporation as of February 28, 2005 and February 29, 2004, and the related consolidated statements
of income, shareholders equity, and cash flows for each of the three years in the period ended
February 28, 2005. Our audits also included the financial statement schedule listed in the Index
at Item 15. These financial statements and schedule are the responsibility of the Corporations
management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of American Greetings Corporation at February 28,
2005 and February 29, 2004, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended February 28, 2005, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of American Greetings Corporations internal control over
financial reporting as of February 28, 2005, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated April 15, 2005 expressed an unqualified opinion thereon. /s/
Ernst & Young
LLP
 Cleveland, Ohio
April 15, 2005 41




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CONSOLIDATED STATEMENT OF INCOME
Years ended February 28, 2005, February 29, 2004 and February 28, 2003 Thousands of dollars except share and per share amounts 2005
    
    
    2004
    
    
    2003Net sales
    
    $
    1,902,727
    
    
    $
    1,953,729
    
    
    $
    1,935,654Costs and expenses:Material, labor and other production costs
    
    
    905,201
    
    
    
    912,705
    
    
    
    853,210Selling, distribution and marketing
    
    
    654,402
    
    
    
    635,224
    
    
    
    607,031Administrative and general
    
    
    252,622
    
    
    
    219,369
    
    
    
    234,940Interest expense
    
    
    79,526
    
    
    
    85,828
    
    
    
    79,095Other income  net
    
    
    (97,272
    )
    
    
    (59,248
    )
    
    
    (26,487
    )1,794,479
    
    
    
    1,793,878
    
    
    
    1,747,789Income from continuing operations before
income tax expense
    
    
    108,248
    
    
    
    159,851
    
    
    
    187,865Income tax expense
    
    
    37,698
    
    
    
    61,862
    
    
    
    74,327Income from continuing operations
    
    
    70,550
    
    
    
    97,989
    
    
    
    113,538Income from discontinued operations, net of tax
    
    
    24,729
    
    
    
    6,681
    
    
    
    7,568Net income
    
    $
    95,279
    
    
    $
    104,670
    
    
    $
    121,106Earnings per share  basic:Income from continuing operations
    
    $
    1.03
    
    
    $
    1.47
    
    
    $
    1.73Income from discontinued operations
    
    
    0.36
    
    
    
    0.10
    
    
    
    0.12Net income
    
    $
    1.39
    
    
    $
    1.57
    
    
    $
    1.85Earnings per share  assuming dilution:Income from continuing operations
    
    $
    0.95
    
    
    $
    1.32
    
    
    $
    1.53Income from discontinued operations
    
    
    0.30
    
    
    
    0.08
    
    
    
    0.10Net income
    
    $
    1.25
    
    
    $
    1.40
    
    
    $
    1.63Average number of shares outstanding
    
    
    68,545,432
    
    
    
    66,509,332
    
    
    
    65,636,621Average number of shares outstanding 
assuming dilution
    
    
    82,016,835
    
    
    
    80,088,377
    
    
    
    78,980,830Dividends declared per share
    
    $
    0.12
    
    
    $
    
    
    
    $
    
 See notes to consolidated financial statements. 42




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CONSOLIDATED
STATEMENT OF FINANCIAL POSITION

February 28, 2005 and February 29, 2004 Thousands of dollars except share and per share amounts 2005
    
    
    2004ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    250,267
    
    
    $
    285,450Short-term investments
    
    
    208,740
    
    
    
    Trade accounts receivable, less allowances for seasonal
sales returns of $94,672 ($85,638 in 2004) and for
doubtful accounts of $16,684 ($17,871 in 2004)
    
    
    200,408
    
    
    
    238,473Inventories
    
    
    222,874
    
    
    
    238,612Deferred and refundable income taxes
    
    
    193,497
    
    
    
    157,886Assets of businesses held for sale
    
    
    
    
    
    
    40,815Prepaid expenses and other
    
    
    205,853
    
    
    
    237,809Total current assets
    
    
    1,281,639
    
    
    
    1,199,045GOODWILL
    
    
    270,057
    
    
    
    223,697OTHER ASSETS
    
    
    644,140
    
    
    
    706,898PROPERTY, PLANT AND EQUIPMENT  NET
    
    
    339,792
    
    
    
    354,373$
    2,535,628
    
    
    $
    2,484,013
 43




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##### Table of Contents



2005
    
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    143,041
    
    
    $
    125,816Accrued liabilities
    
    
    118,090
    
    
    
    129,773Accrued compensation and benefits
    
    
    96,789
    
    
    
    70,896Income taxes
    
    
    38,777
    
    
    
    14,513Liabilities of businesses held for sale
    
    
    
    
    
    
    5,338Other current liabilities
    
    
    90,970
    
    
    
    78,243Total current liabilities
    
    
    487,667
    
    
    
    424,579LONG-TERM DEBT
    
    
    486,099
    
    
    
    665,874OTHER LIABILITIES
    
    
    137,868
    
    
    
    96,325DEFERRED INCOME TAXES
    
    
    37,214
    
    
    
    29,695SHAREHOLDERS EQUITYCommon shares  par value $1 per share:Class A  77,428,103 shares issued
less 12,561,371 Treasury shares in 2005
and 75,452,637 shares issued less
12,571,924 Treasury shares in 2004
    
    
    64,867
    
    
    
    62,880Class B  6,066,092 shares issued
less 1,906,172 Treasury shares in 2005
and 6,064,472 shares issued less
1,476,248 Treasury shares in 2004
    
    
    4,160
    
    
    
    4,588Capital in excess of par value
    
    
    368,777
    
    
    
    331,765Treasury stock
    
    
    (445,618
    )
    
    
    (438,612
    )Accumulated other comprehensive income
    
    
    29,039
    
    
    
    20,638Retained earnings
    
    
    1,365,555
    
    
    
    1,286,281Total shareholders equity
    
    
    1,386,780
    
    
    
    1,267,540$
    2,535,628
    
    
    $
    2,484,013
 See notes to consolidated financial statements. 44




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CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended February 28, 2005, February 29, 2004 and February 28, 2003 Thousands of dollars 2005
    
    
    2004
    
    
    2003OPERATING ACTIVITIES:Net income
    
    $
    95,279
    
    
    $
    104,670
    
    
    $
    121,106Income from discontinued operations
    
    
    24,729
    
    
    
    6,681
    
    
    
    7,568Income from continuing operations
    
    
    70,550
    
    
    
    97,989
    
    
    
    113,538Adjustments to reconcile net income to net cash
provided by operating activities:Gain on sale of investment
    
    
    (3,095
    )
    
    
    
    
    
    
    (12,027
    )Loss on fixed assets
    
    
    7,544
    
    
    
    4,455
    
    
    
    (776
    )Loss on extinguishment of debt
    
    
    39,056
    
    
    
    18,389
    
    
    
    Depreciation and amortization
    
    
    57,045
    
    
    
    59,600
    
    
    
    60,602Deferred income taxes
    
    
    (9,454
    )
    
    
    56,853
    
    
    
    (25,154
    )Changes in operating assets and liabilities, net of acquisitions:Decrease (increase) in trade accounts receivable
    
    
    50,581
    
    
    
    65,507
    
    
    
    (11,415
    )Decrease in inventories
    
    
    23,311
    
    
    
    42,461
    
    
    
    15,870(Increase) decrease in other current assets
    
    
    (15,181
    )
    
    
    6,577
    
    
    
    5,782Decrease in deferred costs  net
    
    
    107,660
    
    
    
    34,875
    
    
    
    39,546Increase (decrease) in accounts payable and other liabilities
    
    
    31,768
    
    
    
    (99,474
    )
    
    
    (124,910
    )Other  net
    
    
    (1,371
    )
    
    
    (4,109
    )
    
    
    1,882Cash Provided by Operating Activities
    
    
    358,414
    
    
    
    283,123
    
    
    
    62,938INVESTING ACTIVITIES:Proceeds from the sale of discontinued operations
    
    
    77,000
    
    
    
    
    
    
    
    Cash payments for business acquisitions
    
    
    (25,178
    )
    
    
    
    
    
    
    Proceeds from the sale of short-term investments
    
    
    297,660
    
    
    
    
    
    
    
    Purchases of short-term investments
    
    
    (506,400
    )
    
    
    
    
    
    
    Property, plant and equipment additions
    
    
    (47,497
    )
    
    
    (32,544
    )
    
    
    (28,053
    )Proceeds from sale of fixed assets
    
    
    5,848
    
    
    
    198
    
    
    
    1,613Investment in corporate-owned life insurance
    
    
    603
    
    
    
    7,808
    
    
    
    10,017Other  net
    
    
    10,934
    
    
    
    (5,688
    )
    
    
    35,788Cash (Used) Provided by Investing Activities
    
    
    (187,030
    )
    
    
    (30,226
    )
    
    
    19,365FINANCING ACTIVITIES:Reduction of long-term debt
    
    
    (216,417
    )
    
    
    (80,954
    )
    
    
    (124,833
    )(Decrease) increase in short-term debt
    
    
    
    
    
    
    (128,693
    )
    
    
    116,747Sale of stock under benefit plans
    
    
    40,114
    
    
    
    18,466
    
    
    
    21,487Purchase of treasury shares
    
    
    (24,080
    )
    
    
    (828
    )
    
    
    (83
    )Dividends to shareholders
    
    
    (8,264
    )
    
    
    
    
    
    
    Cash (Used) Provided by Financing Activities
    
    
    (208,647
    )
    
    
    (192,009
    )
    
    
    13,318Cash (Used) Provided by Discontinued Operations
    
    
    (2,397
    )
    
    
    5,987
    
    
    
    8,066EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    4,477
    
    
    
    10,112
    
    
    
    3,797(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (35,183
    )
    
    
    76,987
    
    
    
    107,484Cash and Cash Equivalents at Beginning of Year
    
    
    285,450
    
    
    
    208,463
    
    
    
    100,979Cash and Cash Equivalents at End of Year
    
    $
    250,267
    
    
    $
    285,450
    
    
    $
    208,463
 See notes to consolidated financial statements. 45




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##### Table of Contents



CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
Years ended February 28, 2005, February 29, 2004 and February 28, 2003 AccumulatedCapital in
    
    
    
    
    
    
    
    
    
    
    Deferred
    
    
    OtherCommon Shares
    
    
    Excess of
    
    
    Treasury
    
    
    Shares Held
    
    
    Compensation
    
    
    Comprehensive
    
    
    RetainedThousands of dollars except per share amounts
    
    Class A
    
    
    Class B
    
    
    Par Value
    
    
    Stock
    
    
    In Trust
    
    
    Plans
    
    
    Income (Loss)
    
    
    Earnings
    
    
    TotalBALANCE FEBRUARY 28, 2002
    
    $
    59,153
    
    
    $
    4,608
    
    
    $
    286,158
    
    
    $
    (438,824
    )
    
    $
    (20,480
    )
    
    $
    20,480
    
    
    $
    (69,614
    )
    
    $
    1,060,938
    
    
    $
    902,419Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,106
    
    
    
    121,106Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,171
    
    
    
    
    
    
    
    33,171Reclassification of realized gain on available-for-sale securities (net of tax of $3,040)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,051
    )
    
    
    
    
    
    
    (6,051
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148,226Exchange of shares
    
    
    11
    
    
    
    (11
    )Sale of shares under benefit
plans, including tax benefits
    
    
    2,133
    
    
    
    
    
    
    
    24,714
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (95
    )
    
    
    26,792Purchase of treasury shares
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83
    )Sale of treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    2Stock grants and other
    
    
    2
    
    
    
    8
    
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )
    
    
    108BALANCE FEBRUARY 28, 2003
    
    
    61,299
    
    
    
    4,600
    
    
    
    310,872
    
    
    
    (438,704
    )
    
    
    (20,480
    )
    
    
    20,480
    
    
    
    (42,494
    )
    
    
    1,181,891
    
    
    
    1,077,464Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104,670
    
    
    
    104,670Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,327
    
    
    
    
    
    
    
    63,327Unrealized loss on available-for-sale
securities (net of tax benefit of $125)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (195
    )
    
    
    
    
    
    
    (195
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167,802Exchange of shares
    
    
    14
    
    
    
    (14
    )Sale of shares under benefit
plans, including tax benefits
    
    
    1,566
    
    
    
    32
    
    
    
    20,876
    
    
    
    651
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (245
    )
    
    
    22,880Purchase of treasury shares
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    (787
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (828
    )Sale of treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    4Stock grants and other
    
    
    1
    
    
    
    11
    
    
    
    17
    
    
    
    221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    218BALANCE FEBRUARY 29, 2004
    
    
    62,880
    
    
    
    4,588
    
    
    
    331,765
    
    
    
    (438,612
    )
    
    
    (20,480
    )
    
    
    20,480
    
    
    
    20,638
    
    
    
    1,286,281
    
    
    
    1,267,540Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,279
    
    
    
    95,279Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,750
    
    
    
    
    
    
    
    9,750Minimum pension liability (net of tax of $417)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (655
    )
    
    
    
    
    
    
    (655
    )Unrealized loss on available-for-sale
securities
(net of tax benefit of $23)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    
    
    
    
    (37
    )Reclassification of realized loss on available-for-sale securities (net of tax of $84)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133
    )
    
    
    
    
    
    
    (133
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (524
    )
    
    
    
    
    
    
    (524
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,680Cash dividends  $0.12 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,264
    )
    
    
    (8,264
    )Exchange of shares
    
    
    1
    
    
    
    (1
    )Sale of shares under benefit
plans, including tax benefits
    
    
    2,041
    
    
    
    489
    
    
    
    33,555
    
    
    
    15,861
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,686
    )
    
    
    44,260Purchase of treasury shares
    
    
    (56
    )
    
    
    (925
    )
    
    
    
    
    
    
    (23,099
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,080
    )Distribution of shares held in trust
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,480
    
    
    
    (20,480
    )Stock grants and other
    
    
    1
    
    
    
    9
    
    
    
    3,457
    
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    
    3,644BALANCE FEBRUARY 28, 2005
    
    $
    64,867
    
    
    $
    4,160
    
    
    $
    368,777
    
    
    $
    (445,618
    )
    
    $
    
    
    
    $
    
    
    
    $
    29,039
    
    
    $
    1,365,555
    
    
    $
    1,386,780
 See notes to consolidated financial statements. 46




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 28, 2005, February 29, 2004 and February 28, 2003 Thousands of dollars except per share amounts NOTE 1  SIGNIFICANT ACCOUNTING POLICIES Consolidation:The consolidated financial statements include the accounts of American Greetings
Corporation and its subsidiaries (the Corporation). All significant intercompany accounts and
transactions are eliminated. The Corporations fiscal year ends on February 28 or 29. References
to a particular year refer to the fiscal year ending in February of that year. For example, 2005
refers to the year ended February 28, 2005. The Corporations subsidiary, AG Interactive (formerly
known as AmericanGreetings.com, Inc.), is consolidated on a two-month lag corresponding with its
fiscal year-end of December 31. The Corporations investments in less than majority-owned companies in which it has the ability to
exercise significant influence over operating and financial policies are accounted for using the
equity method except when they qualify as variable interest entities in which case the investments
are consolidated in accordance with Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities. Reclassifications:Certain amounts in the prior year financial statements have been reclassified
to conform to the 2005 presentation. These reclassifications had no material impact on earnings or
cash flows. Use of Estimates:The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. On an ongoing basis, management reviews its estimates,
including those related to seasonal returns, allowance for doubtful accounts, recoverability of
intangibles and other long-lived assets, deferred tax asset valuation allowances, deferred costs
and various other operating allowances and accruals, based on currently available information.
Changes in facts and circumstances may alter such estimates and affect results of operations and
financial position in future periods. Cash Equivalents:The Corporation considers all highly liquid instruments purchased with a
maturity of less than three months to be cash equivalents. Short-term Investments:During fiscal 2005, the Corporation began investing in auction rate
securities, which are highly liquid, variable-rate debt securities associated with bond offerings.
While the underlying security has a long-term nominal maturity, the interest rate is reset through
Dutch auctions that are typically held every 7, 28 or 35 days, creating short-term liquidity for
the Corporation. The securities trade at par and are callable at par on any interest payment date
at the option of the issuer. Interest is paid at the end of each auction period. The investments
are classified as available-for-sale and are recorded at cost, which approximates market value. 47




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##### Table of Contents



Allowance for Doubtful Accounts:The Corporation evaluates the collectibility of its accounts
receivable based on a combination of factors. In circumstances where the Corporation is aware of a
customers inability to meet its financial obligations (evidenced by such events as bankruptcy or
insolvency proceedings), a specific reserve for bad debts against amounts due is recorded to reduce
the receivable to the amount the Corporation reasonably expects will be collected. In addition,
the Corporation recognizes reserves for bad debts based on estimates developed by using standard
quantitative measures incorporating historical write-offs and current economic conditions. Customer Allowances and Discounts:The Corporation offers certain of its customers allowances and
discounts including cooperative advertising, rebates, marketing allowances and other various
allowances and discounts. These amounts are recorded as a reduction of gross accounts receivable
and are recognized as reductions of net sales when earned. In addition to the seasonal sales
allowance and allowance for doubtful accounts shown on the Consolidated Statement of Financial
Position, Trade accounts receivable includes allowances for cooperative advertising of $23,571
and $18,427 at February 28, 2005 and February 29, 2004, respectively, and rebate allowances of
$36,819 and $26,929 at February 28, 2005 and February 29, 2004, respectively. Financial Instruments:The carrying value of the Corporations financial instruments approximate
their fair market values, other than the fair value of the Corporations publicly-traded debt. See
Note 11 for further discussion. Concentration of Credit Risks:The Corporation sells primarily to customers in the retail trade,
including those in the mass merchandiser, drug store, supermarket and other channels of
distribution. These customers are located throughout the United States, Canada, the United
Kingdom, Australia, New Zealand, Mexico and South Africa. Net sales to the Corporations five
largest customers accounted for approximately 30% of net sales in 2005, 2004 and 2003. Net sales
to Wal-Mart Stores, Inc. accounted for approximately 13%, 11% and 11% of net sales in 2005, 2004
and 2003, respectively. The Corporation conducts business based on periodic evaluations of its customers financial
condition and generally does not require collateral. While the competitiveness of the retail
industry presents an inherent uncertainty, the Corporation does not believe a significant risk of
loss from a concentration of credit exists. 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. The Corporation
classifies the total contractual amount of the incentive consideration committed to the customer
but not yet earned as a deferred cost asset at the inception of an agreement, or any future
amendments. Deferred costs estimated to be earned by the customer and charged to operations during
the next twelve months are classified as Prepaid expenses and other in the Consolidated Statement
of Financial Position, and the remaining amounts to be charged beyond the next twelve months are
classified as Other assets. The periods of amortization are continually evaluated to determine
if later circumstances warrant revisions of the estimated amortization periods. Such costs are
capitalized as assets reflecting the probable future economic benefits obtained as a result of the
transactions. Future economic benefit is
further defined as cash inflow to the Corporation. The Corporation, by incurring these costs, is 48




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##### Table of Contents



ensuring the probability of future cash flows through sales to customers. The amortization of such
deferred costs properly matches the cost of obtaining business over the periods to be benefited.
The Corporation maintains adequate reserves for deferred contract costs related to supply
agreements and does not expect that the non-completion of any particular contract would result in a
material loss. See Note 10 for further discussion. Inventories:Finished products, work in process and raw material inventories are carried at the
lower of cost or market. The last-in, first-out (LIFO) cost method is used for approximately 65%
of the domestic inventories in 2005 and approximately 50% in 2004. The foreign subsidiaries
principally use the first-in, first-out method. Display material and factory supplies are carried
at average cost. See Note 7 for further information. In November 2004, the Financial Accounting Standards Board (the FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151 (SFAS 151), Inventory Costs  an amendment of
ARB No. 43, Chapter 4. SFAS 151 seeks to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material (spoilage) in the determination of
inventory carrying costs. The statement requires such costs to be treated as a current period
expense. SFAS 151 also establishes the concept of normal capacity and requires the allocation of
fixed production overhead to inventory based on the normal capacity of the production facilities.
Any unallocated overhead would be treated as a current period expense in the period incurred. This
statement is effective for fiscal years beginning after July 15, 2005. The Corporation does not
believe that the adoption of SFAS 151 will have a significant impact on the Corporations
consolidated financial statements. Investment in Life Insurance:The Corporations investment in corporate-owned life insurance
policies is recorded in Other assets net of policy loans. The net life insurance expense,
including interest expense, is included in Administrative and general expenses in the
Consolidated Statement of Income. The related interest expense, which approximates amounts paid,
was $10,341, $12,798 and $25,453 in 2005, 2004 and 2003, respectively. In April 2003, as part of
its settlement with the Internal Revenue Service (IRS), the Corporation agreed to surrender
certain of its corporate-owned life insurance policies. See Note 17 for further discussion. Goodwill:Goodwill represents the excess of purchase price over the estimated fair value of net
assets acquired in business combinations accounted for by the purchase method. On March 1, 2002,
the Corporation adopted SFAS No. 142 (SFAS 142), Goodwill and Intangible Assets. This
Statement, which superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, and Accounting Principles Board (APB) Opinion No. 17
(APB 17), Intangible Assets, eliminates the requirement to amortize goodwill and
indefinitelived intangible assets, addresses the amortization of intangible assets with a defined
life and addresses the impairment testing and recognition for goodwill and intangible assets.
While the Corporation uses a variety of methods to estimate fair value for the annual impairment
test, its primary method is discounted cash flows. The Corporation completes the required annual
impairment test of goodwill each year during the fourth quarter. See Note 9 for further
discussion. 49




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##### Table of Contents



Translation of Foreign Currencies:Asset and liability accounts are translated into United States
dollars using exchange rates in effect at the date of the Consolidated Statement of Financial
Position; revenue and expense accounts are translated at average exchange rates during the related
period. Translation adjustments are reflected as a component of shareholders equity. Gains and
losses resulting from foreign currency transactions, including intercompany transactions that are
not considered permanent investments, are included in net income as incurred. Property and Depreciation: Property, plant and equipment are carried at cost. Depreciation and
amortization of buildings, equipment and fixtures is computed principally by the straight-line
method over the useful lives of the various assets. The cost of buildings is depreciated over 25
to 40 years; computer hardware and software over 3 to 7 years; machinery and equipment over 10 to
15 years; and furniture and fixtures over 20 years. Leasehold improvements are amortized over the
lesser of the lease term or the estimated life of the leasehold improvement. Property, plant and
equipment are reviewed for impairment in accordance with SFAS No. 144 (SFAS 144), Accounting for
the Impairment or Disposal of Long-Lived Assets, which superseded SFAS 121. SFAS 144 also
provides a single accounting model for the disposal of long-lived assets. In accordance with SFAS
144, assets held-for-sale are stated at the lower of their fair values or carrying amounts and
depreciation is no longer recognized. See Note 8 for further information. Revenue Recognition:Sales of seasonal product to unrelated, third party retailers are recognized
at the approximate date the product is received by the customer, commonly referred to in the
industry as the ship-to-arrive date (STA). The Corporation maintains STA data due to the large
volumes of seasonal product shipment activity and the lead time required to achieve
customer-requested delivery dates. Seasonal cards are sold with the right of return on unsold
merchandise. In addition, the Corporation provides for estimated returns of seasonal cards when
those sales to unrelated, third party retailers are recognized. Accrual rates utilized for
establishing estimated returns reserves have approximated actual returns experience. At
Corporation-owned retail locations, sales of seasonal product are recognized upon the sales of
products to the consumer. Except for seasonal products, sales are recognized by the Corporation upon shipment of products to
unrelated, third party retailers and upon the sales of products to the consumer at
Corporation-owned retail locations. Sales of these products are generally sold without the right
of return. Sales credits for non-seasonal product are issued at the Corporations sole discretion
for damaged, obsolete and outdated products. Sales of both everyday and seasonal products to retailers with scan-based trading arrangements with
the Corporation are recognized when the products are sold by those retailers to customers. The Corporation has agreements for licensing the Care Bear and Strawberry Shortcake characters.
These license agreements provide for royalty revenue to the Corporation based
on a percentage of net sales and are subject to certain guaranteed minimum royalties. Certain of
these agreements are managed by outside agents. All payments flow through the agents prior to
being remitted to the Corporation. Typically, the Corporation receives quarterly payments from the
agents. Royalty revenue is recognized upon receipt and recorded in 50




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##### Table of Contents



Other income  net and
expenses associated with the servicing of these agreements are primarily recorded as Selling,
distribution and marketing. Shipping and Handling Fees:The Corporation classifies shipping and handling fees as part of
Selling, distribution and marketing expenses. Shipping and handling costs were $140,039,
$137,667 and $135,604 in 2005, 2004 and 2003, respectively. Advertising Expense:Advertising costs are expensed as incurred. Advertising expense was $50,587,
$48,847 and $48,039 in 2005, 2004 and 2003, respectively. Income Taxes:Income tax expense includes both current and deferred taxes. Current tax expense
represents the amount of income taxes paid or payable (or refundable) for the year, including
interest. Deferred income taxes, net of appropriate valuation allowances, are provided for
temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. See Note 17 for further discussion. Stock-Based Compensation:The Corporation follows APB Opinion No. 25 (APB 25), Accounting for
Stock Issued to Employees, and related Interpretations in accounting for its stock options granted
to employees and directors. Because the exercise price of the Corporations 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 (SFAS
123), Accounting for Stock-Based Compensation, as amended by SFAS No. 148 (SFAS 148),
Accounting for Stock-Based Compensation  Transition and Disclosure. 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: 2005
    
    
    2004
    
    
    2003Net income as reported
    
    $
    95,279
    
    
    $
    104,670
    
    
    $
    121,106Deduct: Stock-based compensation
expense determined under fair
value based method, net of tax
    
    
    5,784
    
    
    
    5,881
    
    
    
    4,695Pro forma net income
    
    $
    89,495
    
    
    $
    98,789
    
    
    $
    116,411Earnings per share:As reported
    
    $
    1.39
    
    
    $
    1.57
    
    
    $
    1.85Pro forma
    
    
    1.31
    
    
    
    1.49
    
    
    
    1.77Earnings per share  assuming dilution:As reported
    
    $
    1.25
    
    
    $
    1.40
    
    
    $
    1.63Pro forma
    
    
    1.18
    
    
    
    1.33
    
    
    
    1.57
 51




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##### Table of Contents



The fair value of the options granted used to compute pro forma net income and pro forma earnings
per share is the estimated present value at the grant date using the Black-Scholes option-pricing
model with the following assumptions: 2005
    
    
    2004
    
    
    2003Risk-free interest rate
    
    
    3.4
    %
    
    
    2.7
    %
    
    
    3.8
    %Dividend yield
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected stock volatility
    
    
    0.36
    
    
    
    0.50
    
    
    
    0.53Expected life in years:Grant date to exercise date
    
    
    3.8
    
    
    
    4.0
    
    
    
    4.4Vest date to exercise date
    
    
    1.3
    
    
    
    1.2
    
    
    
    1.3
 The weighted average fair value per share of options granted during 2005, 2004 and 2003 was $7.41,
$6.09 and $5.96, respectively. In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS 123(R)), Share-Based
Payment. SFAS 123(R) requires that compensation cost relating to share-based payment transactions
be recognized in financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. SFAS 123(R) eliminates the alternative to use the
intrinsic value method of accounting in accordance with APB 25. The Corporation is in the process
of evaluating the impact that the adoption of this statement will have on the consolidated
financial statements. SFAS 123(R) is effective for the Corporation on March 1, 2006. NOTE 2  ACQUISITIONS During the second quarter of 2005, the AG Interactive segment acquired 100% of the equity interests
of MIDIRingTones, LLC (MIDI) and K-Mobile S.A. (K-Mobile). During the fourth quarter of 2005,
the Social Expression Products segment acquired 100% of the equity interests of Collage Designs
Limited (Collage) and 50% of the equity interests of The Hatchery, LLC (the Hatchery). The
financial results of these acquisitions are included in the Corporations consolidated results from
their respective dates of acquisition. Pro forma results of operations have not been presented
because the effects of these acquisitions were not material. MIDI is an entertainment company that creates, licenses and sells content for cellular phones
including polyphonic ringtones and color graphics. AG Interactive acquired the net assets of MIDI
valued at approximately $1,000 and recorded goodwill of approximately $3,000. The purchase
agreement also provided for a contingent payment based on MIDIs operating results for calendar
year 2005. In February 2005, AG Interactive negotiated an early settlement of the contingent
payment due under the purchase agreement. At that time, AG Interactive paid approximately $9,000
to the sellers, which it recorded as additional 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 $2,000, and recorded goodwill of
approximately $17,000. As the K-Mobile acquisition was a non-cash 52




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transaction, it is not reflected in the 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 approximately 92% to 83%. During February 2005, the Corporation paid approximately $7,000 to acquire approximately 7% of the
outstanding shares of AG Interactive held by certain minority shareholders. As a result of this
transaction, the Corporation recorded additional goodwill of approximately $3,000 and its ownership
interest in AG Interactive increased from approximately 83% to 90%. The Hatchery develops and produces original family and childrens entertainment for all media. In
accordance with FIN 46, the results of the Hatchery are consolidated. The Corporation acquired 50%
of the net assets of the Hatchery which were valued at approximately $200 and recorded goodwill of
approximately $2,200. Collage is a European manufacturer of gift-wrap products. The Corporation acquired the net assets
of Collage valued at approximately $300 and recorded goodwill of approximately $6,000.
Approximately 45% of the acquisition price was paid at the closing and the remainder will be
settled over the next two years. The allocation of the purchase price has not yet been finalized for these acquisitions. As part of the acquisition of Gibson Greetings, Inc. (Gibson) in March 2000, the Corporation
incurred acquisition integration expenses for the incremental costs to exit and consolidate
activities at Gibson locations, to involuntarily terminate Gibson employees, and for other costs to
integrate operating locations and other activities of Gibson with the Corporation. As of March 1,
2002, all activities and cash payments were substantially completed with the exception of ongoing
rent payments related to a closed distribution facility. The remaining balance of the facility
obligation at February 28, 2005, February 29, 2004 and February 28, 2003, was $25,081, $26,561 and
$31,420, respectively. The Corporation anticipates making payments on the facility obligations
through 2013. NOTE 3  OTHER INCOME  NET 2005
    
    
    2004
    
    
    2003Royalty revenue
    
    $
    (63,761
    )
    
    $
    (44,880
    )
    
    $
    (6,670
    )Foreign exchange (gain) loss
    
    
    (3,868
    )
    
    
    (5,236
    )
    
    
    1,028Interest income
    
    
    (5,175
    )
    
    
    (2,688
    )
    
    
    (4,824
    )Gain on sale of investments
    
    
    (3,095
    )
    
    
    
    
    
    
    (12,027
    )Other
    
    
    (21,373
    )
    
    
    (6,444
    )
    
    
    (3,994
    )$
    (97,272
    )
    
    $
    (59,248
    )
    
    $
    (26,487
    )
 In 2005, other included a $10,000 one-time receipt related to licensing activities. Other
includes, among other things, gains and losses on asset disposals and rental income. The proceeds
received from the sale of investments of $19,050 in 2005 and $16,964 in 2003 are included in Other
 net investing activities in the Consolidated Statement of Cash Flows for the respective periods. 53




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NOTE 4  RESTRUCTURE RESERVES In 2002, the Corporation undertook a restructure of its domestic and foreign manufacturing and
distribution operations and recorded a charge of $56,715. 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 at
February 28, 2005: Termination
    
    
    All OtherBenefits
    
    
    Costs
    
    
    TotalBalance February 28, 2002
    
    $
    17,977
    
    
    $
    1,806
    
    
    $
    19,783Cash expenditures
    
    
    (13,936
    )
    
    
    (1,667
    )
    
    
    (15,603
    )Balance February 28, 2003
    
    
    4,041
    
    
    
    139
    
    
    
    4,180Cash expenditures
    
    
    (2,537
    )
    
    
    (139
    )
    
    
    (2,676
    )Balance February 29, 2004
    
    
    1,504
    
    
    
    
    
    
    
    1,504Cash expenditures and other
    
    
    (1,061
    )
    
    
    
    
    
    
    (1,061
    )Balance February 28, 2005
    
    $
    443
    
    
    $
    
    
    
    $
    443
 The above balance is included in Accrued liabilities at February 28, 2005. NOTE 5  EARNINGS PER SHARE The following table sets forth the computation of earnings per share and earnings per share 
assuming dilution: 2005
    
    
    2004
    
    
    2003Numerator:Income from continuing operations
    
    $
    70,550
    
    
    $
    97,989
    
    
    $
    113,538Add-back  interest on convertible
subordinated notes, net of tax
    
    
    7,501
    
    
    
    7,525
    
    
    
    7,403Income from continuing operations 
assuming dilution
    
    $
    78,051
    
    
    $
    105,514
    
    
    $
    120,941Denominator (thousands):Weighted average shares outstanding
    
    
    68,545
    
    
    
    66,509
    
    
    
    65,637Effect of dilutive securities:Stock options
    
    
    881
    
    
    
    988
    
    
    
    753Convertible debt
    
    
    12,591
    
    
    
    12,591
    
    
    
    12,591Weighted average shares outstanding 
assuming dilution
    
    
    82,017
    
    
    
    80,088
    
    
    
    78,981Income from continuing operations per share
    
    $
    1.03
    
    
    $
    1.47
    
    
    $
    1.73Income from continuing operations per share 
assuming dilution
    
    $
    0.95
    
    
    $
    1.32
    
    
    $
    1.53
 54




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Approximately 2.5 million, 3.7 million and 4.6 million shares of exercisable stock options, in
2005, 2004 and 2003, respectively, were excluded from the computation of earnings per share 
assuming dilution because the options exercise prices were greater than the average market price
of the common shares during the respective years. NOTE 6  ACCUMULATED OTHER COMPREHENSIVE INCOME At February 28, 2005 and February 29, 2004, the balance of accumulated other comprehensive income
consisted of the following components: 2005
    
    
    2004Foreign currency translation adjustment
    
    $
    30,583
    
    
    $
    20,833Minimum pension liability adjustment
    
    
    (655
    )
    
    
    Unrealized investment loss
    
    
    (365
    )
    
    
    (195
    )Other
    
    
    (524
    )
    
    
    $
    29,039
    
    
    $
    20,638
 NOTE 7  INVENTORIES 2005
    
    
    2004Raw materials
    
    $
    23,241
    
    
    $
    37,514Work in process
    
    
    19,719
    
    
    
    30,047Finished products
    
    
    228,088
    
    
    
    212,252271,048
    
    
    
    279,813Less LIFO reserve
    
    
    75,890
    
    
    
    73,213195,158
    
    
    
    206,600Display material and factory supplies
    
    
    27,716
    
    
    
    32,012$
    222,874
    
    
    $
    238,612
 The Corporation experienced LIFO liquidations in 2004 and 2003, which increased Income from
continuing operations before income tax expense by approximately $4,600 and $2,700, respectively. NOTE 8  PROPERTY, PLANT AND EQUIPMENT 2005
    
    
    2004Land
    
    $
    13,397
    
    
    $
    14,200Buildings
    
    
    287,774
    
    
    
    308,279Equipment and fixtures
    
    
    690,586
    
    
    
    667,035991,757
    
    
    
    989,514Less accumulated depreciation
    
    
    651,965
    
    
    
    635,141$
    339,792
    
    
    $
    354,373
 55




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During 2005, the Corporation disposed of approximately $73,000 of property, plant and equipment
that included accumulated depreciation of approximately $60,000 compared to disposals in 2004 of
approximately $88,000 with accumulated depreciation of approximately $83,000. NOTE 9  GOODWILL AND INTANGIBLE ASSETS Effective March 1, 2002, the Corporation adopted SFAS 142 pursuant to which goodwill and
indefinite-lived intangibles are no longer amortized but rather are reviewed for impairment
annually or more frequently if impairment indicators arise. This Statement also addresses the
amortization of intangible assets with defined lives. At February 28, 2005 and February 29, 2004, intangible assets subject to the amortization
provisions of SFAS 142, net of accumulated amortization, were $2,767 and $1,374, respectively. The
Corporation does not have any indefinite-lived intangible assets. The Corporation completed the first step of the transitional impairment test for goodwill during
the second quarter of 2003 and determined there were no indicators of impairment as of March 1,
2002. In addition, the Corporation completed the required annual impairment test of goodwill, and
based on the results of the testing, did not record a charge for impairment in 2005, 2004 or 2003. A summary of the changes in the carrying amount of the Corporations goodwill during the years
ended February 28, 2005 and February 29, 2004, by segment, is as follows: Social
    
    
    
    
    
    
    
    
    
    
    Non-Expression
    
    
    AG
    
    
    Retail
    
    
    reportableProducts
    
    
    Interactive
    
    
    Operations
    
    
    Segments
    
    
    TotalBalance at February 28, 2003
    
    $
    147,350
    
    
    $
    42,669
    
    
    $
    14,306
    
    
    $
    81
    
    
    $
    204,406Acquisition related
    
    
    (2,120
    )
    
    
    
    
    
    
    3,331
    
    
    
    
    
    
    
    1,211Foreign currency translation
    
    
    18,018
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    18,080Balance at February 29, 2004
    
    
    163,248
    
    
    
    42,669
    
    
    
    17,699
    
    
    
    81
    
    
    
    223,697Acquisition related
    
    
    8,674
    
    
    
    32,485
    
    
    
    
    
    
    
    
    
    
    
    41,159Foreign currency translation
    
    
    3,357
    
    
    
    1,794
    
    
    
    50
    
    
    
    
    
    
    
    5,201Balance at February 28, 2005
    
    $
    175,279
    
    
    $
    76,948
    
    
    $
    17,749
    
    
    $
    81
    
    
    $
    270,057
 Included in the calculation of the 2005 gain on disposal of the Magnivision business was
$5,258 of goodwill that was previously reported in non-reportable segments. See Note 18 for
further discussion. NOTE 10  DEFERRED COSTS In the normal course of its business, the Corporation enters into agreements with certain customers
for the supply of greeting cards and related products. Under these agreements, the customer
typically receives from the Corporation a combination of cash payments, credits, discounts,
allowances and other incentive considerations to be earned by the customer as product is purchased
from the Corporation over the effective time period of the agreement to meet a minimum purchase
volume commitment. In the event a contract is not completed, the Corporation has a claim for
unearned advances under the agreement. The Corporation 56




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##### Table of Contents



periodically reviews the progress toward
the commitment and adjusts the estimated amortization period accordingly to match the costs with
the revenue associated with the agreement. The agreements may or may not specify the Corporation
as the sole supplier of social expression products to the customer. A portion of the total consideration may be payable by the Corporation at the time the agreement is
consummated. All future payment commitments are classified as liabilities at inception until paid.
The payments that are expected to be made in the next twelve months are classified as Other
current liabilities in the Consolidated Statement of Financial Position, and the remaining payment
commitments beyond the next twelve months are classified as Other liabilities. The Corporation
maintains reserves for deferred costs related to supply agreements of $37,500 and $40,100 at
February 28, 2005 and February 29, 2004, respectively. The Corporation does not expect that the
non-completion of any particular contract would result in a material loss. At February 28, 2005 and February 29, 2004, deferred costs and future payment commitments were as
follows: 2005
    
    
    2004Prepaid expenses and other
    
    $
    156,665
    
    
    $
    187,844Other assets
    
    
    582,401
    
    
    
    630,445Deferred cost assets
    
    
    739,066
    
    
    
    818,289Other current liabilities
    
    
    (65,944
    )
    
    
    (58,047
    )Other liabilities
    
    
    (95,452
    )
    
    
    (69,493
    )Deferred cost liabilities
    
    
    (161,396
    )
    
    
    (127,540
    )Net deferred costs
    
    $
    577,670
    
    
    $
    690,749
 NOTE 11  LONG AND SHORT-TERM DEBT On June 29, 2001, the Corporation issued $260,000 of 11.75% senior subordinated notes, due on July
15, 2008. During 2004, the Corporation repurchased $63,630 of these notes and recorded a charge of
$13,750 for the write-off of related deferred financing costs and the premium associated with the
note repurchase. During 2005, the Corporation commenced a cash tender offer for all of its
remaining outstanding 11.75% senior subordinated notes. As a result of this tender offer, a total
of $186,186 of these notes were repurchased and the Corporation recorded a charge of $39,056,
included in Interest expense on the Consolidated Statement of Income, for the payment of the
premium and other fees associated with the notes repurchased as well as for the write-off of
related deferred financing costs. At February 28, 2005, $10,016 of these notes remained
outstanding. As part of this transaction, substantially all restrictive covenants were eliminated
from the remaining outstanding notes. On June 29, 2001, the Corporation issued $175,000 of 7.00% convertible subordinated notes, due on
July 15, 2006. The notes are convertible at the option of the holders into 57




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Class A common shares
of the Corporation at any time before the close of business on July 15, 2006, at a conversion rate
of 71.9466 common shares per $1 principal amount of notes. If converted in their entirety, the
notes outstanding would result in the issuance of approximately 12,591,000 Class A common shares of
the Corporation. The total fair value of the Corporations publicly traded debt, based on quoted market prices, was
$645,509 (at a carrying value of $483,519) and $845,791 (at a carrying value of $665,284) at
February 28, 2005 and February 29, 2004, respectively. 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 $350,000 facility and was amended on
July 22, 2002 to a $320,000 facility. The Corporation paid the remaining outstanding balance of
$117,988 of the term loan on April 7, 2003. At that date, the Corporation recorded a charge of $4,639 for the
write-off of related deferred financing costs and a premium associated with the early retirement of
the loan. The amended and restated senior secured credit facility currently consists of a $200,000
revolving facility maturing on May 10, 2008. There were no outstanding balances under this
facility at February 28, 2005 or February 29, 2004. The amended and restated credit facility is secured by the domestic assets of the Corporation and a
65% interest in the common stock of its foreign subsidiaries. The Corporation pays an annual
commitment fee of 25 basis points on the undrawn portion of the facility. The facility contains
various restrictive covenants. Some of these restrictions require that the Corporation meet
specified periodic financial ratios, minimum net worth, maximum leverage, and interest coverage.
The credit facility places certain restrictions on the Corporations ability to incur additional
indebtedness, to engage in acquisitions of other businesses, to repurchase its own capital stock
and to pay shareholder dividends. These covenants are less restrictive than the covenants
previously in place. In April 2005, the Corporation amended its amended and restated senior secured credit facility
dated May 11, 2004. The amendment, among other things, increases the maximum amount of dividends
that the Corporation may pay to its shareholders, increases the maximum amount of its own capital
stock that it may repurchase and extends the period during which the Corporation may repurchase its
11.75% senior subordinated notes due July 15, 2008. The Corporation is also party to a three-year accounts receivable securitization financing
agreement that provides for up to $200,000 of financing and is secured by certain trade accounts
receivable. Under the terms of the agreement, the Corporation transfers trade receivables to a
wholly-owned consolidated subsidiary that in turn utilizes the receivables to secure borrowings
through a credit facility with a financial institution. On August 2, 2004, the agreement was
amended to extend the maturity date to August 1, 2007. The related interest rate is commercial
paper-based. The Corporation pays an annual commitment fee of 25 basis points on the undrawn
portion of the accounts receivable facility. There were no outstanding balances under this
agreement at February 28, 2005 or February 29, 2004. At February 28, 2005, the Corporation was in compliance with its financial covenants under the
borrowing agreements described above. 58




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At February 28, 2005 and February 29, 2004, the Corporation had no debt due within one year. At February 28, 2005 and February 29, 2004, long-term debt and their related calendar year due
dates were as follows: 2005
    
    
    20046.10% Senior Notes, due 2028
    
    $
    298,503
    
    
    $
    298,12211.75% Senior Subordinated Notes, due 2008
    
    
    10,016
    
    
    
    192,1627.00% Convertible Subordinated Notes, due 2006
    
    
    175,000
    
    
    
    175,000Other (due 2007-2011)
    
    
    2,580
    
    
    
    590$
    486,099
    
    
    $
    665,874
 The 6.10% senior notes due 2028 are secured by the domestic assets of the Corporation. Aggregate maturities of long-term debt are as follows: 2006
    
    $
    2007
    
    
    176,0822008
    
    
    3352009
    
    
    10,2302010
    
    
    183Thereafter
    
    
    299,269$
    486,099
 As part of its normal operations, the Corporation provides certain financing for some of its
vendors, which includes a combination of various guarantees and letters of credit. At February 28,
2005, the Corporation had credit arrangements to support the guarantees and letters of credit in
the amount of $75,500 with $36,384 of open guarantees and credit outstanding. Interest paid in cash on short-term and long-term debt was $70,379 in 2005, $74,762 in 2004 and
$71,092 in 2003. In 2005, interest expense included $39,056 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. In 2004, interest expense included the write-off of $18,389 in deferred financing
costs and the premium associated with the note repurchase and term loan retirement. NOTE 12  RETIREMENT PLANS The Corporation has a non-contributory profit-sharing plan with a contributory 401(k) provision
covering most of its United States employees. Corporate contributions to the profit-sharing plan
were $11,280, $7,122 and $13,637 for 2005, 2004 and 2003, respectively. In addition, the
Corporation matches a portion of 401(k) employee contributions contingent upon meeting specified
annual operating results goals. The Corporations matching contributions were $4,682, $4,778 and
$4,896 for 2005, 2004 and 2003, respectively. 59




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The Corporation also has several defined benefit and defined contribution pension plans covering
certain employees in foreign countries. The cost of these plans was not material in any of the
years presented. In the aggregate, the actuarially computed plan benefit obligation approximates
the fair value of the plan assets. In 2001, the Corporation assumed the obligations and assets of Gibsons defined benefit pension
plan (the Retirement Plan) that covered substantially all Gibson employees who met certain
eligibility requirements. Benefits earned under the Retirement Plan have been frozen and
participants no longer accrue benefits after December 31, 2000. The Retirement Plan has a
measurement date of February 28 or 29. The Corporation made discretionary contributions of $6,500
and $9,000 to the plan assets in 2005 and 2004, respectively, amounts sufficient to fully fund the
Retirement Plan at both February 28, 2005 and February 29, 2004. The following table sets forth summarized information on the Retirement Plan: 2005
    
    
    2004Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    96,012
    
    
    $
    90,822Interest cost
    
    
    5,832
    
    
    
    5,944Actuarial loss
    
    
    6,125
    
    
    
    5,577Benefit payments
    
    
    (6,453
    )
    
    
    (6,331
    )Benefit obligation at end of year
    
    
    101,516
    
    
    
    96,012Change in plan assets:Fair value of plan assets at beginning of year
    
    
    98,174
    
    
    
    91,352Actual return on plan assets
    
    
    4,180
    
    
    
    4,153Employer contributions
    
    
    6,500
    
    
    
    9,000Benefit payments
    
    
    (6,453
    )
    
    
    (6,331
    )Fair value of plan assets at end of year
    
    
    102,401
    
    
    
    98,174Funded status at end of year
    
    
    885
    
    
    
    2,162Unrecognized loss
    
    
    16,950
    
    
    
    9,363Prepaid benefit cost
    
    $
    17,835
    
    
    $
    11,525
 2005
    
    
    2004Assumptions:Weighted average discount rate used to determine:Benefit obligations at measurement date
    
    
    5.75
    %
    
    
    6.25
    %Net periodic benefit cost
    
    
    6.25
    %
    
    
    6.75
    %Expected long-term return on plan assets
    
    
    6.00
    %
    
    
    6.00
    %Rate of compensation increase
    
    
    N/A
    
    
    
    N/A
 For 2005, the net periodic pension cost was based on a long-term asset rate of return of 6%. In
developing the 6% expected long-term rate of return assumption, consideration was given 60




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to expected returns based on the current investment policy and historical return for the asset classes. A summary of the components of net periodic cost for the Retirement Plan for the years ended
February 28, 2005, February 29, 2004 and February 28, 2003, is as follows: 2005
    
    
    2004
    
    
    2003Interest cost
    
    $
    5,832
    
    
    $
    5,944
    
    
    $
    6,045Expected return on plan assets
    
    
    (5,686
    )
    
    
    (5,283
    )
    
    
    (5,490
    )Recognized net actuarial loss
    
    
    44
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    190
    
    
    $
    661
    
    
    $
    555
 At February 28, 2005 and February 29, 2004, the assets of the Retirement Plan are held in trust and
allocated as follows: 2005
    
    2004Equity securities
    
    
    47
    %
    
    
    32
    %Debt securities
    
    
    43
    %
    
    
    31
    %Cash and cash equivalents
    
    
    10
    %
    
    
    37
    %100
    %
    
    
    100
    %
 As of February 28, 2005, the investment policy for the Retirement Plan targets an approximately
even distribution between equity securities and debt securities with a minimal level of cash
maintained in order to meet obligations as they come due. At February 29, 2004, the investment
policy for the Retirement Plan was to maintain an approximately even distribution among equity
securities, debt securities and cash and cash equivalents. This policy continues to be subject to
review and change. Although the Corporation does not anticipate that contributions to the Retirement Plan will be
required in 2006, it may make contributions in excess of the legally required minimum contribution
level. Any voluntary contributions by the Corporation are not expected to exceed deductible limits
in accordance with IRS regulations. The benefits expected to be paid out under the Retirement Plan are as follows: 2006
    
    $
    6,2602007
    
    
    6,2412008
    
    
    6,3432009
    
    
    6,4532010
    
    
    6,5782011  2015
    
    
    34,874
 The Corporation also has a defined benefit pension plan (the Executive Plan) covering certain
management employees. The Executive Plan has a measurement date of February 28 or 29. The
Executive Plan was amended in 2005 to change the twenty-year cliff vesting 61




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period with no minimum
Executive Plan service requirements to a ten-year cliff-vesting period with a requirement that at
least five years of that service must be as an Executive Plan participant. The following table sets forth summarized information on the Executive Plan: 2005
    
    
    2004Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    26,140
    
    
    $
    23,719Service cost
    
    
    546
    
    
    
    462Interest cost
    
    
    1,577
    
    
    
    1,551Plan amendments
    
    
    872
    
    
    
    Actuarial (gain) loss
    
    
    (147
    )
    
    
    1,591Benefit payments
    
    
    (1,321
    )
    
    
    (1,183
    )Benefit obligation at end of year
    
    
    27,667
    
    
    
    26,140Change in plan assets:Fair value of plan assets at beginning of year
    
    
    
    
    
    
    Employer contributions
    
    
    1,321
    
    
    
    1,183Benefit payments
    
    
    (1,321
    )
    
    
    (1,183
    )Fair value of plan assets at end of year
    
    
    
    
    
    
    Underfunded status at end of year
    
    
    (27,667
    )
    
    
    (26,140
    )Unrecognized prior service cost
    
    
    779
    
    
    
    Unrecognized loss
    
    
    3,552
    
    
    
    3,720Accrued benefit cost
    
    $
    (23,336
    )
    
    $
    (22,420
    )
 The accrued benefit cost is included in the Consolidated Statement of Financial Position in the
following captions: 2005
    
    
    2004Other liabilities
    
    $
    (25,187
    )
    
    $
    (22,420
    )Other assets
    
    
    779
    
    
    
    Accumulated other comprehensive income
    
    
    1,072
    
    
    
    Accrued benefit cost
    
    $
    (23,336
    )
    
    $
    (22,420
    )
 2005
    
    
    2004Assumptions:Weighted average discount rate used to determine:Benefit obligations at measurement date
    
    
    5.75
    %
    
    
    6.25
    %Net periodic benefit cost
    
    
    6.25
    %
    
    
    6.75
    %Rate of compensation increase
    
    
    6.50
    %
    
    
    6.50
    %
 62




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##### Table of Contents



A summary of the components of net periodic cost for the Executive Plan for the years ended
February 28, 2005, February 29, 2004 and February 28, 2003, is as follows: 2005
    
    
    2004
    
    
    2003Service cost
    
    $
    546
    
    
    $
    462
    
    
    $
    390Interest cost
    
    
    1,577
    
    
    
    1,551
    
    
    
    1,541Amortization of prior service cost
    
    
    93
    
    
    
    
    
    
    
    Recognized net actuarial loss
    
    
    21
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    2,237
    
    
    $
    2,013
    
    
    $
    1,931
 Based on historic patterns and currently scheduled benefit payments, the Corporation expects to
contribute approximately $1,620 to the Executive Plan in 2006. The Executive Plan is a non-qualified and unfunded plan, and annual contributions, which are equal
to benefit payments, are made from the Corporations general funds. The benefits expected to be paid out under the Executive Plan are as follows: 2006
    
    $
    1,6212007
    
    
    1,6722008
    
    
    1,7882009
    
    
    1,8202010
    
    
    1,8482011  2015
    
    
    10,101
 In addition, during 2005, the Corporation distributed shares held in a Rabbi Trust (see
Consolidated Statement of Shareholders Equity) to its beneficiary. NOTE 13  POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Corporation sponsors a defined benefit health care plan that provides postretirement medical
benefits to full-time United States employees who meet certain age, service and other requirements.
The plan is contributory; with retiree contributions adjusted periodically, and contains other
cost-sharing features such as deductibles and coinsurance. The plan has a measurement date of
February 28 or 29. The Corporation made significant changes to its retiree health care plan in
2002 by imposing dollar maximums on the per capita cost paid by the Corporation for future years.
The Plan was amended in 2004 and 2005 to further limit the Corporations contributions at certain
locations. The Corporation maintains a trust for the payment of retiree health care benefits.
This trust is funded at the discretion of management. 63




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##### Table of Contents



Summarized information on the postretirement medical benefit plan follows: 2005
    
    
    2004Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    121,696
    
    
    $
    110,323Service cost
    
    
    2,597
    
    
    
    2,113Interest cost
    
    
    7,692
    
    
    
    7,346Participant contributions
    
    
    4,290
    
    
    
    4,092Plan amendments
    
    
    (9,264
    )
    
    
    (6,972
    )Actuarial losses
    
    
    8,481
    
    
    
    13,872Benefit payments
    
    
    (9,712
    )
    
    
    (9,078
    )Benefit obligation at end of year
    
    
    125,780
    
    
    
    121,696Change in plan assets:Fair value of plan assets at beginning of year
    
    
    70,037
    
    
    
    59,307Actual return on plan assets
    
    
    2,309
    
    
    
    6,835Employer contributions
    
    
    5,422
    
    
    
    8,881Participant contributions
    
    
    4,290
    
    
    
    4,092Benefit payments
    
    
    (9,712
    )
    
    
    (9,078
    )Fair value of plan assets at end of year
    
    
    72,346
    
    
    
    70,037Underfunded status at end of year
    
    
    (53,434
    )
    
    
    (51,659
    )Unrecognized prior service (credit)
    
    
    (48,621
    )
    
    
    (45,979
    )Unrecognized loss
    
    
    90,671
    
    
    
    85,938Accrued benefit cost
    
    $
    (11,384
    )
    
    $
    (11,700
    )
 2005
    
    
    2004
    
    
    2003Components of net periodic benefit cost:Service cost
    
    $
    2,597
    
    
    $
    2,113
    
    
    $
    1,615Interest cost
    
    
    7,692
    
    
    
    7,346
    
    
    
    7,096Expected return on plan assets
    
    
    (5,327
    )
    
    
    (4,491
    )
    
    
    (4,376
    )Amortization of prior service cost
    
    
    (6,623
    )
    
    
    (6,236
    )
    
    
    (5,655
    )Amortization of actuarial loss
    
    
    6,767
    
    
    
    7,186
    
    
    
    5,831Net periodic benefit cost
    
    $
    5,106
    
    
    $
    5,918
    
    
    $
    4,511
 The weighted average assumptions used to determine benefit obligations as of February 28, 2005 and
February 29, 2004, are as follows: 2005
    
    
    2004Discount rate
    
    
    5.75
    %
    
    
    6.25
    %Expected return on assets
    
    
    8.00
    %
    
    
    8.00
    %Health care cost trend rates:For year following February 28 or 29
    
    
    10.5
    %
    
    
    11.0
    %Rate to which the cost trend rate is
assumed to decline (the ultimate trend rate)
    
    
    6.0
    %
    
    
    6.0
    %Year the rate reaches the ultimate trend rate
    
    
    2014
    
    
    
    2014
 64




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The weighted average assumptions used to determine net periodic benefit cost for years ended
February 28, 2005 and February 29, 2004 are as follows: 2005
    
    
    2004Discount rate
    
    
    6.25
    %
    
    
    6.75
    %Expected return on assets
    
    
    8.00
    %
    
    
    8.00
    %Health care cost trend rates:For year ending February 28 or 29
    
    
    11.0
    %
    
    
    11.5
    %Rate to which the cost trend rate is
assumed to decline (the ultimate trend rate)
    
    
    6.0
    %
    
    
    6.0
    %Year the rate reaches the ultimate trend rate
    
    
    2014
    
    
    
    2014
 For 2005, the Corporation assumed a long-term asset rate of return of 8% to calculate the expected
return for the plan. In developing the 8% expected long-term rate of return assumption,
consideration was given to various factors, including a review of asset class return expectations
based on historical 15-year compounded returns for such asset classes. This rate is also
consistent with actual compounded returns earned by the plan over several years. 2005
    
    
    2004Effect of a 1% increase in health care cost trend rate on:Service cost plus interest cost
    
    $
    823
    
    
    $
    897Accumulated postretirement benefit obligation
    
    
    8,155
    
    
    
    10,883Effect of a 1% decrease in health care cost trend rate on:Service cost plus interest cost
    
    $
    (450
    )
    
    $
    (751
    )Accumulated postretirement benefit obligation
    
    
    (7,075
    )
    
    
    (9,151
    )
 2005
    
    
    2004Accumulated postretirement benefit obligation:Retired
    
    $
    73,695
    
    
    $
    72,076Active entitled to full benefits
    
    
    10,435
    
    
    
    11,847Other active
    
    
    41,650
    
    
    
    37,773$
    125,780
    
    
    $
    121,696
 At February 28, 2005 and February 29, 2004, the assets of the plan are held in trust and allocated
as follows: Target2005
    
    
    2004
    
    
    AllocationEquity securities
    
    
    30
    %
    
    
    31
    %
    
    
    15% - 35
    %Debt securities
    
    
    66
    %
    
    
    59
    %
    
    
    55% - 75
    %Cash and cash equivalents
    
    
    4
    %
    
    
    10
    %
    
    
    0% - 20
    %Total
    
    
    100
    %
    
    
    100
    %
 The investment policy for the plan targets a distribution among equity securities, debt securities
and cash and cash equivalents, as noted above. All investments are actively 65




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##### Table of Contents



managed, with debt
securities averaging 2.5 years to maturity with a credit rating of A or better. This policy is
subject to review and change. The Corporation anticipates contributing approximately $6,000 to the plan in 2006. The benefits expected to be paid by the postretirement medical plan are as follows: Excluding Effect of
    
    
    Including Effect ofMedicare Part D Subsidy
    
    
    Medicare Part D Subsidy2006
    
    $
    7,820
    
    
    $
    7,8202007
    
    
    8,297
    
    
    
    8,0522008
    
    
    8,726
    
    
    
    8,4562009
    
    
    9,164
    
    
    
    8,8712010
    
    
    9,469
    
    
    
    9,1482011-2015
    
    
    52,457
    
    
    
    50,523
 On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act) was signed into law. The Act provides plan sponsors a federal subsidy for certain
qualifying prescription drug benefits covered under the sponsors postretirement health care plans.
FASB Staff Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, (FSP 106-2) was issued on May 19,
2004. FSP 106-2 provides guidance on accounting for the effects of the new Medicare prescription
drug legislation by employers whose prescription drug benefits are actuarially equivalent to the
drug benefit under Medicare Part D. FSP 106-2 also contains basic guidance on related income tax
accounting and complex rules for transition that permit various alternative prospective and
retroactive transition approaches. The effect of the adoption of FSP 106-2 was a reduction of the
net periodic postretirement benefit cost in 2005 of approximately $390. The adoption of FSP 106-2
also reduced the accumulated postretirement benefit obligation by approximately $6,143 during 2005. NOTE 14  LONG-TERM LEASES AND COMMITMENTS The Corporation is committed under noncancelable operating leases for commercial properties
(certain of which have been subleased) and equipment, terms of which are generally less than 25
years. Rental expense under operating leases for the years ended February 28, 2005, February 29,
2004 and February 28, 2003, are as follows: 2005
    
    
    2004
    
    
    2003Gross rentals
    
    $
    67,926
    
    
    $
    72,699
    
    
    $
    70,253Sublease rentals
    
    
    (2,865
    )
    
    
    (2,115
    )
    
    
    (1,549
    )Net rental expense
    
    $
    65,061
    
    
    $
    70,584
    
    
    $
    68,704
 66




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##### Table of Contents



At February 28, 2005, future minimum rental payments for noncancelable operating leases, net of
aggregate future minimum noncancelable sublease rentals, are as follows: Gross rentals:2006
    
    $
    45,5082007
    
    
    35,6222008
    
    
    29,1562009
    
    
    23,6522010
    
    
    17,974Later years
    
    
    33,433185,345Sublease rentals
    
    
    (9,296
    )Net rentals
    
    $
    176,049
 NOTE 15  COMMON SHARES AND STOCK OPTIONS At February 28, 2005 and February 29, 2004, common shares authorized consisted of 187,600,000 Class
A and 15,832,968 Class B shares. Class A shares have one vote per share and Class B shares have ten votes per share. There is no
public market for the Class B common shares of the Corporation. Pursuant to the Corporations
Amended Articles of Incorporation, a holder of Class B common shares may not transfer such Class B
common shares (except to permitted transferees, a group that generally includes members of the
holders extended family, family trusts and charities) unless such holder first offers such shares
to the Corporation for purchase at the most recent closing price for the Corporations Class A
common shares. If the Corporation does not purchase such Class B common shares, the holder must
convert such shares, on a share for share basis, into Class A common shares prior to any transfer. Under the Corporations Stock Option Plans, options to purchase Class A and/or Class B shares are
granted to directors, officers and other key employees at the then-current market price. In
general, subject to continuing service, options become exercisable commencing twelve months after
date of grant in annual installments and expire over a period of not more than ten years from the
date of grant. Under certain grants made in 2002, the exercise period has the potential to be
accelerated if the market value of Class A shares reaches a specified share price. These options
expire at the earlier of six months plus one day after a specified share price is reached or ten
years from the date of grant. During 2005, a target share price was met and certain of these 2002
options became subject to expiration, unless exercised, in six months plus one day from the date
the target share price was met. 67




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##### Table of Contents



Stock option transactions and prices are summarized as follows: Weighted-Average ExerciseNumber of Options
    
    
    Price Per ShareClass A
    
    
    Class B
    
    
    Class A
    
    
    Class BOptions outstanding
February 28, 2002
    
    
    9,031,128
    
    
    
    1,033,373
    
    
    $
    17.74
    
    
    $
    20.81Granted
    
    
    1,700,308
    
    
    
    
    
    
    
    14.35
    
    
    
    Exercised
    
    
    (2,134,250
    )
    
    
    (10,400
    )
    
    
    10.05
    
    
    
    9.95Cancelled
    
    
    (634,385
    )
    
    
    (5,000
    )
    
    
    22.33
    
    
    
    27.25Options outstanding
February 28, 2003
    
    
    7,962,801
    
    
    
    1,017,973
    
    
    $
    18.76
    
    
    $
    20.89Granted
    
    
    1,551,718
    
    
    
    
    
    
    
    14.31
    
    
    
    Exercised
    
    
    (1,566,499
    )
    
    
    (31,600
    )
    
    
    11.45
    
    
    
    9.95Cancelled
    
    
    (518,810
    )
    
    
    (420
    )
    
    
    23.30
    
    
    
    48.06Options outstanding
February 29, 2004
    
    
    7,429,210
    
    
    
    985,953
    
    
    $
    19.06
    
    
    $
    21.23Granted
    
    
    1,400,738
    
    
    
    361,342
    
    
    
    20.88
    
    
    
    21.33Exercised
    
    
    (2,049,106
    )
    
    
    (489,080
    )
    
    
    14.93
    
    
    
    12.31Cancelled
    
    
    (498,512
    )
    
    
    (38,000
    )
    
    
    22.09
    
    
    
    26.33Options outstanding
February 28, 2005
    
    
    6,282,330
    
    
    
    820,215
    
    
    $
    20.57
    
    
    $
    26.36Options exercisable
at February 28/29:2005
    
    
    4,362,271
    
    
    
    627,215
    
    
    $
    21.55
    
    
    $
    28.162004
    
    
    5,299,372
    
    
    
    985,953
    
    
    
    20.94
    
    
    
    21.232003
    
    
    5,268,606
    
    
    
    1,017,973
    
    
    
    19.76
    
    
    
    20.89
 The weighted-average remaining contractual life of the options outstanding as of February 28, 2005
is 5.7 years. 68




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##### Table of Contents



The range of exercise prices for options outstanding is as follows: Outstanding
    
    
    ExercisableWeighted-Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    AverageAverage
    
    
    
    
    
    
    Average
    
    
    RemainingExercise Price
    
    Optioned
    
    
    Exercise
    
    
    Optioned
    
    
    Exercise
    
    
    ContractualRanges
    
    Shares
    
    
    Price

    
    
    Shares
    
    
    Price
    
    
    Life (Years)$    8.50 - $13.01
    
    
    534,808
    
    
    $
    11.62
    
    
    
    534,808
    
    
    $
    11.62
    
    
    
    6.3213.10 -   13.15
    
    
    840,940
    
    
    
    13.15
    
    
    
    276,926
    
    
    
    13.15
    
    
    
    8.0113.19 -   18.10
    
    
    826,323
    
    
    
    14.84
    
    
    
    728,873
    
    
    
    14.72
    
    
    
    6.9918.40 -   19.81
    
    
    151,393
    
    
    
    19.69
    
    
    
    141,718
    
    
    
    19.71
    
    
    
    8.3420.02 -   20.51
    
    
    1,286,570
    
    
    
    20.51
    
    
    
    400
    
    
    
    20.51
    
    
    
    9.1820.87 -   22.26
    
    
    181,952
    
    
    
    21.85
    
    
    
    143,852
    
    
    
    21.94
    
    
    
    7.1622.30 -   23.57
    
    
    1,555,883
    
    
    
    23.53
    
    
    
    1,503,433
    
    
    
    23.55
    
    
    
    4.1823.68 -   29.44
    
    
    594,350
    
    
    
    26.68
    
    
    
    529,150
    
    
    
    26.86
    
    
    
    2.8129.50
    
    
    919,200
    
    
    
    29.50
    
    
    
    919,200
    
    
    
    29.50
    
    
    
    1.9030.12 -   51.63
    
    
    211,126
    
    
    
    39.75
    
    
    
    211,126
    
    
    
    39.75
    
    
    
    2.74$    8.50 - $51.63
    
    
    7,102,545
    
    
    
    
    
    
    
    4,989,486
 The number of shares available for future grant at February 28, 2005 is 4,572,487 Class A and
1,210,283 Class B shares. NOTE 16  BUSINESS 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 SFAS 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. At February 28, 2005, the Corporation owned and operated 542 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 as well as products purchased from other vendors. AG Interactive (89.9% owned) is an electronic provider of social expression content through the
Internet and wireless platforms. The Corporations non-reportable operating segments primarily include the design, manufacture and
sale of display fixtures. 69




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##### Table of Contents



The Corporations senior management evaluates segment performance based on earnings before foreign
currency exchange gains or losses, interest income, interest expense, centrally-managed costs and
income taxes. The accounting policies of the reportable segments are the same as those
described in Note 1  Significant Accounting Policies, except those that are related to LIFO or
applicable to only corporate items. Intersegment sales from the Social Expression Products segment to the Retail Operations segment are
recorded at estimated arms-length prices. Intersegment sales and profits are eliminated in
consolidation. All inventories resulting from intersegment sales are carried at cost.
Accordingly, the Retail Operations segment records full profit upon its sales to consumers. The reporting and evaluation of segment assets include net accounts receivable, inventory on a
first-in, first-out basis, display materials and factory supplies, prepaid expenses, other assets
(including net deferred costs), and net property, plant and equipment. Segment results are internally reported and evaluated at consistent exchange rates between years to
eliminate the impact of foreign currency fluctuations. An exchange rate adjustment is included in
the reconciliation of the segment results to the consolidated results; this adjustment represents
the impact on the segment results of the difference between the exchange rates used for segment
reporting and evaluation and the actual exchange rates for the periods presented. Centrally incurred and managed costs are not allocated back to the operating segments. The
unallocated items include interest expense on centrally-incurred debt and domestic profit-sharing
expense. In addition, the costs associated with corporate operations including the senior
management, corporate finance, legal and human resource functions, among other costs, are included
in the unallocated items. Operating Segment Information Net Sales
    
    
    Segment Earnings (Loss)2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Social Expression Products
    
    $
    1,599,642
    
    
    $
    1,671,927
    
    
    $
    1,705,130
    
    
    $
    320,763
    
    
    $
    372,909
    
    
    $
    374,489Intersegment items
    
    
    (63,623
    )
    
    
    (77,460
    )
    
    
    (80,595
    )
    
    
    (46,630
    )
    
    
    (55,090
    )
    
    
    (58,233
    )Exchange rate adjustment
    
    
    34,152
    
    
    
    995
    
    
    
    (37,692
    )
    
    
    6,061
    
    
    
    135
    
    
    
    (5,376
    )Net
    
    
    1,570,171
    
    
    
    1,595,462
    
    
    
    1,586,843
    
    
    
    280,194
    
    
    
    317,954
    
    
    
    310,880Retail Operations
    
    
    238,159
    
    
    
    272,917
    
    
    
    275,296
    
    
    
    (20,685
    )
    
    
    4,269
    
    
    
    19,128Exchange rate adjustment
    
    
    4,759
    
    
    
    126
    
    
    
    (9,168
    )
    
    
    317
    
    
    
    16
    
    
    
    (1,200
    )Net
    
    
    242,918
    
    
    
    273,043
    
    
    
    266,128
    
    
    
    (20,368
    )
    
    
    4,285
    
    
    
    17,928AG Interactive
    
    
    57,514
    
    
    
    36,427
    
    
    
    34,615
    
    
    
    (955
    )
    
    
    4,540
    
    
    
    477Exchange rate adjustment
    
    
    405
    
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    
    
    
    
    Net
    
    
    57,919
    
    
    
    36,427
    
    
    
    34,615
    
    
    
    (1,076
    )
    
    
    4,540
    
    
    
    477Non-reportable segments
    
    
    32,624
    
    
    
    54,295
    
    
    
    47,896
    
    
    
    (10,824
    )
    
    
    (7,404
    )
    
    
    6,451Unallocated items  net
    
    
    (905
    )
    
    
    (5,498
    )
    
    
    172
    
    
    
    (139,032
    )
    
    
    (159,529
    )
    
    
    (147,624
    )Exchange rate adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (646
    )
    
    
    5
    
    
    
    (247
    )Net
    
    
    (905
    )
    
    
    (5,498
    )
    
    
    172
    
    
    
    (139,678
    )
    
    
    (159,524
    )
    
    
    (147,871
    )Consolidated
    
    $
    1,902,727
    
    
    $
    1,953,729
    
    
    $
    1,935,654
    
    
    $
    108,248
    
    
    $
    159,851
    
    
    $
    187,865
 70




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##### Table of Contents



Assets2005
    
    
    2004
    
    
    2003Social Expression Products
    
    $
    1,475,993
    
    
    $
    1,684,542
    
    
    $
    1,813,954Exchange rate adjustment
    
    
    57,560
    
    
    
    37,291
    
    
    
    (20,334
    )Net
    
    
    1,533,553
    
    
    
    1,721,833
    
    
    
    1,793,620Retail Operations
    
    
    77,402
    
    
    
    89,822
    
    
    
    95,572Exchange rate adjustment
    
    
    1,936
    
    
    
    431
    
    
    
    (1,808
    )Net
    
    
    79,338
    
    
    
    90,253
    
    
    
    93,764AG Interactive
    
    
    96,300
    
    
    
    55,638
    
    
    
    58,619Exchange rate adjustment
    
    
    2,590
    
    
    
    
    
    
    
    Net
    
    
    98,890
    
    
    
    55,638
    
    
    
    58,619Non-reportable segments
    
    
    21,058
    
    
    
    47,504
    
    
    
    64,725Unallocated and intersegment items
    
    
    797,634
    
    
    
    564,945
    
    
    
    591,617Exchange rate adjustment
    
    
    5,155
    
    
    
    3,840
    
    
    
    (18,225
    )Net
    
    
    802,789
    
    
    
    568,785
    
    
    
    573,392Consolidated
    
    $
    2,535,628
    
    
    $
    2,484,013
    
    
    $
    2,584,120
 Depreciation and Amortization
    
    
    Capital Expenditures2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Social Expression Products
    
    $
    43,695
    
    
    $
    45,099
    
    
    $
    45,855
    
    
    $
    36,298
    
    
    $
    21,009
    
    
    $
    22,890Exchange rate adjustment
    
    
    723
    
    
    
    32
    
    
    
    (882
    )
    
    
    449
    
    
    
    21
    
    
    
    (506
    )Net
    
    
    44,418
    
    
    
    45,131
    
    
    
    44,973
    
    
    
    36,747
    
    
    
    21,030
    
    
    
    22,384Retail Operations
    
    
    6,511
    
    
    
    7,678
    
    
    
    9,243
    
    
    
    8,638
    
    
    
    8,959
    
    
    
    3,589Exchange rate adjustment
    
    
    100
    
    
    
    3
    
    
    
    (242
    )
    
    
    174
    
    
    
    2
    
    
    
    (116
    )Net
    
    
    6,611
    
    
    
    7,681
    
    
    
    9,001
    
    
    
    8,812
    
    
    
    8,961
    
    
    
    3,473AG Interactive
    
    
    3,976
    
    
    
    4,402
    
    
    
    3,716
    
    
    
    1,427
    
    
    
    1,224
    
    
    
    1,014Exchange rate adjustment
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net
    
    
    3,987
    
    
    
    4,402
    
    
    
    3,716
    
    
    
    1,427
    
    
    
    1,224
    
    
    
    1,014Non-reportable segments
    
    
    1,023
    
    
    
    1,073
    
    
    
    1,015
    
    
    
    343
    
    
    
    1,329
    
    
    
    1,182Unallocated and intersegment items
    
    
    1,006
    
    
    
    1,313
    
    
    
    1,897
    
    
    
    168
    
    
    
    
    
    
    
    Consolidated
    
    $
    57,045
    
    
    $
    59,600
    
    
    $
    60,602
    
    
    $
    47,497
    
    
    $
    32,544
    
    
    $
    28,053
 Product Information Net Sales2005
    
    
    2004
    
    
    2003Everyday greeting cards
    
    $
    690,897
    
    
    $
    750,219
    
    
    $
    743,805Seasonal greeting cards
    
    
    370,521
    
    
    
    368,757
    
    
    
    364,086Gift wrapping and wrap accessories
    
    
    331,218
    
    
    
    323,779
    
    
    
    364,961All other
    
    
    510,091
    
    
    
    510,974
    
    
    
    462,802Consolidated
    
    $
    1,902,727
    
    
    $
    1,953,729
    
    
    $
    1,935,654
 Geographic Information Net Sales
    
    
    Fixed Assets - Net2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003United States
    
    $
    1,432,578
    
    
    $
    1,543,202
    
    
    $
    1,580,063
    
    
    $
    272,170
    
    
    $
    296,760
    
    
    $
    326,799Foreign
    
    
    470,149
    
    
    
    410,527
    
    
    
    355,591
    
    
    
    67,622
    
    
    
    57,613
    
    
    
    51,648Consolidated
    
    $
    1,902,727
    
    
    $
    1,953,729
    
    
    $
    1,935,654
    
    
    $
    339,792
    
    
    $
    354,373
    
    
    $
    378,447
 71




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Other Termination Benefits and Plant Closing During 2005, the Corporation recorded a severance accrual of $18,333 related to an overhead
reduction program that eliminated approximately 300 associates and the Franklin, Tennessee plant
closure. The following table summarizes this charge by segment: Social Expression Products
    
    $
    14,797Retail Operations
    
    
    496Non-reportable
    
    
    442Unallocated
    
    
    2,598Total
    
    $
    18,333
 Substantially all of the associates receiving payments separated from the Corporation on or prior
to February 28, 2005, with the remaining to exit during the quarter ending May 31, 2005.
Approximately 70% of the severance will be paid prior to February 28, 2006, with the remaining
payments extending through 2008. The remaining balance of this severance accrual was $13,590 at
February 28, 2005. In connection with the plant closing, the Social Expression Products segment recorded an additional
charge of $10,842 during 2005 for the write-down of the building, the write-off of equipment
disposed, moving costs, and various other related expenses. The Corporation expects this action to
be completed during the first half of 2006 at an additional cost of approximately $3,000. Retail Leases During 2005, the Retail Operations segment reviewed its accounting for leases and recorded a
pre-tax charge of $4,883 during the fourth quarter to correct certain errors that were identified.
This correction relates solely to accounting treatment and did not impact historic or future cash
flows and did not have a material impact on current or prior year consolidated financial
statements. NOTE 17  INCOME TAXES Income from continuing operations before income tax expense: 2005
    
    
    2004
    
    
    2003United States
    
    $
    53,672
    
    
    $
    103,054
    
    
    $
    145,613Foreign
    
    
    54,576
    
    
    
    56,797
    
    
    
    42,252$
    108,248
    
    
    $
    159,851
    
    
    $
    187,865
 72




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##### Table of Contents



Income tax expense (benefit) from the Corporations continuing operations has been provided as
follows: 2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    10,784
    
    
    $
    (2,910
    )
    
    $
    77,731Foreign
    
    
    31,576
    
    
    
    9,994
    
    
    
    9,017State and local
    
    
    4,928
    
    
    
    574
    
    
    
    13,80847,288
    
    
    
    7,658
    
    
    
    100,556Deferred
    
    
    (9,590
    )
    
    
    54,204
    
    
    
    (26,229
    )$
    37,698
    
    
    $
    61,862
    
    
    $
    74,327
 Significant components of the Corporations deferred tax assets and liabilities as reflected in the
Consolidated Statement of Financial Position at February 28, 2005 and February 29, 2004 are as
follows: 2005
    
    
    2004Deferred tax assets:Employee benefit and incentive plans
    
    $
    17,974
    
    
    $
    21,936Net operating loss carryforwards
    
    
    63,604
    
    
    
    41,896Deferred capital loss
    
    
    5,608
    
    
    
    5,608Reserves not currently deductible
    
    
    76,786
    
    
    
    56,311Charitable contributions carryforward
    
    
    9,040
    
    
    
    14,278Foreign tax credit carryforward
    
    
    17,702
    
    
    
    14,691Other
    
    
    12,522
    
    
    
    46,933203,236
    
    
    
    201,653Valuation allowance
    
    
    (49,260
    )
    
    
    (51,827
    )Total deferred tax assets
    
    
    153,976
    
    
    
    149,826Deferred tax liabilities:Inventory costing
    
    
    3,033
    
    
    
    5,020Depreciation
    
    
    31,666
    
    
    
    35,975Other
    
    
    18,405
    
    
    
    18,180Total deferred tax liabilities
    
    
    53,104
    
    
    
    59,175Net deferred tax assets
    
    $
    100,872
    
    
    $
    90,651
 Deferred income tax balances reflect the effects of temporary differences between the carrying
amounts of assets and liabilities and their tax bases as well as from net operating loss and tax
credit carryforwards, and are stated at tax rates expected to be in effect when taxes are actually
paid or recovered. Deferred income tax assets represent amounts available to reduce income tax
payments in future years. The Corporations deferred tax assets at February 28, 2005 include
foreign tax credits that will be realized as a result of the American Jobs Creation Act of 2004
(the Act), which increased the foreign tax credit (FTC) carryover period from five years to ten
years. Based on the carryforward period, the Corporation believes it is more likely than not that
it will utilize the credits, allowing it to remove the valuation allowance previously recorded
against the FTC carryforwards. 73




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The Corporation periodically reviews the need for a valuation allowance against deferred tax assets
and recognizes these deferred tax assets to the extent that realization is more likely than not.
Based upon a review of earnings history and trends, forecasted earnings and the relevant expiration
of carryforwards, the Corporation believes that the valuation allowances provided are appropriate.
At February 28, 2005, the valuation allowance of $49,260 related principally to certain foreign and
domestic net operating loss carryforwards and the deferred capital loss. Reconciliation of the Corporations income tax expense from continuing operations from the U.S.
statutory rate to the actual effective income tax rate is as follows: 2005
    
    
    2004
    
    
    2003Income tax expense at statutory rate
    
    $
    37,887
    
    
    $
    55,948
    
    
    $
    65,753State and local income taxes,
net of federal tax benefit
    
    
    3,314
    
    
    
    4,657
    
    
    
    6,016Canada income tax audit assessment
    
    
    12,961
    
    
    
    945
    
    
    
    Foreign differences
    
    
    (127
    )
    
    
    (2,888
    )
    
    
    (493
    )Foreign tax credit related matters
    
    
    (12,358
    )
    
    
    3,401
    
    
    
    Other
    
    
    (3,979
    )
    
    
    (201
    )
    
    
    3,051Income tax at effective tax rate
    
    $
    37,698
    
    
    $
    61,862
    
    
    $
    74,327
 Income taxes paid from continuing operations were $50,760 in 2005, $34,702 in 2004, and $168,843 in
2003. As of February 28, 2005, the Corporation has projected income tax refunds of $55,410 related
to federal amended returns filed and IRS exam adjustments for 2000 through 2003 and current year
tax overpayments. At February 28, 2005, the Corporation had deferred tax assets of approximately $30,181 related to
foreign net operating loss carryforwards, of which $17,547 have no expiration dates and $12,634
have expiration dates ranging from 2006 through 2014. In addition, the Corporation had deferred
tax assets related to domestic net operating loss, state net operating loss, charitable
contribution and FTC carryforwards of approximately $10,500, $22,923, $9,040 and $17,702,
respectively. The federal net operating loss carryforward expires in 2021. The state net
operating loss carryforwards have expiration dates ranging from 2004 to 2024. The charitable
contribution carryforwards have expiration dates ranging from 2006 to 2009. The FTC carryforwards
have expiration dates ranging from 2010 to 2014. During the fourth quarter of 2005, the Canada Customs and Revenue Agency issued a tax assessment to
the Corporation for certain income tax issues related to years 2000 through 2002. The Corporation
recorded a tax expense, including interest and penalties, of $12,961 in 2005 related to the
assessment. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law. The Act provides
for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated (as
defined in the Act) in 2006. The Corporation has not fully evaluated the effect of the
repatriation provision and, therefore, has not determined if the Act will materially change its
foreign earnings reinvestment plan. A full evaluation of the plan is expected to be completed by
November 30, 2005. As such, deferred taxes have not been provided on approximately 74




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$118,833 of undistributed earnings of foreign subsidiaries since substantially all of these
earnings are necessary to meet their business requirements. It is not practicable to calculate the
deferred taxes associated with these earnings; however, foreign tax credits would be available to
reduce federal income taxes in the event of distribution. NOTE 18  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 first quarter of fiscal
2006 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
$77,000 and recorded a pre-tax gain of $35,525 on 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 144. Accordingly, the Corporations consolidated financial
statements and related notes have been presented to reflect Magnivision as a discontinued operation
for all periods presented. Magnivision was previously included within the Corporations
non-reportable segments. The following summarizes the results of discontinued operations for the periods presented: 2005
    
    
    2004
    
    
    2003Net sales
    
    $
    30,965
    
    
    $
    56,537
    
    
    $
    60,206Pretax income from operations
    
    
    4,816
    
    
    
    10,900
    
    
    
    12,973Gain on sale
    
    
    35,525
    
    
    
    
    
    
    
    40,341
    
    
    
    10,900
    
    
    
    12,973Income tax expense
    
    
    15,612
    
    
    
    4,219
    
    
    
    5,405Income from discontinued operations
    
    $
    24,729
    
    
    $
    6,681
    
    
    $
    7,568
 At February 29, 2004, Assets of businesses held for sale and Liabilities of businesses held for
sale in the Consolidated Statement of Financial Position include the following: Assets of businesses held for sale:Current assets
    
    $
    22,154Other assets
    
    
    7,318Fixed assets
    
    
    11,343$
    40,815Liabilities of businesses held for sale:Current liabilities
    
    $
    3,722Noncurrent liabilities
    
    
    1,616$
    5,338
 75




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QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Thousands of dollars except per share amounts The following is a summary of the unaudited quarterly results of operations for the years ended
February 28, 2005 and February 29, 2004: Quarter EndedMay 31
    
    
    Aug 31
    
    
    Nov 30
    
    
    Feb 28Fiscal 2005Net sales
    
    $
    433,541
    
    
    $
    392,084
    
    
    $
    586,165
    
    
    $
    490,937Gross profit
    
    
    251,926
    
    
    
    205,367
    
    
    
    293,428
    
    
    
    246,805Income from continuing operations
    
    
    2,936
    
    
    
    5,900
    
    
    
    40,344
    
    
    
    21,370Discontinued operations
    
    
    1,302
    
    
    
    1,010
    
    
    
    22,417
    
    
    
    Net income
    
    
    4,238
    
    
    
    6,910
    
    
    
    62,761
    
    
    
    21,370Earnings per share:Continuing operations
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.58
    
    
    $
    0.31Net income
    
    
    0.06
    
    
    
    0.10
    
    
    
    0.91
    
    
    
    0.31Earnings per share  assuming dilution:Continuing operations
    
    
    0.04
    
    
    
    0.09
    
    
    
    0.51
    
    
    
    0.28Net income
    
    
    0.06
    
    
    
    0.10
    
    
    
    0.78
    
    
    
    0.28Dividends declared per share
    
    
    
    
    
    
    
    
    
    
    0.06
    
    
    
    0.06
 The first quarter included a pre-tax charge of $39,024 related to the repurchase of a portion
of the Corporations 11.75% senior subordinated notes. The second quarter included a pre-tax gain
of $10,000 resulting from the modification of certain agreements related to licensing activities.
The third quarter included a pre-tax charge of $16,570 associated with an overhead reduction
program, a pre-tax charge of $13,000 related to the implementation of a new merchandising strategy
for seasonal space management, a pre-tax charge of $8,233 associated with a plant closure and a
pre-tax gain of $35,525 on the sale of the discontinued operations. The fourth quarter included a
pre-tax charge of $29,769 associated with scan based trading conversions, a pre-tax charge of
$6,376 associated with a plant closure, a pre-tax charge of $4,883 for a correction in the
accounting for certain operating leases and an after-tax benefit of $4,194 resulting primarily from
changes in tax laws. The previously reported net sales and gross profit amounts for the first and second quarters have
been adjusted to include an amount that was previously classified as other income. Miscellaneous
sales of $505 in the first quarter and $191 in the second quarter were reclassified from other
income  net to net sales. During the second quarter, the Corporation committed to a plan to sell the Magnivision business.
Accordingly, the business was reclassified as discontinued operations and prior periods continuing
operations were restated. 76




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##### Table of Contents



Quarter EndedMay 31
    
    
    Aug 31
    
    
    Nov 30
    
    
    Feb 29Fiscal 2004Net sales
    
    $
    440,755
    
    
    $
    391,033
    
    
    $
    603,754
    
    
    $
    518,187Gross profit
    
    
    262,010
    
    

    
    195,061
    
    
    
    313,391
    
    
    
    270,562Income (loss) from continuing operations
    
    
    18,745
    
    
    
    (10,609
    )
    
    
    45,091
    
    
    
    44,762Discontinued operations
    
    
    960
    
    
    
    914
    
    
    
    1,271
    
    
    
    3,536Net income (loss)
    
    
    19,705
    
    
    
    (9,695
    )
    
    
    46,362
    
    
    
    48,298Earnings (loss) per share:Continuing operations
    
    $
    0.29
    
    
    $
    (0.16
    )
    
    $
    0.68
    
    
    $
    0.67Net income (loss)
    
    
    0.30
    
    
    
    (0.15
    )
    
    
    0.70
    
    
    
    0.72Earnings (loss) per share 
assuming dilution:Continuing operations
    
    
    0.26
    
    
    
    (0.16
    )
    
    
    0.58
    
    
    
    0.58Net income (loss)
    
    
    0.27
    
    
    
    (0.15
    )
    
    
    0.60
    
    
    
    0.62
 The first quarter included a pre-tax charge of $4,639 related to the repayment of a term loan.
The third quarter included a pre-tax charge of $13,750 related to the repurchase of a portion of
the Corporations 11.75% senior subordinated notes. The fourth quarter included a pre-tax charge
of approximately $20,000 for the write down of inventories related to seasonal performance and
product discontinuances. The previously reported net sales and gross profit amounts for the second and fourth quarters have
been adjusted to include an amount that was previously classified as other income. Miscellaneous
sales of $96 in the second quarter and $649 in the fourth quarter were reclassified from other
income  net to net sales. During the second quarter of 2005, the Corporation committed to a plan to sell the Magnivision
business. Accordingly, the business was reclassified as discontinued operations and 2004 periods
continuing operations were restated. In quarters where the Corporation incurs a net loss, the Corporation does not calculate a dilutive
effect on earnings (loss) per share because the effect would be antidilutive. Therefore, the sum
of the quarterly earnings (loss) per share  assuming dilution may not equal the annual totals. The business exhibits seasonality, which is typical for most companies in the retail industry.
Sales are much stronger in the second half of the year than the first half of the year due to the
concentration of major holidays during the second half of the year. Net earnings are highest
during the months of September through December when sales volumes provide significant operating
leverage. Working capital requirements needed to finance operations fluctuate during the year and
reach their highest levels during the second and third fiscal quarters as inventory is increased in
preparation for the peak selling season. 77




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements with the Corporations independent registered public accounting firm on
accounting or financial disclosure matters within the three year period ended February 28, 2005, or
in any period subsequent to such date. 
 Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures. The Corporation maintains disclosure
controls and procedures that are designed to ensure that information required to be disclosed in
the Corporations reports under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the Commissions rules and
forms and that such information is accumulated and communicated to the Corporations management,
including its Chief Executive Officer and principal financial officer, as appropriate, to allow for
timely decisions regarding required disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives. The Corporation carries out a variety of on-going procedures, under the supervision and with the
participation of the Corporations management, including the Corporations Chief Executive Officer
and principal financial officer, to evaluate the effectiveness of the design and operation of the
Corporations disclosure controls and procedures. Based on the foregoing, the Corporations Chief
Executive Officer and principal financial officer concluded that the Corporations disclosure
controls and procedures were effective as of February 28, 2005. Report of Management on
Internal Control Over Financial Reporting. The management of American Greetings Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting for the Corporation. American Greetings
internal control system was designed to provide reasonable assurance regarding the preparation and
fair presentation of published financial statements. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate. American Greetings management assessed the effectiveness of the Corporations internal control
over financial reporting as of February 28, 2005. In making this assessment, it used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
managements assessment under COSOs Internal Control-Integrated Framework, management believes
that as of February 28, 2005, American Greetings internal control over financial reporting is
effective. Ernst & Young LLP, independent registered public accounting firm, has issued an audit report on
managements assessment of American Greetings internal control over financial reporting 78




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and on the effectiveness of internal control over financial reporting. This attestation report is
included in Part II, Item 8, at page 39 of this Annual Report on Form 10-K. Zev Weiss
Chief Executive Officer
(principal executive officer)
    
    Joseph B. Cipollone
Chief Accounting Officer
(principal accounting officer & interim
principal financial officer)
 Changes in Internal Controls. There has been no change in the Corporations internal
control over financial reporting during the Corporations most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Corporations internal
control over financial reporting. 
 Item 9B. Other Information Not applicable 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant The Corporation hereby incorporates by reference the information called for by this Item 10
from the information contained in (i) the Corporations Proxy Statement in connection with its
Annual Meeting of Shareholders to be held on June 24, 2005 under the headings and with
subheadings Election of Directors, Security Ownership  Section 16(a) Beneficial Ownership
Reporting Compliance, Corporate Governance and (ii) for information regarding executive
officers, Part I of this Annual Report on Form 10-K. 
 Item 11. Executive Compensation The Corporation hereby incorporates by reference the information called for by this Item 11
from the information contained in the Corporations Proxy Statement in connection with its
Annual Meeting of Shareholders to be held on June 24, 2005 under the heading Information
Concerning Executive Officers. 79




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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters The Corporation hereby incorporates by reference the information called for by this Item 12 from
the information contained in the Corporations Proxy Statement in connection with its Annual
Meeting of Shareholders to be held on June 24, 2005 under the headings Security Ownership 
Security Ownership of Management and Security Ownership  Security Ownership of Certain
Beneficial Owners. EQUITY COMPENSATION PLAN INFORMATION The following table provides information about the Corporations common shares that may be issued
under the Corporations equity compensation plans as of February 28, 2005. Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected in columnPlan category
    
    and rights
    
    
    and rights
    
    
    (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
(1)
    
    
    7,102,545
    
    
    $
    21.24
    
    
    
    5,782,770Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    N/A
    
    
    
    Total
    
    
    7,102,545
    
    
    $
    21.24
    
    
    
    5,782,770
   (1)
    
    Column (a) represents the number of common shares that may be issued in connection with the
exercise of outstanding stock options granted under the Corporations equity compensation
plans. The amount includes 6,282,330 Class A common shares and 820,215 Class B common
shares.Column (b) is the weighted-average exercise price of outstanding stock options; excludes
restricted stock and deferred compensation share units.Column (c) includes 4,572,487 Class A common shares and 1,210,283 Class B common shares,
which shares may generally be issued under the Corporations equity compensation plans upon
the exercise of stock options or stock appreciation rights and/or awards of deferred shares,
performance shares or restricted stock.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 80




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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. The amounts reflected in column (c) do not reflect the number of
shares that may be issued from time to time under the 1995 Director Stock Plan as payment
for Director fees because there is no maximum number of shares that may be so issued. 
 Item 13. Certain Relationships and Related Transactions The Corporation hereby incorporates by reference the information called for by this Item 13
from the information contained in the Corporations Proxy Statement in connection with its
Annual Meeting of Shareholders to be held on June 24, 2005 under the heading Information
Concerning Executive Officers  Certain Relationships and Related Transactions. 
 Item 14. Principal Accounting Fees and Services The Corporation hereby incorporates by reference the information called for by this Item 14
from the information contained in the Corporations Proxy Statement in connection with its
Annual Meeting of Shareholders to be held on June 24, 2005 under the heading Independent
Registered Public Accounting Firm  Fees Paid to Ernst & Young LLP. (Next item is Part IV) 81




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PART IV 
 Item 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as part of this Annual Report on Form 10-K 1. Financial Statements Report of Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting Report of Independent Registered Public Accounting Firm
Consolidated Statement of Income  Years ended February 28, 2005, February
29, 2004, and February 28, 2003 Consolidated Statement of Financial Position  February 28, 2005 and
February 29, 2004 Consolidated Statement of Cash Flows  Years ended February 28, 2005,
February 29, 2004, and February 28, 2003 Consolidated Statement of Shareholders Equity  Years ended February 28,
2005, February 29, 2004, and February 28, 2003 Notes to Consolidated Financial Statements  Years ended February 28, 2005,
February 29, 2004, and February 28, 2003 Quarterly Results of Operations (Unaudited) 2. Financial Statement Schedules Schedule II  Valuation and Qualifying Accounts 3. Exhibits required by Item 601 of Regulation S-K Item
    
    Description3
    
    Articles of Incorporation and By-laws(i)
    
    Amended Articles of Incorporation of the CorporationThis Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 1999, and is
incorporated herein by reference.
 82




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Item
    
    Description(ii)
    
    Amendment to Amended Articles of Incorporation of the CorporationThis Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 29, 2004, and is
incorporated herein by reference.(iii)
    
    Amended Regulations of the CorporationThis Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 1999, and is
incorporated herein by reference.(4)
    
    Instruments Defining the Rights of Security Holders, including indentures(i)
    
    Trust Indenture, dated as of July 27, 1998.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 1999, and is
incorporated herein by reference.(ii)
    
    Credit Agreement, dated May 11, 2004, among the following: (i) the
Corporation, (ii) National City Bank, as an LC issuer, swing line lender and as the
lead arranger and global agent, (iii) KeyBank National Association, as lender and
syndication agent, (iv) LaSalle Bank National Association, as lender, LC issuer and
documentation agent, and (v) certain named financial institutions as lenders (the
Credit Agreement). Certain exhibits and schedules to the Credit Agreement have
been excluded and will be furnished to the Securities and Exchange Commission upon
request.This Exhibit has been previously filed as an Exhibit to the Corporations Quarterly
Report on Form 10-Q for the quarter ended May 31, 2004, and is incorporated herein
by reference.(iii)
    
    Amendment No. 1 to the Credit Agreement and Waiver and Consent, dated as of
January 28, 2005, among the Corporation, National City Bank as the Global Agent and
as Collateral Agent, and certain named financial institutions as lenders. Certain
exhibits and schedules to the Credit Agreement have been excluded and will be
furnished to the Securities and Exchange Commission upon request.
This Exhibit is filed herewith.(iv)
    
    Amendment No. 2 to the Credit Agreement, dated as of April 1, 2005, among the
Corporation, National City Bank as the Global Agent and as Collateral Agent, and
certain named financial institutions as lenders. Certain exhibits and schedules to
the Credit Agreement have been excluded and will be furnished to the Securities and
Exchange Commission upon request.This Exhibit is filed herewith.
 83




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##### Table of Contents



Item
    
    Description(v)
    
    Indenture, dated as of June 29, 2001, between the Corporation, as issuer, and
The Huntington National Bank, as Trustee, with respect to the Corporations 11.75%
Senior Subordinated Notes due 2008.This Exhibit has been previously filed as an Exhibit to the Corporations
Registration Statement on Form S-4 (Registration No. 333-68536), dated August 28,
2001, and is incorporated herein by reference.(vi)
    
    First Supplemental Indenture, dated May 12, 2004, to the Indenture dated June
29, 2001, with respect in the Corporations 11.75% Senior Subordinated Notes due
2008, between the Corporation, as issuer, and The Huntington National Bank, as
Trustee.This Exhibit has been previously filed as an Exhibit to the Corporations Quarterly
Report on Form 10-Q for the quarter ended May 31, 2004, and is incorporated herein
by reference.(vii)
    
    Indenture, dated as of June 29, 2001, between the Corporation, as issuer, and
National City Bank, as Trustee, with respect to the Corporations 7.00% Convertible
Subordinated Notes due July 15, 2006.This Exhibit has been previously filed as an Exhibit to the Corporations
Registration Statement on Form S-3 (Registration No. 333-68526), dated August 28,
2001, and is incorporated herein by reference.(viii)
    
    Receivables Purchase Agreement, dated as of August 7, 2001, among AGC
Funding Corporation, the Corporation, Market Street Funding Corporation and PNC
Bank, National Association.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 2002, and is
incorporated herein by reference.(ix)
    
    Fifth Amendment to Receivables
Purchase Agreement, dated as of August 2, 2004, among AGC Funding
Corporation, the Corporation, Market Street Funding Corporation, PNC
Bank, National Association, Fifth Third Bank, Liberty Street Funding
Corp. and The Bank of Nova Scotia.This Exhibit is filed herewith.10
    
    Material Contracts(i)
    
    Officers contracts.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 1999, and is
incorporated herein by reference.(ii)
    
    Shareholders Agreement dated November 19, 1984.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 2002, and is
incorporated herein by reference.
 84




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Item
    
    Description(iii)
    
    Executive Deferred Compensation Plan.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 1999, and is
incorporated herein by reference.(iv)
    
    1982 Incentive Stock Option Plan.This Exhibit has been previously filed as an Exhibit to the Corporations
Registration Statement on Form S-8 (Registration No. 2-84911), dated July 1, 1983,
and is incorporated herein by reference.(v)
    
    1985 Incentive Stock Option Plan.This Exhibit has been previously filed as an Exhibit to the Corporations
Registration Statement on Form S-8 (Registration No. 33-975), dated November 7,
1985, and is incorporated herein by reference.(vi)
    
    1987 Class B Stock Option Plan.This Exhibit has been previously filed as an Exhibit to the Corporations
Registration Statement on Form S-8 (Registration No. 33-16180), dated July 31,
1987, and is incorporated herein by reference.(vii)
    
    Stock Option Agreement with Morry Weiss dated January 25, 1988.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 2002, and is
incorporated herein by reference.(viii)
    
    1992 Stock Option Plan.This Exhibit has been previously filed as an Exhibit to the Corporations
Registration Statement on Form S-8 (Registration No. 33-58582), dated February 22,
1993, and is incorporated herein by reference.(ix)
    
    1995 Director Stock Plan.This Exhibit has been previously filed as an Exhibit to the Corporations
Registration Statement on Form S-8 (Registration No. 33-61037), dated July 14,
1995, and is incorporated herein by reference.(x)
    
    1996 Employee Stock Option Plan.This Exhibit has been previously filed as an Exhibit to the Corporations
Registration Statement on Form S-8 (Registration No. 33-08123), dated July 15,
1996, and is incorporated herein by reference.
 85




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Item
    
    Description(xi)
    
    1997 Equity and Performance Incentive Plan (as amended on June 25, 2004).This Exhibit has been previously filed as an Exhibit to the Corporations
Registration Statement on Form S-8 (Registration No. 333-121982), dated January 12,
2005, and is incorporated herein by reference.(xii)
    
    CEO and Named Executive Officers Compensation Plan.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 2001, and is
incorporated herein by reference.(xiii)
    
    Supplemental Executive Retirement Plan (as amended and restated effective
March 1, 2004).This Exhibit has been previously filed as an Exhibit to the Corporations Quarterly
Report on Form 10-Q for the quarter ended November 30, 2004, and is incorporated
herein by reference.(xiv)
    
    Employment Agreement, dated as of September 25, 2001, between James C. Spira
and the Corporation.This Exhibit has been previously filed as an Exhibit to the Corporations
Registration Statement on Form S-8 (Registration No. 333-75696), dated December 21,
2001, and is incorporated herein by reference.(xv)
    
    Employment Agreement, dated as of March 1, 2001, between William R. Mason and
the Corporation.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 2002, and is
incorporated herein by reference.(xvi)
    
    Employment Agreement, dated as of October 17, 2002, between Michael Goulder
and the Corporation.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 2003, and is
incorporated herein by reference.(xvii)
    
    Employment Agreement, dated as of May 6, 2002, between Erwin Weiss and the
Corporation.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 2003, and is
incorporated herein by reference.
 86




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Item
    
    Description(xviii)
    
    Employment Agreement, dated as of September 9, 2002, between Steven
Willensky and the Corporation.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 2003, and is
incorporated herein by reference.(xix)
    
    Employment Agreement, dated as of August 22, 2003, between Catherine M.
Kilbane and the Corporation.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 29, 2004, and is
incorporated herein by reference.(xx)
    
    Employment Agreement, dated as of June 1, 1991, between Jeffrey M. Weiss and
the Corporation.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 29, 2004, and is
incorporated herein by reference.(xxi)
    
    Employment Agreement, dated as of May 1, 1997, between Zev Weiss and the
Corporation.This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 29, 2004, and is
incorporated herein by reference.(xxii)
    
    Retirement Agreement, effective as of February 21, 2005, between David R.
Beittel and the Corporation.This Exhibit is filed herewith.(xxiii)
    
    Severance Agreement, effective as of February 28, 2005, between Pamela L.
Linton and the Corporation.This Exhibit is filed herewith.(xxiv)
    
    Consulting Agreement, effective as of March 1, 2005, between Pamela L.
Linton and the Corporation.This Exhibit is filed herewith.(xxv)
    
    Severance Agreement and Mutual Release, effective as of February 28, 2005,
between Mary Ann Corrigan-Davis and the Corporation.This Exhibit is filed herewith.
 87




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Item
    
    Description(xxvi)
    
    Key Management Annual Incentive Plan (fiscal year 2004 Description)This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 29, 2004, and is
incorporated herein by reference.(xxvii)
    
    Key Management Annual Incentive Plan (fiscal year 2005 Description)This Exhibit is filed herewith.(xxviii)
    
    Key Management Annual Incentive Plan (fiscal year 2006 Description)This Exhibit is filed herewith.(xxix)
    
    Agreement to defer stock option gains with Morry Weiss dated December 15,
1997This Exhibit has been previously filed as an Exhibit to the Corporations Annual
Report on Form 10-K for the fiscal year ended February 28, 2003, and is
incorporated herein by reference.(xxx)
    
    Form of Employee Stock Option AgreementThis Exhibit is filed herewith.(xxxi)
    
    Form of Director Stock Option Agreement.This Exhibit is filed herewith.(xxxii)
    
    Form of Restricted Shares Grant Agreement.This Exhibit is filed herewith.(xxxiii)
    
    Form of Deferred Shares Grant Agreement.This Exhibit is filed herewith.(xxxiv)
    
    Employment Agreement, dated June 26, 2003, between James C. Spira and the
Corporation, as amended on June 24, 2004.This Exhibit is filed herewith.(xxxv)
    
    Bonus Letter, dated October 4, 2000, to Erwin Weiss.This Exhibit is filed herewith.
 88




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Item
    
    Description(xxxvi)
    
    Employment Agreement, dated as of March 4, 2004, between Thomas H. Johnston
and the Corporation, as amended on March 11, 2004.This Exhibit is filed herewith.21
    
    Subsidiaries of the CorporationThis Exhibit is filed herewith.23
    
    Consent of Independent Registered Public Accounting FirmThis Exhibit is filed herewith.(31)a
    
    Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934This Exhibit is filed herewith.(31)b
    
    Certification of
Principal Financial Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934This Exhibit is filed herewith.32(a)
    
    Certification Pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002This Exhibit is filed herewith.(b)
    Exhibits listed in Item
15(a) 3. are included herein or incorporated herein by reference.(c)
    Financial Statement SchedulesThe response to this
portion of Item 15 is submitted below.3. Financial Statement SchedulesIncluded in Part IV of the report:Schedule II  Valuation and Qualifying Accounts
 All other schedules for which provision is made in the applicable accounting regulations of
the Securities and Exchange Commission are not required under the related instructions
or are inapplicable, and therefore have been omitted. 89




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 CORPORATION
                      (Registrant)Date:
May 11, 2005
    
    By:
    
    /s/ Catherine M. KilbaneCatherine M. Kilbane
Senior Vice President, General Counsel and Secretary




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Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated: SIGNATURE
    
    TITLE
    
    
    
    
    
    DATE)/s/ Morry Weiss
    
    Chairman of the Board;
    
    
    )Morry Weiss
    
    Director
    
    
    )))Chief Executive Officer; (principal
    
    
    )/s/ Zev Weiss
    
    executive officer)
    
    
    )Zev Weiss
    
    Director
    
    
    )))/s/ Jeffrey Weiss
    
    President and Chief Operating Officer;
    
    
    )Jeffrey Weiss
    
    Director
    
    
    )))/s/ Scott S. Cowen
    
    Director
    
    
    )Scott S. Cowen
    
    
    
    
    )))/s/ Joseph S. Hardin Jr.
    
    Director
    
    
    )Joseph S. Hardin, Jr.
    
    
    
    
    )))/s/ Stephen R. Hardis
    
    Director
    
    
    )
    
    
    May 11, 2005Stephen R. Hardis
    
    
    
    
    )))/s/ Harriet Mouchly-Weiss
    
    Director
    
    
    )Harriet Mouchly-Weiss
    
    
    
    
    )))/s/ Charles A. Ratner
    
    Director
    
    
    )Charles A. Ratner
    
    
    
    
    ))/s/ James C. Spira
    
    Director
    
    
    )James C. Spira
    
    
    
    
    )))/s/ Jerry Sue Thornton
    
    Director
    
    
    )Jerry Sue Thornton
    
    
    
    
    ))Vice President and Corporate
    
    
    )/s/ Joseph B. Cipollone
    
    Controller; Chief Accounting
    
    
    )Joseph B. Cipollone
    
    Officer (principal accounting officer
    
    
    )and interim principal financialofficer)




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SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
AMERICAN GREETINGS CORPORATION AND SUBSIDIARIES
(In thousands of dollars) COLUMN A
    

COLUMN B
    
    

COLUMN C
    
    

COLUMN D
    
    

COLUMN EADDITIONSBalance
    
    
    (1)
    
    
    (2)
    
    
    
    
    
    
    Balanceat Beginning
    
    
    Charged to Costs
    
    
    Charged to Other
    
    
    
    
    
    
    at EndDescription
    
    of Period
    
    
    and Expenses
    
    
    Accounts-Describe
    
    
    Deductions-Describe
    
    
    of PeriodYear ended February 28, 2005:Deduction from asset account:Allowance for doubtful
accounts
    
    $
    17,871
    
    
    $
    2,557
    
    
    $
    158
    (A)
    
    $
    3,902
    (B)
    
    $
    16,684Allowance for sales returns
    
    $
    85,638
    
    
    $
    264,840
    
    
    $
    1,306
    (A)
    
    $
    257,112
    (C)
    
    $
    94,672Allowance for other assets
    
    $
    40,100
    
    
    $
    11,800
    
    
    $
    0
    
    
    $
    14,400
    (D)
    
    $
    37,500Year ended February 29, 2004:Deduction from asset account:Allowance for doubtful
accounts
    
    $
    34,825
    
    
    $
    5,119
    
    
    $
    547
    (A)
    
    $
    22,620
    (B)
    
    $
    17,871Allowance for sales returns
    
    $
    86,318
    
    
    $
    288,874
    
    
    $
    3,316
    (A)
    
    $
    292,870
    (C)
    
    $
    85,638Allowance for other assets
    
    $
    36,100
    
    
    $
    7,500
    
    
    $
    0
    
    
    $
    3,500
    (D)
    
    $
    40,100Year ended February 28, 2003:Deduction from asset account:Allowance for doubtful
accounts
    
    $
    34,498
    
    
    $
    15,031
    
    
    $
    425
    (A)
    
    $
    15,129
    (B)
    
    $
    34,825Allowance for sales returns
    
    $
    102,265
    
    
    $
    317,646
    
    
    $
    1,985
    (A)
    
    $
    335,578
    (C)
    
    $
    86,318Allowance for other assets
    
    $
    34,900
    
    
    $
    32,500
    
    
    $
    0
    
    
    $
    31,300
    (D)
    
    $
    36,100
   Note A: Translation adjustment on foreign subsidiary balances.Note B: Accounts charged off, less recoveries.Note C: Sales returns charged to the allowance account for actual returns.Note D: Deferred Contract costs charged to the allowance account. S - 1