American Greetings Corp. 10-K
Table of Contents

 
 

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 1934
  For the fiscal year ended February 28, 2005
 
   
  OR
 
   
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from                     to                     .

Commission File 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) 252-7300
     
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
     
     
Class 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.

 
 

 


Table of Contents

AMERICAN GREETINGS CORPORATION
INDEX

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

 


Table of Contents

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

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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

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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

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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.

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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:

         
        Contract
Union   Plant Location   Expiration Date
International Brotherhood
  Bardstown, Kentucky;   03/23/08
of Teamsters
  Kalamazoo, Michigan;   04/30/10
 
  Cleveland, Ohio   03/31/10
 
       
Union of Needle Trades,
  Greeneville, Tennessee   10/19/05
Industrial, & Textile
  (Plus Mark)    
Employees
       
 
       
Firemen & 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.

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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.

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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

                             
                    Expiration    
    Approximate Square   Date of    
    Feet Occupied   Material   Principal
Location   Owned   Leased   Leases*   Activity
                          World 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 greetings
 
                           
Bardstown, Kentucky
    413,500                     Cutting, folding, finishing, and packaging of greeting cards
 
                           
Berea, Kentucky
            552,000       2013     Production and distribution of candles
 
                           
Danville, Kentucky
    1,374,000                     Distribution of everyday products including greeting cards
 
                           
Lafayette, Tennessee
    194,000                     Manufacture of envelopes for greeting cards, cutting, folding, finishing and packaging of cellos and stationery cards
 
                           
Burgaw, North Carolina
            59,000       2006     Manufacture of plastic molded party ware
 
                           
Osceola, Arkansas
    2,552,000                     Cutting, folding, finishing and packaging of greeting cards and warehousing; distribution of seasonal products

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                    Expiration    
    Approximate Square   Date of    
    Feet Occupied   Material   Principal
Location   Owned   Leased   Leases*   Activity
Philadelphia,
Mississippi
            120,000       2005     Hand finishing of greeting cards
 
                           
Ripley,
Tennessee
    165,000                     Greeting card printing (lithography)
 
                           
Kalamazoo,
Michigan
    602,500                     Manufacture and distribution of party goods
 
                           
Forest 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 products
 
                           
Dewsbury, England
2 Locations
    394,000                     General offices of Carlton Cards Limited (U.K.); manufacture greeting cards and related products
 
                           
Croydon, Hull,
Leicester and Oxford,
England
3 Locations
    116,500       31,000       2007     Manufacture and distribution of greeting cards and related products
 
                           
Stafford Park,
England
2 Locations
    219,000       29,000       2010     General offices and warehouse for Gibson Hanson Graphics

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                    Expiration    
    Approximate Square   Date of    
    Feet Occupied   Material   Principal
Location   Owned   Leased   Leases*   Activity
Mexico City,
Mexico
    89,000                     General offices of Carlton Mexico, S.A. de C.V. and distribution of greeting cards and related products
 
                           
Johannesburg,
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 as    
Name   Age   Executive Officer   Current Position and Office
Morry Weiss
    64       32     Chairman
Zev Weiss
    38       4     Chief Executive Officer
Jeffrey Weiss
    41       7     President and Chief Operating Officer
Catherine M. Kilbane
    42       1     Senior Vice President, General Counsel and Secretary
Michael L. Goulder
    45       2     Senior Vice President, Executive Supply Chain Officer
Thomas H. Johnston
    57          
Senior Vice President, Creative and Merchandising; President, Carlton Cards Retail
William R. Mason
    60       23     Senior Vice President, Wal-Mart Team

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            Years as    
Name   Age   Executive Officer   Current Position and Office
Erwin Weiss
    56       15     Senior Vice President, Specialty Business
Steven S. Willensky
    50       2     Senior Vice President, Executive Sales and Marketing Officer
Joseph B. Cipollone
    46       4     Vice President, Corporate Controller
Brian T. McGrath
    54           Vice President, Human Resources
Douglas W. Rommel
    49           Vice President, Information Services
Stephen 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

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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.

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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     2004  
    High     Low     High     Low  
1st Quarter
  $ 23.45     $ 19.09     $ 17.73     $ 12.65  
2nd Quarter
    24.18       20.87       20.22       17.00  
3rd Quarter
    28.16       23.98       22.14       18.33  
4th 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     2004
3rd 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

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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   Maximum
                    Shares   Number of
                    Purchased as   Shares that May
            Average     Part of Publicly   Yet Be
    Total Number of     Price Paid     Announced   Purchased
Period   Shares Repurchased     per Share     Plans   Under the Plans
December 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.

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Item 6. Selected Financial Data

Thousands of dollars except share and per share amounts

                                         
    2005     2004     2003     2002     2001  
Summary of Operations
                                       
Net sales
  $ 1,902,727     $ 1,953,729     $ 1,953,654     $ 1,868,813     $ 2,050,955  
Gross profit
    997,526       1,041,024       1,082,444       961,352       1,146,525  
Restructure and other charges
                      56,715        
Interest expense
    79,526       85,828       79,095       78,599       55,387  
Income (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       5,915  
Cumulative 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       0.09  
Cumulative 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       0.62  
Fiscal year end market price per share
    24.63       22.67       13.12       13.77       13.06  
Average number of shares outstanding
    68,545,432       66,509,332       65,636,621       63,615,193       63,646,405  
 
                                       
Financial Position
                                       
Accounts receivable — net
  $ 200,408     $ 238,473     $ 294,109     $ 277,388     $ 374,820  
Inventories
    222,874       238,612       271,187       280,805       356,705  
Working capital
    793,972       774,466       554,363       373,381       119,062  
Total assets
    2,535,628       2,484,013       2,584,120       2,614,995       2,712,074  
Property, plant and equipment additions
    47,497       32,544       28,053       24,436       69,743  
Long-term debt
    486,099       665,874       726,531       853,113       380,129  
Shareholders’ equity
    1,386,780       1,267,540       1,077,464       902,419       1,047,190  
Shareholders’ equity per share
    20.09       18.79       16.35       14.15       16.49  
Net return on average shareholders’ equity from continuing operations
    5.3 %     8.4 %     11.5 %     (13.0 )%     (8.6 )%

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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.

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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.

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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 %)
 
                                   

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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     2004  
Everyday 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 Year  
    Everyday Cards     Seasonal Cards     Total Greeting Cards  
    2005   2004   2005   2004   2005   2004
Unit 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.

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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).

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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     % Change  
Net 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     % Change  
Net 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.

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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     % Change  
Net 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

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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 %)
 
                                   

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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   2003
Everyday greeting cards
    38 %     39 %
Seasonal greeting cards
    19 %     18 %
Gift wrapping and wrap accessories
    17 %     19 %
All other products*
    26 %     24 %


* 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

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 Year  
    Everyday Cards     Seasonal Cards     Total Greeting Cards  
    2004   2003   2004   2003   2004   2003
Unit 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 %

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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

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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     % Change  
Net 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.

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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     % Change  
Net 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     % Change  
Net 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

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$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

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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.

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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

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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.

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Contractual Obligations

The following chart reflects the Corporation’s known contractual obligations as of February 28, 2005:

(Dollars in Thousands)

                                                 
                    Payment                    
                    Commitments                    
                    Under     Payment              
Obligations   Long-             Agreements     Commitments              
due by   Term     Operating     with     Under Royalty              
Period   Debt     Leases     Customers     Agreements     Severance     Total  
2006
  $     $ 45,508     $ 65,944     $ 15,131     $ 12,316     $ 138,899  
2007
    176,082       35,622       28,981       2,936       2,130       245,751  
2008
    335       29,156       24,357       1,494       1,200       56,542  
2009
    10,230       23,652       21,314       143             55,339  
2010
    183       17,974       20,800                   38,957  
Thereafter
    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.

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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

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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.

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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

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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

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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.

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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.

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Item 8. Financial Statements and Supplementary Data

         
      Page  
Index to Consolidated Financial Statements and Supplementary Financial Data     Number  
    39  
 
       
    41  
 
       
    42  
 
       
    43  
 
       
    45  
 
       
    46  
 
       
    47  
 
       
Supplementary Financial Data:
       
 
       
    76  

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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

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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

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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

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

See notes to consolidated financial statements.

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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     2004  
ASSETS
               
 
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 250,267     $ 285,450  
 
               
Short-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       238,473  
 
               
Inventories
    222,874       238,612  
 
               
Deferred and refundable income taxes
    193,497       157,886  
 
               
Assets of businesses held for sale
          40,815  
 
               
Prepaid expenses and other
    205,853       237,809  
 
           
 
               
Total current assets
    1,281,639       1,199,045  
 
               
GOODWILL
    270,057       223,697  
 
               
OTHER ASSETS
    644,140       706,898  
 
               
PROPERTY, PLANT AND EQUIPMENT — NET
    339,792       354,373  
 
           
 
               
 
  $ 2,535,628     $ 2,484,013  
 
           

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    2005     2004  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
CURRENT LIABILITIES
               
Accounts payable
  $ 143,041     $ 125,816  
Accrued liabilities
    118,090       129,773  
Accrued compensation and benefits
    96,789       70,896  
Income taxes
    38,777       14,513  
Liabilities of businesses held for sale
          5,338  
Other current liabilities
    90,970       78,243  
 
           
 
               
Total current liabilities
    487,667       424,579  
 
               
LONG-TERM DEBT
    486,099       665,874  
 
               
OTHER LIABILITIES
    137,868       96,325  
 
               
DEFERRED INCOME TAXES
    37,214       29,695  
 
               
SHAREHOLDERS’ EQUITY
               
Common 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       62,880  
 
               
Class 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       4,588  
 
               
Capital in excess of par value
    368,777       331,765  
Treasury stock
    (445,618 )     (438,612 )
Accumulated other comprehensive income
    29,039       20,638  
Retained earnings
    1,365,555       1,286,281  
 
           
Total shareholders’ equity
    1,386,780       1,267,540  
 
           
 
               
 
  $ 2,535,628     $ 2,484,013  
 
           

See notes to consolidated financial statements.

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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     2003  
OPERATING ACTIVITIES:
                       
Net income
  $ 95,279     $ 104,670     $ 121,106  
Income from discontinued operations
    24,729       6,681       7,568  
 
                 
Income from continuing operations
    70,550       97,989       113,538  
Adjustments 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       60,602  
Deferred 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       5,782  
Decrease in deferred costs – net
    107,660       34,875       39,546  
Increase (decrease) in accounts payable and other liabilities
    31,768       (99,474 )     (124,910 )
Other – net
    (1,371 )     (4,109 )     1,882  
 
                 
Cash Provided by Operating Activities
    358,414       283,123       62,938  
 
                       
INVESTING 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       1,613  
Investment in corporate-owned life insurance
    603       7,808       10,017  
Other – net
    10,934       (5,688 )     35,788  
 
                 
Cash (Used) Provided by Investing Activities
    (187,030 )     (30,226 )     19,365  
 
                       
FINANCING ACTIVITIES:
                       
Reduction of long-term debt
    (216,417 )     (80,954 )     (124,833 )
(Decrease) increase in short-term debt
          (128,693 )     116,747  
Sale of stock under benefit plans
    40,114       18,466       21,487  
Purchase of treasury shares
    (24,080 )     (828 )     (83 )
Dividends to shareholders
    (8,264 )            
 
                 
Cash (Used) Provided by Financing Activities
    (208,647 )     (192,009 )     13,318  
 
                       
Cash (Used) Provided by Discontinued Operations
    (2,397 )     5,987       8,066  
 
                       
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    4,477       10,112       3,797  
 
                 
 
                       
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (35,183 )     76,987       107,484  
Cash and Cash Equivalents at Beginning of Year
    285,450       208,463       100,979  
 
                 
Cash and Cash Equivalents at End of Year
  $ 250,267     $ 285,450     $ 208,463  
 
                 

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Years ended February 28, 2005, February 29, 2004 and February 28, 2003

                                                                         
                                                    Accumulated              
                    Capital in                     Deferred     Other              
    Common Shares     Excess of     Treasury     Shares Held     Compensation     Comprehensive     Retained        
Thousands of dollars except per share amounts   Class A     Class B     Par Value     Stock     In Trust     Plans     Income (Loss)     Earnings     Total  
                 
BALANCE FEBRUARY 28, 2002
  $ 59,153     $ 4,608     $ 286,158     $ (438,824 )   $ (20,480 )   $ 20,480     $ (69,614 )   $ 1,060,938     $ 902,419  
 
Net income
                                                            121,106       121,106  
Other comprehensive income (loss):
                                                                       
Foreign currency translation adjustment
                                                    33,171               33,171  
Reclassification of realized gain on available-for-sale securities (net of tax of $3,040)
                                                    (6,051 )             (6,051 )
 
                                                                     
Comprehensive income
                                                                    148,226  
Exchange of shares
    11       (11 )                                                        
Sale of shares under benefit plans, including tax benefits
    2,133               24,714       40                               (95 )     26,792  
Purchase of treasury shares
            (5 )             (78 )                                     (83 )
Sale of treasury shares
                            6                               (4 )     2  
 
Stock grants and other
    2       8               152                               (54 )     108  
 
                                                     
BALANCE FEBRUARY 28, 2003
    61,299       4,600       310,872       (438,704 )     (20,480 )     20,480       (42,494 )     1,181,891       1,077,464  
 
                                                                       
Net income
                                                            104,670       104,670  
Other comprehensive income (loss):
                                                                       
Foreign currency translation adjustment
                                                    63,327               63,327  
Unrealized loss on available-for-sale securities (net of tax benefit of $125)
                                                    (195 )             (195 )
 
                                                                     
Comprehensive income
                                                                    167,802  
Exchange of shares
    14       (14 )                                                        
Sale of shares under benefit plans, including tax benefits
    1,566       32       20,876       651                               (245 )     22,880  
Purchase of treasury shares
            (41 )             (787 )                                     (828 )
Sale of treasury shares
                            7                               (3 )     4  
Stock grants and other
    1       11       17       221                               (32 )     218  
 
                                                     
BALANCE FEBRUARY 29, 2004
    62,880       4,588       331,765       (438,612 )     (20,480 )     20,480       20,638       1,286,281       1,267,540  
 
                                                                       
Net income
                                                            95,279       95,279  
Other comprehensive income (loss):
                                                                       
Foreign currency translation adjustment
                                                    9,750               9,750  
Minimum 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
                                                                    103,680  
Cash 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 )     44,260  
Purchase 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 )     3,644  
 
                                                     
BALANCE 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.

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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.

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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.

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

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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.

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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

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“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     2003  
Net income as reported
  $ 95,279     $ 104,670     $ 121,106  
 
                       
Deduct: Stock-based compensation expense determined under fair value based method, net of tax
    5,784       5,881       4,695  
 
                 
 
                       
Pro forma net income
  $ 89,495     $ 98,789     $ 116,411  
 
                 
 
                       
Earnings per share:
                       
As reported
  $ 1.39     $ 1.57     $ 1.85  
Pro forma
    1.31       1.49       1.77  
 
                       
Earnings per share – assuming dilution:
                       
As reported
  $ 1.25     $ 1.40     $ 1.63  
Pro forma
    1.18       1.33       1.57  

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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     2003  
Risk-free interest rate
    3.4 %     2.7 %     3.8 %
Dividend yield
    0.01 %     0.00 %     0.00 %
Expected stock volatility
    0.36       0.50       0.53  
 
                       
Expected life in years:
                       
Grant date to exercise date
    3.8       4.0       4.4  
Vest 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

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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     2003  
Royalty revenue
  $ (63,761 )   $ (44,880 )   $ (6,670 )
Foreign exchange (gain) loss
    (3,868 )     (5,236 )     1,028  
Interest 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.

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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 Other        
    Benefits     Costs     Total  
Balance February 28, 2002
  $ 17,977     $ 1,806     $ 19,783  
Cash expenditures
    (13,936 )     (1,667 )     (15,603 )
 
                 
Balance February 28, 2003
    4,041       139       4,180  
Cash expenditures
    (2,537 )     (139 )     (2,676 )
 
                 
Balance February 29, 2004
    1,504             1,504  
Cash 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     2003  
Numerator:
                       
Income from continuing operations
  $ 70,550     $ 97,989     $ 113,538  
Add-back – interest on convertible subordinated notes, net of tax
    7,501       7,525       7,403  
 
                 
Income from continuing operations – assuming dilution
  $ 78,051     $ 105,514     $ 120,941  
 
                 
 
                       
Denominator (thousands):
                       
Weighted average shares outstanding
    68,545       66,509       65,637  
 
                       
Effect of dilutive securities:
                       
Stock options
    881       988       753  
Convertible debt
    12,591       12,591       12,591  
 
                 
 
                       
Weighted average shares outstanding – assuming dilution
    82,017       80,088       78,981  
 
                 
 
                       
Income from continuing operations per share
  $ 1.03     $ 1.47     $ 1.73  
 
                 
 
                       
Income from continuing operations per share – assuming dilution
  $ 0.95     $ 1.32     $ 1.53  
 
                 

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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     2004  
Foreign currency translation adjustment
  $ 30,583     $ 20,833  
Minimum pension liability adjustment
    (655 )      
Unrealized investment loss
    (365 )     (195 )
Other
    (524 )      
 
           
 
  $ 29,039     $ 20,638  
 
           

NOTE 7 – INVENTORIES

                 
    2005     2004  
Raw materials
  $ 23,241     $ 37,514  
Work in process
    19,719       30,047  
Finished products
    228,088       212,252  
 
           
 
    271,048       279,813  
Less LIFO reserve
    75,890       73,213  
 
           
 
    195,158       206,600  
Display 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     2004  
Land
  $ 13,397     $ 14,200  
Buildings
    287,774       308,279  
Equipment and fixtures
    690,586       667,035  
 
           
 
    991,757       989,514  
Less accumulated depreciation
    651,965       635,141  
 
           
 
  $ 339,792     $ 354,373  
 
           

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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     reportable        
    Products     Interactive     Operations     Segments     Total  
Balance at February 28, 2003
  $ 147,350     $ 42,669     $ 14,306     $ 81     $ 204,406  
Acquisition related
    (2,120 )           3,331             1,211  
Foreign currency translation
    18,018             62             18,080  
 
                             
Balance at February 29, 2004
    163,248       42,669       17,699       81       223,697  
Acquisition related
    8,674       32,485                   41,159  
Foreign currency translation
    3,357       1,794       50             5,201  
 
                             
Balance 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

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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     2004  
Prepaid expenses and other
  $ 156,665     $ 187,844  
Other assets
    582,401       630,445  
 
           
Deferred cost assets
    739,066       818,289  
 
               
Other 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

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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.

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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     2004  
6.10% Senior Notes, due 2028
  $ 298,503     $ 298,122  
11.75% Senior Subordinated Notes, due 2008
    10,016       192,162  
7.00% Convertible Subordinated Notes, due 2006
    175,000       175,000  
Other (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
    176,082  
2008
    335  
2009
    10,230  
2010
    183  
Thereafter
    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.

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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     2004  
Change in benefit obligation:
               
Benefit obligation at beginning of year
  $ 96,012     $ 90,822  
Interest cost
    5,832       5,944  
Actuarial loss
    6,125       5,577  
Benefit payments
    (6,453 )     (6,331 )
 
           
Benefit obligation at end of year
    101,516       96,012  
 
               
Change in plan assets:
               
Fair value of plan assets at beginning of year
    98,174       91,352  
Actual return on plan assets
    4,180       4,153  
Employer contributions
    6,500       9,000  
Benefit payments
    (6,453 )     (6,331 )
 
           
Fair value of plan assets at end of year
    102,401       98,174  
 
           
 
               
Funded status at end of year
    885       2,162  
 
               
Unrecognized loss
    16,950       9,363  
 
           
 
               
Prepaid benefit cost
  $ 17,835     $ 11,525  
 
           
                 
    2005     2004  
Assumptions:
               
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

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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     2003  
Interest cost
  $ 5,832     $ 5,944     $ 6,045  
Expected 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   2004
Equity 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
  $ 6,260  
2007
    6,241  
2008
    6,343  
2009
    6,453  
2010
    6,578  
2011 – 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

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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     2004  
Change in benefit obligation:
               
Benefit obligation at beginning of year
  $ 26,140     $ 23,719  
Service cost
    546       462  
Interest cost
    1,577       1,551  
Plan amendments
    872        
Actuarial (gain) loss
    (147 )     1,591  
Benefit payments
    (1,321 )     (1,183 )
 
           
 
               
Benefit obligation at end of year
    27,667       26,140  
 
               
Change in plan assets:
               
Fair value of plan assets at beginning of year
           
Employer contributions
    1,321       1,183  
Benefit 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       3,720  
 
           
 
               
Accrued benefit cost
  $ (23,336 )   $ (22,420 )
 
           

The accrued benefit cost is included in the Consolidated Statement of Financial Position in the following captions:

                 
    2005     2004  
Other liabilities
  $ (25,187 )   $ (22,420 )
Other assets
    779        
Accumulated other comprehensive income
    1,072        
 
           
 
               
Accrued benefit cost
  $ (23,336 )   $ (22,420 )
 
           
                 
    2005     2004  
Assumptions:
               
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 %

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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     2003  
Service cost
  $ 546     $ 462     $ 390  
Interest cost
    1,577       1,551       1,541  
Amortization 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
  $ 1,621  
2007
    1,672  
2008
    1,788  
2009
    1,820  
2010
    1,848  
2011 – 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.

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Summarized information on the postretirement medical benefit plan follows:

                 
    2005     2004  
Change in benefit obligation:
               
Benefit obligation at beginning of year
  $ 121,696     $ 110,323  
Service cost
    2,597       2,113  
Interest cost
    7,692       7,346  
Participant contributions
    4,290       4,092  
Plan amendments
    (9,264 )     (6,972 )
Actuarial losses
    8,481       13,872  
Benefit payments
    (9,712 )     (9,078 )
 
           
Benefit obligation at end of year
    125,780       121,696  
 
               
Change in plan assets:
               
Fair value of plan assets at beginning of year
    70,037       59,307  
Actual return on plan assets
    2,309       6,835  
Employer contributions
    5,422       8,881  
Participant contributions
    4,290       4,092  
Benefit payments
    (9,712 )     (9,078 )
 
           
Fair value of plan assets at end of year
    72,346       70,037  
 
           
 
               
Underfunded status at end of year
    (53,434 )     (51,659 )
Unrecognized prior service (credit)
    (48,621 )     (45,979 )
Unrecognized loss
    90,671       85,938  
 
           
Accrued benefit cost
  $ (11,384 )   $ (11,700 )
 
           
                         
    2005     2004     2003  
Components of net periodic benefit cost:
                       
Service cost
  $ 2,597     $ 2,113     $ 1,615  
Interest cost
    7,692       7,346       7,096  
Expected 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       5,831  
 
                 
Net 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     2004  
Discount 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  

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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     2004  
Discount 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     2004  
Effect of a 1% increase in health care cost trend rate on:
               
Service cost plus interest cost
  $ 823     $ 897  
Accumulated postretirement benefit obligation
    8,155       10,883  
 
               
Effect 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     2004  
Accumulated postretirement benefit obligation:
               
Retired
  $ 73,695     $ 72,076  
Active entitled to full benefits
    10,435       11,847  
Other 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:

                         
                    Target  
    2005     2004     Allocation  
Equity 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

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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 of  
    Medicare Part D Subsidy     Medicare Part D Subsidy  
2006
  $ 7,820     $ 7,820  
2007
    8,297       8,052  
2008
    8,726       8,456  
2009
    9,164       8,871  
2010
    9,469       9,148  
2011-2015
    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     2003  
Gross rentals
  $ 67,926     $ 72,699     $ 70,253  
Sublease rentals
    (2,865 )     (2,115 )     (1,549 )
 
                 
Net rental expense
  $ 65,061     $ 70,584     $ 68,704  
 
                 

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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
  $ 45,508  
2007
    35,622  
2008
    29,156  
2009
    23,652  
2010
    17,974  
Later years
    33,433  
 
     
 
    185,345  
Sublease 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.

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Stock option transactions and prices are summarized as follows:

                                 
                    Weighted-Average Exercise  
    Number of Options     Price Per Share  
    Class A     Class B     Class A     Class B  
Options outstanding February 28, 2002
    9,031,128       1,033,373     $ 17.74     $ 20.81  
Granted
    1,700,308             14.35        
Exercised
    (2,134,250 )     (10,400 )     10.05       9.95  
Cancelled
    (634,385 )     (5,000 )     22.33       27.25  
 
                           
 
                               
Options outstanding February 28, 2003
    7,962,801       1,017,973     $ 18.76     $ 20.89  
Granted
    1,551,718             14.31        
Exercised
    (1,566,499 )     (31,600 )     11.45       9.95  
Cancelled
    (518,810 )     (420 )     23.30       48.06  
 
                           
 
                               
Options outstanding February 29, 2004
    7,429,210       985,953     $ 19.06     $ 21.23  
Granted
    1,400,738       361,342       20.88       21.33  
Exercised
    (2,049,106 )     (489,080 )     14.93       12.31  
Cancelled
    (498,512 )     (38,000 )     22.09       26.33  
 
                           
 
                               
Options outstanding February 28, 2005
    6,282,330       820,215     $ 20.57     $ 26.36  
 
                           
 
                               
Options exercisable at February 28/29:
                               
2005
    4,362,271       627,215     $ 21.55     $ 28.16  
2004
    5,299,372       985,953       20.94       21.23  
2003
    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.

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The range of exercise prices for options outstanding is as follows:

                                         
    Outstanding     Exercisable        
                                    Weighted-  
            Weighted-             Weighted-     Average  
            Average             Average     Remaining  
Exercise Price   Optioned     Exercise     Optioned     Exercise     Contractual  
Ranges   Shares     Price     Shares     Price     Life (Years)  
$    8.50 - $13.01
    534,808     $ 11.62       534,808     $ 11.62       6.32  
13.10 -   13.15
    840,940       13.15       276,926       13.15       8.01  
13.19 -   18.10
    826,323       14.84       728,873       14.72       6.99  
18.40 -   19.81
    151,393       19.69       141,718       19.71       8.34  
20.02 -   20.51
    1,286,570       20.51       400       20.51       9.18  
20.87 -   22.26
    181,952       21.85       143,852       21.94       7.16  
22.30 -   23.57
    1,555,883       23.53       1,503,433       23.55       4.18  
23.68 -   29.44
    594,350       26.68       529,150       26.86       2.81  
29.50
    919,200       29.50       919,200       29.50       1.90  
30.12 -   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.

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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     2003  
Social Expression Products
  $ 1,599,642     $ 1,671,927     $ 1,705,130     $ 320,763     $ 372,909     $ 374,489  
Intersegment 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       310,880  
 
                                               
Retail Operations
    238,159       272,917       275,296       (20,685 )     4,269       19,128  
Exchange rate adjustment
    4,759       126       (9,168 )     317       16       (1,200 )
 
                                   
Net
    242,918       273,043       266,128       (20,368 )     4,285       17,928  
 
                                               
AG Interactive
    57,514       36,427       34,615       (955 )     4,540       477  
Exchange rate adjustment
    405                   (121 )            
 
                                   
Net
    57,919       36,427       34,615       (1,076 )     4,540       477  
 
                                               
Non-reportable segments
    32,624       54,295       47,896       (10,824 )     (7,404 )     6,451  
 
                                               
Unallocated 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  
 
                                   

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    Assets  
    2005     2004     2003  
Social Expression Products
  $ 1,475,993     $ 1,684,542     $ 1,813,954  
Exchange rate adjustment
    57,560       37,291       (20,334 )
 
                 
Net
    1,533,553       1,721,833       1,793,620  
 
                       
Retail Operations
    77,402       89,822       95,572  
Exchange rate adjustment
    1,936       431       (1,808 )
 
                 
Net
    79,338       90,253       93,764  
 
                       
AG Interactive
    96,300       55,638       58,619  
Exchange rate adjustment
    2,590              
 
                 
Net
    98,890       55,638       58,619  
 
                       
Non-reportable segments
    21,058       47,504       64,725  
 
                       
Unallocated and intersegment items
    797,634       564,945       591,617  
Exchange rate adjustment
    5,155       3,840       (18,225 )
 
                 
Net
    802,789       568,785       573,392  
 
                 
Consolidated
  $ 2,535,628     $ 2,484,013     $ 2,584,120  
 
                 
                                                 
    Depreciation and Amortization     Capital Expenditures  
    2005     2004     2003     2005     2004     2003  
Social Expression Products
  $ 43,695     $ 45,099     $ 45,855     $ 36,298     $ 21,009     $ 22,890  
Exchange rate adjustment
    723       32       (882 )     449       21       (506 )
 
                                   
Net
    44,418       45,131       44,973       36,747       21,030       22,384  
 
                                               
Retail Operations
    6,511       7,678       9,243       8,638       8,959       3,589  
Exchange rate adjustment
    100       3       (242 )     174       2       (116 )
 
                                   
Net
    6,611       7,681       9,001       8,812       8,961       3,473  
 
                                               
AG Interactive
    3,976       4,402       3,716       1,427       1,224       1,014  
Exchange rate adjustment
    11                                
 
                                   
Net
    3,987       4,402       3,716       1,427       1,224       1,014  
 
                                               
Non-reportable segments
    1,023       1,073       1,015       343       1,329       1,182  
 
                                               
Unallocated 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 Sales  
    2005     2004     2003  
Everyday greeting cards
  $ 690,897     $ 750,219     $ 743,805  
Seasonal greeting cards
    370,521       368,757       364,086  
Gift wrapping and wrap accessories
    331,218       323,779       364,961  
All other
    510,091       510,974       462,802  
 
                 
Consolidated
  $ 1,902,727     $ 1,953,729     $ 1,935,654  
 
                 

Geographic Information

                                                 
    Net Sales     Fixed Assets - Net  
    2005     2004     2003     2005     2004     2003  
United States
  $ 1,432,578     $ 1,543,202     $ 1,580,063     $ 272,170     $ 296,760     $ 326,799  
Foreign
    470,149       410,527       355,591       67,622       57,613       51,648  
 
                                   
Consolidated
  $ 1,902,727     $ 1,953,729     $ 1,935,654     $ 339,792     $ 354,373     $ 378,447  
 
                                   

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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
  $ 14,797  
Retail Operations
    496  
Non-reportable
    442  
Unallocated
    2,598  
 
     
Total
  $ 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     2003  
United States
  $ 53,672     $ 103,054     $ 145,613  
Foreign
    54,576       56,797       42,252  
 
                 
 
  $ 108,248     $ 159,851     $ 187,865  
 
                 

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Income tax expense (benefit) from the Corporation’s continuing operations has been provided as follows:

                         
    2005     2004     2003  
Current:
                       
Federal
  $ 10,784     $ (2,910 )   $ 77,731  
Foreign
    31,576       9,994       9,017  
State and local
    4,928       574       13,808  
 
                 
 
    47,288       7,658       100,556  
Deferred
    (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     2004          
Deferred tax assets:
                       
Employee benefit and incentive plans
  $ 17,974     $ 21,936          
Net operating loss carryforwards
    63,604       41,896          
Deferred capital loss
    5,608       5,608          
Reserves not currently deductible
    76,786       56,311          
Charitable contributions carryforward
    9,040       14,278          
Foreign tax credit carryforward
    17,702       14,691          
Other
    12,522       46,933          
 
                   
 
    203,236       201,653          
Valuation allowance
    (49,260 )     (51,827 )        
 
                   
Total deferred tax assets
    153,976       149,826          
 
                       
Deferred tax liabilities:
                       
Inventory costing
    3,033       5,020          
Depreciation
    31,666       35,975          
Other
    18,405       18,180          
 
                   
Total deferred tax liabilities
    53,104       59,175          
 
                   
Net 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.

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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     2003  
Income tax expense at statutory rate
  $ 37,887     $ 55,948     $ 65,753  
State and local income taxes, net of federal tax benefit
    3,314       4,657       6,016  
Canada 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 )     3,051  
 
                 
Income 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

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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     2003  
Net sales
  $ 30,965     $ 56,537     $ 60,206  
 
                       
Pretax income from operations
    4,816       10,900       12,973  
Gain on sale
    35,525              
 
                 
 
    40,341       10,900       12,973  
Income tax expense
    15,612       4,219       5,405  
 
                 
Income 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
  $ 22,154  
Other assets
    7,318  
Fixed assets
    11,343  
 
     
 
  $ 40,815  
 
     
 
       
Liabilities of businesses held for sale:
       
Current liabilities
  $ 3,722  
Noncurrent liabilities
    1,616  
 
     
 
  $ 5,338  
 
     

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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 Ended  
    May 31     Aug 31     Nov 30     Feb 28  
Fiscal 2005
                               
Net sales
  $ 433,541     $ 392,084     $ 586,165     $ 490,937  
Gross profit
    251,926       205,367       293,428       246,805  
Income from continuing operations
    2,936       5,900       40,344       21,370  
Discontinued operations
    1,302       1,010       22,417        
Net income
    4,238       6,910       62,761       21,370  
Earnings per share:
                               
Continuing operations
  $ 0.04     $ 0.09     $ 0.58     $ 0.31  
Net income
    0.06       0.10       0.91       0.31  
Earnings per share – assuming dilution:
                               
Continuing operations
    0.04       0.09       0.51       0.28  
Net income
    0.06       0.10       0.78       0.28  
 
                               
Dividends 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.

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    Quarter Ended  
    May 31     Aug 31     Nov 30     Feb 29  
Fiscal 2004
                               
Net sales
  $ 440,755     $ 391,033     $ 603,754     $ 518,187  
Gross profit
    262,010       195,061       313,391       270,562  
Income (loss) from continuing operations
    18,745       (10,609 )     45,091       44,762  
Discontinued operations
    960       914       1,271       3,536  
Net income (loss)
    19,705       (9,695 )     46,362       48,298  
Earnings (loss) per share:
                               
Continuing operations
  $ 0.29     $ (0.16 )   $ 0.68     $ 0.67  
Net income (loss)
    0.30       (0.15 )     0.70       0.72  
Earnings (loss) per share – assuming dilution:
                               
Continuing operations
    0.26       (0.16 )     0.58       0.58  
Net 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.

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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

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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.”

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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 of  
                    securities  
                    remaining available  
    Number of             for future issuance  
    securities to be             under equity  
    issued upon     Weighted-average     compensation plans  
    exercise of     exercise price of     (excluding  
    outstanding     outstanding     securities  
    options, warrants     options, warrants     reflected in column  
Plan category   and rights     and rights     (a))  
    (a)     (b)     (c)  
Equity compensation plans approved by security holders (1)
    7,102,545     $ 21.24       5,782,770  
Equity 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

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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)

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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   Description
3   Articles of Incorporation and By-laws
 
       
  (i)   Amended Articles of Incorporation of 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, 1999, and is incorporated herein by reference.

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Item   Description
  (ii)   Amendment to Amended Articles of Incorporation of 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.
 
       
  (iii)   Amended Regulations of 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, 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.

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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.

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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.

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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.

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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.

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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, 1997
 
       
      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.
 
       
  (xxx)   Form of Employee Stock Option Agreement
 
       
      This 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.

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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 Corporation
 
       
      This Exhibit is filed herewith.
 
       
23   Consent of Independent Registered Public Accounting Firm
 
       
      This Exhibit is filed herewith.
 
       
(31)a   Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
       
      This Exhibit is filed herewith.
 
       
(31)b   Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
       
      This 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 2002
 
       
      This Exhibit is filed herewith.
 
       
(b) Exhibits listed in Item 15(a) 3. are included herein or incorporated herein by reference.
 
       
 
       
(c) Financial Statement Schedules
 
       
  The response to this portion of Item 15 is submitted below.
 
       
 
       
      3. Financial Statement Schedules
      Included 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.

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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. Kilbane    
           
      Catherine 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, 2005
 
               
Stephen 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 financial            
  officer)            

 


Table of Contents

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

                                         
COLUMN A   COLUMN B     COLUMN C     COLUMN D     COLUMN E  
            ADDITIONS                
    Balance     (1)     (2)             Balance  
    at Beginning     Charged to Costs     Charged to Other             at End  
Description   of Period     and Expenses     Accounts-Describe     Deductions-Describe     of Period  
Year ended February 28, 2005:
                                       
Deduction from asset account:
                                       
Allowance for doubtful accounts
  $ 17,871     $ 2,557     $ 158  (A)   $ 3,902  (B)   $ 16,684  
 
                             
Allowance for sales returns
  $ 85,638     $ 264,840     $ 1,306  (A)   $ 257,112  (C)   $ 94,672  
 
                             
Allowance for other assets
  $ 40,100     $ 11,800     $ 0     $ 14,400  (D)   $ 37,500  
 
                             
Year ended February 29, 2004:
                                       
Deduction from asset account:
                                       
Allowance for doubtful accounts
  $ 34,825     $ 5,119     $ 547  (A)   $ 22,620  (B)   $ 17,871  
 
                             
Allowance for sales returns
  $ 86,318     $ 288,874     $ 3,316  (A)   $ 292,870  (C)   $ 85,638  
 
                             
Allowance for other assets
  $ 36,100     $ 7,500     $ 0     $ 3,500  (D)   $ 40,100  
 
                             
Year ended February 28, 2003:
                                       
Deduction from asset account:
                                       
Allowance for doubtful accounts
  $ 34,498     $ 15,031     $ 425  (A)   $ 15,129  (B)   $ 34,825  
 
                             
Allowance for sales returns
  $ 102,265     $ 317,646     $ 1,985  (A)   $ 335,578  (C)   $ 86,318  
 
                             
Allowance 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.

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