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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

AMERICAN GREETINGS CORPORATION
(Exact name of registrant as specified in Charter)

Registrant’s telephone number, including area code (216) 252-7300

Securities registered pursuant to Section 12 (b) of the Act:

Class A Common Shares, Par Value $1.00

Securities registered pursuant to Section 12 (g) of the Act:

Class B Common Shares, Par Value $1.00

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. þ   

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

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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 30, 2002 — $1,073,333,699

Number of shares outstanding as of April 28, 2003:

CLASS A COMMON — 61,309,505
CLASS B COMMON — 4,599,994

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement filed with the Securities and Exchange Commission on May 19, 2003 with respect to the 2003 Annual Meeting of Shareholders called for June 27, 2003, are incorporated by reference into Part III.

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PART I

Item 1. Business

American Greetings Corporation (“the Corporation”) and its subsidiaries 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, paper party goods, candles, balloons, stationery and giftware are manufactured and /or sold in the United States by American Greetings Corporation, Gibson Greetings, Inc. and Plus Mark, Inc., in Canada by Carlton Cards Limited; in the United Kingdom by Carlton Cards Limited, Camden Graphics Group, Hanson White Ltd., Gibson Greetings International Limited, The Ink Group Publishers Ltd. (U.K.) and Carlton Cards Ltd. (Ireland); in Mexico by Carlton Mexico, S.A. de C.V. ; in Australia by John Sands (Australia) Ltd. and The Ink Group PTY Ltd.; in New Zealand by John Sands (N.Z.) Ltd. and The Ink Group NZ Ltd.; in South Africa by S.A. Greetings Corporation (PTY) Ltd.; and in Singapore, Hong Kong, China, and Malaysia by Memory Lane SDN BHD (85% owned). AmericanGreetings.com, Inc. (92% owned), markets e-mail greetings, personalized printable greeting cards and other social expression products through the Corporation’s websites www.americangreetings.com, www.bluemountain.com, www.egreetings.com and www.beatgreets.com; co-branded websites and on-line services. AmericanGreetings.com also provides design and verse content which is included in various CD-Rom software products for use on personal computers. Magnivision, Inc. produces and sells non-prescription reading glasses and eyeware accessories, and Learning Horizons distributes supplemental educational products. Carlton Cards Retail, Inc. owns and operates card and gift retail stores in the United States. Design licensing and character licensing are done by AGC, Inc. and Those Characters From Cleveland, Inc., respectively. A.G. Industries, Inc. manufactures custom display fixtures for the Corporation’s products and products of others. (Although other subsidiaries of American Greetings Corporation exist, they are either inactive, of minor importance or of a holding company nature.)

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, 2003 refers to the year ended February 28, 2003. The Corporation’s AmericanGreetings.com, Inc. subsidiary is consolidated on a two-month lag corresponding with its fiscal year-end of December 31.

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The Corporation makes available, free of charge, on or through its investor relations Internet site, www.corporate.americangreetings.com, 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. When new corporate governance rules proposed to the SEC by the New York Stock Exchange are approved by the SEC, the Corporation will adopt, in compliance with those rules, a code of business conduct and ethics for its directors, officers and other employees and a set of corporate governance principles that comply with those new rules. The Corporation also intends to adopt during the current fiscal year a code of ethics for its senior financial and executive officers. The Corporation will post these documents on its Internet site, along with the charters of (i) the Audit Committee, (ii) the Compensation and Management Development Committee and (iii) the Nominating and Governance Committee of its Board of Directors. Any changes to or waivers of the code of ethics provisions affecting senior financial and executive officers also will be promptly disclosed on the Corporation’s Internet site.

Many of the Corporation’s products are manufactured at common production facilities and marketed by a common sales force. Marketing and manufacturing functions in the United States and Canada are combined; dual priced cards are produced in the United States and distributed in both countries. Information concerning sales by major product classifications is included in Part II, Item 7. Additionally, information by geographic area is included in Note 15 to the Consolidated Financial Statements included in Part II, Item 8.

The Corporation’s products are primarily sold in about 125,000 retail outlets worldwide. In addition, the Corporation licenses its designs to various foreign licensees, so that in total, the Corporation’s products and designs are available in more than 70 nations around the world. 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 2,000 companies in this industry in the United States. The Corporation’s principal competitor is Hallmark Cards, Incorporated. 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 company in the industry. For information regarding the various business segments comprising the Corporation’s business, see the discussion in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the subheading “Segment Information”, and in Note 15 to the Consolidated Financial Statements included in Part II, Item 8.

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The Corporation’s unit sales of everyday cards increased approximately 5.6% in 2003 over 2002. Of the 5.6% increase in unit volume, approximately 4.0 percentage points is the result of scan-based trading buybacks and other initiatives in 2002 (see Part II, Item 7). The remaining 1.6 percentage-point increase in unit sales in 2003 is the result of strong acceptance of the Corporation’s value priced card products, partially offset by net store losses at two mass retail accounts and one supermarket chain. In 2002, after adjusting for the effects of the initiatives noted above, unit sales of everyday greeting cards declined 2.9% from 2001. Approximately half of the decline was the result of the Corporation completing its activities to reduce inventory levels at certain retailers while the remainder reflected the continuation of a slightly declining trend in everyday greeting card consumption.

The Corporation’s unit sales of seasonal cards, net of provisions for returns, decreased approximately 2.5% in 2003 from 2002. The net unit volume decrease is primarily the result of net store losses in the United States market. In 2002, unit sales of seasonal greeting cards increased approximately 8.7% from 2001.

Production of the Corporation’s products is generally on a level basis throughout the year. Everyday inventories 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. Two of the Corporation’s largest customers were converted to a scan-based trading model, and payments for both everyday and seasonal sales to those customers are received generally within 10 to 15 days of the product being sold by those customers at their retail locations. 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.

During the fiscal year, the Corporation experienced no difficulty in obtaining raw materials from suppliers.

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At February 28, 2003, the Corporation employed approximately 9,600 full-time employees and approximately 23,000 part-time employees which, when jointly considered, equate to approximately 21,100 full-time employees. Approximately 3,200 of the Corporation’s hourly plant employees are unionized, of which approximately 2,300 are covered by the following collective bargaining agreements:

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.

The Corporation has a number of copyrights, patents and registered trademarks which are used in connection with its products. The Corporation’s designs and verses are protected by copyright. Although the licensing of copyrighted designs and trademarks produces additional revenue, in the opinion of the Corporation, the Corporation’s operations are not dependent upon any individual patent, trademark, copyright or intellectual property license. The collective value of the Corporation’s copyrights and trademarks is substantial, and the Corporation follows an aggressive policy of protecting its patents, copyrights and trademarks.

In 2003, 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).

Net sales to the Corporation’s five largest customers, which include mass merchandisers and major drug stores, accounted for approximately 30%, 37% and 29% of net sales in 2003, 2002 and 2001, respectively. The decline from 2002 to 2003 was due in part to a decline in sales to a major customer that operated in Chapter 11 protection throughout 2003. Net sales to Wal-Mart Stores, Inc. accounted for approximately 11%, 12% and 10% of consolidated net sales in 2003, 2002 and 2001, respectively. No other customer accounted for 10% or more of the Corporation’s net sales.

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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.

Although risk is inherent in the granting of advances, the Corporation subjects such customers to its normal credit review. In circumstances 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 9 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.

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.

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Item 2. Properties

As of February 28, 2003, the Corporation owns or leases approximately 15.3 million square feet of plant, warehouse and office space, of which approximately 1.7 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:

*		- Indicates calendar year.
**		- Facility will be closed in the first quarter of fiscal 2004

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Item 3.  Legal Proceedings

This matter was previously disclosed in Form 10-K for the period ended February 29, 2000. In January 2000, Plus Mark, Inc. (“Plus Mark”), a wholly owned subsidiary of the Corporation, received a request from the United States Environmental Protection Agency (“US EPA”) in connection with the excavation of eight underground storage tanks at Plus Mark’s Afton, TN facility to perform initial site characterization for both soil and groundwater. After Plus Mark submitted the initial test results, the US EPA concluded that no further action was required regarding soil, but that further site characterization was required for groundwater. The US EPA transferred the matter to TDEC for administration. In November 2001, Plus Mark voluntarily entered into a Remediation Order with TDEC. A Remediation Plan addressing groundwater contamination, including a plan for off-site work, was approved by TDEC in June 2002.

This matter was previously disclosed in Form 10-K for the period ended February 29, 2000. In May 1998, TDEC informed Gibson Greetings, Inc. (“Gibson”), now a wholly owned subsidiary of the Corporation, that Cleo, a former subsidiary of Gibson, may be a potentially responsible party for the costs incurred by the State of Tennessee in remediating the Carl Wright Site. TDEC notified Gibson that storage drums recovered from the Site during clean up bore “Cleo Wrap” labels. Gibson had agreed to indemnify Cleo and its shareholder, CSS, against various environmental liabilities, in connection with the sale of Cleo to CSS. In November 2001, the Division of Superfund issued a second notice of assessment to “Cleo Wrap/Gibson Greetings” for $94,261.55, representing 8.3% of the clean-up costs assessed. The assessment was paid in January 2002. TDEC issued a 10% refund for timely payment and an order of contribution protection in June 2002.

This matter was previously disclosed in Form 10-K for the period ended February 28, 2001. In March 2001, the US EPA sent to the Corporation a General Notice of Potential Liability and Request for Information under CERCLA. The Notice stated the US EPA’s intent to conduct a remedial investigation/feasibility study at the Chemical Recovery Systems Site in Elyria, Ohio. The Corporation undertook a review of its records. The alleged shipments to this Site occurred in 1978. The Corporation is part of the de minimus contributor group. In January 2003, the Corporation settled with the US EPA for an amount not material to the financial statements of the Corporation.

This matter was previously disclosed in Form 10-Q for the period ending August 31, 2002. Party Concepts, Inc. filed an Amended Statement of Claim and demand for arbitration (“Demand”) against Gibson Greetings, Inc., alleging breach of the Supply Agreement between the parties dated as of September 1, 1998. Party Concepts, formerly known as The Paper Factory of Wisconsin, Inc., is a national retail chain selling party goods, greetings cards and related products at discount prices. Party Concepts had filed for Chapter 11 bankruptcy protection in August 2001 and has since emerged from bankruptcy. After discovery began but before the arbitration hearing date, the parties settled the arbitration dispute for an amount not material to the financial statements of the Corporation. The settlement was approved in March 2003 by the bankruptcy court in Party Concepts’ Chapter 11 bankruptcy.

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Executive Officers of the Registrant

The following is a list of the Corporation’s executive officers, their ages as of April 30, 2003, their positions and offices, and number of years in executive office:

Morry Weiss and Erwin Weiss are brothers. Jeffrey M. 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 James C. Spira, William R. Mason or Erwin Weiss would be subject to the terms of his respective employment agreement.

Effective June 1, 2003, Morry Weiss will relinquish his role as Chief Executive Officer but will remain Chairman of the board. James C. Spira will retire from the Corporation but will continue as a member of the Board of Directors and as an advisor to management. Zev Weiss will become Chief Executive Officer of the Corporation, and Jeffrey Weiss will become President and Chief Operating Officer of the Corporation. On that same date, Zev Weiss and Jeffrey Weiss will be appointed to the Board of Directors of the Corporation.

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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.

•		James C. Spira was a management consultant with several firms. He has served on the Board of Directors of the Corporation since 1998. He was appointed Vice Chairman of the Corporation in June 2000 and President and Chief Operating Officer of the Corporation in March 2001.
•		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; and Senior Vice President from March 2001 until becoming Executive Vice President in December 2001.
•		David R. Beittel was Vice President, Creative Visual Design of the Corporation’s Carlton Cards Retail, Inc. unit from August 1993 until April 1995; Executive Director, Product Management of the Corporation from April 1995 until January 1997; and Vice President, Creative of the Corporation from January 1997 until becoming Senior Vice President in April 2001.
•		Michael L. Goulder was a Vice President in the management consulting firm of Booz Allen Hamilton from October 1998 until September 2002. He became Senior Vice President, Executive Operations Officer of the Corporation in November 2002.
•		Pamela L. Linton was Senior Vice President, Global Human Resources of Amway Corporation from 1997 until 2000. She became Senior Vice President, Human Resources of the Corporation in June 2001.
•		Robert P. Ryder was Vice President and Chief Financial Officer of PepsiCo’s European Developing Markets, in London from 1995 to 1998 and Vice President and Controller for PepsiCo’s Frito-Lay North American division from 1998 to 2002. He became Senior Vice President and Chief Financial Officer of the Corporation in September 2002.
•		Steven S. Willensky was President of Medex, a subsidiary of The Furon Company, from 1997 to 2000 and President and Chief Executive Officer of Westec Interactive 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.

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•

Stephen J. Smith was Treasurer and Officer from 1998 to 1999 and Vice President, Treasurer and Assistant Secretary in 1999 of Insilco Holding Company. He was Vice President and Treasurer of General Cable Corporation 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 and Related Stockholder Matters

(a) Market Information

The Corporation’s Class A common stock is listed on the New York Stock Exchange under the symbol AM. The high and low stock prices, as reported in the New York Stock Exchange listing, for the years ended February 28, 2003 and 2002, were:

National City Bank, Cleveland, Ohio, is the Corporation’s registrar and transfer agent. 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.

(b) Shareholders

At February 28, 2003, there were approximately 30,000 holders of Class A Common Shares and 184 holders of Class B Common Shares of record and individual participants in security position listings.

(c) Cash Dividends

On August 9, 2001, the Corporation entered into a new $350,000 senior secured credit facility that was amended to $320,000 on July 22, 2002. The credit facility restricts the Corporation’s ability to incur additional indebtedness and to engage in acquisitions of other businesses and entities and to pay shareholder dividends.

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Item 6. Selected Financial Data

Years ended February 28 or 29
Thousands of dollars except share and per share amounts

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Years ended February 28, 2003, 2002 and 2001

Overview

In 2003, the Corporation aligned its cost structure to its revenue base. The Corporation has embraced a culture of change and has established a platform for continuous improvement. As an example, the Corporation recently announced plans to significantly transform its supply chain activities in 2004.

The senior management team has established four strategic initiatives to improve both net sales and pretax income — supply chain transformation, category innovation, strategic account management and human capital development. The Corporation is committed to demonstrating continuous improvement and is confident in its ability to successfully integrate change. The financial results for 2003 reflect the success of the 2002 restructure program, as pretax margins have rebounded from the prior two fiscal years.

Results of Operations

The Corporation adopted the Financial Accounting Standards Board’s Emerging Issues Task Force Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer/Reseller” (“EITF 01-09”), effective March 1, 2002. As a result, certain amounts related to incentive payments, amortization of deferred costs and other customer benefits in the prior year financial statements have been reclassified to conform with the 2003 presentation. For 2002, net sales; material, labor and other production costs; and selling, distribution and marketing expenses were reduced by $428.4 million, $55.2 million and $373.2 million, respectively. For 2001, net sales; material, labor and other production costs; and selling, distribution and marketing expenses were reduced by $408.9 million, $65.3 million and $343.6 million, respectively. These reclassifications did not affect net income (loss) for those periods. Throughout the discussion and analysis that follow, the amounts referred to include the reclassifications noted above.

Net Sales Overview

Consolidated net sales for the year ended February 28, 2003 were $2.0 billion, an increase of $68.5 million or 3.6% over the prior year. The 2002 amount of $1.9 billion included reductions for credits issued during 2002 for the conversion of two of the Corporation’s largest customers to a scan-based trading business model, as well as for the elimination of the Forget Me Not brand (“FMN”). The net sales effect of these two initiatives explains an increase from 2002 to 2003 of $102.3 million leaving a net sales decrease from 2002 to 2003 of $33.8 million or 1.7%. The majority of this shortfall, $22.0 million, is the result of the net sales impact of businesses divested throughout 2002 while the remaining shortfall of $11.8 million is the result of continuing operations.

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The net sales decrease from ongoing operations of $11.8 million from 2002 to 2003 was the result of several factors including the loss of certain store doors in the second half of the year, poor sell through of calendars, and a depressed market for advertising for the Corporation’s Internet business.

Net sales for 2002 of $1.9 billion were down 8.7% from 2001. The effect of reductions taken during 2002 for the scan-based trading conversion, the elimination of the FMN product line, and Stock Keeping Units (“SKU”) reductions resulted in the majority of this shortfall. These initiatives drove net sales in 2002 down from 2001 by 4.9% with the remaining shortfall of 3.8% due to soft demand in the core business.

The contribution of each major product category as a percent of net sales for the past three years is:

The “all other products” classification includes giftware, party goods, reading glasses, candles, balloons, calendars, custom display fixtures, educational products and stickers.

Unit and Pricing Analysis

Total greeting card sales less returns were up 0.5% in 2003 over 2002 but include the favorable impact of sales reductions in 2002 for scan based trading buybacks, the elimination of the FMN line, and the SKU reduction initiatives. Adjusting for these initiatives, combined everyday and seasonal greeting card sales less returns decreased approximately 2% in 2003. Virtually all of this decrease was reflected in lower average prices from the 2002 levels. Total unit sales of greeting cards remained flat to prior year levels.

In 2003 the Corporation had an increase in sales less returns of everyday cards of approximately 3.5% over 2002, with approximately 5.6% of the increase attributable to higher unit volume, partially offset by a reduction in average selling prices of 2.1%. Of the 5.6% increase in unit volume, approximately 4.0 percentage points is the result of scan-based trading buybacks and other initiatives in 2002. The remaining 1.6 percentage point increase in unit sales in 2003 is the result of strong acceptance of the Corporation’s value priced card products, partially offset by net store losses at two mass retail accounts and one supermarket chain. The reduction in average selling prices is primarily the result of a shift in product mix to more value priced products, which partially offset a 1.3% increase in the average price of cards at other price points.

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In 2002, after adjusting for the effects of the initiatives noted above, the market for everyday products was soft for the Corporation, particularly in the United States and Australia and unit sales of everyday greeting cards declined 2.9% from 2001. Approximately half of the decline was the result of the Corporation completing its activities to reduce inventory levels at certain retailers while the remainder reflected the continuation of a slightly declining trend in everyday greeting card consumption. In 2002, the Corporation experienced a 2.8% decline in its average selling prices for these everyday cards primarily resulting from the broader distribution of value priced cards in its overall product mix. The Corporation views the introduction of lower entry price points as an important piece of its longer-term strategy.

In 2003, the Corporation had a decrease in seasonal card sales, net of provisions for returns, of 5.3% from prior year. Unit sales of seasonal greeting cards in 2003, net of provisions for returns, were down 2.5% on a consolidated basis compared to 2002. The unit volume decrease is primarily the result of net store losses in the United States market. In addition, the average selling prices for seasonal cards fell 2.8% in 2003 compared to 2002, primarily driven by mix shifts in the United States business.

Seasonal card sales, net of provisions for returns, improved 4.1% from 2001 in 2002. The 2002 performance represented a reversal of slightly declining trends seen over the past several years. The Corporation’s greeting card divisions in the United States, Canada, and the United Kingdom all experienced improved seasonal card performance. In the United States, where sales less returns increased by 4.4%, the average price was reduced by approximately 5.8%. Net seasonal card unit sales were up 8.7% in 2002 from 2001 worldwide for the Corporation.

Expenses and Profit Margins

In 2003, the pretax margin of 10.1% represented a significant improvement over the 2002 pretax margin loss of (10.2%). In 2002, the Corporation incurred reductions to net sales as well as expense charges for its various initiatives involving conversion of retailers to scan-based trading, SKU reductions, plant consolidations, elimination of non-value-added activities, contractual changes and impairment charges. These initiatives represented 16.0 percentage points of the 20.3% improvement in pretax margins. The remaining 4.3 percentage-point net improvement in pretax margins is primarily the direct result of effective and sustainable cost reductions experienced throughout the entire organization during 2003.

Material, labor and other production costs for the year ended February 28, 2003 were 44.2% of net sales, a decrease from 48.6% in 2002. Material, labor and other production costs in 2002 included the following:

•		A pretax charge of $49.1 million, net of LIFO valuation benefits, to reduce the value of inventory in the Corporation’s domestic operations to net realizable value associated with its brand rationalization and product line reduction.
•		A pretax reduction of $8.6 million related to the Corporation’s conversion to scan-based trading.
•		Other pretax costs of $19.6 million associated with the Corporation’s reorganization of its core business, including equipment moving expenses; fixture, displayer and signage costs; and production system enhancements.

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Excluding those items, material, labor and other production costs were 43.2% of net sales in 2002. The increase in this percentage in 2003 was due primarily to initial inefficiencies in the consolidation of domestic gift wrap and candle manufacturing operations. In addition, production volumes were down as the Corporation improved its net product sell through on seasonal products, resulting in higher overhead costs per unit. In 2001, material, labor and other production costs were 44.3% of net sales. The decrease from 2001 to 2002 was due to favorable production efficiencies.

Selling, distribution and marketing expenses were 31.1% of net sales for 2003 compared to 35.6% in 2002. Of the 4.5 percentage-point improvement as a percent of net sales experienced in 2003, approximately 2.7 percentage points is the result of the Corporation’s previously discussed initiatives included in 2002 while the remaining improvement of 1.8 percentage points represents the substantial cost reductions realized through merchandising efficiencies, streamlined order filling costs, and reduced advertising expenditures.

In 2001, selling, distribution and marketing expenses were 34.4% of net sales compared to 32.9% in 2002 excluding $18.1 million of pretax expenses for the previously discussed business initiatives. The decrease from 2001 to 2002 was due to lower marketing costs in the Corporation’s Internet unit, as well as lower advertising and sales administration expenses, which more than offset higher field expenses associated with implementing a new agreement with a major retailer.

Administrative and general expenses were $240.1 million in 2003, compared to $313.7 million in 2002 and $280.2 million in 2001. The 2002 amount included the costs of the Corporation’s conversion to scan-based trading of $12.4 million and other charges for the Corporation’s reorganization efforts of $13.4 million. Excluding those items, administrative and general expenses in 2003 decreased $47.7 million or 16.6% from 2002. In 2003, bad debt expense for the year was $7.2 million lower than the prior year. Additionally, the pretax cost of the corporate-owned life insurance (“COLI”) program was approximately $6 million lower than the prior year, reflecting the wind-down of a portion of the program. Reduced costs for postretirement health care of approximately $6 million reflected changes in participant contributions and lower executive compensation costs contributed approximately $15 million to the reduction in administrative expenses. The increase from 2001 to 2002, excluding the charges in 2002 noted above, was due in large part to higher health care and executive compensation costs.

Interest expense was $79.1 million in 2003, compared to $78.6 million in 2002 and $55.4 million in 2001. Although debt levels were generally lower in 2003 compared to 2002, the 2003 interest expense included the impact of the 11.75% senior subordinated notes and the 7.0% convertible subordinated notes for the entire year, while the 2002 amount included interest expense for those notes for only the eight months since issuance. Those factors generally offset so that the 2003 interest expense was up only slightly from 2002. The increase from 2001 to 2002 was due to the increase in the debt levels of the Corporation to fund the reorganization and scan-based trading initiatives and other general purposes. Higher interest rates on the Corporation’s new credit facilities also contributed to the increase in interest expense in 2002.

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Other (income) expense — net was income of $26.9 million in 2003 compared to expense of $51.8 million in 2002 and expense of $16.8 million in 2001. The 2003 amount includes a pretax gain of $12.0 million (total proceeds of $17.0 million) on the sale of a marketable security investment held by the Corporation’s United Kingdom subsidiary. Upon the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” on March 1, 2002, the Corporation discontinued amortization of its goodwill in accordance with this Statement. In 2002 and 2001, other (income) expense-net included $12.4 million and $8.7 million, respectively, of amortization expense related to goodwill. See Notes 1 and 8 to the Consolidated Financial Statements for further discussion. In addition, the 2002 amount also included a $37 million impairment charge to reflect the pretax, non-cash write-down of goodwill associated with the Corporation’s operations in Australasia as a result of restructuring the business and to address the general economic deterioration in the Pacific Rim. Also included in the 2002 amount was a charge of $9.5 million to reflect the Corporation’s decision to divest of one of its operating units in the Pacific Rim region and write down the carrying value of that unit to its estimated fair value. The 2001 amount included a $32.5 million non-cash charge for the write-down of the Corporation’s investment in Egreetings Network, Inc. (“Egreetings”) shares acquired as part of the acquisition of Gibson Greetings, Inc., as well as an $8.4 million gain on the sale of a building.

The effective tax rates for 2003 and 2002 were 39.7% and 37.7%, 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. Certain of the Corporation’s profitable foreign subsidiary results have continued to increase the effective tax rate over the past several years as the Corporation gradually loses the tax benefits of foreign losses that helped reduce its effective rates in the past.

In 2001, the Corporation recorded a charge of $143.6 million for potential tax exposure for 1992 through 1999 relating to the Corporation’s COLI programs. This exposure had been previously discussed in periodic filings with the Securities and Exchange Commission (“SEC”) and sufficiently provided for the effect of the adjustments by the Internal Revenue Service (“IRS”) for the disallowance of certain deductions related to this insurance program. In March 2003, the Corporation entered into a final settlement agreement with the IRS regarding the COLI tax dispute. The negotiated payments were within the Corporation’s previous provisions and no additional charges were necessary in 2003 or will be required going forward. As part of the settlement agreement, the Corporation surrendered certain of its insurance policies. Additionally, in 2001 the Corporation recorded the write-down of its investment in shares in Egreetings and established a valuation allowance equal to the full tax benefit of the write-down. See Note 16 to the Consolidated Financial Statements for details of the differences between taxes at the Federal statutory rate and actual tax expense (benefit).

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Cumulative Effect of Accounting Change

In December 1999, the SEC issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), which, among other guidance, clarified the Staff’s views on various revenue recognition and reporting matters. As a result, effective March 1, 2000, the Corporation adopted a change in its method of accounting for certain shipments of seasonal product, which carry implied acceptance provisions. Under the new accounting method adopted retroactive to March 1, 2000, the Corporation now recognizes revenue on these seasonal shipments at the approximate date the merchandise is received by the customer, commonly referred to in the industry as the ship-to-arrive date (“STA”), and not upon shipment from the Corporation’s distribution facility. STA is a more preferable method of recording revenue due to the large volumes of seasonal product shipment activity and the lead time required to achieve customer-requested delivery dates. The cumulative effect of the change in 2001 resulted in a one-time non-cash reduction to the Corporation’s earnings of $21.1 million (net of tax of $12.6 million), or approximately $0.33 per share.

Impact of Initiatives — 2002

In its filing of Form 10-K for the period ended February 28, 2002 and in its subsequent Form 10-Q filings, the Corporation had discussed the progress on the implementation of its restructuring and scan-based trading initiatives. Virtually all of those initiatives were substantially completed in 2002, and the Corporation incurred total pretax charges of $314.4 million.

The scan-based trading business model represented a significant change in the Corporation’s traditional business practices relative to two of its largest customers. The new relationship redefined risks and responsibilities for both parties while at the same time strengthening the reliance upon each other for a true partnering relationship.

The core of this business model rests with the Corporation providing product to the customer on a consignment basis with the Corporation recording sales to the retailer at the time a product is electronically scanned through the retailer’s cash register. The need for enhanced controls on the part of both parties requires a high reliance on the compatibility and coordination of electronic data interchange.

The advance costs of converting to this new business model were substantial for both parties and indicate the commitment to a true partnering relationship. For the Corporation, the single largest financial impact related to the reversal of previous sales transactions required to revert legal ownership of the inventory at the customer’s retail stores back to the Corporation. Following physical inventories conducted at each store location, the Corporation issued sales credits totaling $64.9 million to these two customers and all parties simultaneously modified their electronic inventory tracking systems accordingly. The Corporation incurred additional costs, net of inventory credits, of $23.7 million primarily for the initial inventory counting procedures, systems enhancements, outside consulting, recognition of shrink obligations and other costs related to this fundamental change in the business relationship.

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The Corporation also incurred additional pretax charges of $225.8 million associated with its restructure program. The primary objectives of the restructure program were to complete the integration of recent acquisitions, rationalize the product branding strategy, significantly reduce product line sizes, consolidate manufacturing operations, and reduce costs through the elimination of non-value-added activities. The Corporation established a Project Management Office to charter, scope and track the progress of various restructuring initiatives to assure achievement of the objectives. By February 28, 2002, all projects had been completed or were substantially complete and the Corporation did not expect to incur any additional charges related to these projects going forward. The costs for these projects are summarized as follows:

•		A pretax restructuring charge of $56.7 million. This pretax charge included $39.0 million for the consolidation and rationalization of certain of the Corporation’s domestic and foreign manufacturing and distribution operations. These costs relate directly to employee severance and benefit termination costs, lease termination costs, and certain other costs required to exit certain facilities. In addition, the restructuring charge includes $17.7 million related to the completion of contractual changes with an online partner of the Corporation’s Internet unit.
•		A reduction in net sales of $16.2 million for the elimination of the FMN brand and other product line size reductions.
•		A pretax charge of $49.1 million to reduce the value of inventory in the Corporation’s domestic and Canadian operations to net realizable value associated with the brand rationalization and product line size reduction, highlighted by the elimination of the Corporation’s FMN product brand.
•		A pretax charge of $46.5 million to reduce the carrying value of the net assets of two of the Corporation’s under-performing foreign operating units in the Pacific Rim.
•		A pretax charge of $57.3 million for other costs related to the restructure efforts, primarily involving field execution, program administration, moving and training costs, fixed asset eliminations, and similar costs incurred at certain of the foreign subsidiaries.

In a related phase of its restructuring efforts, the Corporation realigned its borrowing capabilities and increased its potential debt capacity to approximately $1.3 billion. The new facilities are comprised of a balanced mix of senior notes, convertible notes, term loans, secured credit facilities and revolving credit facilities, all with varying maturities and interest rates.

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On June 22, 2001, the Corporation entered into agreements to sell $175 million of 7.00% convertible subordinated notes due in 2006 and $260 million of 11.75% senior subordinated notes due in 2008 to qualified institutional investors. The convertible notes outstanding could potentially result in the issuance of 12.6 million shares of the Corporation’s Class A Common Stock. The transactions, which closed on June 29, 2001, resulted in net proceeds to the Corporation of approximately $414.3 million, after deducting underwriting discounts and transactional expenses. The Corporation used the net proceeds from these offerings to repay indebtedness and to provide funds for other general corporate purposes. On August 28, 2001, the Corporation filed Form S-3 and Form S-4 with the SEC to register these debt offerings.

On August 9, 2001, the Corporation entered into a new $350 million senior secured credit facility that was reduced to $320 million on July 22, 2002. It consists of three tranches: a $75 million, 364-day revolving credit facility, a $120 million revolving credit facility maturing January 15, 2006, and a $125 million term loan maturing June 15, 2006, of which $118 million was outstanding at February 28, 2003. On April 7, 2003, the Corporation paid the entire $118 million outstanding amount of this term loan. On July 22, 2002, the Corporation exercised its option on the 364-day revolving facility for an additional 364 days. At the request of the Corporation, the facility was reduced from $105 million to $75 million. The credit facility contains various restrictive covenants which require, among other things, that the Corporation meet specified periodic financial ratios, minimum net worth and earnings requirements. The credit facility provides for certain restrictions on the Corporation’s ability to incur additional indebtedness to acquire other businesses and entities, and to pay shareholder dividends. At February 28, 2003, the Corporation is in compliance with all its debt covenants. Based on the strong improvement in its balance sheet, the Corporation has modified its debt covenants and expects to be in compliance throughout 2004. As a final piece of the debt realignment, the Corporation also entered into a three-year, $250 million credit facility secured by certain trade accounts receivable. At the request of the Corporation, on August 6, 2002, the agreement was amended reducing the available financing from $250 million to $200 million.

Restructuring Activities — 2002

During 2002, the Corporation recorded a $56.7 million restructure charge as discussed above. This restructure charge included $29.0 million for employee termination benefits, $2.1 million for facility rationalization costs, $1.5 million for lease exit costs, $17.7 million for a change in the contractual relationship with a partner of the Corporation’s Internet unit and $6.4 million of other costs. In total, approximately 1,600 positions were eliminated, comprised of approximately 1,200 hourly and 400 salaried positions. All activities were substantially completed by February 28, 2002.

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The following table summarizes the provisions and remaining reserve associated with the restructure charge at February 28, 2003:

(Thousands of dollars)

Included in accrued liabilities at February 28, 2003 is $4.2 million representing the portion of severance and other exit costs not yet expended. The payment of certain termination benefits will not be completed until 2006.

Net Income (Loss) and Earnings (Loss) Per Share

The net income of $121.1 million or $1.63 per share in 2003 compared to a net loss of $122.3 million or $1.92 per share in 2002. However, the net loss in 2002 was significantly impacted by the restructuring and other charges discussed above; the total impact of these charges was to reduce pretax earnings by $314.4 million. The net loss of $113.8 million or $1.79 per share for 2001 included non-cash charges of $143.6 million for disputed deductions with the IRS relating to the Corporation’s COLI programs and $32.5 million for the write-down of the Corporation’s 19.6% investment in shares of Egreetings. Also included was a charge of $21.1 million for the cumulative effect of accounting changes related to the recording of certain seasonal shipments required by the issuance of SAB 101.

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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 products through various channels of distribution with mass retailers as the primary channel and is managed by geographic location. As a result of the Corporation’s restructure efforts in 2002, the Plus Mark, Inc. subsidiary has been reclassified to the Social Expression Products segment. This reflects the integration of the production of the domestic gift wrap and boxed card product into that subsidiary and its integration with the Social Expression Products’ operations. This subsidiary now has a substantial mix of both everyday and seasonal products and as a result has similar economic characteristics with the Social Expression Products segment. This subsidiary previously was included in non-reportable segments, and the prior year amounts have been reclassified to conform to the current year presentation. 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.

The Corporation owns and operates approximately 600 card and gift retail stores in the United States and Canada through its Retail Operations segment. The stores are primarily located in malls and strip shopping centers. The stores sell products purchased from the Social Expression Products segment and products purchased from other vendors. Upon the adoption of EITF 01-09, as discussed above, the Retail Operations segment now meets the revenue threshold for separate disclosure required under SFAS No. 131. This segment was previously included in the non-reportable segments, and the prior year amounts have been reclassified to conform to the current year presentation.

AmericanGreetings.com, Inc. is an Internet-based provider of greetings and other social communication content to consumers and Internet-based businesses.

Social Expression Products Segment

In 2002, the effect of the conversion to scan-based trading for two major United States customers was to reverse sales and the related cost of sales of product that had previously been shipped to those customers. In addition, the elimination of the Corporation’s FMN brand and the associated product line size reduction resulted in credits being granted to customers for already-sold product that was eliminated from the ongoing product offerings. The Corporation also undertook a number of other restructuring and reorganization initiatives during the year. For management evaluation of its operating segments, the effects of these initiatives were excluded from the internal reporting and evaluation of the performance of the operating segments. These items are reported consistently in Note 3 to the Consolidated Financial Statements.

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The net sales of the Social Expression Products segment decreased $21.1 million or 1.3% from 2002 to 2003. The decrease reflected the continued weak market demand in Australia, poor sell through on calendar products in the United States and a reduction in seasonal card shipments in an effort to further reduce return rates in all of the greeting card markets. In the United States, the impact of net store losses at several retailers was primarily offset by increased acceptance of the Corporation’s entry price products.

Overall, unit sales of everyday greeting cards increased approximately 5.6% from 2002 to 2003, with higher unit volume in the United States and the United Kingdom more than offsetting decreases in the other international operations, including Australia. In the United States, approximately 4.0 percentage points of the increase is the result of prior year initiatives to convert to scan based trading and eliminations of the FMN product line. Everyday card prices decreased approximately 2.1% in 2003 from 2002, particularly in the United States. Unit sales of seasonal greeting cards decreased approximately 2.5% from 2002 to 2003 while seasonal card prices declined approximately 2.8% in 2003 from 2002.

The net sales of the segment decreased 5.2% from 2001 to 2002, as unit sales of everyday greeting cards decreased significantly in the United States and Australia, and to a lesser extent in Canada. However, net sales of seasonal cards in this segment were up approximately 4% in 2002 from 2001.

Segment earnings increased $53.9 million or 21.3% from 2002 to 2003. Improved earnings in the United States and the United Kingdom more than offset declines in Australia from 2002 to 2003. The increase in earnings reflects operating expense reductions in several areas as a result of the restructuring activities in 2002, particularly order filling, field sales, merchandiser and administration expenses.

Segment earnings decreased 7.2% in 2002 from 2001, which was due to the lower sales of higher-margin everyday greeting cards in the United States. Earnings were improved, however, in other countries where the Social Expression Products segment has operations, including Canada, the United Kingdom, Mexico and South Africa. The improvement in these countries was attributable to benefits relating to the various restructure and other cost-saving initiatives undertaken in 2000.

Retail Operations

Net sales in the Retail Operations segment decreased $3.4 million or 1.3% in 2003 from 2002, after decreasing $3.1 million or 1.1% in 2002 from 2001. Comparable same-store sales, however, were slightly up in 2003 from 2002. In 2003, the Corporation closed 28 stores and opened 11 new stores and ended the year with 603 operating outlets.

Segment profits, however, increased $0.2 million or 1.1% in 2003 from 2002, reflecting expense reductions that more than offset the lower sales level and continued emphasis on improving the overall portfolio of stores by closing poor performing locations. Segment profits decreased $3.9 million in 2002 from 2001, as the savings in expenses did not offset the decline in sales.

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AmericanGreetings.com, Inc. Segment

In March 2001, AmericanGreetings.com, Inc. acquired Egreetings Network, Inc., a company that operated an online card and entertainment Internet site. In September 2001, AmericanGreetings. com, Inc. acquired the BlueMountain.com division of At Home Corporation. The BlueMountain.com division also operated an online card and entertainment Internet site.

Net sales of AmericanGreetings.com, Inc. decreased $5.1 million or 12.9% in 2003 from 2002, reflecting a $16.1 million decrease in advertising revenue that was only partially offset by an increase in the subscription-fee based business that began in December 2001. By the end of 2003, the Corporation had approximately 2 million paid subscribers. Net sales increased 63.0% in 2002 compared to 2001, as a strong advertising market drove this revenue from $17.4 million in 2001 to $30.5 million in 2002.

AmericanGreetings.com, Inc. continued to make progress in 2003 in terms of profitability. Earnings increased to a profit of $0.5 million from the 2002 loss of $2.1 million. The segment loss of $2.1 million in 2002 excludes a $17.7 million charge related to the completion of contractual changes with an online strategic partner. The reduction in the segment loss from $36.1 million in 2001 was due to the higher revenues as well as lower expenses due to the contractual changes noted above.

Unallocated Items

Centrally incurred and managed costs and charges for the previously identified business initiatives are not allocated back to the operating segments. The unallocated items include interest expense of $79.1 million in 2003 on centrally-incurred debt and domestic profit-sharing expense of $13.6 million. In addition, the costs associated with corporate operations including the senior management staff, corporate finance, legal, human resource functions, insurance programs and certain other programs, among other costs, are included in the unallocated items totaling $53.5 million.

Liquidity and Capital Resources

Cash flow from operations provided $77.0 million in 2003 compared to $36.4 million in 2002 and $109.8 million in 2001. The overall increase from 2002 to 2003 reflects the improvement in net income, a significant shift in deferred costs-net amounts between 2002 and 2003 as amortization exceeded payments, and continued improvements in working capital, partially offset by a payoff of the Corporation’s COLI tax settlement and the discretionary funding of the Gibson Retirement Income Plan, a defined benefit plan.

Accounts receivable, net of the effect of acquisitions and divestitures, used $15.6 million in cash in 2003, compared to generations of $94.9 million in 2002 and $29.2 million in 2001. The decrease of $94.9 million in 2002 reflected strong cash collections during the year, aided in part by the conversion to scan-based trading for two major customers. Upon conversion to scan-based trading, customer payment terms improved and leveled seasonal peaks in their accounts receivable.

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Inventories, net of the effects of acquisitions and divestitures, decreased $18.3 million in 2003, compared with a decrease of $63.9 million in 2002 and an increase of $46.6 million in 2001. The decrease in 2003 reflects the favorable impacts of plant consolidations and SKU reductions undertaken in the prior year, as well as reduced seasonal card production as gross outbound shipments were reduced in an effort to control return rates. The decrease in 2002 included inventory write-downs of $49.1 million, net of LIFO valuation benefits, recorded during the year, combined with the eliminations of the FMN product line, but partially offset by a $17 million increase related to the Corporation’s conversion to scan-based trading.

Deferred costs — net represents payments under agreements with retailers net of the related amortization of those payments. During 2003, amortization exceeded payments by $39.7 million; in 2002, payments exceeded amortization by $124.8 million. The 2002 amount reflected the Corporation’s significant expansion of its agreements with three major customers while the 2003 amount reflects a lower level of additions for new or amended contracts. In 2001, amortization exceeded cash payments by $4.1 million. Payments are made under new, existing, amended and extended agreements, and a portion of the year-to-year fluctuation in these amounts is due to the timing of various payment and effective dates of the agreements. However, these deferred costs are amortized against operations over the estimated periods of the agreements, so that the effect on earnings approximates the associated revenue streams. Total commitments under the agreements are capitalized as deferred costs when the agreements are consummated, and any future payment commitments are recorded as liabilities at that time. See Note 9 to the Consolidated Financial Statements for further discussion of deferred costs related to customer agreements. See “Critical Accounting Policies” below for further discussion related to the accounting treatment of customer agreements.

Accounts payable and other liabilities decreased $106.1 million in 2003 compared to a decrease of $37.2 million in 2002 and an increase of $87.3 million in 2001. The decrease in 2003 was due primarily to payments to settle the disputed income tax liability associated with the Corporation’s COLI program. The decrease in 2002 was due to decreases in income taxes payable and dividends payable, offset partially by the liabilities established in connection with the 2002 restructure charge, primarily for employee severance payment obligations. The decrease in income taxes payable reflected the tax benefits of the loss incurred by the Corporation in 2002, and the decrease in dividends payable reflected the elimination of quarterly shareholder dividend payments. The increase in 2001 was due to the increase in income taxes payable that year for the recording of $143.6 million for the COLI tax exposure, partially offset by cash payments associated with the 2000 restructuring activities and with the integration costs of acquisitions.

The net amount of $22.5 million used for business acquisitions and divestitures in 2002 represents the cash price paid of $35.0 million for the BlueMountain.com acquisition, less $12.5 million received in the sale of a domestic business unit, M&D Balloons. The 2001 amount of $180.0 million includes primarily the net cash payments of $139 million made that year for the completion of the acquisition of Gibson and $31 million paid for the acquisition of CPS.

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Capital expenditures were $31.3 million in 2003, up slightly from $29.0 million in 2002, as the Corporation continued to limit capital expenditures to only projects with high internal rates of returns or critical operating necessities. In 2001, capital expenditures were $74.4 million. The 2001 amount included $14 million of investments in facilities and manufacturing equipment in the United Kingdom in order to increase operating efficiency and enable facility rationalization. In addition, capital expenditures in 2001 included $7.3 million for the expansion of the acquired Contempo party goods manufacturing facility and $4.5 million related to the Gibson acquisition.

Investing activities other than acquisitions, divestitures and capital expenditures provided $44.6 million in 2003, compared to using $20.0 million in 2002 and providing $59.2 million in 2001. The COLI program provided $10.0 million during 2003 as the Corporation took further steps to wind down the program, and the sale of a marketable security investment held by the Corporation’s United Kingdom subsidiary provided $17.0 million. The $20.0 million cash use in 2002 reflected additional cash required for the Corporation’s COLI program that year. The cash provided in 2001 included $20.3 million of cash proceeds from the sale of a building and the settlement of a $15 million supply agreement loan.

Net cash provided from financing activities was $13.3 million in 2003. This increase was primarily due to $21.5 million provided by the exercise of stock options under employee benefit 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 agreements from long-term to short-term, as the Corporation will retire those outstanding loans in 2004.

In 2002, cash provided by financing activities was $86.1 million. The net increase in long-term debt of $473.3 million and the reduction of short-term debt reflected the Corporation’s realignment of its borrowing facilities, including $260 million of 11.75% senior subordinated notes, $175 million of 7.00% convertible subordinated notes, and the borrowings made under the $320 million senior secured credit facility. These notes and the credit facility are discussed in more detail above and in Note 10 to the Consolidated Financial Statements. In 2002, the Corporation had negligible transactions affecting its outstanding shares, as there was limited stock option activity due to the lower market price of the Corporation’s publicly-traded Class A shares, and the Corporation did not make any significant purchases of treasury shares.

In 2001, cash provided from financing activities was $78.8 million, primarily as a result of an increase in short-term borrowings to fund the Gibson and CPS acquisitions. During 2001, the Corporation purchased 1.0 million Class A shares at an average price of $20.56 per share or $21 million. Additionally in 2001, the Corporation purchased 1.2 million Class A shares in connection with the CPS acquisition at an average price of $20.36 per share or $24.4 million. In total in 2001, 2.2 million Class A shares were purchased at an average price of $20.46 or approximately $45 million.

A total of $26.6 million was paid as dividends to shareholders during 2002. This reduction from $52.7 million in 2001 was due to the suspension of quarterly dividend payments after the $0.10 per share dividend declared in September 2001 and paid in December 2001.

The Corporation’s operating cash flow and existing credit facilities are expected to meet currently anticipated funding requirements. The seasonal nature of the business results in peak working capital requirements which are financed through short-term borrowings.

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Market Risk

During 2002, the Corporation entered into an exclusive supply agreement with a major customer. The agreement provided for certain advances and allowances to be earned over the length of the commitment. Subsequent to entering into the agreement, the customer filed for Chapter 11 protection. The customer has assumed the supply agreement with the Corporation in its plan of reorganization, which was approved on April 22, 2003. The Corporation expects that the customer will satisfy its purchase commitments under the terms of the agreement.

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.

The Corporation’s market risk is further impacted by changes in interest rates and foreign currency exchange rates. The Corporation manages interest rate exposure through a mix of fixed and floating rate debt. A significant portion of the Corporation’s debt has fixed rates, limiting its exposure to fluctuations in interest rates. To date, risks associated with interest rate movements have not been significant and are not expected to be so in the near term.

Approximately 18% of the Corporation’s 2003 net sales 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. Each of these operations conducts substantially all of its business in its local currency and is not subject to material operational risks associated with fluctuations in exchange rates. The Corporation’s net income was not materially impacted by the translation of the foreign operations’ functional currencies into United States dollars. Exposure to exchange rate fluctuations historically has not been significant; however, no assurance can be given that future results will not be adversely affected by significant changes in foreign currency exchange rates.

Contractual Obligations

The following chart reflects the Corporation’s contractual obligations as of February 28, 2003:

(Thousands of Dollars)

Excluded from the foregoing table are open purchase orders at February 28, 2003 for raw materials and supplies used in the normal course of business.

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Critical Accounting Policies

The consolidated financial statements of the Corporation are prepared in accordance with accounting principles generally accepted in the United States, which requires the Corporation to make estimates and assumptions (see Note 1 to the Consolidated Financial Statements).

The Corporation exercises considerable judgment in establishing estimates for certain critical accounting policies which could have a material impact in the preparation of its consolidated financial statements:

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 (e.g., bankruptcy filings), 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 No. 142, “Goodwill and Other Intangible Assets”. This Statement, which superceded APB Opinion No. 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. SFAS No. 142 applies to goodwill and intangible assets arising from transactions completed before and after the Statement’s effective date. Upon adoption, the Corporation discontinued amortization of its goodwill in accordance with this Statement but performs an annual test for goodwill impairment. To test goodwill for impairment, the Corporation is required to estimate the fair market value of the reporting units. This fair market value model incorporates the Corporation’s estimates of future cash flows, estimated allocations of certain assets and cash flows among reporting units, estimates of future growth rates and management’s judgment regarding the applicable discount rates to use to discount those estimated cash flows. 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 Corporation will complete its annual test for impairment at the beginning of its fourth quarter.

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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 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 stated 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.

Although risk is inherent in the granting of advances, the Corporation subjects such customers to its normal credit review. In circumstances 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. Losses attributed to these specific events have historically not been material. The balances and movement of the valuation reserve accounts are disclosed on an annual basis on Schedule II of the Annual Report on Form 10-K filed by the Corporation.

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 on an individual customer agreement basis. 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 6.5 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 on 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 be not recoverable through performance, such assets are written down as appropriate.

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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 on 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 the estimates if factors such as the historical data the Corporation uses to calculate these estimates does 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

In October 2001, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, was issued. This Statement, which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, provides a single accounting model for the disposal of long-lived assets. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the Statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The Corporation adopted this statement effective March 1, 2002.

In April 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections”, was issued. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. SFAS No. 145 requires that debt extinguishment must meet the criteria under APB Opinion No. 30 to be classified as an extraordinary item. This Statement also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The Corporation does not believe that adoption of this Statement will have a material impact on the financial statements of the Corporation.

In June 2002, SFAS No. 146, “Accounting for Exit or Disposal Activities”, was issued. SFAS No. 146 is effective for disposal activities initiated after December 31, 2002. SFAS No. 146 requires that liabilities for one-time termination benefits that will be incurred over future service periods should be measured at the fair value as of the termination date and recognized over any future service period. These liabilities should be adjusted for subsequent changes resulting from revisions to either the timing or amount of estimated cash flows, discounted at the original credit-adjusted risk-free rate. Interest on the liability would be accreted and charged to expense as an operating item. In the normal course of business, in the fourth quarter of 2003, the Corporation undertook numerous individual and independent cost reduction programs that included charges for employee severance costs. While none of the independent programs were material individually, aggregate severance costs of $8.9 million for approximately 500 positions were recorded at the end of 2003. All affected employees were notified of termination prior to February 28, 2003 and were terminated in early 2004. All severance is expected to be paid by the end of 2004.

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In November 2002, FASB Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, was issued. FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 irrespective of the guarantor’s fiscal year-end. The disclosure requirements in FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. No additional disclosures are required by the Corporation related to this Interpretation.

Factors That May Affect Future Results

The Corporation believes that the restructuring and reorganization activities it completed in 2002 will strengthen its position in the social expression industry. However, other potential challenges in the economic environment in which it operates may have negative impacts on 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 Corporations’ customers’ retail locations, which may be affected in the future.

The Corporation has maintained a strong customer base in a wide variety of channels of distribution through its investment in deferred costs related to its agreements with certain retailers and other competitive arrangements. The agreements have lessened the impact to the Corporation from loss of business due to the retailer consolidations in recent years. These agreements have been a strategic element of the Corporation’s growth and the financial condition of the retail customers is continually monitored and evaluated to reduce risk.

The statements contained in this document that are not historical facts are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements involve risks and uncertainties, including but not limited to retail bankruptcies and consolidations, successful integration of acquisitions, a weak retail environment, consumer acceptance of products as priced and marketed, the impact of technology on core product sales and competitive terms of sale offered to customers. Risks pertaining specifically to the Corporation’s electronic marketing business include the viability of Internet advertising as a generator of revenue and the public’s continued acceptance of paid Internet greetings and other social expression products.

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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 for trading purposes.

Interest Rate Exposure — 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, 2003, 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. The impact of foreign currency exchange rates changes from 2002 to 2003 was to increase the net income of the Corporation by approximately $1.6 million in 2003. The net income of the Corporation was not materially affected by exchange rate fluctuations for the years ended February 28, 2002, or 2001.

At February 28, 2003, a hypothetical 10% movement in the weighted-average foreign exchange rates for the entire 2003 fiscal year would have had an approximate $4.4 million effect on income.

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for a discussion of the Corporation’s exposure to market risk.

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Item 8. Financial Statements and Supplementary Data

CONSOLIDATED STATEMENT OF OPERATIONS
Years ended February 28, 2003, 2002 and 2001

Thousands of dollars except share and per share amounts

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION

February 28, 2003 and 2002
Thousands of dollars except share and per share amounts

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