10-K405 1 l85631ae10-k405.txt AMERICAN GREETINGS CORPORATION 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Commission File Ended February 28, 2001 Number 1-13859 ----------------- ------- AMERICAN GREETINGS CORPORATION ----------------------------------------------- (Exact name of registrant as specified in Charter) OHIO 34-0065325 ------------------------------ ------------------ (State of incorporation) (I.R.S. Employer Identification No.) 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: 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 X NO --- 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. [ X ] 2 State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of April 23, 2001 - $673,069,222 Number of shares outstanding as of April 23, 2001: CLASS A COMMON - 58,864,613 CLASS B COMMON - 4,628,809 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement to be filed with the Securities and Exchange Commission on May 15, 2001 with respect to the 2001 Annual Meeting of Shareholders called for June 22, 2001, are incorporated by reference into Part III. PART I Item 1. Business American Greetings 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., Plus Mark, Inc., Carlton Cards Retail, Inc., CPS Corporation of Delaware Inc., M&D Balloons, Inc., and Quality Greeting Card Distributing Company; 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 France by Carlton Cards (France) SNC; 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. (89% owned) markets e-mail greetings, personalized greeting cards and other social expression products through the Corporation's websites www.americangreetings.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. AmericanGreetings.com also operates eAgents, an electronic newsletter that consolidates and delivers personalized content from top Internet sites to subscribers. Magnivision, Inc. produces and sells non-prescription reading glasses and eyeware accessories, and Learning Horizons distributes supplemental educational products. Design licensing and character licensing are done by AGC, Inc. and Those Characters From Cleveland, Inc., respectively. AG 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.) 2 3 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 N 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. On March 9, 2000, the Corporation completed its acquisition of Gibson Greetings, Inc. ("Gibson"). Gibson had been the Corporation's other principal competitor. 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. The Corporation's unit sales of greeting cards increased 14% in 2001, primarily due to the Gibson acquisition, after decreasing 3% in 2000. Excluding acquisitions, 2001 total unit sales would have decreased 4%. 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. The Corporation and many of its competitors sell seasonal greeting cards with the right of return. Beginning in fiscal 2002, the Corporation will implement scan-based trading with certain retailers; see Item 7 for further discussion of this initiative. During the fiscal year, the Corporation experienced no difficulty in obtaining raw materials from suppliers. 3 4 At February 28, 2001, the Corporation employed approximately 11,700 full-time employees and approximately 27,000 part-time employees which, when jointly considered, equate to approximately 25,200 full-time equivalent employees. Approximately 3,000 of the Corporation's hourly plant employees are unionized, of which approximately 2,400 are covered by the following collective bargaining agreements:

Union Plant Location Contract Expiration Date ----------------------------------- --------------------------- ------------------------ International Brotherhood Bardstown, Kentucky 4/15/03 of Teamsters Corbin, Kentucky 12/01/02 Shelbyville, Kentucky 10/31/01 Kalamazoo, Michigan 4/30/05 Union of Needle Trades, Greeneville, Tennessee 10/20/02 Industrial, & Textile Employees (Plus Mark) Firemen Oilers Berea, Kentucky 3/31/03 Laborers' International Henderson, Kentucky 12/17/04

Other locations with unions are Cleveland, Ohio, 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 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 fiscal 2001, the Corporation's major channel of distribution continues to be mass retail (which is comprised of mass merchandisers, chain drug stores and supermarkets), where it is the social expression industry leader. Other major channels of distribution include card and gift shops, department stores, military post exchanges, variety stores and combo stores (stores combining food, general merchandise and drug items). Sales to the Corporation's five largest customers, which include mass merchandisers and major drug stores, accounted for approximately 28.7% of net sales in fiscal 2001. Sales to retail customers are made through 27 sales offices in the United States, Canada, the United Kingdom, Australia, New Zealand, France, Mexico, South Africa and Malaysia. Sales to one customer accounted for 10% of net sales in both Fiscal 2000 and 2001. The Corporation has agreements with various customers for the supply of greeting cards and related products. Contracts are separately negotiated to meet competitive situations; therefore, while some aspects of the agreements may be the same or similar, important contractual terms often vary from contract to contract. Under the agreements, customers typically receive allowances, discounts and/or advances in consideration for the Corporation being allowed to supply customers' stores for a stated term and/or specify a minimum sales volume commitment. 4 5 Some of these competitive agreements have been negotiated with customers covering a period following that covered by current agreements and requiring the Corporation to make advances prior to the start of such future period. The Corporation views the use of such agreements as advantageous in developing and maintaining business with retail customers. Although risk is inherent in the granting of advances, payments and credits, the Corporation subjects such customers to its normal credit review. Losses attributable to these agreements have historically not been material. Advances, payments and credits made under these agreements are accounted for as deferred costs. The current and long-term portions of such deferred costs, including future payment commitments, are disclosed in Note H to the Consolidated Financial Statements included in Part II, Item 8. Note H also discusses the amortization policy. The Corporation believes that these agreements represent a common practice within the industry. Since Hallmark Cards, the Corporation's principal competitor, is a non-public company, public disclosure of its practices has been limited. In November 2000, the Corporation announced it would undertake three initiatives in 2002: the reorganization of the core greeting card business, the implementation of scan-based trading with certain retailers, and changes in certain contractual relationships with strategic partners associated with AmericanGreetings.com. See Item 7 for further discussion of these initiatives. The operations of the Corporation, like those of other companies in our industry, are subject to various federal, state and local environmental laws and regulation. 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. 5 6 Item 2. Properties As of February 28, 2001, the Corporation owns or leases approximately 18.1 million square feet of plant, warehouse, store and office space, of which approximately 4.9 million square feet are leased. Space needs in the United States have been met primarily through long-term leases of properties constructed and financed by community development corporations and municipalities. The following table summarizes the principal plants and materially important physical properties of the Corporation:

Expiration Approximate Square Date of Feet Occupied Material Principal Location Owned Leased Leases Activity ----------------- ------------- -------------- -------------- --------- Cleveland, 1,700,000 International headquarters; Ohio general offices of U.S. Greeting Card Division, Plus Mark, Inc., AG Industries, Inc., Carlton Cards Retail, Inc., Learning Horizons, Inc., AmericanGreetings.com, and AGC, Inc.; creation and design of greeting cards, gift wrap, paper party goods, candles, balloons, stationery and giftware Bardstown, 413,500 Cutting, folding, finishing, and Kentucky packaging of greeting cards Corbin, 1,010,000 Printing of greeting cards, Kentucky gift wrapping and paper party goods and manufacture of other related products Danville, 1,374,000 2001 Distribution of everyday greeting Kentucky cards and related products Harrisburg, 417,000 2006 Warehousing for seasonal Arkansas greeting cards and related products Lafayette, 194,000 Manufacture of envelopes Tennessee for greeting cards and packaging of cards McCrory, 771,000 2004 Order filling and shipping of Arkansas everyday and seasonal products

6 7

Expiration Approximate Square Date of Feet Occupied Material Principal Location Owned Leased Leases Activity -------- ----- ------ ------ -------- Osceola, 2,800,800 Cutting, folding, finishing and Arkansas packaging of seasonal greeting cards and warehousing; distribution of seasonal products Ripley, 165,000 Seasonal card printing and Tennessee forms Philadelphia, 120,000 2003 Hand finishing of greeting cards Mississippi Kalamazoo, 602,500 Manufacturing and distribution Michigan of party supplies Shelbyville, 250,000 2002 Warehousing for Carlton Kentucky Cards Retail, Inc. and distribution for Learning Horizons, Inc. Forest City, 498,000 415,000 2001 Manufacture of the North Carolina Corporation's display fixtures and other custom display fixtures by AG Industries, Inc. Greeneville, 1,410,000 102,000 Printing and packaging of Tennessee seasonal wrapping items (4 locations) and order filling and shipping for Plus Mark, Inc. Franklin, 2,960,200 Manufacture of gift wrap Tennessee and related items for CPS/Plus Mark, Inc. Henderson, 500,000 Manufacture of gift wrap Kentucky and related items for CPS/Plus Mark, Inc. Cincinnati, 356,000 2001 Warehouse and distribution of Ohio thru gift wrap and related items for 2004 CPS/Plus Mark, Inc. Ft. Lauderdale / 323,000 2001 General offices of Magnivision, Miami Inc.; manufacture, order filling Florida and shipping of non-prescription (4 locations) reading glasses

7 8

Expiration Approximate Square Date of Feet Occupied Material Principal Location Owned Leased Leases Activity -------- ----- ------ ------ -------- Monteno, 104,500 2001 General offices and manufacture Illinois of balloons and related items (3 locations) for M&D Industries Toronto, 87,000 2003 General offices of Carlton Ontario, Cards (Canada) Limited; Canada (2 locations) Clayton, 208,000 General offices of John Sands Victoria, (Australia) Ltd.; manufacture of Australia greeting cards and related products Alexandria, 40,000 2003 General offices, production Australia and distribution for The Ink Group Auckland, 80,000 General offices of John New Zealand Sands (New Zealand) Ltd. Dewsbury, 417,000 95,500 2001 General offices of England and Carlton Cards (UK) Limited; (5 locations) 2014 manufacture of greeting cards and related products Corby, 85,000 Distribution of greeting cards England and related products for Carlton Cards (UK) Limited Mexico City, 60,000 General offices of Carlton Mexico Mexico, S.A. de C.V. and distribution of greeting cards and related products Paris, 93,000 2001 General offices of Carlton France and Cards (France) SNC; 2003 distribution of greeting cards and related products Roodepoort, 105,500 2001 General offices of South Africa thru S.A. Greetings Corporation; 2005 manufacture and distribution of greeting cards and related products

8 9

Expiration Approximate Square Date of Feet Occupied Material Principal Location Owned Leased Leases Activity ----------------- --------------------------------- --------------- --------- London, 31,000 2001 General offices of Camden England and Graphics; publishing and (3 locations) 2011 distribution of greeting cards Croydon, 42,000 107,500 2001 General offices of Hanson England thru White; manufacturer and (8 locations) 2011 distributor of greeting cards and related products Stafford Park, 29,000 50,000 2004 General office and warehouse England for Gibson Greetings (2 locations) International Ezakheni, 140,000 33,500 2001 Manufacture and distribution Phoenix, thru of greeting cards and South Africa 2003 related products Kajang 7,000 2001 General office of Memory Selangor Lane Malaysia Malaysia

9 10 Item 3. Legal Proceedings 1. Hallmark Cards, Inc. v. American Greetings Corporation and Americangreetings.com, Inc., Case No. 00-0538-CV-W-1, U.S. District Court, Western District of Missouri. This matter was previously disclosed in Form 10-Q for the period ending August 31, 2000. In this case, which was filed in June 2000, Hallmark alleged infringement of three patents relating to an electronic system for the management, selection and delivery of cards. Hallmark voluntarily dismissed its Complaint on January 19, 2001. 2. In re: Underground Storage Tank Release Report, U.S. EPA Facility ID# TN 1-300153, Tennessee Department of Environment & Conservation (TDEC) v. Plus Mark. This matter was previously disclosed in Form 10-K for the period ending February 29, 2000. There has been no change since the last report. In January 2000, Plus Mark, a wholly owned subsidiary of American Greetings Corporation, received a request from U.S. 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, U.S. EPA concluded that no further action was required regarding soil, but that further site characterization was required for groundwater. U.S. EPA transferred the matter to TDEC for administration. No remedy has been determined, but costs are not expected to be material. 3. In re: Tennessee Dept. of Environment and Conservation (TDEC) v. Cleo. Tennessee State Superfund Site - Carl Wright Site, Henry County, TN This matter was previously disclosed in Form 10-K for the period ending February 29, 2000. There has been no change since the last report. In May 1998, TDEC informed Gibson Greetings, now a wholly owned subsidiary of American Greetings Corporation, that Cleo, a former subsidiary of Gibson Greetings, may be a potentially responsible party for the costs incurred by the State of Tennessee in remediating the Carl Wright Site. TDEC notified Gibson Greetings 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. Gibson's share of the estimated clean up cost is not expected to be material. 4. In re: Chemical Recovery Systems Site, Elyria, Ohio. In March 2001, the United States Environmental Protection Agency sent to the Corporation a General Notice of Potential Liability and Request for Information under CERCLA. The Notice stated the U.S. EPA's intent to conduct a remedial investigation/feasibility study at the Chemical Recovery Systems Site in Elyria, Ohio. The Corporation is undertaking a review of its records. The alleged shipments to this Site occurred in 1978. The Corporation's share of estimated clean-up costs is not expected to be material. 10 11 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, 2001, their positions and offices, and number of years in executive office:

Years as Name Age Executive Officer Current Position and Office ---- --- ----------------- --------------------------- Morry Weiss 61 29 Chairman and Chief Executive Officer James C. Spira 58 1 President and Chief Operating Officer Jeffrey M. Weiss 37 3 Executive Vice President Michael B. Birkholm 49 4 Senior Vice President Mary Ann Corrigan-Davis 47 4 Senior Vice President David R. Beittel 53 - Senior Vice President Jon Groetzinger, Jr. 52 13 Senior Vice President, General Counsel and Secretary William R. Mason 56 19 Senior Vice President William S. Meyer 54 13 Senior Vice President, Chief Financial Officer Patricia A. Papesh 53 6 Senior Vice President Patricia L. Ripple 45 5 Senior Vice President Erwin Weiss 52 11 Senior Vice President Zev Weiss 34 - Senior Vice President George A. Wenz 56 3 Senior Vice President Thomas T. Zinn, Sr. 52 3 Senior Vice President Dale A. Cable 53 9 Vice President, Treasurer Joseph B. Cipollone 42 - Vice President, Corporate Controller

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. 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: 11 12 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. Jeffrey M. 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; and Senior Vice President from January 1998 until becoming Executive Vice President in March 2000. 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 B. Birkholm was Plant Manager at Osceola, Arkansas from September 1992 until June 1994; and Vice President, Manufacturing from June 1994 until becoming Senior Vice President in March 1998. 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. Mary Ann Corrigan-Davis was President of Carlton Cards Retail, Inc. from December 1992 until January 1996, and Group Managing Director of the John Sands Group from January 1996 until becoming Senior Vice President in May 1997. Patricia L. Ripple was Director, Tax and Financial Reporting of the Corporation from November 1991 until April 1993; Executive Director, Tax and Financial Reporting of the Corporation from April 1993 until September 1996; and Vice President and Corporate Controller from September 1996 until becoming Senior Vice President 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; and Vice President, Strategic Business Units from March 2000 until becoming Senior Vice President in March 2001. George A. Wenz was Vice President, National Accounts from October 1984 until becoming Senior Vice President in June 1997. Thomas T. Zinn, Sr. was a Principal with Ernst & Young LLP before joining the Corporation January 1995 as Vice President, Information Services. He became Senior Vice President in March 1998. 12 13 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters (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 share prices, as reported in the New York Stock Exchange listing, for the years ended February 28, 2001 and February 29, 2000:

2001 2000 -------------------------------------- -------------------------------------- High Low High Low ---------------- ----------------- ---------------- ----------------- 1st Quarter.................. $ 19-9/16 $ 15-5/16 $ 28-13/16 $ 22-5/16 2nd Quarter................. 24-1/16 16-7/8 32-3/8 27-3/16 3rd Quarter.................. 20.13 8.94 28-1/2 23-1/16 4th Quarter.................. 13.91 8.19 25-11/16 17-1/4

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, 2001, there were approximately 28,800 holders of Class A Common Shares and 202 holders of Class B Common Shares of record and individual participants in security position listings. (c) Cash Dividends -------------------

Dividends per share declared in 2001 2000 ------------------- ---------- ---------- 2nd Quarter (paid September 8, 2000 and September 10, 1999) $.21 $ .20 3rd Quarter (paid December 8, 2000 and December 10, 1999) .21 .20 3rd Quarter (paid March 9, 2001) .10 - 4th Quarter (paid March 10, 2000) - .20 4th Quarter (to be paid June 8, 2001 and paid June 10, 2000) .10 .20 ---------- ---------- $.62 $ .80

13 14 Item 6. Selected Financial Data Years ended February 28 or 29 Thousands of dollars except per share amounts

Summary of Operations 2001 2000 1999 1998 1997 --------------------- -------------- ------------- ------------- ------------- ------------- Net sales ............................................. $ 2,518,814 $ 2,175,236 $ 2,205,706 $ 2,198,765 $ 2,161,089 Gross profit .......................................... 1,519,543 1,365,889 1,448,626 1,408,077 1,355,965 Non-recurring charge (gain) ........................... -- 38,873 13,925 (22,125) -- Interest expense ...................................... 55,387 34,255 29,326 22,992 30,749 Income (loss) before cumulative effect of accounting change ........................................... (92,673) 89,999 180,222 190,084 167,095 Cumulative effect of accounting change, net of tax .... (21,141) -- -- -- -- Net (loss) income ..................................... (113,814) 89,999 180,222 190,084 167,095 Earnings (loss) per share: Before cumulative effect of accounting change .... (1.46) 1.37 2.56 2.58 2.23 Cumulative effect of accounting change, net of tax (0.33) -- -- -- -- Earnings (loss) per share ........................ (1.79) 1.37 2.56 2.58 2.23 Earnings (loss) per share - assuming dilution .... (1.79) 1.37 2.53 2.55 2.22 Cash dividends declared per share* .................... .62 .80 .94 .71 .67 Fiscal year end market price per share ................ 13.06 17.25 23.69 45.63 31.00 Average number of shares outstanding .................. 63,646,405 65,591,798 70,345,980 73,708,100 74,818,960 Financial Position ------------------ Accounts receivable ................................... $ 387,534 $ 430,825 $ 390,740 $ 373,594 $ 375,324 Inventories ........................................... 365,221 249,433 251,289 271,205 303,611 Working capital ....................................... 94,455 518,196 728,144 506,029 562,148 Total assets .......................................... 2,712,074 2,517,983 2,419,328 2,161,464 2,135,120 Property, plant and equipment additions ............... 74,382 50,753 60,950 67,898 92,895 Long-term debt ........................................ 380,124 442,102 463,246 148,800 219,639 Shareholders' equity .................................. 1,047,190 1,252,411 1,346,611 1,345,217 1,361,655 Shareholders' equity per share ........................ 16.49 19.41 19.49 18.90 18.16 Net return on average shareholders' equity before cumulative effect of accounting changes ... (8.1)% 6.9% 13.4% 14.0% 12.9% Return on net sales before income taxes and cumulative effect of accounting changes .......... 3.9% 6.5% 12.8% 13.3% 11.8%

* See quarterly results of operations for detailed table. 14 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW During 2001, the Corporation experienced declines in net income due to market pressures and two special charges. Market pressures included unit decline in the United States everyday card market as a result of continued pressure to reduce retailer inventories, increased competition from lower-priced cards and general retail sales weakness. In addition, charges related to an equity investment write-down and potential tax assessments were recorded. The Corporation, as announced during the third quarter, has responded by initiating a restructure strategy focusing on process improvements that is expected to improve efficiency and reduce costs by rationalizing brands, products and facilities, and resetting the organizational structure. Details of the restructuring effort were announced in March 2001, and the Corporation expects to record a restructure charge during Fiscal 2002 as part of this initiative. The Corporation completed the acquisition of Gibson Greetings Inc. (Gibson), the No. 3 greeting card company in the industry, early in 2001. The Corporation focused its efforts throughout 2001 on integrating that business which is substantially complete as of February 2001. The Corporation has begun to realize significant operating synergies and cost reductions from the Gibson transaction which will be accretive to earnings in 2002. During the third quarter, the Corporation completed the acquisition of CPS Corporation (CPS), a leading supplier of gift wrap and decorative packaging, headquartered in Franklin, Tennessee. This acquisition expands the Corporation's seasonal boxed card, gift wrap, and decorative packaging product offering, adds new customers and channels of distribution, and includes two state-of-the-art manufacturing and distribution facilities in Tennessee and Kentucky. CPS became part of Plus Mark, the promotional giftwrap and Christmas boxed card unit of the Corporation. CONSOLIDATED RESULTS OF OPERATIONS REVENUE Net sales rose 15.8% to a record $2.5 billion in 2001 driven primarily by the acquisition of the Gibson and CPS business units, which contributed $263 million and $89 million, respectively. Excluding acquisitions, net sales decreased 1.0% compared to 2000 due primarily to soft everyday card sales in the U.S. market and weakening of certain foreign currencies against the U. S. dollar. Increased sales of promotional gift wrap, calendars and party goods in the U.S. as well as stronger sales in Canada helped offset the U.S. everyday greeting card performance. In 2000, net sales decreased 1.4% compared to 1999 primarily due to initiatives to lower retailers' inventories. Net sales of everyday cards increased 8.9% in 2001 due primarily to the favorable impact of the Gibson acquisition. Excluding Gibson, everyday card net sales decreased 4.9% principally due to softness in the United States and Australasia greeting card markets. The decrease in 2000 reflects lower sales in the United States as a result of initiatives to lower retailers' inventory partially offset by strong sales gains in the United Kingdom primarily due to increased market share. Unit sales of everyday greeting cards increased approximately 13% compared to 2000. However, excluding the Gibson acquisition, unit sales of everyday greeting cards decreased approximately 2%. Net seasonal card sales improved 17% during 2001 as a result of the Gibson acquisition but decreased 3.5% compared to 2000 when excluding Gibson. The Corporation continued to implement initiatives to improve sell-through of seasonal card sales; however, these efforts were 15 16 hampered by a slowing retail environment. In 2000, net seasonal card sales decreased 2.6% as the Corporation reduced seasonal card shipments to improve seasonal sales productivity. Primarily fueled by the CPS acquisition, sales of non-card products increased 24% in 2001. Significant sales increases were also realized in both calendars and party goods. Sales of calendars increased more than 150% in 2001 due to increased distribution while increased core growth drove party goods sales to an increase of 13% over 2000. Sales of non-card products increased in 2000 due to the acquisition of Contempo Colours, Inc. and to higher seasonal promotional gift wrap sales. The contribution of each major product category as a percent of net sales for the past three years is:

2001 2000 1999 ------------ ----------- ------------ Everyday Greeting Cards 42% 45% 48% Seasonal Greeting Cards 20% 20% 20% Gift Wrapping and Wrap Accessories 16% 14% 14% All Other Products 22% 21% 18%

The All Other Products classification includes giftware, party goods, non-prescription reading glasses, candles, balloons, calendars, custom display fixtures, stationery, ornaments, educational products and stickers. EXPENSES AND PROFIT MARGINS Margins continued to decrease in 2001 due primarily to a changing product mix. While acquisitions have increased sales to record levels, these business units typically have higher cost of product than the core greeting card business. Additionally, the Corporation's investment and losses in its Internet subsidiary, AmericanGreetings.com, have unfavorably impacted margins. Material, labor and other production costs were 39.7% of net sales, up from 37.2% in 2000 and 34.3% in 1999. The key driver of this increase is a sales shift to increased sales of higher cost product due primarily to the CPS acquisition and to lower sales of higher margin everyday greeting cards. The increase in 2000 compared to 1999 reflects increased sales of lower margin products, $7.8 million of unfavorable manufacturing variances and a $7.7 million write-down of inventory related to the integration of the Canadian and domestic operations. Selling, distribution and marketing expenses were 42.4% of net sales in 2001, flat to prior year but up from 40.5% in 1999. In 2001, increased order fulfillment costs had an unfavorable impact of 60 basis points which was offset by lower expenditures for national advertising of $10 million. The increase in 2000 over 1999 primarily reflects expenses associated with Internet agreements for AmericanGreetings.com, Inc. and higher freight costs relating to strong seasonal promotional gift wrap sales. Competitive costs in 2001 increased only 2.8% compared to 2000. Deferred costs and the Corporation's method of accounting for them are described in Note H to the Consolidated Financial Statements. Administrative and general expenses increased $53.1 million in 2001. Almost all of the increase is related to the acquired companies which reflected spending levels prior to integration savings. Administrative and general expenses decreased $1.1 million in 2000 from 1999 due to reduced employee benefit costs partially offset by additional costs associated with AmericanGreetings.com, Inc. 16 17 Other expense - net was $16.8 million in 2001, $3.7 million in 2000 and $1.3 million in 1999. Included in other expense - net for 2001, is a $32.5 million non-cash charge recorded in the fourth quarter relating to the write down of the Corporation's 19.6% investment in Egreetings Network, Inc. (Egreetings) shares acquired as part of the Gibson transaction. Partially offsetting this charge is an $8.4 million gain on the sale of a Canadian building. Also favorably impacting 2001 are savings of approximately $8.6 million of Year 2000 remediation costs incurred in the prior year. Interest expense amounted to $55.4 million in 2001, compared to $34.3 million in 2000 and $29.3 million in 1999. Higher borrowing levels to fund the Corporation's acquisition of Gibson and CPS, as well as the common stock repurchase program were the primary drivers of the increase in interest expense. These initiatives were funded by free cash flow and additional borrowings in 2001 and 2000. As a result, debt less cash increased to $707.3 million at the end of 2001 compared to $490.8 million at the end of 2000. During the fourth quarter of 2001, the Corporation recorded a charge of approximately $143 million for potential tax exposure for the fiscal years ended 1992 through 1999 relating to the Corporation's corporate-owned life insurance programs (COLI). This exposure was previously discussed in periodic filings with the Securities and Exchange Commission and represents the effect of proposed adjustments by the Internal Revenue Service (IRS) for the disallowance of certain deductions related to these insurance programs. In February 2001, a federal tax decision unfavorable to another corporation with COLI issues was published. The Corporation plans to vigorously contest the proposed adjustments or any subsequent assessments and feels it can distinguish certain of its COLI plans from those addressed in previous litigation. Additionally, the Corporation recorded the write-down of its investment in Egreetings shares and established a valuation allowance equal to the full tax benefit of the write-down. The 2000 and 1999 effective tax rates were 36.0%. The rate for 2000 includes a 2.1 percentage point benefit for utilization of a foreign net operating loss carryforward while the rate for 1999 reflected tax benefits of the corporate-owned life insurance. Those benefits were reduced due to the phase out of the Federal income tax deduction for interest on loans associated with these policies. The deduction for this interest expense was entirely eliminated as of January 1, 1999. See Note O to the Consolidated Financial Statements for details of the differences between taxes at the Federal statutory rate and actual tax expense. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which among other guidance, clarifies 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 and not upon shipment from the distribution facility. Customer receipt is a more preferable method of recording revenue due to the large volumes of seasonal product shipment activity and the time required to achieve customer requested delivery dates. The cumulative effect of the change on prior years 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. Had this change been adopted effective March 1, 1999, fiscal 2000 net sales and earnings before the cumulative effect of this accounting change would not have been materially impacted. 17 18 RESTRUCTURING ACTIVITIES AND SPECIAL CHARGES Fiscal 2000 - Fourth Quarter During the fourth quarter, the Corporation recorded a $6.1 million ($4.8 million net of tax, or earnings per share of $0.08) restructure charge related to various foreign operations. The primary component of this charge was for the rationalization of various warehouse, distribution and manufacturing facilities in the United Kingdom in order to increase operating efficiency and lower fixed expenses. Additional initiatives include, to a lesser extent, the integration of Mexican manufacturing in the United States and the realignment of various business functions in Australia. The restructure charge included $5.2 million for costs of severing employees, $0.6 million for lease exit costs, $0.3 million for the write off of assets no longer in use and other restructure costs. In total, approximately 336 positions will be eliminated comprised of 304 hourly and 32 salaried employees. As of February, 2001, 114 hourly and 33 salaried employees have been severed. All activities are expected to be completed by the end of the first quarter in fiscal 2002 and the Corporation anticipates annual cost savings to be approximately $4.0 million. Fiscal 2000 - Second Quarter In connection with the Corporation's initiative to streamline its international operations, the Corporation recorded a $40.4 million ($24.2 million net of tax, or earnings per share of $0.36) special charge during the second quarter of Fiscal 2000 relating primarily to the consolidation of the Canadian manufacturing and distribution in the United States. Included in this special charge is a $32.7 million restructure charge primarily for exit costs associated with the closure of certain Canadian facilities and to a lesser extent, costs to exit certain minor United Kingdom businesses. The remaining $7.7 million of the special charge was recorded in material, labor and other production costs for the write-down of Canadian inventory to net realizable value. The restructure charge of $32.7 million includes $25.8 million of severance, pension and personnel related items, $4.6 million of facility shut-down costs, $1.5 million of lease exit costs and $0.8 million related to other restructure costs. As of February 2001, 712 Canadian employees have been terminated as a result of the Corporation's realignment of its manufacturing and distribution operations. All initiatives associated with the Canadian restructuring have been substantially completed and the Corporation anticipates annual aggregate cost savings to be approximately $12 million. The largest remaining restructuring activity relates to the Canadian Division pension plans. The Corporation has taken the necessary actions to settle the pension liabilities, and pending the appropriate Canadian regulatory approval, the remaining pension plan assets will be distributed to satisfy those obligations. This is expected to be completed by December 2001. Fiscal 1999 During the third quarter of fiscal 1999, the Corporation recorded a restructure charge of $13.9 million ($8.3 million net of tax, or earnings per share of $0.12) which reflected management's efforts to optimize the Corporation's cost structure and to provide for operational streamlining initiatives. This restructure charge consisted of approximately $8.6 million of personnel-related charges associated with the termination of 228 employees; $4.6 million of exit costs associated with discontinuing the kiosk business; $0.4 million of costs associated with carrying vacated office space until lease expiration or sublease; and approximately $0.3 million of other restructure costs. All initiatives associated with this restructuring have been substantially completed at February 29, 2000. 18 19 The following table summarizes the provisions, payments and remaining reserves associated with the restructure charges recorded in 1999 through 2001.

Facility Kiosk Lease Termination Shut-Down Exit Exit Other Benefits Costs Costs Costs Costs Total ---------------- -------------- ----------- ---------- -------- ------------ (Thousands of dollars) Provision in 1999 $8,644 $4,618 $663 $13,925 Cash expenditures (5,019) (5,019) Non-cash charges (3,362) (3,362) ---------------- ----------- -------- ------------ Balance 2/28/99 3,625 1,256 663 5,544 Provision in 2000 31,018 $4,634 $2,108 1,113 38,873 Activity relating ----------------- to 1999 Provision: ------------------ Cash expenditures (3,645) (620) (469) (4,734) Non-cash charges (588) (588) Change in estimate 162 (162) Activity relating to -------------------- 2000 Provision: --------------- Cash expenditures (1,646) (454) (930) (3,030) Non-cash charges (4,358) (99) (162) (519) (5,138) ---------------- -------------- ----------- ---------- -------- ------------ Balance 2/29/00 25,156 4,081 48 1,016 626 30,927 Activity relating to -------------------- 1999 Provision: --------------- Cash expenditures (222) (222) Activity relating to -------------------- 2000 Provision: --------------- Cash expenditures (19,152) (514) (13) (12) (22) (19,713) Non-cash charges (2,334) (342) (2,676) Change in estimate 45 (35) (10) Impact of foreign currency exchange rate changes (419) (85) (70) (17) (591) ---------------- -------------- ----------- ---------- -------- ------------ Balance 2/28/01 $5,408 $1,148 $-- $934 $235 $7,725 ================ ============== =========== ========== ======== ============

Included in accounts payable and accrued liabilities at February 28, 2001 is $7.7 million related to severance and other exit costs for those actions not completed. The Corporation believes the remaining accrued restructure liability is adequate for its remaining cash and non-cash obligations. 19 20 NET INCOME AND EARNINGS PER SHARE The net loss of $113.8 million or $1.79 per share for 2001 includes non-cash charges of $143 million or $2.26 per share for disputed deductions with the IRS relating to the Corporation's COLI programs and $32.5 million or $0.51 per share for the write-down of the Corporation's 19.6% investment in Egreetings shares. Also included is a charge of $21.1 million or $0.33 per share for the cumulative effect of accounting changes relating to the recording of certain seasonal shipments. Excluding these charges, adjusted net income for 2001 was $83.5 million or $1.31 per share. This compares to net income, excluding the impact of non-recurring items for restructuring efforts, of $119 million or $1.81 per share in 2000 and $188.6 million or $2.68 per share in 1999. Assuming dilution, earnings per share excluding the non-recurring items discussed above were $1.31 in 2001, $1.81 in 2000, $2.65 in 1999. 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 permitted under Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," certain operating divisions have been aggregated into the Social Expression Products segment. These operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. AmericanGreetings.com is a web-based provider of greetings and other social communication content to consumers and web-based businesses. SOCIAL EXPRESSION PRODUCTS SEGMENT Net sales in 2001 increased 14.2% from the prior year due primarily to the acquisition of Gibson, which contributed $263 million of net sales. Excluding the impact of the Gibson acquisition, net sales decreased 1.7%. The primary driver of this sales decline was lower sales of everyday greeting card product in the United States partially offset by strong accessory product sales in the United States, primarily party products, and increased sales in Canada. Net sales in 2000 decreased 5.2% due primarily to reduced everyday card shipments in the United States partially offset by significant growth in the UK market. Total segment greeting card unit sales increased approximately 14% in 2001, however excluding Gibson unit sales declined approximately 4%. Total unit sales of all greeting cards decreased approximately 3% in 2000. Segment earnings, net of intersegment items, decreased 12.6% in 2001 reflecting the earnings impact of lower sales in the United States of high margin everyday greeting card product. Partially offsetting this decrease was improved performance from the Canadian Division due primarily to benefits relating to the integration of manufacturing in the United States. Segment earnings, net of intersegment items, decreased 28.1% in 2000 reflecting the decrease in high margin everyday card sales in the United States partially offset by the strength of the UK market. 20 21 AMERICANGREETINGS.COM, INC. SEGMENT Net sales improved 70% in 2001 driven by increased advertising revenue resulting from new advertising sales initiatives and higher traffic. AmericanGreetings.com more than doubled its website traffic in 2001 as a result of moving to a new business model as a relationship service provider which includes providing free electronic greetings. Net sales almost doubled in 2000 due to significant increases in subscription revenue and to increased advertising revenue resulting from new online distribution agreements with key Internet service providers. The segment loss for 2001 reflects increased partner share costs associated with various Internet distribution agreements and the Corporation's continued investment in technology and content for expanded Internet services and increased volume growth. The segment loss in 2000 reflects the increased costs associated with the amortization of payments relating to various Internet distribution agreements and increased advertising expenditures. LIQUIDITY AND CAPITAL RESOURCES Cash flow before acquisitions, divestitures and financing in 2001 was $91.8 million and remained relatively strong compared to $96.8 million in 2000. In 1999, cash flow before acquisitions, divestitures and financing was $179.3 million. Cash flow provided by operating activities for 2001 was $108.9 million, a decrease of $58.7 million from 2000, due primarily to lower net income. Accounts receivable, net of the effect of acquisitions, generated $29.2 million of cash in 2001, compared to a use of $35.9 million in 2000 and $10.5 million in 1999. The primary components of the accounts receivable performance in 2001 were increased cash collections and the impact of the shift in the recognition of Mother's Day shipments from the fourth quarter to the first quarter which decreased accounts receivable by $44.4 million. Net accounts receivable as a percent of net sales decreased to 15.4% in 2001 compared to 19.8% in 2000 and 17.7% in 1999. Inventories as a percent of material, labor and other production costs increased to 36.5% after improving to 30.8% in 2000 from 33.2% in 1999. Inventories, net of the effect of acquisitions, used $46.6 million of cash in 2001 compared to a source of $11.7 million and $17.8 million in 2000 and 1999, respectively. Key components of this increase are increased inventory levels attributable to everyday accessory products of $18.6 million and an increase of $13.9 million of seasonal inventory, primarily Mother's Day, that will now ship in Fiscal 2002. In 2000, the Corporation realized a $19.3 million inventory reduction in both Canada and the United States relating to the integration of Canadian manufacturing and distribution in the United States and to other production efficiencies. In 2001, Deferred costs - net, representing payments under agreements with certain retailers (net of related amortization), reflected amortization in excess of payments of $4.1 million compared to net cash payments of $5.6 million in 2000 and $65.6 million in 1999. Payments are made in connection with both new and existing agreements and reflect the fluctuations resulting from various contract payment and renewal dates. However, the deferred costs which result from the payments are less volatile as they are amortized over the effective period of the agreement. 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. Future payment commitments 21 22 under existing agreements at the end of 2001 were $230.8 million with $119.8 million due within the next year. See Note H to the Consolidated Financial Statements for further discussion of deferred costs related to certain customer agreements. Accounts payable and other liabilities increased $87.9 million compared to a decrease of $24.9 million in 2000. In 1999, accounts payable and other liabilities increased $13.8 million. The activity in 2001 reflects an increase in income taxes payable of $143 million for the recording of the COLI tax exposure partially offset by $19.7 million of cash payments associated with the Corporation's restructuring activities and approximately $28 million of cash payments for integration costs associated with acquisitions. The change in 2000 compared to 1999 reflects lower income tax accruals and employee profit sharing liability. Investing activities included $139 million of cash (net of $10.1 million of acquired cash) in 2001 to purchase Gibson, in addition to the $30 million escrow payment made in 2000. Additionally, 2001 reflects the $31 million cash portion of the CPS acquisition made during the second quarter. In 2000, investing activities included $35.5 million for the acquisition of Contempo Colours, Inc. and the Gibson escrow payment. Capital expenditures were $74.4 million in 2001 up from $50.8 million in 2000 and $61.0 million in 1999. The increase was largely due to approximately $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, 2001 capital expenditures included $7.3 million for the expansion of the Kalamazoo facility (party goods) and $4.5 million related to the Gibson acquisition. The decrease in 2000 reflects lower capitalized system projects as the Corporation focused its efforts on Year 2000 remediation. Capital expenditures are expected to be approximately $50 million in 2002. Investing activities other than capital expenditures and acquisitions provided $56.4 million of cash in 2001 compared to a use of $20.9 million in 2000. The cash provided in 2001 reflects $20.3 million of cash proceeds from the sale of a Canadian building and the settlement of a $15 million supply agreement loan. The use of cash in 2000 reflects a supply agreement loan to a customer and lower cash distributions received from the Corporation's investment in corporate owned life insurance. During 2001, the Corporation repurchased 1.0 million Class A shares at an average price of $20.56 per share or $21 million bringing the total shares purchased under this program to 4.5 million at an average cost of $27.70. Additionally, the Corporation repurchased 1.2 million shares, relating to the acquisition of CPS, at an average price of $20.36 per share or $24.4 million. In total 2.2 million shares were repurchased during 2001 at an average price of $20.46 or approximately $45 million. During 2000, a total of 4.6 million shares were repurchased at an average price of $28.25 per share or approximately $130 million. Net 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; however, the Corporation will continue to evaluate long term financing options. A total of $52.7 million in dividends was paid during 2001 compared to $51.2 million in 2000. The Corporation has reduced its quarterly dividend from 21 cents per share to 10 cents per share, beginning with the dividend payable in March 2001. In 2000, net cash used in financing activities was $114.4 million primarily related to the Corporation's stock repurchase program and dividend payments. Debt as a percent of total capitalization in 2001 increased to 42% compared to 30.6% in 2000. 22 23 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. See Note I to the Consolidated Financial Statements for further discussion of the Corporation's credit facilities. MARKET RISK The Corporation's market risk is impacted from 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 portion of the Corporation's debt has a fixed rate, 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 17% of the Corporation's 2001 revenues were generated from operations outside the United States. Operations in Australasia, Canada, France, Malaysia, Mexico, South Africa, and the United Kingdom, are denominated in currencies other than U.S. 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. While intercompany balances with the parent company are denominated in U.S. dollars, the Corporation's multi-currency credit facility provides the foreign operations the ability to satisfy these balances and reduce exchange risk. Additionally, the Corporation's net income was not materially impacted by the translation of the foreign operations' currencies into U.S. dollars. Exposure to exchange rate fluctuations historically have 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. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, along with its amendments SFAS No. 137 and SFAS No. 138, will become effective for the Corporation for 2002. The Corporation has evaluated the effects of these Statements on its accounting and reporting policies, and the adoption of the Statements will not have a material impact on the Corporation's consolidated financial statements. FACTORS THAT MAY AFFECT FUTURE RESULTS In November 2000, the Corporation announced it would undertake a review of its operations focusing on process improvements that is expected to improve efficiency and reduce costs. Additionally, the Corporation will undertake two other initiatives, all of which will take place in 2002 and result in the following one-time pre-tax charges: - The reorganization of the core greeting card business will result in a pre-tax charge of approximately $200 million to $220 million. The implementation of the new business structure will result in expected ongoing pre-tax cost savings of about $90 million beginning in 2003. Included in the restructuring are a brand rationalization process, product line size reduction program, the consolidation of six to nine facilities, and a headcount reduction of approximately 1,500 associates, or about 13% of the full-time workforce. The Corporation expects the reorganization to begin in the first quarter of 2002 and conclude by the end of 2002. - The implementation of scan-based trading with certain retailers will result in a pre-tax charge of $80 million to $90 million. This new initiative is part of the Corporation's new business model and should ultimately result in a reduction of working capital, maximize retail productivity and throughput, reduce costs and continue to enhance retailer relationships. 23 24 - Anticipated in 2002, positive changes in certain contractual relationships with strategic partners associated with the Corporation's Internet business will result in a pre-tax, non-cash charge of $18 million. These forthcoming contractual changes, coupled with recent acquisitions and organic growth should allow AmericanGreetings.com to achieve its goal of reaching profitability during the fourth calendar quarter of 2001. The Corporation expects the pre-tax cost of these three initiatives to be about $300 million to $330 million. Combined, these efforts are expected to use about $110 million to $120 million in after-tax cash, with the majority of the cash usage coming in 2002. The Corporation has maintained a strong customer base in a wide variety of channels of distribution through its investment in deferred costs related to 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 which continued, to a lesser extent, in 2000. These agreements have been a strategic element of the Corporation's growth and the financial condition of the retail customers is continually evaluated and monitored 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 ability of AmericanGreetings.com to attract strategic partners as investors, the viability of online advertising as a revenue generator, and the public's acceptance of online greetings and other social expression products. 24 25 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 - Based on the Corporation's overall interest rate exposure as of and during the year ended February 28, 2001, a hypothetical 10% movement in interest rates would not materially affect the Corporation's results of operations. 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 income of international subsidiaries to U.S. dollars could affect comparability of results between years. The earnings of the Corporation were not materially affected by exchange rate fluctuations for the years ended February 28 or 29, 2001, 2000, or 1999. At February 28, 2001, a hypothetical 10% movement in foreign exchange rates would not have a material effect on the Corporation's results of operations. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", for a discussion of the Corporation's exposure to foreign currency translation risk. 25 26 Item 8. Financial Statements and Supplementary Data CONSOLIDATED STATEMENT OF OPERATIONS Years ended February 28 or 29, 2001, 2000 and 1999 Thousands of dollars except per share amounts

2001 2000 1999 ------------ ------------ ------------ Net sales $ 2,518,814 $ 2,175,236 $ 2,205,706 Costs and expenses: Material, labor and other production costs 999,271 809,347 757,080 Selling, distribution and marketing 1,068,543 921,392 894,323 Administrative and general 280,202 227,075 228,183 Non-recurring items -- 38,873 13,925 Interest 55,387 34,255 29,326 Other expense - net 16,778 3,670 1,272 ------------ ------------ ------------ 2,420,181 2,034,612 1,924,109 ------------ ------------ ------------ Income before income taxes and cumulative effect of accounting change 98,633 140,624 281,597 Income taxes 191,306 50,625 101,375 ------------ ------------ ------------ (Loss) income before cumulative effect of accounting change (92,673) 89,999 180,222 Cumulative effect of accounting change, net of tax (21,141) -- -- ------------ ------------ ------------ Net (loss) income $ (113,814) $ 89,999 $ 180,222 ============ ============ ============ (Loss) earnings per share: Before cumulative effect of accounting change $ (1.46) $ 1.37 $ 2.56 Cumulative effect of accounting change, net of tax (.33) -- -- ------------ ------------ ------------ (Loss) earnings per share $ (1.79) $ 1.37 $ 2.56 ============ ============ ============ (Loss) earnings per share - assuming dilution $ (1.79) $ 1.37 $ 2.53 ============ ============ ============ Average number of shares outstanding 63,646,405 65,591,798 70,345,980

See notes to consolidated financial statements. 26 27 CONSOLIDATED STATEMENT OF FINANCIAL POSITION February 28, 2001 and February 29, 2000 Thousands of dollars

ASSETS 2001 2000 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 51,691 $ 61,010 Trade accounts receivable, less allowances of $184,799 and $136,037 respectively (principally for sales returns) 387,534 430,825 Inventories 365,221 249,433 Deferred and refundable income taxes 190,241 99,709 Prepaid expenses and other 211,049 259,707 ------------ ------------ Total current assets 1,205,736 1,100,684 GOODWILL - NET 229,802 149,437 OTHER ASSETS 799,348 820,447 PROPERTY, PLANT AND EQUIPMENT - NET 477,188 447,415 ------------ ------------ $ 2,712,074 $ 2,517,983 ============ ============

27 28

LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 ------------ ------------ CURRENT LIABILITIES Debt due within one year $ 378,904 $ 109,694 Accounts payable and accrued liabilities 304,063 213,180 Accrued compensation and benefits 89,936 84,456 Dividends payable 12,732 25,808 Income taxes 192,936 13,090 Other current liabilities 132,710 136,260 ------------ ------------ Total current liabilities 1,111,281 582,488 LONG-TERM DEBT 380,124 442,102 OTHER LIABILITIES 146,187 195,985 DEFERRED INCOME TAXES 27,292 44,997 SHAREHOLDERS' EQUITY Common shares - par value $1: Class A - 71,739,574 shares issued less 12,879,781 Treasury shares in 2001 and 71,736,804 shares issued less 11,863,921 Treasury shares in 2000 58,860 59,873 Class B - 6,066,096 shares issued less 1,437,283 Treasury shares in 2001 and 6,066,096 shares issued less 1,418,762 Treasury shares in 2000 4,629 4,647 Capital in excess of par value 286,054 304,946 Treasury stock (447,127) (445,758) Accumulated other comprehensive loss (58,179) (27,572) Retained earnings 1,202,953 1,356,275 ------------ ------------ Total shareholders' equity 1,047,190 1,252,411 ------------ ------------ $ 2,712,074 $ 2,517,983 ============ ============

See notes to consolidated financial statements. 28 29 CONSOLIDATED STATEMENT OF CASH FLOWS Years ended February 28 or 29, 2001, 2000 and 1999 Thousands of dollars

2001 2000 1999 ----------- ----------- ----------- OPERATING ACTIVITIES: Net (loss) income $ (113,814) $ 89,999 $ 180,222 Adjustments to reconcile to net cash provided by operating activities: Cumulative effect of accounting change, net of tax 21,141 -- -- Write-down of equity investment 32,554 -- -- Non-recurring items -- 30,704 5,544 Depreciation and amortization 98,057 76,600 74,783 Deferred income taxes 61,227 54,248 (8,940) Changes in operating assets and liabilities, net of effects of acquisitions: Decrease (increase) in trade accounts receivable 29,201 (35,883) (10,450) (Increase) decrease in inventories (46,587) 11,655 17,809 Increase in other current assets (67,292) (57,261) (3,271) Decrease (increase) in deferred costs - net 4,110 (5,640) (65,588) Increase (decrease) in accounts payable and other liabilities 87,256 (689) 24,211 Other - net 3,947 4,786 (3,052) ----------- ----------- ----------- Cash Provided by Operating Activities 109,800 168,519 211,268 INVESTING ACTIVITIES: Business acquisitions (179,993) (65,947) (52,957) Property, plant and equipment additions (74,382) (50,753) (60,950) Proceeds from sale of fixed assets 22,294 1,490 2,522 Investment in corporate-owned life insurance 181 2,746 18,413 Other 33,944 (25,183) 8,040 ----------- ----------- ----------- Cash Used by Investing Activities (197,956) (137,647) (84,932) FINANCING ACTIVITIES: Increase in long-term debt -- 1,076 317,096 Reduction of long-term debt (80,431) (16,397) (22,669) Increase (decrease) in short-term debt 257,541 81,097 (158,657) Sale of stock under benefit plans -- 1,171 18,981 Purchase of treasury shares (45,530) (130,151) (131,745) Dividends to shareholders (52,743) (51,213) (52,410) ----------- ----------- ----------- Cash Provided (Used) by Financing Activities 78,837 (114,417) (29,404) ----------- ----------- ----------- (DECREASE) INCREASE IN CASH AND EQUIVALENTS (9,319) (83,545) 96,932 Cash and Equivalents at Beginning of Year 61,010 144,555 47,623 ----------- ----------- ----------- Cash and Equivalents at End of Year $ 51,691 $ 61,010 $ 144,555 =========== =========== ===========

See notes to consolidated financial statements. 29 30 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended February 28 or 29, 2001, 2000 and 1999 Thousands of dollars except per share amounts

Common Shares Capital in Shares Deferred -------------------------- Excess of Treasury Held In Compensation Class A Class B Par Value Stock Trust Plans ----------- ----------- ---------- --------- -------- ------------ BALANCE MARCH 1, 1998 $ 66,904 $ 4,278 $290,820 $(200,380) -- -- Net income Other comprehensive income: Foreign currency translation adjustment Unrealized gain on available-for-sale securities (net of tax of $3,360) Comprehensive income Issuance of shares to trust $(20,480) $20,480 Cash dividends - $0.94 per share Exchange of shares 40 (40) Sale of shares under benefit plans, including tax benefits 395 574 13,033 8,403 Purchase of treasury shares (2,906) (162) (128,677) Sale of treasury shares 10 233 162 ----------- ----------- -------- --------- -------- ------- BALANCE FEBRUARY 28, 1999 64,433 4,660 304,086 (320,492) (20,480) 20,480 Net income Other comprehensive loss: Foreign currency translation adjustment Unrealized loss on available-for-sale securities (net of tax of $1,131) Comprehensive income Cash dividends - $0.80 per share Exchange of shares 23 (23) Sale of shares under benefit plans, including tax benefits 20 2 826 122 Purchase of treasury shares (4,603) (6) (125,556) Sale of treasury shares 14 34 168 ----------- ----------- -------- --------- -------- ------- BALANCE FEBRUARY 29, 2000 59,873 4,647 304,946 (445,758) (20,480) 20,480 Net loss Other comprehensive loss: Foreign currency translation adjustment Unrealized loss on available-for-sale securities (net of tax of $129) -- Comprehensive loss Cash dividends - $0.62 per share Exchange of shares 1 (1) Sale of shares under benefit plans, including tax benefits 3 24 Purchase of treasury shares (2,220) (24) (43,287) Sale of treasury shares 3 7 202 Shares issued in acquisition 1,200 (18,916) 41,716 ----------- ----------- -------- --------- -------- ------- BALANCE FEBRUARY 28, 2001 $ 58,860 $ 4,629 $286,054 $(447,127) $(20,480) $20,480 =========== =========== ======== ========= ======== =======

Accumulated Other Comprehensive Retained (Loss) Income Earnings Total -------------- ----------- ----------- BALANCE MARCH 1, 1998 $(23,437) $ 1,207,032 $ 1,345,217 Net income 180,222 180,222 Other comprehensive income: Foreign currency translation adjustment (6,819) (6,819) Unrealized gain on available-for-sale securities (net of tax of $3,360) 6,691 6,691 ------------ Comprehensive income 180,094 Issuance of shares to trust Cash dividends - $0.94 per share (65,935) (65,935) Exchange of shares Sale of shares under benefit plans, including tax benefits (3,830) 18,575 Purchase of treasury shares (131,745) Sale of treasury shares 405 -------- ----------- ----------- BALANCE FEBRUARY 28, 1999 (23,565) 1,317,489 1,346,611 Net income 89,999 89,999 Other comprehensive loss: Foreign currency translation adjustment (1,744) (1,744) Unrealized loss on available-for-sale securities (net of tax of $1,131) (2,263) (2,263) ----------- Comprehensive income 85,992 Cash dividends - $0.80 per share (51,213) (51,213) Exchange of shares Sale of shares under benefit plans, including tax benefits 970 Purchase of treasury shares (130,165) Sale of treasury shares 216 -------- ----------- ----------- BALANCE FEBRUARY 29, 2000 (27,572) 1,356,275 1,252,411 Net loss (113,814) (113,814) Other comprehensive loss: Foreign currency translation adjustment (30,350) (30,350) Unrealized loss on available-for-sale securities (net of tax of $129) (257) (257) ----------- Comprehensive loss (144,421) Cash dividends - $0.62 per share (39,407) (39,407) Exchange of shares Sale of shares under benefit plans, including tax benefits 27 Purchase of treasury shares (45,531) Sale of treasury shares (101) 111 Shares issued in acquisition 24,000 -------- ----------- ----------- BALANCE FEBRUARY 28, 2001 $(58,179) $ 1,202,953 $ 1,047,190 ======== =========== ===========

See notes to consolidated financial statements. 30 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended February 28 or 29, 2001, 2000 and 1999 Thousands of dollars except per share amounts NOTE A - SIGNIFICANT ACCOUNTING POLICIES Consolidation: The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany accounts and transactions are eliminated. The Corporation's subsidiary, AmericanGreetings.com, Inc., is consolidated on a two-month lag corresponding with its fiscal year-end of December 31. Reclassifications: Certain amounts in the prior year financial statements have been reclassified to conform with the 2001 presentation. 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. Cash Equivalents: The Corporation considers all highly liquid instruments purchased with a maturity of less than three months to be cash equivalents. 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 I. 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, France, Mexico, South Africa, Malaysia, Hong Kong and Singapore. Sales to the Corporation's five largest customers accounted for approximately 29%, 33% and 32% of net sales in 2001, 2000 and 1999, respectively. Sales to one customer accounted for 10% of net sales in 2001 and 2000. 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. 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 the majority of the domestic inventories. The foreign subsidiaries principally use the first-in, first-out method. Display material and factory supplies are carried at average cost. 31 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 Operations. The related interest expense, which approximates amounts paid, was $26,120, $40,564 and $54,670 in 2001, 2000 and 1999, respectively. Goodwill: Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired and is amortized on a straight-line basis over a period of 40 years for goodwill associated with the social expression product segment and 15 years for goodwill associated with all other businesses. Accumulated amortization of goodwill at February 28, 2001 and February 29, 2000 was $34,708 and $25,908, respectively. Goodwill is reviewed annually for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of " (SFAS No. 121). Impairment losses are recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. Translation of Foreign Currencies: Asset and liability accounts are translated into U.S. dollars using exchange rates in effect at the date of the consolidated balance sheet; revenue and expense accounts are translated at average monthly exchange rates. Translation adjustments are reflected as a component of shareholders' equity. For subsidiaries operating in highly inflationary economies, both historical and current exchange rates are used in translating balance sheet accounts, and translation adjustments are included in net income. 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 and equipment and fixtures over 3 to 20 years. Property, plant and equipment are reviewed annually for impairment in accordance with SFAS No. 121. Revenue Recognition: Except for seasonal cards, sales are recorded by the Corporation upon shipment of products to non-related retailers and upon the sale of products at Corporation-owned retail locations. Sales of seasonal cards to non-related retailers are recognized at the approximate date the product is received by the customer. Seasonal cards are sold with the right of return on unsold merchandise. The Corporation provides for estimated returns of seasonal cards when those products are shipped to non-related retailers. Accrual rates utilized for establishing estimated returns reserves have approximated actual returns experience. 32 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In December 1999, the Securities and Exchange Commission 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. Under the new accounting method, the Corporation recognizes revenue on these seasonal shipments at the approximate date the merchandise is received by the customer and not upon shipment from the distribution facility. Customer receipt is a more preferable method of recording revenue due to the large volumes of seasonal product shipment activity and the time required to achieve customer-requested delivery dates. The implementation of the change has been accounted for as a change in accounting principle and applied cumulatively as if the change occurred at March 1, 2000. The effect of the change was a one-time non-cash reduction to the Corporation's earnings of $21,141 (net of tax of $12,564) or approximately $0.33 per share, which is included in operations for the year ended February 28, 2001. The Corporation recognized approximately $44,400 in net sales that are included in the cumulative effect adjustment as of March 1, 2000. Had this change been adopted effective March 1, 1999, net sales and earnings before the cumulative effect of this accounting change in 2000 would not have been materially impacted. Shipping and Handling Fees and Costs: The Corporation classifies shipping and handling fees as part of selling, distribution and marketing expenses. Shipping and handling costs were approximately $154,000, $116,900 and $107,000 in 2001, 2000 and 1999, respectively. Advertising Expense: Advertising costs are expensed as incurred. Advertising expense was $61,610, $76,879 and $67,369 in 2001, 2000 and 1999, respectively. Other Expense - Net: In 2001, other expense - net included $32,554 related to the write-down of the Corporation's investment in Egreetings Network, Inc. to $0.85 per share and a gain of $8,400 on the sale of a building in Canada. In 2000, other expense - net included costs to convert the Corporation's computer systems to be Year 2000 compliant. In the years presented, other expense-net also included amortization of goodwill, foreign exchange gains and losses, gains and losses on asset disposals, and royalty and interest income. 33 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes: Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Stock-Based Compensation: The Corporation has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options. Because the exercise price of the Corporation's employee 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 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". New Pronouncements: In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. This Statement, which establishes new accounting and reporting standards for derivative financial instruments, along with its amendments SFAS No. 137 and SFAS No. 138, will become effective for the Corporation for 2002. The Corporation has evaluated the effects of these statements on its accounting and reporting policies, and the adoption of the statements will not have a material effect on the Corporation's consolidated financial statements. 34 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE B - ACQUISITIONS On March 9, 2000, the Corporation completed its acquisition of Gibson Greetings, Inc. ("Gibson") for a cash price of $10.25 per share. Gibson distributed individual relationship communication products, including greeting cards, gift wrap, party goods and licensed products. E-mail greetings featuring Gibson content are available through Egreetings Network, Inc., in which Gibson held a minority equity interest. The acquisition has been accounted for by the purchase method of accounting, and accordingly, the consolidated statements of operations include the results of Gibson beginning with the first quarter of fiscal 2001. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by the Corporation's management based on information currently available and on current assumptions as to future operations. For financial statement purposes, the excess of cost over net assets acquired is amortized by the straight-line method over 40 years. A summary of the assets acquired and liabilities assumed in the acquisition follows: Estimated fair values: Assets acquired $ 296,086 Liabilities assumed (165,065) Excess of cost over net assets acquired 49,288 -------------- Purchase price 180,309 Less cash acquired 10,147 -------------- Net cash paid (including $30,000 paid in prior fiscal year) $ 170,162 ============== The acquisition of Gibson was primarily financed through short-term borrowings; however, the Corporation will continue to evaluate long-term financing options. As a result of the acquisition of Gibson, 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. Generally accepted accounting principles require that these acquisition integration expenses, which are not associated with the generation of future revenues and have no future economic benefit, be reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. An additional requirement is that acquisition integration expenses which are associated with the generation of future revenues 35 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE B - ACQUISITIONS and have future economic benefit, and those associated with integrating Gibson operations into the Corporation's locations, must be recorded as expense. The components of the acquisition integration liabilities included in the purchase price allocation for Gibson follow:

Original Balance Remaining at Costs Utilized February 28, 2001 ----------------- ----------------- ---------------------------- Facility obligations $ 59,483 $ 5,649 $ 53,834 Workforce reductions 11,405 10,084 1,321 Other 19,363 10,973 8,390 ----------------- ----------------- ---------------------------- $ 90,251 $ 26,706 $ 63,545 ================= ================= ============================

The acquisition integration liabilities are based on the Corporation's integration plan which focuses on distribution facility rationalization. Unaudited pro forma results of operations for the twelve month period ended February 29, 2000, as if the Corporation and Gibson had been combined as of the beginning of that period, follow. Consolidated results for the year ended February 28, 2001, as reported, include the results of Gibson for the entire period. The pro forma results include estimates and assumptions which the Corporation's management believes are reasonable. However, the pro forma results do not include any cost savings or other effects of the planned integration of the Corporation and Gibson, and are not necessarily indicative of the results which would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future. The pro forma results for the twelve months ended February 29, 2000 include a charge recorded by Gibson of approximately $23,000 to write down the inventory and related assets for one of its operations.

Pro forma Twelve months ended February 29, 2000 ----------------------- Net sales $2,521,663 Net income $51,104 Earnings per share and earnings per share assuming dilution $0.78

On July 13, 2000, the Corporation completed its acquisition of CPS Corporation ("CPS"), for a cash price of $31,000 plus 1,200,000 shares of the Corporation's common stock. CPS is a supplier of gift wrap and decorative packaging. 36 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - NON-RECURRING ITEMS AND SPECIAL CHARGES During the quarter ended February 29, 2000, the Corporation recorded a restructuring charge of $6,126 ($4,849 net of tax, or earnings per share of $0.08) related to various foreign operations. The primary component of this charge was for the rationalization of various warehouse, distribution and manufacturing facilities in the United Kingdom. The balance of the charge is composed of costs associated with the integration of Mexican manufacturing in the United States and the realignment of various business functions in Australia. During the second quarter ended August 31, 1999, the Corporation recorded a restructuring charge of $32,747. The primary components of this charge were costs associated with the shutdown of the Corporation's Canadian manufacturing and distribution operations, including employee severance and benefit termination costs and the costs of closing down the facilities used for those operations. In addition, the Corporation recorded a charge of $7,682 during the period to write down inventory in the Canadian operations. This amount is classified as material, labor and other production costs. The total impact of the restructuring and inventory charges net of tax was $24,224, or $0.36 per share. During the quarter ended November 30, 1998, the Corporation recorded a restructuring charge of $13,925 ($8,342 net of tax, or earnings per share of $0.12). The primary components of this charge were employee severance and termination benefit costs. The balance of the charge is comprised of costs associated with exiting the Corporation's kiosk business and lease exit costs due to the closure of certain sales offices. 37 38 The following table summarizes the provisions, payments and remaining reserves associated with the restructure charges recorded in 1999 through 2001.

Facility Kiosk Termination Shut-Down Exit Lease Exit Other Benefits Costs Costs Costs Costs Total -------- -------- -------- -------- -------- -------- Provision in 1999 $ 8,644 $ 4,618 $ 663 $ 13,925 Cash expenditures (5,019) (5,019) Non-cash charges (3,362) (3,362) -------- -------- -------- -------- Balance February 28, 1999 3,625 1,256 663 5,544 Provision in 2000 31,018 $ 4,634 $ 2,108 1,113 38,873 Activity relating to 1999 ------------------------- Provision: ---------- Cash expenditures (3,645) (620) (469) (4,734) Non-cash charges (588) (588) Change in estimate 162 (162) Activity relating to 2000 ------------------------- Provision: -------- Cash expenditures (1,646) (454) (930) (3,030) Non-cash charges (4,358) (99) (162) (519) (5,138) -------- -------- -------- -------- -------- -------- Balance February 29, 2000 25,156 4,081 48 1,016 626 30,927 Activity relating to 1999 ------------------------- Provision: -------- Cash expenditures (222) (222) Activity relating to 2000 ------------------------- Provision: ---------- Cash expenditures (19,152) (514) (13) (12) (22) (19,713) Non-cash charges (2,334) (342) (2,676) Change in estimate 45 (35) (10) Impact of foreign currency exchange rate changes (419) (85) (70) (17) (591) -------- -------- -------- -------- -------- -------- Balance February 28, 2001 $ 5,408 $ 1,148 $ -- $ 934 $ 235 $ 7,725 ======== ======== ======== ======== ======== ========

At February 28, 2001 and February 29, 2000, $7,725 and $30,927, respectively, were included in accounts payable and accrued liabilities representing the portion of the restructuring charges not yet expended. 38 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE D - (LOSS) EARNINGS PER SHARE The following table sets forth the computation of (loss) earnings per share and (loss) earnings per share - assuming dilution:

2001 2000 1999 ---------- ---------- ---------- Numerator: Net (loss) income for earnings per share and earnings per share - assuming dilution $ (113,814) $ 89,999 $ 180,222 ========== ========== ========== Denominator (thousands): Denominator for earnings per share - weighted average shares outstanding 63,646 65,592 70,346 Effect of dilutive securities - stock options -- -- 758 ---------- ---------- ---------- Denominator for (loss) earnings per share - assuming dilution - adjusted weighted average shares outstanding 63,646 65,592 71,104 ========== ========== ========== (Loss) earnings per share $ (1.79) $ 1.37 $ 2.56 ========== ========== ========== (Loss) earnings per share - assuming dilution $ (1.79) $ 1.37 $ 2.53 ========== ========== ==========

Certain stock options have been excluded for the years ended February 28, 2001 and February 29, 2000 because they would have been antidilutive. NOTE E - COMPREHENSIVE (LOSS) INCOME Accumulated other comprehensive (loss) income consists of the following components:

Foreign Unrealized Gains Accumulated Currency (Losses) on Other Translation Available-For-Sale Comprehensive Adjustments Securities Loss ----------- ------------------ ------------- Balance at February 28, 1998 $ (23,437) $ (23,437) Other comprehensive (loss) income (6,819) $ 6,691 (128) ---------- ---------- ---------- Balance at February 28, 1999 (30,256) 6,691 (23,565) Other comprehensive loss (1,744) (2,263) (4,007) ---------- ---------- ---------- Balance at February 29, 2000 (32,000) 4,428 (27,572) Other comprehensive loss (30,350) (257) (30,607) ---------- ---------- ---------- Balance at February 28, 2001 $ (62,350) $ 4,171 $ (58,179) ========== ========== ==========

Gross unrealized holding gains on available-for-sale securities as of February 28, 2001 and February 29, 2000 are $6,271 and $6,657, respectively. 39 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE F - INVENTORIES

2001 2000 ----------------- --------------- Raw material $ 49,408 $ 38,218 Work in process 33,370 27,099 Finished products 330,664 229,887 ----------------- --------------- 413,442 295,204 Less LIFO reserve 93,111 90,343 ----------------- --------------- 320,331 204,861 Display material and factory supplies 44,890 44,572 ----------------- --------------- $365,221 $249,433 ================= ===============

NOTE G - PROPERTY, PLANT AND EQUIPMENT 2001 2000 ----------------- --------------- Land $ 15,085 $ 14,589 Buildings 320,849 307,713 Equipment and fixtures 750,160 696,819 ----------------- --------------- 1,086,094 1,019,121 Less accumulated depreciation 608,906 571,706 ----------------- --------------- $477,188 $ 447,415 ================= ===============

40 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE H - DEFERRED COSTS Deferred costs relating to agreements with certain customers are charged to operations on a straight-line basis over the effective period of each agreement, generally three to six years. Deferred costs estimated to be charged to operations during the next year are classified with prepaid expenses and other. Total commitments under the agreements are capitalized as deferred costs and future payment commitments, if any, are recorded as liabilities when the agreements are consummated. At February 28, 2001 and February 29, 2000, deferred costs and future payment commitments are included in the following financial statement captions: 2001 2000 ----------------- --------------- Prepaid expenses and other $ 142,436 $ 200,517 Other assets 717,400 679,214 Other current liabilities (119,770) (118,250) Other liabilities (111,030) (163,865) ----------------- --------------- $ 629,036 $ 597,616 ================= =============== 41 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE I - LONG AND SHORT-TERM DEBT On July 27, 1998, the Corporation issued $300,000 of 30-year senior notes with a 6.10% coupon rate under its $600,000 shelf registration with the Securities and Exchange Commission. The majority of the proceeds were used to retire commercial paper and other short-term debt, with the remainder used for other general corporate purposes and short-term investments. The fair value of the Corporation's publicly traded debt, based on quoted market prices, was $214,500 and $267,000 at February 28, 2001 and February 29, 2000, respectively. On August 3, 2000, the Corporation amended its multi-currency credit facility that provides liquidity and working capital financing for the Corporation and its subsidiaries in the United States, Canada, the United Kingdom, Australia, New Zealand and France. The aggregate availability under this facility is approximately $719,000 of which approximately $660,000 is available at February 28, 2001. The United States portion and one-half of the Canadian portion of the facilities, totaling $584,172, mature on August 2, 2001. The balance of the facility matures on August 2, 2005. The United States portion and one half of the Canadian portion of the facility are annually renewable for additional 364-day periods and are convertible to term loans with a maturity of August 2, 2005. A facility fee is due on the aggregate amount of the facility and can vary with the Corporation's debt rating. At February 28, 2001, the facility fee is 0.125% for the non-364 day portion of the facility and 0.100% for the 364-day portion. The borrowings of the Corporation in Canada consist of commercial paper. At February 28, 2001, commercial paper borrowings were $11,065, which are classified as long-term. The commercial paper borrowings are supported by the multi-currency credit facility described above. The Corporation's subsidiary in South Africa has credit agreements permitting borrowings of up to $5,715. At February 28, 2001, the amount outstanding under this foreign revolving credit facility is classified as long-term. All of the Corporation's revolving credit and term loan agreements provide for various borrowing alternatives in their respective currencies with interest rates generally ranging from 5% to 9% for amounts borrowed as of February 28, 2001. At February 28, 2001 and February 29, 2000, debt due within one year consists of the following:

2001 2000 ------------------- ----------------- Current maturities of long-term debt $ 664 $ 1,016 Foreign revolving credit facilities -- 1,263 ------------------- ----------------- Aggregate current maturities 664 2,279 Commercial paper 359,541 101,716 Other short-term debt 18,699 5,699 ------------------- ----------------- $ 378,904 $ 109,694 =================== =================

42 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE I - LONG AND SHORT-TERM DEBT (CONTINUED) At February 28, 2001 and February 29, 2000, long-term debt consists of the following:

2001 2000 --------------- --------------- Revolving credit, commercial paper and term loan agreements $ 80,484 $132,524 Notes payable 299,996 311,294 Other 308 563 --------------- --------------- 380,788 444,381 Less current maturities 664 2,279 --------------- --------------- $380,124 $442,102 =============== ===============

Aggregate maturities of long-term debt are as follows: 2002 $ 664 2003 590 2004 381 2005 265 2006 59,245 Thereafter 319,643 -------------- $ 380,788 ============== At February 28, 2001, the Corporation had credit arrangements to support the issuance of letters of credit in the amount of $41,102 with $29,481 of open credits outstanding. Interest paid on short-term and long-term debt was $54,637 in 2001, $34,051 in 2000 and $27,831 in 1999. The weighted average interest rate on short-term borrowings outstanding was 6.0% and 5.4% as of February 28, 2001 and February 29, 2000, respectively. 43 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE J - RETIREMENT PLANS The Corporation has a non-contributory profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. Contributions to the profit-sharing plan were $5,175, $11,858, and $22,687 for 2001, 2000 and 1999, respectively. The Corporation matches a portion of 401(k) employee contributions contingent upon meeting specified annual operating results goals. The Corporation's matching contributions were $0, $4,517, and $4,622 for 2001, 2000 and 1999, respectively. 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. The Corporation assumed Gibson's defined contribution plan that provided Gibson employees meeting certain eligibility requirements the ability to defer a portion of their salary subject to certain limitations. The plan was merged into the Corporation's profit sharing plan effective December 31, 2000. The Corporation paid certain administrative costs of the plan and made contributions to the plan during 2001 based upon a percentage of the employee's salary deferral. The Corporation's contributions totaled $170 during 2001. The Corporation also assumed the obligations and assets of Gibson's defined benefit pension plan (the Retirement Plan) which covered substantially all Gibson employees who met certain eligibility requirements. Benefits earned under the Retirement Plan have been frozen and participants no longer accrue any more benefits after December 31, 2000. The Corporation will contribute to the plan amounts sufficient to ensure the Retirement Plan meets funding requirements. Contributions are intended to provide for benefits earned to date as no additional benefits will be earned in the future. 44 45 The following table sets forth summarized information on Gibson's plans for the year ended February 28, 2001:

Defined Benefit Other Pension Postretirement Plan Benefits ----------- -------------- Change in benefit obligation: Benefit obligation at beginning of year $ -- $ -- Acquired business 95,540 3,034 Service cost -- 150 Interest cost 5,770 200 Participant contribution -- 234 Actuarial loss -- 624 Benefit payments (6,099) (404) ----------- ----------- Benefit obligation at end of year 95,211 3,838 Change in plan assets: Fair value of plan assets at beginning of year -- -- Fair value of plan assets of acquired business 84,080 -- Actual return on plan assets 7,967 -- Contributions -- 404 Benefit payments (6,099) (404) ----------- ----------- Fair value of plan assets at end of year 85,948 -- ----------- ----------- Funded (underfunded) status at end of year (9,263) (3,838) Unrecognized (gain) loss (2,109) 624 ----------- ----------- Accrued benefit cost $ (11,372) $ (3,214) =========== =========== Assumptions Discount rate 6.25% 7.25% Expected return on plan assets 7.25% N/A Health care cost trend rate -- 10% in 2002 decreasing 1% each year to 5%

45 46 Defined Benefit Other Pension Postretirement Plan Benefits ----------- -------------- Components of net periodic benefit cost for the year ended February 28, 2001: Service cost $ -- $ 150 Interest cost 5,770 200 Expected return on assets (5,858) -- ---------- ---------- Net periodic benefit cost $ (88) $ 350 ========== ========== Effect of a 1% increase in the health care cost trend rate on: Service cost plus interest cost $ 17 Accumulated postretirement benefit obligation 167 Effect of a 1% decrease in the health care cost trend rate on: Service cost plus interest cost $ (16) Accumulated postretirement benefit obligation (160) 46 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE K - 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 and service requirements. In addition, for retirements on or after January 2, 1992, the retiree must have been continuously enrolled for health care for a minimum of five years or since January 2, 1992. The plan is contributory, with retiree contributions adjusted periodically, and contains other cost-sharing features such as deductibles and coinsurance. The Corporation maintains a trust for the payment of retiree health care benefits. This trust is funded at the discretion of management.

2001 2000 ---------- ---------- Change in benefit obligation: Benefit obligation at beginning of year $ 80,452 $ 75,276 Service cost 2,252 2,327 Interest cost 6,449 5,637 Participant contributions 3,293 1,483 Actuarial losses 24,205 1,961 Benefit payments (6,634) (6,232) ---------- ---------- Benefit obligation at end of year 110,017 80,452 Change in plan assets: Fair value of plan assets at beginning of year 47,269 44,714 Actual return on plan assets 5,838 2,178 Contributions 9,120 6,609 Benefit payments (6,634) (6,232) ---------- ---------- Fair value of plan assets at end of year 55,593 47,269 ---------- ---------- Funded (underfunded) status at end of year (54,424) (33,183) Unrecognized loss 43,524 23,215 ---------- ---------- Accrued benefit cost $ (10,900) $ (9,968) ========== ==========

47 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE K - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)

2001 2000 ---------- ---------- Components of net periodic benefit cost: Service cost $ 2,252 $ 2,327 Interest cost 6,449 5,637 Expected return on plan assets (3,627) (3,441) Amortization of actuarial loss 1,685 1,784 ---------- ---------- Net periodic benefit cost $ 6,759 $ 6,307 ========== ========== Weighted average assumptions as of February 28 or 29: Discount rate 7.25% 7.50% Expected return on assets 8% 8% Health care cost trend rate 10% in 2002 5% decreasing 1% per year to 5% Effect of a 1% increase in health care cost trend rate on: Service cost plus interest cost $ 1,619 $ 1,522 Accumulated postretirement benefit obligation 17,314 13,642 Effect of a 1% decrease in health care cost trend rate on: Service cost plus interest cost $ (1,284) $ (1,202) Accumulated postretirement benefit obligation (14,015) (10,980)

48 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE L - LONG-TERM LEASES 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 or 29, 2001, 2000 and1999 follows:

2001 2000 1999 --------------- --------------- --------------- Gross rentals $71,479 $59,876 $58,616 Less sublease rentals 2,611 3,638 4,470 --------------- --------------- --------------- Net rental expense $68,868 $56,238 $54,146 =============== =============== ===============

At February 28, 2001, future minimum rental payments for noncancelable operating leases, net of aggregate future minimum noncancelable sublease rentals, follow: Gross Rentals: 2002 $ 53,414 2003 46,175 2004 27,596 2005 28,794 2006 24,385 Later years 65,471 --------------- 245,835 Sublease rentals (20,961) --------------- Net rentals $ 224,874 =============== 49 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE M - COMMON SHARES AND STOCK OPTIONS At February 28, 2001 and February 29, 2000, 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 Class B shares are granted to directors, officers and other key employees at the then-current market price. In general, subject to continuing employment, options become exercisable commencing one year after date of grant in four annual installments and expire over a period of not more than ten years from the date of grant. The options granted to non-employee directors become exercisable in either six installments over five years or in four installments over four years. The Corporation has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Corporation's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Corporation had accounted for its employee stock options issued subsequent to February 28, 1995 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model. 50 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE M - COMMON SHARES AND STOCK OPTIONS (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Corporation's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The pro forma information for stock options indicates an increase in net loss of $4,863 in 2001, and decreases in net income of $8,520 in 2000 and $3,248 in 1999. The pro forma information and related assumptions under the Black-Scholes method follow:

2001 2000 1999 ------------- ------------ ------------ Net (loss) income $ (118,677) $ 81,479 $ 176,974 (Loss) earnings per share $ (1.86) $ 1.24 $ 2.52 (Loss) earnings per share - assuming dilution $ (1.86) $ 1.24 $ 2.49 Assumptions: Risk-free interest rate 5.9% 5.4% 5.4% Dividend yield 5.4% 3.2% 1.6% Expected stock volatility 0.46 0.41 0.27 Expected life in years: Grant date to exercise date 7.7 5.7 5.6 Vest date to exercise date 2.4 2.4 2.4

51 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE M - COMMON SHARES AND STOCK OPTIONS (CONTINUED) Stock option transactions and prices are summarized as follow:

Number of Options Weighted-Average Exercise Price Per Share ----------------------------------- -------------------------------------------- Class A Class B Class A Class B --------------- ---------------- --------------------- ------------------ Options outstanding February 28, 1998 2,611,135 1,349,012 $ 27.58 $ 19.54 Granted 189,850 596 45.73 48.06 Exercised (395,754) (573,422) 25.54 9.07 Cancelled (127,200) (7,000) 30.25 26.13 --------------- ---------------- Options outstanding February 28, 1999 2,278,031 769,186 $ 29.18 $ 27.30 Granted 3,648,950 -- 23.81 -- Exercised (20,800) (2,000) 20.28 19.25 Cancelled (293,000) (1,000) 26.09 26.13 --------------- ---------------- Options outstanding February 29, 2000 5,613,181 766,186 $25.87 $27.32 Granted 775,500 -- 15.45 -- Exercised (1,600) -- 16.53 -- Cancelled (626,850) (76,500) 25.16 24.15 --------------- ---------------- Options outstanding February 28, 2001 5,760,231 689,686 $ 24.57 $ 27.67 =============== ================ Options exercisable at February 28 or 29 2001 2,469,531 689,686 $ 27.44 $ 27.74 2000 1,709,281 649,436 27.47 26.93 1999 1,235,331 490,936 26.23 26.23

The weighted average remaining contractual life of the options outstanding as of February 28, 2001 is 6.7 years. 52 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE M - COMMON SHARES AND STOCK OPTIONS (CONTINUED) Range of exercise prices for options outstanding:

Outstanding Exercisable ------------------------------------- ----------------------------------- Weighted- Weighted Weighted Average Average Average Remaining Exercise Price Optioned Exercise Optioned Exercise Contractual Ranges Shares Price Shares Price Life (Years) ------------------------------ ----------------- ---------------- --------------- --------------- ----------------- $ 8.50000 - 18.88000 727,000 $15.08151 19,300 $17.80052 9.33 19.12500 - 19.25000 345,600 19.24967 345,600 19.24967 0.96 19.81250 - 23.56250 2,783,400 23.50612 546,000 23.50002 7.56 23.68750 - 27.25000 846,092 26.38701 692,492 26.82114 5.11 27.50000 - 29.43750 126,887 28.42696 71,687 28.45861 6.33 29.50000 - 29.50000 1,224,842 29.50000 1,204,542 29.50000 5.57 29.87500 - 48.50000 373,146 38.46682 267,046 38.31815 6.39 50.00000 - 50.00000 16,000 50.00000 8,000 50.00000 7.33 50.25000 - 50.25000 6,800 50.25000 4,400 50.25000 6.75 51.62500 - 51.62500 150 51.62500 150 51.62500 7.34 ----------------- --------------- $8.50000 - $51.62500 6,449,917 3,159,217 ================= ===============

53 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE N - 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 products through various channels of distribution with mass retailers as the primary channel and is managed by geographic location. As permitted under Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," certain operating divisions have been aggregated into one reportable segment. These operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. AmericanGreetings.com is a web-based provider of greetings and other social communication content to consumers and web-based businesses. The Corporation's non-reportable operating segments include the design, manufacture and sale of promotional Christmas product, non-prescription reading glasses, educational materials and display fixtures; and the sale of both the Corporation's products and other products through retail stores. The Corporation evaluates segment performance based on earnings before foreign currency exchange gains or losses, interest income, interest expense and income taxes. Centrally incurred and managed costs and non-recurring items are not allocated back to the operating segments. The accounting policies of the reportable segments are the same as those described in Note A - Significant Accounting Policies, except those that are related to LIFO or applicable to only corporate items. Intersegment sales are recorded at wholesale prices. Intersegment sales and profits are eliminated in consolidation. All inventories resulting from intersegment sales are carried at cost. 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 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. 54 55 Operating Segment Information -----------------------------

Net Sales Earnings ------------------------------------------- ------------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- ----------- Social Expressions Products $ 1,981,772 $ 1,745,830 $ 1,832,784 $ 306,921 $ 340,332 $ 447,246 Intersegment items (85,659) (85,229) (80,578) (61,825) (59,763) (56,748) ----------- ----------- ----------- ----------- ----------- ----------- Net 1,896,113 1,660,601 1,752,206 245,096 280,569 390,498 AmericanGreetings.com 24,378 14,345 7,577 (36,065) (20,373) 3,794 Non-reportable segments 621,039 495,848 441,446 58,843 50,771 44,202 Non-recurring items -- -- -- -- (46,387) (13,925) Egreetings write down -- -- -- (32,554) -- -- Exchange rate adjustment (22,716) 4,442 4,477 (1,925) (4,004) 403 Unallocated items - net -- -- -- (134,762) (119,952) (143,375) ----------- ----------- ----------- ----------- ----------- ----------- Consolidated $ 2,518,814 $ 2,175,236 $ 2,205,706 $ 98,633 $ 140,624 $ 281,597 =========== =========== =========== =========== =========== ===========

Assets Depreciation and Amortization ----------------------------------------- ---------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- ----------- Social Expressions Products $ 1,840,771 $ 1,717,982 $ 1,676,314 $ 47,663 $ 44,207 $ 45,910 AmericanGreetings.com 48,563 31,663 12,507 22,773 6,385 2,154 Non-reportable segments 418,714 266,080 262,236 24,271 22,777 25,921 Unallocated and intersegment items 454,829 505,399 469,724 3,852 3,136 960 Exchange rate adjustment (50,803) (3,141) (1,453) (502) 95 (162) ----------- ----------- ----------- ----------- ----------- ----------- Consolidated $ 2,712,074 $ 2,517,983 $ 2,419,328 $ 98,057 $ 76,600 $ 74,783 =========== =========== =========== =========== =========== ===========

Capital Expenditures ------------------------------------- 2001 2000 1999 ---------- --------- ---------- Social Expressions Products $56,811 $25,666 $43,907 AmericanGreetings.com 4,741 3,762 401 Non-reportable segments 14,546 21,103 17,152 Unallocated and intersegment items - - - Exchange rate adjustment (1,716) 222 (510) ---------- --------- ---------- Consolidated $74,382 $50,753 $60,950 ========== ========= ==========

Other Information ----------------- Product Information Net Sales -------------------------------------------- 2001 2000 1999 ------------ ----------- ------------ Everyday greeting cards $1,063,576 $976,922 $1,051,374 Seasonal greeting cards 513,464 438,921 450,611 Gift wrapping and wrap 395,639 301,131 301,517 accessories All other 546,135 458,262 402,204 ------------ ----------- ------------ Consolidated $2,518,814 $2,175,236 $2,205,706 ============ =========== ============

Geographic Information Net Sales Fixed Assets - Net ------------------------------------------- ------------------------------------------- 2001 2000 1999 2001 2000 1999 ------------ ----------- ----------- ----------- ------------ ------------ United States $2,087,090 $1,751,686 $1,819,857 $416,447 $371,622 $363,801 Foreign 431,724 423,550 385,849 60,741 75,793 71,005 ------------ ----------- ----------- ----------- ------------ ------------ Consolidated $2,518,814 $2,175,236 $2,205,706 $477,188 $447,415 $434,806 ============ =========== =========== =========== ============ ============

55 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE O - INCOME TAXES Income (loss) before income taxes and cumulative effect of accounting change:

2001 2000 1999 ---------------- --------------- ---------------- United States $ 87,231 $ 135,039 $ 300,411 Foreign 11,402 5,585 (18,814) ---------------- --------------- ---------------- $ 98,633 $ 140,624 $ 281,597 ================ =============== ================

Income taxes (benefit) have been provided as follows:

2001 2000 1999 ---------------- --------------- ---------------- Current: Federal $ 212,138 $ 3,029 $ 111,736 Foreign (2,799) (9,082) (18,423) State and local 21,821 1,197 16,977 ---------------- --------------- ---------------- 231,160 (4,856) 110,290 Deferred (principally federal) (39,854) 55,481 (8,915) ---------------- --------------- ---------------- $ 191,306 $ 50,625 $ 101,375 ================ =============== ================

Significant components of the Corporation's deferred tax assets and liabilities at February 28, 2001 and February 29, 2000 are as follows:

2001 2000 ---------------- ---------------- Deferred tax assets: Employee benefit and incentive plans $ 20,742 $ 36,781 Sales returns 11,225 2,708 Deferred capital loss carryforward 11,394 - Inventory costing 24,698 7,911 Lease buyout 35,096 15,785 Other 99,334 49,615 ---------------- ---------------- 202,489 112,800 Valuation allowance (20,861) (9,467) ---------------- ---------------- Total deferred tax assets 181,628 103,333 Deferred tax liabilities: Depreciation 30,056 44,969 Other 25,567 29,374 ---------------- ---------------- Total deferred tax liabilities 55,623 74,343 ---------------- ---------------- Net deferred tax assets $ 126,005 $ 28,990 ================ ================

The increase in the valuation allowance was primarily due to an increase in a capital loss carryforward. 56 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE O - INCOME TAXES (CONTINUED) Reconciliation of income tax expense using the statutory rate and actual income tax exposure is as follows:

2001 2000 1999 --------------- ------------ -------------- Income tax at statutory rate $ 34,522 $49,218 $ 98,559 State and local income taxes, net of federal tax benefit 3,286 5,346 10,419 Corporate-owned life insurance investments (1,238) 75 (8,166) Contested liability - COLI 143,581 - - Change in valuation allowance 11,394 - - Foreign differences (6,763) (2,953) - Other 6,524 (1,061) 563 --------------- ------------ -------------- Income tax at effective tax rate $191,306 $50,625 $101,375 =============== ============ ==============

Income taxes (refunded) paid were $(18,174) in 2001, $19,821 in 2000 and $102,363 in 1999. Deferred taxes have not been provided on approximately $16,517 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. At February 28, 2001, the Corporation had approximately $28,303 of foreign operating loss carryforwards, of which $16,546 have no expiration dates and $11,757 have expiration dates ranging from 2002 through 2012. Included in income tax expense was a charge for approximately $143,000 for potential tax exposure for the fiscal years ended 1992 through 1999 relating to the Corporation's corporate-owned life insurance program (COLI). This charge represents the effect of proposed adjustments by the IRS for the disallowance of certain deductions related to this insurance program. The Corporation believes that it has fully complied with the tax law as it related to its COLI program and plans to vigorously contest the proposed adjustments or any subsequent assessments. 57 58 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, 2001 and February 29, 2000:

Quarter Ended ----------------------------------------------------------------------- May 31 Aug 31 Nov 30 Feb 28 --------------- -------------- -------------- --------------- Fiscal 2001 ----------- Net sales $ 595,741 $ 493,732 $ 766,095 $ 663,246 Gross profit 392,417 298,621 410,237 418,268 Cumulative effect of accounting change, net of tax 21,141 -- -- -- Net income (loss) 17,365 (35,505) 32,015 (127,689) Earnings (loss) per share 0.27 (0.55) 0.50 (2.01) Earnings (loss) per share - assuming dilution 0.27 (0.55) 0.50 (2.01) Quarter Ended ----------------------------------------------------------------------- May 31 Aug 31 Nov 30 Feb 29 --------------- -------------- -------------- --------------- Fiscal 2000 ----------- Net sales $ 458,757 $ 477,783 $ 623,356 $ 615,340 Gross profit 298,992 288,962 372,583 405,352 Non-recurring charge -- 32,747 -- 6,126 Net income (loss) 10,847 (26,298) 53,882 51,568 Earnings (loss) per share 0.16 (0.39) 0.81 0.79 Earnings (loss) per share - assuming dilution 0.16 (0.39) 0.81 0.79

58 59 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders American Greetings Corporation We have audited the accompanying consolidated statement of financial position of American Greetings Corporation as of February 28, 2001 and February 29, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended February 28, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a) 3. 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 auditing standards generally accepted in the 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, 2001 and February 29, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 28, 2001, in conformity with accounting principles generally accepted in the United States. 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. As discussed in Note A to the consolidated financial statements, effective March 1, 2000, the Corporation changed its method of accounting for certain shipments of seasonal product. /s/ Ernst & Young LLP Cleveland, Ohio March 27, 2001 59 60 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements with the Corporation's independent auditors on accounting or financial disclosure matters within the three year period ended February 28, 2001, or in any period subsequent to such date. PART III The Corporation hereby incorporates by reference the information called for by Part III of Form 10-K from the Corporation's Notice of Annual Meeting of Shareholders to be held June 22, 2001, and related Proxy Statement to be filed with the Securities and Exchange Commission on May 15, 2001. (Next item is Part IV) 60 61 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements -------------------- Included in Part II of this report: Consolidated Statement of Operations - Years ended February 28 or 29, 2001, 2000 and 1999 Consolidated Statement of Financial Position - February 28, 2001 and February 29, 2000 Consolidated Statement of Cash Flows - Years ended February 28 or 29, 2001, 2000 and 1999 Consolidated Statement of Shareholders' Equity - Years ended February 28 or 29, 2001, 2000 and 1999 Notes to Consolidated Financial Statements - Years ended February 28 or 29, 2001, 2000 and 1999 Quarterly Results of Operations (Unaudited) Report of Independent Auditors 2. Exhibits required by Item 601 of Regulation S-K: ------------------------------------------------ (3) Articles of Incorporation and By-laws (i) Amended Articles of Incorporation of the Registrant This Exhibit has been previously filed as an Exhibit to the Registrant's 10-K Annual Report for the Fiscal year ended February 28, 1999, and is incorporated herein by reference. (ii) Amended Regulations of the Registrant This Exhibit has been previously filed as an Exhibit to the Registrant's 10-K Annual Report for the Fiscal year ended February 28, 1999, and is incorporated herein by reference. 61 62 PART IV - Continued (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 Registrant's 10-K Annual Report for the Fiscal year ended February 28, 1999, and is incorporated herein by reference. (ii) Credit Agreement dated as of August 7, 1998 This Exhibit has been previously filed as an Exhibit to the Registrant's 10-K Annual Report for the Fiscal year ended February 28, 1999, and is incorporated herein by reference. (iii) Amended and Restated Credit Agreement dated August 3, 2000 (iv) Second Amended and Restated Credit Agreement dated April 30, 2001 (10) Material Contracts (i) (A) (i) Officers' contracts * This Exhibit has been previously filed as an Exhibit to the Registrant's Form 10-K Annual Report for the fiscal year ended February 28, 1999, and is incorporated herein by reference. (ii) (A) (i) Shareholders Agreement dated November 19, 1984 * This Exhibit has been previously filed as an Exhibit to the Registrant's Form 10-K Annual Report for the fiscal year ended February 28, 1997, and is incorporated herein by reference. (ii) Executive Bonus Plan * This Exhibit has been previously filed as an Exhibit to the Registrant's Form 10-K Annual Report for the fiscal year ended February 28, 1997, and is incorporated herein by reference. 62 63 PART IV - Continued (iii) Executive Incentive Compensation Plan (as Amended and Restated as at March 6, 1989) * This Exhibit has been previously filed as an Exhibit to the Registrant's Form 10-K Annual Report for the fiscal year ended February 28, 1997, and is incorporated herein by reference. (iv) Executive Deferred Compensation Plan * This Exhibit has been previously filed as an Exhibit to the Registrant's Form 10-K Annual Report for the Fiscal Year ended February 28, 1999, and is incorporated herein by reference. (v) 1982 Incentive Stock Option Plan * This Exhibit has been previously filed as an Exhibit to the Registrant's Form S-8 Registration Statement (Registration No. 2-84911) dated July 1, 1983, and is incorporated herein by reference. (vi) 1985 Incentive Stock Option Plan * This Exhibit has been previously filed as an Exhibit to the Registrant's Form S-8 Registration Statement (Registration No. 33-975) dated November 7, 1985, and is incorporated herein by reference. (vii) Supplemental Executive Retirement Plan * This Exhibit has been previously filed as an Exhibit to the Registrant's Form 10-K Annual Report for the Fiscal Year ended February 28, 1999, and is incorporated herein by reference. (viii) 1987 Class B Stock Option Plan This Exhibit has been previously filed as an Exhibit to the Registrant's Form S-8 Registration Statement (Registration No. 33-16180) dated July 31, 1987, and is incorporated herein by reference. (ix) Stock Option Agreement with Morry Weiss dated January 25,1988 * This Exhibit has been previously filed as an Exhibit to the Registrant's Form 10-K Annual Report for the fiscal year ended February 28, 1997, and is incorporated herein by reference. 63 64 PART IV - Continued (x) Loan Agreement with Edward Fruchtenbaum dated March 1,1990 * This Exhibit has been previously filed as an Exhibit to the Registrant's Form 10-K Annual Report for the fiscal year ended February 28, 1997, and is incorporated herein by reference. (xi) 1992 Stock Option Plan * This Exhibit has been previously filed as an Exhibit to the Registrant's Form S-8 Registration Statement (Registration No. 33-58582) dated February 22,1993, and is incorporated herein by reference. (xii) CEO and Named Executive Officers Compensation Plan (xiii) 1995 Director Stock Plan * This Exhibit has been previously filed as an Exhibit to the Registrant's Form S-8 Registration Statement (Registration No. 33-61037) dated July 14, 1995, and is incorporated herein by reference. (xiv) 1996 Employee Stock Option Plan * This Exhibit has been previously filed as an Exhibit to the Registrant's Form S-8 Registration Statement (Registration No. 33-08123) dated July 15, 1996, and is incorporated herein by reference. (xv) 1997 Equity and Performance Incentive Plan * This Exhibit has been previously filed as an Exhibit to the Registrant's Form 10-K Annual Report for the fiscal year ended February 28, 1997, and is incorporated herein by reference. (xvi) 1997 Equity and Performance Incentive Plan, as amended* This Exhibit has been previously filed as an Exhibit to the Registrant's Form S-8 Registration Statement (Registration No. 333-41912) dated July 21, 2000, and is incorporated herein by reference. (iii) (A) (i) Agreement to defer stock option gains with Morry Weiss dated December 15, 1997 * This Exhibit has been previously filed as an Exhibit to the Registrant's 10-K Annual Report for the Fiscal year ended February 28, 1997, and is incorporated herein by reference. (21) Subsidiaries of the Registrant 64 65 PART IV - Continued (23) Consent of Independent Auditors Executive Compensation Plans and Arrangements The Corporation's executive compensation plans and arrangements are listed under Exhibit 10 hereof and marked by an asterisk (*). (b) Reports on Form 8-K On March 24, 2000, the Corporation filed Form 8-K with the Securities and Exchange Commission. This filing reported that the Corporation had completed its acquisition of Gibson Greetings, Inc. On May 23, 2000, the Corporation filed Form 8-K/A with the Securities and Exchange Commission. This filing amended the Form 8-K filed March 24, 2000 to include the historical and pro forma information required for the combined entity. On May 11, 2000, the Corporation filed Form 8-K with the Securities and Exchange Commission. This filing reported that the Corporation had adopted a change in its method of accounting for certain shipments of seasonal product which carry implied acceptance provisions. On April 3, 2001, the Corporation filed Form 8-K with the Securities and Exchange Commission. This filing reported that the Corporation had completed its acquisition of Egreetings Network, Inc. (c) Exhibits listed in Item 14(a) 3. are included herein or incorporated herein by reference. (d) Financial Statement Schedules The response to this portion of Item 14 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. 65 66 PART IV - Continued 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 3, 2001 By: /s/ Jon Groetzinger, Jr. ------------- ------------------------------ Jon Groetzinger, Jr. Secretary 66 67 Pursuant to the requirements of the Securities 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; ) --------------------------------- Chief Executive Officer; ) Morry Weiss Director ) ) /s/ James C. Spira President; ) --------------------------------- Chief Operating Officer; ) James C. Spira Director ) ) /s/ Scott S. Cowen Director ) --------------------------------- Scott S. Cowen ) ) /s/ Stephen R. Hardis Director ) --------------------------------- Stephen R. Hardis ) ) /s/ Charles Ratner Director ) May 3, 2001 --------------------------------- Charles Ratner ) ) /s/ Harry H. Stone Director ) --------------------------------- Harry H. Stone ) ) /s/ Harriet Mouchly-Weiss Director ) --------------------------------- Harriet Mouchly-Weiss ) ) /s/ Jack Kahl Director ) --------------------------------- Jack Kahl ) ) /s/ Jerry Sue Thornton Director ) --------------------------------- Jerry Sue Thornton ) ) /s/ William S. Meyer Senior Vice President; ) --------------------------------- Chief Financial Officer ) William S. Meyer (principal financial officer) ) ) /s/ Patricia L. Ripple Vice President; ) --------------------------------- Corporate Controller ) Patricia L. Ripple (principal accounting officer) )

67 68

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AMERICAN GREETINGS CORPORATION AND SUBSIDIARIES (000) --------------------------------------- ------------- ------------------------------------- ---------------- ------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------------------------------------- ------------- ------------------------------------- ---------------- ------------ ADDITIONS ------------------------------------- Balance (1) (2) Balance at Beginning Charged to Costs Charged to Other Deductions- at End Description of Period and Expenses Accounts-Describe Describe of Period --------------------------------------- ------------- ---------------- ----------=------- ---------------- ------------- Year ended February 28, 2001: Deduction from asset account: Allowance for doubtful accounts $ 19,245 $ 24,968 $ 25,002 (A) $ 21,247 (B) $ 47,968 ========== ========== ========== =========== ========== Allowance for sales returns $ 116,792 $ 362,885 $ 23,866 (A) $ 366,712 (C) $ 136,831 ========== ========== ========== =========== ========== Allowance for other assets $ 14,900 $ 6,483 $ 0 $ 6,483 $ 14,900 ========== ========== ========== =========== ========== Year ended February 29, 2000: Deduction from asset account: Allowance for doubtful accounts $ 15,583 $ 7,808 $ (9) (A) $ 4,137 (B) $ 19,245 ========== ========== ========== =========== ========== Allowance for sales returns $ 132,103 $ 282,170 $ 1,796 (A) $ 299,277 (C) $ 116,792 ========== ========== ========== =========== ========== Allowance for other assets $ 16,400 $ 0 $ 0 $ 1,500 $ 14,900 ========== ========== ========== =========== ========== Year ended February 28, 1999: Deduction from asset account: Allowance for doubtful accounts $ 15,661 $ 8,472 $ 91 (A) $ 8,641 (B) $ 15,583 ========== ========== ========== =========== ========== Allowance for sales returns $ 135,584 $ 342,267 $ 308 (A) $ 346,056 (C) $ 132,103 ========== ========== ========== =========== ========== Allowance for other assets $ 16,400 $ 0 $ 0 $ 0 $ 16,400 ========== ========== ========== =========== ==========

Note A: Includes translation adjustment on foreign subsidiary balances; business unit acquisitions for the year ended February 28, 2001 of $21,842 allowance for doubtful accounts and $26,460 allowance for sales returns; and other minor reclasses and adjustments. Note B: Accounts charged off, less recoveries. Note C: Sales returns charged to the allowance account for actual returns for the year. S - 1