UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended August 27, 2010

		OR

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

Commission file number 1-13859

AMERICAN GREETINGS CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		34-0065325
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One American Road, Cleveland, Ohio		44144
(Address of principal executive offices)		(Zip Code)

(216) 252-7300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

As of October 4, 2010, the number of shares outstanding of each of the issuer’s classes of common stock was:

Class A Common   37,169,179
Class B Common   2,905,437

 

 

AMERICAN GREETINGS CORPORATION
INDEX

		Page
		Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			27
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 6. Exhibits			30
SIGNATURES			31
EXHIBITS
EX-31.A
EX-31.B
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements

AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME

(Thousands of dollars except share and per share amounts)

						(Unaudited)
		Three Months Ended								Six Months Ended
		August 27,				August 28,				August 27,				August 28,
		2010				2009				2010				2009
Net sales		$	333,339			$	348,639			$	725,444			$	757,916
Other revenue			9,480				7,711				13,683				11,356
Total revenue			342,819				356,350				739,127				769,272
Material, labor and other production costs			145,713				153,248				303,726				320,417
Selling, distribution and marketing expenses			112,318				117,531				229,869				249,748
Administrative and general expenses			62,193				48,483				128,225				111,634
Other operating (income) expense — net			(936	)			(1,397	)			(1,530	)			26,376
Operating income			23,531				38,485				78,837				61,097
Interest expense			6,718				6,671				12,920				13,658
Interest income			(197	)			(989	)			(410	)			(1,265	)
Other non-operating income — net			(3	)			(1,291	)			(1,703	)			(2,333	)
Income before income tax expense			17,013				34,094				68,030				51,037
Income tax expense			8,481				10,972				28,659				17,954
Net income		$	8,532			$	23,122			$	39,371			$	33,083
Earnings per share — basic		$	0.21			$	0.59			$	0.99			$	0.84
Earnings per share — assuming dilution		$	0.21			$	0.59			$	0.96			$	0.84
Average number of shares outstanding			40,026,649				39,407,532				39,832,609				39,508,240
Average number of shares outstanding — assuming dilution			40,875,329				39,407,532				40,861,761				39,508,240
Dividends declared per share		$	0.14			$	0.12			$	0.28			$	0.12

See notes to consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)

		(Unaudited)				(Note 1)				(Unaudited)
		August 27, 2010				February 28, 2010				August 28, 2009
ASSETS
Current assets
Cash and cash equivalents		$	133,834			$	137,949			$	49,903
Trade accounts receivable, net			89,408				135,758				92,167
Inventories			189,366				163,956				199,941
Deferred and refundable income taxes			61,742				78,433				59,082
Assets held for sale			11,868				13,280				23,188
Prepaid expenses and other			113,112				148,048				148,868
Total current assets			599,330				677,424				573,149
Goodwill			29,929				31,106				26,393
Other assets			413,809				428,160				367,574
Deferred and refundable income taxes			153,775				148,210				171,419
Property, plant and equipment — at cost			850,025				840,696				859,695
Less accumulated depreciation			609,901				595,945				595,757
Property, plant and equipment — net			240,124				244,751				263,938
		$	1,436,967			$	1,529,651			$	1,402,473
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Debt due within one year		$	—			$	1,000			$	1,000
Accounts payable			88,668				95,434				96,279
Accrued liabilities			74,129				79,478				82,082
Accrued compensation and benefits			48,287				85,092				50,925
Income taxes payable			23,052				13,901				2,856
Other current liabilities			89,111				97,138				94,462
Total current liabilities			323,247				372,043				327,604
Long-term debt			231,525				328,723				335,372
Other liabilities			174,372				164,642				127,066
Deferred income taxes and noncurrent income taxes payable			32,194				28,179				30,434
Shareholders’ equity
Common shares — Class A			37,137				36,257				35,923
Common shares — Class B			2,923				3,223				3,477
Capital in excess of par value			482,035				461,076				451,328
Treasury stock			(951,682	)			(946,724	)			(941,198	)
Accumulated other comprehensive loss			(30,815	)			(29,815	)			(40,562	)
Retained earnings			1,136,031				1,112,047				1,073,029
Total shareholders’ equity			675,629				636,064				581,997
		$	1,436,967			$	1,529,651			$	1,402,473

See notes to consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)

		(Unaudited)
		Six Months Ended
		August 27, 2010				August 28, 2009
OPERATING ACTIVITIES:
Net income		$	39,371			$	33,083
Adjustments to reconcile net income to cash flows from operating activities:
Net (gain) loss on dispositions			(254	)			27,696
Net (gain) loss on disposal of fixed assets			(1,268	)			9
Depreciation and intangible assets amortization			20,463				23,466
Deferred income taxes			10,618				26,708
Other non-cash charges			8,210				4,622
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Trade accounts receivable			44,279				(10,877	)
Inventories			(24,908	)			(15,714	)
Other current assets			(2,169	)			12,801
Income taxes			15,125				(2,376	)
Deferred costs — net			27,905				11,885
Accounts payable and other liabilities			(54,639	)			(20,439	)
Other — net			5,814				(6,698	)
Total Cash Flows From Operating Activities			88,547				84,166
INVESTING ACTIVITIES:
Property, plant and equipment additions			(14,128	)			(15,447	)
Cash payments for business acquisitions, net of cash acquired			—				(19,300	)
Proceeds from sale of fixed assets			2,997				729
Proceeds from escrow related to party goods transaction			25,151				—
Other — net			—				3,063
Total Cash Flows From Investing Activities			14,020				(30,955	)
FINANCING ACTIVITIES:
Net decrease in long-term debt			(98,250	)			(54,750	)
Net decrease in short-term debt			(1,000	)			—
Sale of stock under benefit plans			19,025				91
Purchase of treasury shares			(13,052	)			(6,176	)
Dividends to shareholders			(11,127	)			(9,593	)
Debt issuance costs			(2,917	)			—
Total Cash Flows From Financing Activities			(107,321	)			(70,428	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			639				6,904
DECREASE IN CASH AND CASH EQUIVALENTS			(4,115	)			(10,313	)
Cash and Cash Equivalents at Beginning of Year			137,949				60,216
Cash and Cash Equivalents at End of Period		$	133,834			$	49,903

See notes to consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three and Six Months Ended August 27, 2010 and August 28, 2009

Note 1 — Basis of Presentation

The accompanying unaudited consolidated financial statements of American Greetings Corporation and its subsidiaries (the “Corporation”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included.

The Corporation’s fiscal year ends on February 28 or 29. References to a particular year refer to the fiscal year ending in February of that year. For example, 2010 refers to the year ended February 28, 2010.

These interim financial statements should be read in conjunction with the Corporation’s financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended February 28, 2010, from which the Consolidated Statement of Financial Position at February 28, 2010, presented herein, has been derived. Certain amounts in the prior year financial statements have been reclassified to conform to the 2011 presentation. These reclassifications had no material impact on financial position, earnings or cash flows.

The Corporation’s investments in less than majority-owned companies in which it has the ability to exercise significant influence over the operation and financial policies are accounted for using the equity method except when they qualify as variable interest entities (“VIE”) and the Corporation is the primary beneficiary, in which case, the investments are consolidated. Investments that do not meet the above criteria are accounted for under the cost method.

The Corporation holds an approximately 15% equity interest in Schurman Fine Papers (“Schurman”), which is a VIE as defined in Accounting Standards Codification (“ASC”) topic 810, (“ASC 810”) “Consolidation.” Schurman owns and operates approximately 450 specialty card and gift retail stores in the United States and Canada. The stores are primarily located in malls and strip shopping centers. During the current period, the Corporation assessed the variable interests in Schurman and determined that a third party holder of variable interests has the controlling financial interest in the VIE and thus, that third party, not the Corporation, is the primary beneficiary. In completing this assessment, the Corporation identified the activities that it considers most significant to the future economic success of the VIE and determined that it does not have the power to direct these activities. As such, Schurman is not consolidated into the Corporation’s results. The Corporation’s maximum exposure to loss as it relates to Schurman includes:

	§		the investment in the equity of Schurman of $1.9 million;
	§		the limited guarantee of Schurman’s indebtedness of $12 million and the limited bridge guarantee of Schurman’s indebtedness of $12 million, see Note 10 for further information;
	§		normal course of business trade accounts receivable due from Schurman, the balance of which fluctuates throughout the year due to the seasonal nature of the business;
	§		the operating leases currently subleased to Schurman, the aggregate lease payments for the remaining life of which was $43.3 million and $50.9 million as of August 27, 2010 and February 28, 2010, respectively.

The Corporation has also made available to Schurman a $10 million subordinated financing arrangement; however, so long as the Corporation’s Bridge Guarantee described in Note 10 exceeds $10 million, Schurman cannot borrow under this arrangement. If the Bridge Guarantee is less than $10 million, the availability under the subordinated financing arrangement is limited to the difference between $10 million and the maximum amount of the Bridge Guarantee. Because the Bridge Guarantee remains at $12 million, there were no loans outstanding, or available, as of August 27, 2010.

In addition to the investment in the equity of Schurman, the Corporation holds an investment in a privately held company, in the form of common stock warrants. These two investments, totaling approximately $18.2 million, are accounted for under the cost method. The Corporation is not aware of any events or changes in circumstances that had occurred during the six months ended August 27, 2010 that the Corporation believes are reasonably likely to have had a significant adverse effect on the carrying amount of these investments.

Note 2 — Seasonal Nature of Business

A significant portion of the Corporation’s business is seasonal in nature. Therefore, the results of operations for interim periods are not necessarily indicative of the results for the fiscal year taken as a whole.

Note 3 — Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2009-17 (“ASU 2009-17”), (Consolidations Topic 810), “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 requires an ongoing reassessment of determining whether a variable interest entity gives a company a controlling financial interest in a VIE. It also requires an entity to qualitatively, rather than quantitatively, determine whether a company is the primary beneficiary of a VIE previously required by FASB guidance. Under the new standard, the primary beneficiary of a VIE is a party that has controlling financial interest in the VIE and has both the power to direct the activities that most significantly impact the VIE’s economic success and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. ASU 2009-17 is effective for interim and annual reporting periods beginning after November 15, 2009. The Corporation adopted ASU 2009-17 as of March 1, 2010. The Corporation’s adoption of this standard did not have a material effect on its financial statements. See Note 1 for further information.

In January 2010, the FASB issued ASU No. 2010-06 (“ASU 2010-06”), “Improving Disclosures about Fair Value Measurements.” ASU 2010-06 provides amendments to ASC Topic 820, “Fair Value Measurements and Disclosures,” that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements in addition to the presentation of purchases, sales, issuances and settlements for Level 3 fair value measurements. ASU 2010-06 also provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation, and inputs and valuation techniques. The new disclosure requirements are effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements of Level 3 fair value measurements. Those disclosures are effective for interim and annual periods beginning after December 15, 2010. As ASU 2010-06 only requires enhanced disclosures, the Corporation’s adoption of this standard did not have a material effect on its financial statements. See Note 12 for further information.

Note 4 — Other Income and Expense

		Three Months Ended								Six Months Ended
		August 27,				August 28,				August 27,				August 28,
(In thousands)		2010				2009				2010				2009
Loss on disposition of retail stores		$	—			$	—			$	—			$	28,333
Gain on disposition of calendar product lines			—				(637	)			—				(637	)
Miscellaneous			(936	)			(760	)			(1,530	)			(1,320	)
Other operating (income) expense — net		$	(936	)		$	(1,397	)		$	(1,530	)		$	26,376

In April 2009, the Corporation sold the rights, title and interest in certain of the assets of its retail store operations to Schurman, and recognized a loss on disposition of $28.3 million. In July 2009, the Corporation sold its calendar product lines and recorded a gain of $0.6 million. The proceeds of $3.1 million received from the sale of the calendar product lines were included in “Other — net” investing activities on the Consolidated Statement of Cash Flows.

		Three Months Ended								Six Months Ended
		August 27,				August 28,				August 27,				August 28,
(In thousands)		2010				2009				2010				2009
Foreign exchange loss (gain)		$	1,441			$	(626	)		$	388			$	(1,205	)
Rental income			(235	)			(325	)			(761	)			(748	)
Miscellaneous			(1,209	)			(340	)			(1,330	)			(380	)
Other non-operating income — net		$	(3	)		$	(1,291	)		$	(1,703	)		$	(2,333	)

“Miscellaneous” includes, among other things, gains and losses on asset disposals and income/loss from equity securities.

In August 2010, the Corporation sold the land and building associated with its Mexican operations that were previously included in “Assets of businesses held for sale” on the Consolidated Statement of Financial Position and recorded a gain of approximately $1.0 million. The cash proceeds of $2.0 million received from the sale of the Mexican assets are included in “Proceeds from sale of fixed assets” on the Consolidated Statement of Cash Flows.

Note 5 — Earnings Per Share

The following table sets forth the computation of earnings per share and earnings per share - assuming dilution:

		Three Months Ended								Six Months Ended
		August 27,				August 28,				August 27,				August 28,
		2010				2009				2010				2009
Numerator (in thousands):
Net income		$	8,532			$	23,122			$	39,371			$	33,083
Denominator (in thousands):
Weighted average shares outstanding			40,027				39,408				39,833				39,508
Effect of dilutive securities:
Stock options and other			848				—				1,029				—
Weighted average shares outstanding — assuming dilution			40,875				39,408				40,862				39,508
Earnings per share		$	0.21			$	0.59			$	0.99			$	0.84
Earnings per share — assuming dilution		$	0.21			$	0.59			$	0.96			$	0.84

Approximately 3.7 million and 3.2 million stock options outstanding in the three and six month periods ended August 27, 2010, respectively, were excluded from the computation of earnings per share-assuming dilution because the options’ exercise prices were greater than the average market price of the common shares during the respective periods (6.6 million and 7.4 million stock options outstanding in the three and six month periods ended August 28, 2009, respectively).

The Corporation issued approximately 0.1 million Class A common shares upon exercise of employee stock options during the three months ended August 27, 2010. The Corporation issued approximately 0.9 million and 0.2 million Class A and Class B common shares, respectively, upon exercise of employee stock options during the six months ended August 27, 2010. There were an insignificant number of employee stock options exercised during the prior year three months and six months ended August 28, 2009.

Note 6 — Comprehensive Income

The Corporation’s total comprehensive income is as follows:

		Three Months Ended								Six Months Ended
		August 27,				August 28,				August 27,				August 28,
(In thousands)		2010				2009				2010				2009
Net income		$	8,532			$	23,122			$	39,371			$	33,083
Other comprehensive income (loss):
Foreign currency translation adjustments			10,082				3,222				1,084				28,160
Pension and postretirement benefit adjustments, net of tax			(639	)			(509	)			(2,084	)			(1,446	)
Unrealized (loss) gain on securities, net of tax			(1	)			1				—				2
Total comprehensive income		$	17,974			$	25,836			$	38,371			$	59,799

Note 7 — Trade Allowances and Discounts

Trade accounts receivable is reported net of certain allowances and discounts. The most significant of these are as follows:

(In thousands)		August 27, 2010				February 28, 2010				August 28, 2009
Allowance for seasonal sales returns		$	21,450			$	36,443			$	18,122
Allowance for outdated products			10,249				10,438				17,862
Allowance for doubtful accounts			3,336				2,963				3,703
Allowance for cooperative advertising and marketing funds			25,259				24,061				25,598
Allowance for rebates			20,573				29,338				29,861
		$	80,867			$	103,243			$	95,146

Certain trade allowances and discounts are settled in cash. These accounts, primarily rebates, which are classified as “Accrued liabilities” on the Consolidated Statement of Financial Position, totaled $12.8 million, $15.3 million and $14.1 million as of August 27, 2010, February 28, 2010 and August 28, 2009, respectively.

Note 8 — Inventories

(In thousands)		August 27, 2010				February 28, 2010				August 28, 2009
Raw materials		$	17,651			$	18,609			$	20,594
Work in process			10,982				6,622				12,702
Finished products			219,265				194,283				230,004
			247,898				219,514				263,300
Less LIFO reserve			75,781				75,491				82,424
			172,117				144,023				180,876
Display materials and factory supplies			17,249				19,933				19,065
		$	189,366			$	163,956			$	199,941

The valuation of inventory under the Last-In, First-Out (“LIFO”) method is made at the end of each fiscal year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations, by necessity, are based on estimates of expected fiscal year-end inventory levels and costs and are subject to final fiscal year-end LIFO inventory calculations.

Inventory held on location for retailers with scan-based trading arrangements, which is included in finished products, totaled $36.7 million, $37.5 million and $36.5 million as of August 27, 2010, February 28, 2010 and August 28, 2009, respectively.

Note 9 — Deferred Costs

Deferred costs and future payment commitments for retail supply agreements are included in the following financial statement captions:

(In thousands)		August 27, 2010				February 28, 2010				August 28, 2009
Prepaid expenses and other		$	73,624			$	82,914			$	95,701
Other assets			295,902				310,555				254,495
Deferred cost assets			369,526				393,469				350,196
Other current liabilities			(53,802	)			(53,701	)			(53,166	)
Other liabilities			(55,405	)			(51,803	)			(1,918	)
Deferred cost liabilities			(109,207	)			(105,504	)			(55,084	)
Net deferred costs		$	260,319			$	287,965			$	295,112

The Corporation maintains an allowance for deferred costs related to supply agreements of $11.6 million, $12.4 million and $19.7 million at August 27, 2010, February 28, 2010 and August 28, 2009, respectively. This allowance is included in “Other assets” in the Consolidated Statement of Financial Position.

Note 10 — Debt

The Corporation was party to an amended and restated $450 million secured credit agreement (the “Original Credit Agreement”) and to an amended and restated receivables purchase agreement that had available financing of up to $80 million. The Original Credit Agreement included a $350 million revolving credit facility and a $100 million delay draw term loan, which the Corporation drew down in 2009 to provide it with greater financial flexibility and to enhance liquidity for the long-term.

On June 11, 2010, the Corporation further amended and restated its Original Credit Agreement by entering into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) among various lending institutions. Pursuant to the terms of the Amended and Restated Credit Agreement, the Corporation may continue to borrow, repay and re-borrow up to $350 million under the revolving credit facility, with the ability to increase the size of the facility to up to $400 million, subject to customary conditions. The Amended and Restated Credit Agreement also continues to provide for a $25 million sub-limit for the issuance of swing line loans and a $100 million sub-limit for the issuance of letters of credit.

The obligations under the Amended and Restated Credit Agreement continue to be guaranteed by the Corporation’s material domestic subsidiaries and continue to be secured by substantially all of the personal property of the Corporation and each of its material domestic subsidiaries, including a pledge of all of the capital stock in substantially all of the Corporation’s domestic subsidiaries and 65% of the capital stock of the Corporation’s first tier international subsidiaries. The revolving loans under the Original Credit Agreement were scheduled to mature on April 4, 2011 and the term loan was scheduled to mature on April 4, 2013. The Amended and Restated Credit Agreement, including revolving loans thereunder, will mature on June 11, 2015. In connection with the Amended and Restated Credit Agreement, the term loan was terminated and the Corporation repaid the full $99 million outstanding under the term loan using cash on hand. The proceeds of the borrowings under the Amended and Restated Credit Agreement may be used to provide working capital and for other general corporate purposes.

Revolving loans that are denominated in U.S. dollars will bear interest at either the U.S. base rate or the London Inter-Bank Offer Rate (“LIBOR”), at the Corporation’s election, plus a margin determined according to the Corporation’s leverage ratio. Swing line loans will bear interest at a quoted rate agreed upon by the Corporation and the swing line lender. In addition to interest, the Corporation is required to pay commitment fees on the unused portion of the revolving credit facility. The commitment fee rate is initially 0.50% per annum and is subject to adjustment thereafter based on the Corporation’s leverage ratio.

The Amended and Restated Credit Agreement contains certain restrictive covenants that are customary for similar credit arrangements, including covenants relating to limitations on liens, dispositions, issuance of debt, investments, payment of dividends, repurchases of capital stock, acquisitions and transactions with affiliates. There are also financial performance covenants that require the Corporation to maintain a maximum leverage ratio and a minimum interest coverage ratio. The Amended and Restated Credit Agreement also requires the Corporation to make certain mandatory prepayments of outstanding indebtedness using the net cash proceeds received from certain dispositions, events of loss and additional indebtedness that the Corporation incurs.

The amended and restated receivables purchase agreement has a maturity date of September 21, 2012, however, the agreement will terminate upon termination of the liquidity commitments obtained by the purchaser groups from third party liquidity providers. Such commitments may be made available to the purchaser groups for 364-day periods only (initial 364-day period began on September 23, 2009), and there can be no assurances that the third party liquidity providers will renew or extend their commitments under the receivables purchase agreement. If that is the case, the receivables purchase agreement will terminate and the Corporation will not receive the benefit of the entire three-year term of the agreement. On September 22, 2010, the liquidity commitments were renewed for an additional 364-day period.

There was no debt due within one year as of August 27, 2010. Debt due within one year as of February 28, 2010 and August 28, 2009 was $1.0 million.

Long-term debt and their related calendar year due dates, net of unamortized discounts which totaled $23.3 million and $25.4 million as of August 27, 2010 and August 28, 2009, respectively, were as follows:

(In thousands)		August 27, 2010				February 28, 2010				August 28, 2009
7.375% senior notes, due 2016		$	212,609			$	212,184			$	211,798
7.375% notes, due 2016			18,735				18,103				17,530
Term loan facility			—				98,250				98,750
Revolving credit facility, due 2015			—				—				7,100
6.10% senior notes, due 2028			181				181				181
Other			—				5				13
		$	231,525			$	328,723			$	335,372

The total fair value of the Corporation’s publicly traded debt, which includes the 7.375% senior notes, 7.375% notes and 6.10% senior notes, based on quoted market prices, was $231.3 million (at a carrying value of $231.5 million), $224.7 million (at a carrying value of $230.5 million) and $207.7 million (at a carrying value of $229.5 million) at August 27, 2010, February 28, 2010 and August 28, 2009, respectively.

As of August 27, 2010, there were no balances outstanding under the Corporation’s revolving credit facility or receivables purchase agreement, which is not publicly traded debt. The total fair value of the Corporation’s non-publicly traded debt, based on comparable privately traded debt prices, was $99.3 million (at a carrying value of $99.3 million) at February 28, 2010.

In addition, the Corporation had, in the aggregate, $45.9 million outstanding under letters of credit, which reduces the total credit availability under the revolving credit facility.

At August 27, 2010, the Corporation was in compliance with the financial covenants under its borrowing agreements.

Guarantees

In April 2009, the Corporation sold certain of the assets of its Retail Operations segment to Schurman and purchased from Schurman its Papyrus trademark and its Papyrus wholesale business division. As part of the transaction, the Corporation agreed to provide Schurman limited credit support through the provision of a limited guarantee (“Liquidity Guarantee”) and a limited bridge guarantee (“Bridge Guarantee”) in favor of the lenders under Schurman’s senior revolving credit facility (the “Senior Credit Facility”).

Pursuant to the terms of the Liquidity Guarantee, the Corporation has guaranteed the repayment of up to $12 million of Schurman’s borrowings under the Senior Credit Facility to help ensure that Schurman has sufficient borrowing availability under this facility. The Liquidity Guarantee is required to be backed by a letter of credit for the term of the Liquidity Guarantee, which is currently anticipated to end in January 2014. Pursuant to the terms of the Bridge Guarantee, the Corporation has guaranteed the repayment of up to $12 million of Schurman’s borrowings under the Senior Credit Facility until Schurman is able to include the inventory and other assets of the acquired retail stores in its borrowing base. The Bridge Guarantee is required to be backed by a letter of credit. The letters of credit required to back both guarantees are included within the $45.9 million outstanding letters of credit mentioned above. The Bridge Guarantee is scheduled to expire in January 2014; however, upon the Corporation’s request, the Bridge Guarantee may be reduced as Schurman is able to include such inventory and other assets in its borrowing base. The Corporation does not currently anticipate requesting such reduction. The Corporation’s obligations under the Liquidity Guarantee and the Bridge Guarantee generally may not be triggered unless Schurman’s lenders under its Senior Credit Facility have substantially completed the liquidation of the collateral under Schurman’s Senior Credit Facility, or 91 days after the liquidation is started, whichever is earlier, and will be limited to the deficiency, if any, between the amount owed and the amount collected in connection with the liquidation. There was no triggering event or liquidation of collateral as of August 27, 2010 requiring the use of the guarantees.

Note 11 — Retirement Benefits

The components of periodic benefit cost for the Corporation’s defined benefit pension and postretirement benefit plans are as follows:

		Defined Benefit Pension
		Three Months Ended								Six Months Ended
		August 27,				August 28,				August 27,				August 28,
(In thousands)		2010				2009				2010				2009
Service cost		$	250			$	193			$	501			$	383
Interest cost			2,206				2,322				4,418				4,568
Expected return on plan assets			(1,654	)			(1,422	)			(3,314	)			(2,800	)
Amortization of prior service cost			44				66				88				133
Amortization of actuarial loss			524				512				1,050				967
		$	1,370			$	1,671			$	2,743			$	3,251

		Postretirement Benefit
		Three Months Ended								Six Months Ended
		August 27,				August 28,				August 27,				August 28,
(In thousands)		2010				2009				2010				2009
Service cost		$	575			$	535			$	1,150			$	1,185
Interest cost			1,550				1,705				3,100				3,680
Expected return on plan assets			(1,125	)			(1,030	)			(2,250	)			(2,055	)
Amortization of prior service credit			(1,850	)			(1,860	)			(3,700	)			(3,710	)
Amortization of actuarial loss			250				445				500				1,195
		$	(600	)		$	(205	)		$	(1,200	)		$	295

The Corporation has a discretionary profit-sharing plan with a 401(k) provision covering most of its United States employees. The profit-sharing plan expense for the six months ended August 27, 2010 was $4.5 million, compared to $5.0 million in the prior year period. The profit-sharing plan expense for the six month periods are estimates as actual contributions to the profit-sharing plan are made after fiscal year-end. The Corporation also matches a portion of 401(k) employee contributions. The expenses recognized for the three and six month periods ended August 27, 2010 were $1.0 million and $2.1 million ($1.0 million and $2.1 million for the three and six month periods ended August 28, 2009), respectively.

At August 27, 2010, February 28, 2010 and August 28, 2009, the liability for postretirement benefits other than pensions was $49.2 million, $44.0 million and $61.0 million, respectively, and is included in “Other liabilities” on the Consolidated Statement of Financial Position. At August 27, 2010, February 28, 2010 and August 28, 2009, the long-term liability for pension benefits was $58.9 million, $58.6 million and $53.0 million, respectively, and is included in “Other liabilities” on the Consolidated Statement of Financial Position.

Note 12 — Fair Value Measurements

The following table presents information about those assets and liabilities measured at fair value as of the measurement date, August 27, 2010, and the basis for that measurement, by level within the fair value hierarchy:

						Quoted				Quoted
						prices in				prices in
						active				active
						markets for				markets for
		Balance as				identical				similar				Significant
		of				assets and				assets and				unobservable
		August 27,				liabilities				liabilities				inputs
		2010				(Level 1)				(Level 2)				(Level 3)
Assets measured on a recurring basis:
Active employees’ medical plan trust assets		$	4,118			$	4,118			$	—			$	—
Deferred compensation plan assets (1)			5,662				5,662				—				—
Total		$	9,780			$	9,780			$	—			$	—
Assets measured on a non-recurring basis:
Assets held for sale		$	5,557			$	—			$	5,557			$	—
Total		$	5,557			$	—			$	5,557			$	—

The fair value of the investments in the active employees’ medical plan trust was considered a Level 1 valuation as it is based on the quoted market value per share of each individual security investment in an active market.

The deferred compensation plan is comprised of mutual fund assets and the Corporation’s common shares. The fair value of the mutual fund assets was considered a Level 1 valuation as it is based on each fund’s quoted market value per share in an active market. The fair value of the Corporation’s common shares was considered a Level 1 valuation as it is based on the quoted market value per share of the Class A common shares in an active market. Although the Corporation is under no obligation to fund employees’ non-qualified accounts, the fair value of the related non-qualified deferred compensation liability is based on the fair value of the mutual fund assets and the Corporation’s common shares.

The Corporation has assets held for sale, certain of which are measured at fair value on a non-recurring basis and are subject to fair value adjustments only in certain circumstances. Land and buildings related to the Corporation’s DesignWare party goods product lines was classified as held for sale during the fourth quarter of 2010. In accordance with ASC Topic 360, “Property, Plant and Equipment,” assets held for sale shall be measured at the lower of its carrying amount or fair value less cost to sell. The fair value of these assets held for sale was considered a Level 2 valuation as it was based on observable selling prices for similar assets that were sold within the past eighteen months.

Note 13 — Income Taxes

The Corporation’s provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The magnitude of the impact that discrete items have on the Corporation’s quarterly effective tax rate is dependent on the level of income in the period. The effective tax

rate was 49.9% and 42.1% for the three and six months ended August 27, 2010, respectively, and 32.2% and 35.2% for the three and six months ended August 28, 2009, respectively. The higher than statutory rate in the current periods is due primarily to the impact of unfavorable settlements of audits in a foreign jurisdiction, the release of insurance reserves that generated taxable income and the recognition of the deferred tax effects of the reduced deductibility of the postretirement prescription drug coverage due to the recently enacted U.S. Patient Protection and Affordable Care Act.

At August 27, 2010, the Corporation had unrecognized tax benefits of $47.2 million that, if recognized, would have a favorable effect on the Corporation’s income tax expense of $34.3 million. During the second quarter of 2011, the Corporation’s unrecognized tax benefits increased approximately $1.8 million due primarily to issues currently under audit by foreign taxing jurisdictions and prior state tax positions. It is reasonably possible that the Corporation’s unrecognized tax benefits could decrease by approximately $12.7 million during 2011 due to anticipated settlements and resulting cash payments related to open years after 1999, which are currently under examination.

The Corporation recognizes interest and penalties accrued on unrecognized tax benefits and refundable income taxes as a component of income tax expense. As of August 27, 2010, the Corporation recognized net expense of $0.2 million for interest and penalties on unrecognized tax benefits and refundable income taxes. As of August 27, 2010, the total amount of gross accrued interest and penalties related to unrecognized tax benefits less refundable income taxes, was a net payable of $2.0 million.

The Corporation is subject to examination by the U.S. Internal Revenue Service and various U.S. state and local jurisdictions for tax years 1996 to the present. The Corporation is also subject to tax examination in various international tax jurisdictions, including Canada, the United Kingdom, Australia, France, Italy, Mexico and New Zealand for tax years 2005 to the present.

Note 14 — Business Segment Information

		Three Months Ended								Six Months Ended
		August 27,				August 28,				August 27,				August 28,
(In thousands)		2010				2009				2010				2009
Total Revenue:
North American Social Expression Products		$	248,723			$	266,886			$	552,891			$	590,699
Intersegment items			—				—				—				(5,104	)
Exchange rate adjustment			3,435				2,043				7,576				2,413
Net			252,158				268,929				560,467				588,008
International Social Expression Products			54,962				54,590				112,763				110,641
Exchange rate adjustment			(226	)			2,150				(454	)			(1,139	)
Net			54,736				56,740				112,309				109,502
Retail Operations			—				—				—				11,727
Exchange rate adjustment			—				—				—				112
Net			—				—				—				11,839
AG Interactive			18,260				18,401				36,926				37,350
Exchange rate adjustment			(93	)			96				(205	)			(8	)
Net			18,167				18,497				36,721				37,342
Non-reportable segments			17,758				11,964				29,630				22,361
Unallocated			—				220				—				220
		$	342,819			$	356,350			$	739,127			$	769,272

		Three Months Ended								Six Months Ended
		August 27,				August 28,				August 27,				August 28,
(In thousands)		2010				2009				2010				2009
Segment Earnings (Loss):
North American Social Expression Products		$	33,613			$	42,780			$	101,720			$	120,766
Intersegment items			—				—				—				(3,511	)
Exchange rate adjustment			1,501				991				3,443				1,072
Net			35,114				43,771				105,163				118,327
International Social Expression Products			1,361				2,310				4,195				2,823
Exchange rate adjustment			(36	)			5				(36	)			(169	)
Net			1,325				2,315				4,159				2,654
Retail Operations			—				—				—				(34,830	)
Exchange rate adjustment			—				—				—				(285	)
Net			—				—				—				(35,115	)
AG Interactive			2,945				1,903				5,419				3,699
Exchange rate adjustment			(59	)			28				(161	)			(54	)
Net			2,886				1,931				5,258				3,645
Non-reportable segments			3,317				367				5,469				238
Unallocated			(25,764	)			(14,191	)			(52,163	)			(39,043	)
Exchange rate adjustment			135				(99	)			144				331
Net			(25,629	)			(14,290	)			(52,019	)			(38,712	)
		$	17,013			$	34,094			$	68,030			$	51,037

Termination Benefits

Termination benefits are primarily considered part of an ongoing benefit arrangement, accounted for in accordance with ASC Topic 712, “Compensation — Nonretirement Postemployment Benefits,” and are recorded when payment of the benefits is probable and can be reasonably estimated.

During the six months ended August 27, 2010, the Corporation recorded severance expense of approximately $3 million. Approximately $2 million of the expense is included in the North American Social Expression Products segment and the remaining $1 million is included in the AG Interactive segment. The balance of the severance accrual was $9.0 million, $14.0 million and $9.2 million at August 27, 2010, February 28, 2010 and August 28, 2009, respectively, and is included in “Accrued liabilities” on the Consolidated Statement of Financial Position.

Deferred Revenue

Deferred revenue, included in “Other current liabilities” on the Consolidated Statement of Financial Position, totaled $34.0 million, $40.2 million and $35.7 million at August 27, 2010, February 28, 2010 and August 28, 2009, respectively. The amounts relate primarily to subscription revenue in the Corporation’s AG Interactive segment and the licensing activities included in non-reportable segments.

Contingent Payment

In March 2008, the Corporation acquired a card publisher and franchised distributor of greeting cards in the United Kingdom. The purchase agreement provided for a contingent payment of up to 2 million Pounds Sterling to be paid based on the company’s operating results over an accumulated three-year period from the date of acquisition. The right to receive the contingent payment has been terminated with no additional payment from the Corporation.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited consolidated financial statements. This discussion and analysis, and other statements made in this Report, contain forward-looking statements, see “Factors That May Affect Future Results” at the end of this discussion and analysis for a description of the uncertainties, risks and assumptions associated with these statements. Unless otherwise indicated or the context otherwise requires, the “Corporation,” “we,” “our,” “us” and “American Greetings” are used in this Report to refer to the businesses of American Greetings Corporation and its consolidated subsidiaries.

Overview

Our revenues and expenses for the second quarter ended August 27, 2010, compared to the prior year period, were significantly affected by our prior year party goods transaction as well as the continued Papyrus Recycled Greetings (“PRG”) integration. To date, we have completed a large part of the integration work and expect to substantially complete the integration effort by the end of this fiscal year. The integration costs are tracking as expected, and to date, we have incurred approximately 75% of the projected total integration costs of $20 million.

For the quarter, total revenue decreased approximately $14 million, or 4%, compared to the prior year period. Approximately 75% of the revenue decline was driven by lower sales of party goods, which, as expected, was the result of the party goods transaction announced during the prior year fourth quarter. The remaining decrease of 25%, or $4 million, was primarily in the North American Social Expression Products segment, partially offset by increased sales in the fixtures business and higher royalties from our intellectual properties business. The revenue decrease in the North American Social Expression Products segment was primarily due to lower sales of party goods noted above, along with lower revenues from gift packaging and other non-card products. Revenues in our International Social Expressions Products segment and AG Interactive segment were flat compared to the prior year quarter.

Operating income was down approximately $15 million, compared to the prior year. Approximately 80% of the decrease was due to a combination of the current year PRG integration costs and the prior year benefit of approximately $7 million related to our corporate-owned life insurance (“COLI”) programs (resulting from higher than average death benefit income reported by our third party administrators). The remaining decrease was primarily driven by lower sales volume (predominantly party goods) and increased variable compensation costs.

During the quarter, we amended and restated our secured credit facility. As a result of this transaction, the maturity of the $350 million revolving credit facility was extended to June 11, 2015 and we repaid the remaining balance of our term loan, totaling $99 million, using available cash balances. See Note 10 “Debt” to the Consolidated Financial Statements for further information.

As we near the completion of the PRG integration project, we will redirect our internal resources to our information technology systems refresh project. This project is focused on modernizing our systems, redesigning and deploying new processes, and evolving new organization structures all intended to drive efficiencies within the business and add new capabilities. We are in the early stages of this project and currently expect the project will be executed in a series of waves over a period of five to seven years. We are currently working to estimate the incremental costs to execute this project.

Results of Operations

Three months ended August 27, 2010 and August 28, 2009

Net income was $8.5 million, or $0.21 per share, in the second quarter compared to net income of $23.1 million, or $0.59 per share, in the prior year second quarter (all per-share amounts assume dilution).

Our results for the three months ended August 27, 2010 and August 28, 2009 are summarized below:

						% Total								% Total
(Dollars in thousands)		2010				Revenue				2009				Revenue
Net sales		$	333,339				97.2	%		$	348,639				97.8	%
Other revenue			9,480				2.8	%			7,711				2.2	%
Total revenue			342,819				100.0	%			356,350				100.0	%
Material, labor and other production costs			145,713				42.5	%			153,248				43.0	%
Selling, distribution and marketing expenses			112,318				32.8	%			117,531				33.0	%
Administrative and general expenses			62,193				18.1	%			48,483				13.6	%
Other operating income — net			(936	)			(0.3	%)			(1,397	)			(0.4	%)
Operating income			23,531				6.9	%			38,485				10.8	%
Interest expense			6,718				2.0	%			6,671				1.9	%
Interest income			(197	)			(0.1	%)			(989	)			(0.3	%)
Other non-operating income — net			(3	)			(0.0	%)			(1,291	)			(0.4	%)
Income before income tax expense			17,013				5.0	%			34,094				9.6	%
Income tax expense			8,481				2.5	%			10,972				3.1	%
Net income		$	8,532				2.5	%		$	23,122				6.5	%

For the three months ended August 27, 2010, consolidated net sales were $333.3 million, down from $348.6 million in the prior year second quarter. This 4.4%, or approximately $15 million, decrease was primarily the result of lower sales in our North American Social Expression Products segment. These decreases were partially offset by an increase in our fixtures business, included in non-reportable segments, of approximately $4 million.

Net sales in our North American Social Expression Products segment decreased approximately $18 million. This decrease is attributable to lower sales of party goods of approximately $10 million, everyday cards of approximately $5 million, and gift packaging and other non-card products of approximately $8 million. Net sales of party goods decreased due to the transaction completed in the prior year fourth quarter. Partially offsetting these decreases was an improvement in seasonal card net sales of approximately $5 million.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, increased $1.8 million from $7.7 million during the three months ended August 28, 2009 to $9.5 million for the three months ended August 27, 2010.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the three months ended August 27, 2010 and August 28, 2009 are summarized below:

		Increase (Decrease) From the Prior Year
		Everyday Cards								Seasonal Cards								Total Greeting Cards
		2010				2009				2010				2009				2010				2009
Unit volume			(1.9	%)			6.7	%			14.2	%			13.2	%			0.7	%			7.7	%
Selling prices			(2.1	%)			1.3	%			(6.2	%)			(1.3	%)			(2.8	%)			0.9	%
Overall increase / (decrease)			(4.0	%)			8.1	%			7.1	%			11.7	%			(2.1	%)			8.7	%

During the second quarter, combined everyday and seasonal greeting card sales less returns decreased 2.1% compared to the prior year quarter, including a 2.8% decline in selling prices which more than offset a 0.7% increase in unit volume. Decreases of everyday card sales less returns in both our North American Social Expression Products and International Social Expressions Products segments more than offset improvement in seasonal card sales less returns in our North American Social Expression Products segment.

Everyday card sales less returns for the three months ended August 27, 2010 were down 4.0% compared to the prior year quarter, with decreases in both unit volume and selling prices of 1.9% and 2.1%, respectively. The decrease in selling prices was driven by the continued shift to a higher mix of value line cards, which more than offset the pricing and mix benefits related to the prior year acquisitions.

Seasonal card sales less returns improved 7.1% during the second quarter including 14.2% unit growth partially offset by a 6.2% decline in selling prices. The increase in unit volume during the current year quarter was primarily driven by our Father’s Day and Graduation programs. The decrease in selling prices was driven by the shift to a higher mix of value line cards in the period.

Expense Overview

Material, labor and other production costs (“MLOPC”) for the three months ended August 27, 2010 were $145.7 million, approximately $8 million less than the prior year three months. As a percentage of total revenue, these costs were 42.5% in the current period compared to 43.0% for the three months ended August 28, 2009. The decrease is due to favorable volume variances of approximately $4 million and improved product mix of approximately $3 million. The favorable volume variances and product mix improvements were primarily the result of the party goods transaction in the prior year fourth quarter. In addition, lower scrap expense in the quarter was offset by higher product content costs.

Selling, distribution and marketing (“SDM”) expenses for the three months ended August 27, 2010 were $112.3 million, decreasing approximately $5 million from $117.5 million during the prior year three months. This improvement is attributable to lower supply chain costs due to a reduction in units shipped, specifically freight and distribution costs, field sales and merchandiser expenses of approximately $7 million. Partially offsetting these improvements were higher marketing and product management costs of approximately $2 million.

Administrative and general expenses were $62.2 million for the three months ended August 27, 2010, an increase from $48.5 million for the three months ended August 28, 2009. The increase of approximately $14 million is primarily driven by continued integration costs associated with our prior year acquisitions of Recycled Paper Greetings and the Papyrus trademark and wholesale division of Schurman Fine Papers (“Schurman”) of approximately $5 million as well as increases in variable compensation expenses, primarily stock compensation expense, of approximately $2 million. In addition, we recognized a prior year benefit of approximately $7 million associated with our COLI programs.

Other operating income — net was $0.9 million for the three months ended August 27, 2010 compared to $1.4 million for the prior year second quarter. The prior year period included a $0.6 million gain on the sale of our calendar product lines.

The effective tax rate was 49.9% and 32.2% for the three months ended August 27, 2010 and August 28, 2009, respectively. The higher than statutory rate in the current period is due primarily to the impact of unfavorable settlements of audits in a foreign jurisdiction and the release of insurance reserves that generated taxable income. The lower than statutory effective tax rate in the prior year quarter is due primarily to the COLI benefit, which was non-taxable.

Results of Operations

Six months ended August 27, 2010 and August 28, 2009

Net income was $39.4 million, or $0.96 per share, in the six months ended August 27, 2010 compared to net income of $33.1 million, or $0.84 per share, in the prior year six months.

Our results for the six months ended August 27, 2010 and August 28, 2009 are summarized below:

						% Total								% Total
(Dollars in thousands)		2010				Revenue				2009				Revenue
Net sales		$	725,444				98.1	%		$	757,916				98.5	%
Other revenue			13,683				1.9	%			11,356				1.5	%
Total revenue			739,127				100.0	%			769,272				100.0	%
Material, labor and other production costs			303,726				41.1	%			320,417				41.7	%
Selling, distribution and marketing expenses			229,869				31.1	%			249,748				32.5	%
Administrative and general expenses			128,225				17.3	%			111,634				14.5	%
Other operating (income) expense — net			(1,530	)			(0.2	)%			26,376				3.4	%
Operating income			78,837				10.7	%			61,097				7.9	%
Interest expense			12,920				1.7	%			13,658				1.8	%
Interest income			(410	)			(0.0	%)			(1,265	)			(0.2	%)
Other non-operating income — net			(1,703	)			(0.2	%)			(2,333	)			(0.3	%)
Income before income tax expense			68,030				9.2	%			51,037				6.6	%
Income tax expense			28,659				3.9	%			17,954				2.3	%
Net income		$	39,371				5.3	%		$	33,083				4.3	%

For the six months ended August 27, 2010, consolidated net sales were $725.4 million, down from $757.9 million in the prior year six months. This 4.3%, or approximately $33 million, decrease was primarily the result of decreased net sales in our North American Social Expression Products segment and our Retail Operations segment of approximately $33 million and $12 million, respectively. These decreases were partially offset by higher net sales in our fixtures business and in our International Social Expression Products segment of approximately $7 million. Foreign currency translation also favorably impacted net sales by approximately $5 million.

Net sales in our North American Social Expression Products segment decreased approximately $33 million. This decrease is attributable to lower sales of party goods of approximately $18 million, combined everyday and seasonal cards of approximately $5 million, and gift packaging and other non-card products of approximately $10 million. Net sales of party goods decreased due to the transaction completed in the prior year fourth quarter.

Net sales of our Retail Operations segment decreased approximately $12 million due to the sale of our retail store assets in April 2009. There were no net sales in our Retail Operation segment during the six months ended August 27, 2010.

The increase in our International Social Expression Products segment’s net sales of approximately $2 million was driven primarily by our United Kingdom (“U.K.”) operations where sales of gifting and other non-card products are continuing to improve as a result of new product introductions in the prior year.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, increased $2.3 million from $11.4 million during the six months ended August 28, 2009 to $13.7 million for the six months ended August 27, 2010.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the six months ended August 27, 2010 and August 28, 2009 are summarized below:

		Increase (Decrease) From the Prior Year
		Everyday Cards								Seasonal Cards								Total Greeting Cards
		2010				2009				2010				2009				2010				2009
Unit volume			(1.7	%)			5.1	%			0.2	%			3.9	%			(1.2	%)			4.7	%
Selling prices			(0.3	%)			2.1	%			0.0	%			1.9	%			(0.2	%)			2.1	%
Overall increase / (decrease)			(2.0	%)			7.3	%			0.1	%			5.9	%			(1.4	%)			6.9	%

During the six months ended August 27, 2010, combined everyday and seasonal greeting card sales less returns declined 1.4%, compared to the prior year six months, driven by a decrease in everyday card sales less returns of 2.0%.

Everyday card sales less returns were down 2.0%, compared to the prior year six months, including decreases in both unit volume and selling prices of 1.7% and 0.3%, respectively. Unit volume declined in both the North American Social Expression Products and International Social Expression Products segments. The decrease in selling prices was driven by the continued shift to a higher mix of value line cards, which more than offset the pricing and mix benefits related to the prior year acquisitions.

Seasonal card sales less returns increased 0.1%, with selling prices remaining flat and unit volume improving 0.2% compared to the prior year six months.

Expense Overview

MLOPC for the six months ended August 27, 2010 were $303.7 million, a decrease from $320.4 million for the comparable period in the prior year. As a percentage of total revenue, these costs were 41.1% in the current period compared to 41.7% for the six months ended August 28, 2009. Approximately $4 million of the decrease was the result of the divestiture of the retail store operations. The remaining approximately $13 million decrease was due to favorable volume variances of approximately $6 million and reduced spending of approximately $6 million. The favorable volume variances were the result of the lower sales volume in the current year, which was driven primarily by the party goods transaction in the prior year fourth quarter. The $6 million of lower spending was attributable to a combination of lower inventory scrap expense, lower product related display and point-of-sale material costs and lower product content costs.

SDM expenses for the six months ended August 27, 2010 were $229.9 million, decreasing from $249.7 million for the comparable period in the prior year. The decrease of approximately $20 million is due to lower spending. The elimination of the operating costs of our retail stores due to the disposition of those stores during the prior year accounted for approximately $12 million of this decrease. Lower supply chain costs of approximately $12 million was the result of lower freight and distribution costs, and field sales and merchandiser expenses resulting from a reduction in units shipped. These reductions were partially offset by higher marketing and product management costs of approximately $4 million.

Administrative and general expenses were $128.2 million for the six months ended August 27, 2010, an increase from $111.6 million for the six months ended August 28, 2009. The increase of approximately $17 million is primarily related to higher variable compensation expense of approximately $5 million and the continued integration costs associated with our recent acquisitions of Recycled Paper Greetings and the Papyrus trademark and wholesale division of Schurman of approximately $9 million. In addition, the prior year included a COLI benefit of

approximately $7 million, which was not included in the current year six months. These increases were partially offset by the reduction of costs associated with the divestiture of our retail store operations as well as a decrease in expenses related to our post retirement benefit plan of approximately $2 million each.

Other operating (income) expense — net was income of $1.5 million for the six months ended August 27, 2010 compared to expense of $26.4 million in the prior period. The prior year six months included a loss of $28.3 million on the sale of our retail stores to Schurman and a gain of $0.6 million on the sale of our calendar product lines.

Interest expense for the six months ended August 27, 2010 was $12.9 million, down from $13.7 million in the prior year period. The decrease of $0.8 million is attributable to interest savings resulting from the $99 million repayment of our term loan, previously outstanding under our senior secured credit facility, as well as reduced borrowings under this facility in the current year.

The effective tax rate was 42.1% and 35.2% for the six months ended August 27, 2010 and August 28, 2009, respectively. The higher than statutory rate in the current period is due primarily to the impact of unfavorable settlements of audits in a foreign jurisdiction, the release of insurance reserves that generated taxable income as well as the recognition of the deferred tax effects of the reduced deductibility of postretirement prescription drug coverage due to the recently enacted U.S. Patient Protection and Affordable Care Act. The lower than statutory effective tax rate in the prior year quarter is due primarily to the COLI benefit, which was non-taxable.

Segment Information

Our operations are organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. Our North American Social Expression Products and our International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through various channels of distribution, with mass retailers as the primary channel. As permitted under Accounting Standards Codification Topic 280, “Segment Reporting,” certain operating divisions have been aggregated into both the North American Social Expression Products and International Social Expression Products segments. The aggregated operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. The AG Interactive segment distributes social expression products, including electronic greetings, personalized printable greeting cards and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices. The AG Interactive segment also offers online photo sharing and a platform to provide consumers the ability to use their own photos to create unique, high quality physical products, including greeting cards, calendars, photo albums and photo books.

We review segment results, including the evaluation of management performance, using consistent exchange rates between years to eliminate the impact of foreign currency fluctuations from operating performance. The 2011 segment results below are presented using our planned foreign exchange rates, which were set at the beginning of the year. For a consistent presentation, 2010 segment results have been recast to reflect the 2011 foreign exchange rates. Refer to Note 14, “Business Segment Information,” to the Consolidated Financial Statements for further information and a reconciliation of total segment revenue to consolidated “Total revenue” and total segment earnings (loss) to consolidated “Income before income tax expense.”

North American Social Expression Products Segment

(Dollars in		Three Months Ended August								%				Six Months Ended August								%
thousands)		27, 2010				28, 2009				Change				27, 2010				28, 2009				Change
Total revenue		$	248,723			$	266,886				(6.8	%)		$	552,891			$	585,595				(5.6	%)
Segment earnings			33,613				42,780				(21.4	%)			101,720				117,255				(13.2	%)

Total revenue of our North American Social Expression Products segment, excluding the impact of foreign exchange and intersegment items, decreased $18.2 million and $32.7 million for the three and six months ended

August 27, 2010, respectively, compared to the prior year periods. The decrease in both periods was primarily driven by a decrease in party goods, which decreased $10.2 million and $17.5 million for the current year three and six months, respectively, primarily due to the transaction announced during the prior year fourth quarter. In addition, the three month period included lower net sales of everyday cards of $5.1 million and gift packaging and other non-card products of approximately $7.6 million. Partially offsetting these decreases was an improvement in seasonal card net sales of $4.7 million. For the six month period, combined everyday and seasonal card net sales declined $5.4 million and gift packaging and other non-card products decreased by $9.8 million.

Segment earnings, excluding the impact of foreign exchange and intersegment items, decreased $9.2 million and $15.5 million in the current year three and six months, respectively, compared to the prior year periods. The decrease for both periods was driven by a combination of lower revenues, lower inventory scrap expense and decreased supply chain costs. The supply chain costs decreased due to a reduction in units shipped, which resulted in lower freight and distribution costs, and field sales and merchandiser expenses. Partially offsetting these favorable supply chain variances were higher marketing and product management costs as well as incremental costs associated with the integration of PRG.

International Social Expression Products Segment

(Dollars in		Three Months Ended August								%				Six Months Ended August								%
thousands)		27, 2010				28, 2009				Change				27, 2010				28, 2009				Change
Total revenue		$	54,962			$	54,590				0.7	%		$	112,763			$	110,641				1.9	%
Segment earnings			1,361				2,310				(41.1	%)			4,195				2,823				48.6	%