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FORM 10-Q

(Mark One)

For the transition period from                       to                     

Commission file number     1-13859    

AMERICAN GREETINGS CORPORATION

(216) 252-7300

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 twelve 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       

As of May 31, 2002, the date of this report, the number of shares outstanding of each of the issuer’s classes of common stock was:

                                                                                        Class A Common 61,173,920
                                                                                        Class B Common 4,601,792

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AMERICAN GREETINGS CORPORATION
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PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

AMERICAN GREETINGS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS

See notes to condensed consolidated financial statements.

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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Thousands of dollars)

See notes to condensed consolidated financial statements.

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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

See notes to condensed consolidated financial statements.

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AMERICAN GREETINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Thousands of dollars except share and per share amounts)

Three Months Ended May 31, 2002 and 2001

Note A — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements 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 accruals) considered necessary for a fair presentation have been included.

The balance sheet at February 28, 2002 has been derived from the audited financial statements at that date but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.

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, 2002 refers to the year ended February 28, 2002.

Certain amounts in the prior year financial statements have been reclassified to conform with the 2003 presentation. The Corporation adopted the Financial Accounting Standards Board’s Emerging Issues Task Force Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer/Reseller” (“EITF 01-09”), effective March 1, 2002. As a result, certain amounts in the prior year financial statements have been reclassified. See Note B for further discussion.

For further information, refer to the consolidated financial statements and notes thereto included in the Corporation’s annual report on Form 10-K for the year ended February 28, 2002.

Note B — Recent Accounting Pronouncements

In November 2001, the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) issued EITF 01-09, which addresses the accounting for consideration given by a vendor to a customer including both a reseller of the vendor’s products and an entity that purchases the vendor’s products from a reseller. EITF 01-09 also codifies and reconciles related guidance issued by the EITF including EITF No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products”, and EITF 00-14, “Accounting for Certain Sales Incentives”. EITF 01-09 outlines the presumption that consideration given by a vendor to a customer, a reseller or a customer of a reseller is to be treated as a reduction of revenue. The Corporation adopted EITF 01-09, effective March 1, 2002, as required. Certain amounts related to incentive payments, amortization of deferred costs and other customer benefits have been reclassified in the prior year results to conform

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with the 2003 presentation. Those reclassifications resulted in decreases to material, labor and other production costs of $18,789 and selling, distribution and marketing costs of $92,707, with corresponding decreases in net sales. These reclassifications did not affect pre-tax income.

On March 1, 2002, the Corporation adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. This Statement, which supersedes APB Opinion No. 17, “Intangible Assets”, eliminates the requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and addresses the impairment testing and recognition for goodwill and intangible assets. SFAS No. 142 applies to goodwill and intangible assets arising from transactions completed before and after the Statement’s effective date. Effective March 1, 2002, the Corporation discontinued amortization of its goodwill in accordance with this Statement. For the three months ended May 31, 2001, the Corporation’s results included $3,031 ($1,888 net of tax) of amortization expense related to goodwill included in other (income) — net. Adjusted information, assuming the adoption of the non-amortization provisions of this Statement for the three months ended May 31, 2001, is as follows:

At May 31, 2002, intangible assets, net of accumulated amortization, were $1,361.

In addition, this Statement requires goodwill to be tested for impairment at least annually at a level of reporting defined in the Statement as a “reporting unit,” using a two-step process. This Statement provides that the Corporation has until the end of the second quarter of 2003 to

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complete the first step of the impairment testing and until the end of 2003 to complete the second step of the impairment testing during this initial year of adoption of SFAS No. 142. In accordance with this provision, the Corporation has begun the process of testing its goodwill for impairment, but has not yet completed the first step of the two-step testing process.

A summary of the changes in the carrying amount of the Corporation’s goodwill during the three months ended May 31, 2002 by segment is as follows:

In October 2001, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, was issued. This Statement, which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets to Be Disposed Of”, provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the Statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. This distinction is important because assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The Corporation has adopted SFAS No. 144 effective March 1, 2002 as required. There was no material impact on the Corporation’s results of operations, financial position or cash flow.

Note C — 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 D — Other (Income) — Net

During the three months ended May 31, 2002, the Corporation sold an investment in a marketable security. The amount of the gain on the sale of $12,027 ($7,252 net of tax) is included in other (income) — net in the Statement of Operations for the period. The amount of the proceeds received from the sale of $16,964 is included in other — net investing activities in the Statement of Cash Flows for the period.

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Note E — Special Charges and Restructure Reserves

During 2002, the Corporation undertook three initiatives: the reorganization of the core greeting card business, the implementation of scan-based trading, and a change in the contractual relationship with a strategic partner of the Corporation’s Internet business. In total, the Corporation incurred $314,448 of pre-tax special charges during 2002 in connection with these initiatives. The Corporation recorded $158,127 of pre-tax special charges during the three months ended May 31, 2001.

Included in the special charges for 2002 noted above is a restructure charge of $56,715 ($35,333 net of tax, or earnings per share of $0.56), of which $52,925 ($32,970 net of tax, or earnings per share of $0.52) was recorded in the three months ended May 31, 2001. This charge was for costs associated with the consolidation and rationalization of certain of the Corporation’s domestic and foreign manufacturing and distribution operations, including employee severance and benefit termination costs. The restructure charge also included a charge for a change in the contractual relationship with a partner of the Corporation’s Internet unit. More specifically, the restructure charge included $29,053 ($25,263 in the three months ended May 31, 2001) for employee termination benefits, $2,054 for facility rationalization costs, $1,500 for lease exit costs, $17,727 for a change in the contractual relationship with a partner of the Corporation’s Internet unit and $6,381 of other related costs. In total, approximately 1,600 positions were eliminated, comprised of approximately 1,200 hourly and 400 salaried positions. All activities were substantially completed by February 28, 2002.

The following table summarizes the remaining reserve associated with the restructure charge at May 31, 2002:

Included in accrued liabilities at May 31, 2002 is $13,309 representing the portion of severance and other exit costs not yet expended. The payment of termination benefits will not be completed until 2006.

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In addition, the Corporation recorded a charge of $53,550 during the three months ended May 31, 2001 to write down inventory in its domestic operations to net realizable value associated with its initiatives. All of the affected inventory was physically disposed of as of February 28, 2002. This amount is classified as material, labor and other production costs.

Also during the three months ended May 31, 2001, the Corporation began implementing its scan-based trading business model with certain of its retailers. The impact of its implementation was reductions in its net sales and material, labor and other production costs of approximately $56,500 and $9,900, respectively, as well as non-recurring administrative costs of $3,871, for a net pre-tax impact of approximately $50,500 or a net of tax impact of $0.50 per share.

In summary, the pre-tax special charges recorded in the three months ended May 31, 2001 consisted of the following: