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 31, 2005

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

For the transition period from                                          to                                         

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)

(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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

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, 2005, the number of shares outstanding of each of the issuer’s classes of common stock was:

		Class A Common		61,496,467
		Class B Common		4,221,126

 

 

AMERICAN GREETINGS CORPORATION
INDEX

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
SIGNATURES
EXHIBITS
Exhibit 10.1 Executive Deferred Comp Plan
Exhibit 10.2 Amendment 1 to Executive Deferred Comp Plan
Exhibit 10.3 Amendment 2 to Executive Deferred Comp Plan
Exhibit 10.4 Amendment 3 to Executive Deferred Comp Plan
Exhibit 10.5 Form of Agreement for Deferred Comp benefits
Exhibit 10.6 Form of Agrmt Under Amend 3 to Exec Deferred Comp
Exhibit 10.7 Performance Share Grant Agreement/Zev Weiss
Exhibit 10.8 Performance Share Grant Agreement/Jeffrey Weiss
Exhibit 31(a) Section 302 Certification of CEO
Exhibit 31(b) Section 302 Certification of CFO
Exhibit 32 Section 906 Certification of CEO and CFO

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Thousands of dollars except share and per share amounts)

		(Unaudited)
		Three Months Ended								Six Months Ended
		August 31,								August 31,
		2005				2004				2005				2004
Net sales		$	387,556			$	392,084			$	830,832			$	825,625
Costs and expenses:
Material, labor and other production costs			176,316				186,717				356,789				368,332
Selling, distribution and marketing			147,328				146,303				302,602				292,955
Administrative and general			58,970				57,505				122,098				121,642
Interest expense			8,587				9,163				18,269				61,857
Other income — net			(11,932	)			(17,230	)			(20,303	)			(33,576	)
Total costs and expenses			379,269				382,458				779,455				811,210
Income from continuing operations before income tax expense			8,287				9,626				51,377				14,415
Income tax expense			5,046				3,726				21,722				5,579
Income from continuing operations			3,241				5,900				29,655				8,836
Income from discontinued operations, net of tax			—				1,010				—				2,312
Net income		$	3,241			$	6,910			$	29,655			$	11,148
Earnings per share — basic:
Income from continuing operations		$	0.05			$	0.09			$	0.44			$	0.13
Income from discontinued operations			—				0.01				—				0.03
Net income		$	0.05			$	0.10			$	0.44			$	0.16
Earnings per share — assuming dilution:
Income from continuing operations		$	0.05			$	0.09			$	0.41			$	0.13
Income from discontinued operations			—				0.01				—				0.03
Net income		$	0.05			$	0.10			$	0.41			$	0.16
Average number of common shares outstanding			67,101,944				68,418,773				67,848,865				68,209,732
Average number of common shares outstanding — assuming dilution			67,913,912				69,265,799				81,240,972				69,057,063
Dividends declared per share		$	0.08			$	—			$	0.16			$	—

See notes to condensed consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Thousands of dollars)

		(Unaudited)				(Note 1)				(Unaudited)
		August 31, 2005				February 28, 2005				August 31, 2004
ASSETS
Current assets
Cash and cash equivalents		$	163,807			$	250,267			$	152,763
Short-term investments			208,750				208,740				—
Trade accounts receivable, net			172,020				188,987				232,054
Inventories			296,133				222,874				308,977
Deferred and refundable income taxes			176,265				193,497				152,143
Assets of businesses held for sale			—				—				40,390
Prepaid expenses and other			219,244				204,253				218,931
Total current assets			1,236,219				1,268,618				1,105,258
Goodwill			260,276				270,057				231,886
Other assets			603,757				644,140				628,619
Property, plant and equipment — at cost			976,308				995,281				992,348
Less accumulated depreciation			657,361				653,889				652,049
Property, plant and equipment — net			318,947				341,392				340,299
		$	2,419,199			$	2,524,207			$	2,306,062
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	132,978			$	143,041			$	150,513
Accrued liabilities			118,980				118,090				101,951
Accrued compensation and benefits			76,933				96,789				65,891
Income taxes			21,462				38,777				15,012
Liabilities of businesses held for sale			—				—				4,462
Other current liabilities			116,564				79,549				68,201
Total current liabilities			466,917				476,246				406,030
Long-term debt			476,222				486,099				483,876
Other liabilities			121,467				137,868				105,480
Deferred income taxes			37,077				37,214				27,427
Shareholders’ Equity
Common shares — Class A			62,170				64,867				64,022
Common shares — Class B			4,221				4,160				4,603
Capital in excess of par value			391,174				368,777				348,474
Treasury stock			(536,249	)			(445,618	)			(435,107	)
Accumulated other comprehensive income			12,853				29,039				10,325
Retained earnings			1,383,347				1,365,555				1,290,932
Total shareholders’ equity			1,317,516				1,386,780				1,283,249
		$	2,419,199			$	2,524,207			$	2,306,062

See notes to condensed consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Thousands of dollars)

		(Unaudited)
		Six Months Ended
		August 31,
		2005				2004
OPERATING ACTIVITIES:
Net income		$	29,655			$	11,148
Income from discontinued operations			—				2,312
Income from continuing operations			29,655				8,836
Adjustments to reconcile to net cash provided by operating activities:
Gain on sale of investment			—				(3,095	)
Loss on sale of fixed assets			1,628				1,127
Loss on extinguishment of debt			863				39,056
Depreciation and amortization			28,426				28,321
Deferred income taxes			25,773				(5,787	)
Other non-cash charges			1,749				1,038
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in trade accounts receivable			11,685				(238	)
Increase in inventories			(75,697	)			(72,229	)
(Increase) decrease in other current assets			(17,865	)			8,590
Decrease in deferred costs — net			52,774				71,006
(Decrease) increase in accounts payable and other liabilities			(29,901	)			2,358
Other — net			4,580				2,672
Cash Provided by Operating Activities			33,670				81,655
INVESTING ACTIVITIES:
Proceeds from sale of short-term investments			1,070,480				—
Purchases of short-term investments			(1,070,490	)			—
Property, plant and equipment additions			(18,780	)			(15,019	)
Proceeds from sale of fixed assets			7,369				115
Cash payments for business acquisitions			—				(3,894	)
Investment in corporate owned life insurance			(2,219	)			(2,861	)
Other — net			(5,893	)			19,783
Cash Used by Investing Activities			(19,533	)			(1,876	)
FINANCING ACTIVITIES:
Reduction of long-term debt			(10,782	)			(216,417	)
Sale of stock under benefit plans			21,302				18,739
Purchase of treasury shares			(98,026	)			(9,363	)
Dividends to shareholders			(10,906	)			—
Cash Used by Financing Activities			(98,412	)			(207,041	)
CASH USED BY DISCONTINUED OPERATIONS			—				(2,789	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(2,185	)			(2,636	)
DECREASE IN CASH AND CASH EQUIVALENTS			(86,460	)			(132,687	)
Cash and Cash Equivalents at Beginning of Year			250,267				285,450
Cash and Cash Equivalents at End of Period		$	163,807			$	152,763

See notes to condensed consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Three and Six Months Ended August 31, 2005 and 2004

Note 1 – 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 adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the period 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, 2005 refers to the year ended February 28, 2005. For 2005, the Corporation’s subsidiary, AG Interactive, was consolidated on a two-month lag corresponding with its fiscal year-end of December 31. For 2006, AG Interactive has changed its fiscal year-end to coincide with the Corporation’s fiscal year-end. As a result, the six months ended August 31, 2005 includes eight months of AG Interactive’s operations. The additional two months of activity generated revenues of approximately $11 million for the six month period ended August 31, 2005, but had no significant impact on segment earnings.

These interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended February 28, 2005 of American Greetings Corporation (the “Corporation”), from which the Condensed Consolidated Statement of Financial Position at February 28, 2005, presented herein, has been derived. Certain amounts in the prior year financial statements have been reclassified to conform to the 2006 presentation.

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 November 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151 (“SFAS 151”), “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” SFAS 151 seeks to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) in the determination of inventory carrying costs. The statement requires such costs to be treated as a current period expense. SFAS 151 also establishes the concept of “normal capacity” and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Any unallocated overhead would be treated as a current period expense in the period incurred. This statement is effective for fiscal years beginning after July 15, 2005. The Corporation does not believe that the adoption of SFAS 151 will have a significant impact on the Corporation’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment.” SFAS 123(R) requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) eliminates the alternative to use the intrinsic value method of accounting in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” The Corporation is in the process of evaluating the impact that the adoption of this statement will have on the consolidated financial statements. It is, however, expected to reduce consolidated net income. This statement was originally effective for the first interim or annual period beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission amended the compliance date of SFAS 123(R) through an amendment of Regulation S-X. The new effective date for the Corporation is March 1, 2006. Refer to Note 12 for the Corporation’s current accounting for stock-based compensation.

Note 4 — Other Income — Net

		Three Months Ended								Six Months Ended
		August 31,								August 31,
(In thousands)		2005				2004				2005				2004
Royalty revenue		$	(9,481	)		$	(1,408	)		$	(15,160	)		$	(11,891	)
Foreign exchange (gain) loss			(720	)			(112	)			519				(417	)
Interest income			(2,694	)			(1,530	)			(5,334	)			(2,236	)
Gain on sale of investment			—				(5	)			—				(3,095	)
Other			963				(14,175	)			(328	)			(15,937	)
		$	(11,932	)		$	(17,230	)		$	(20,303	)		$	(33,576	)

During the three months ended August 31, 2004, other included a $10.0 million one-time receipt related to licensing activities. Other includes, among other things, gains and losses on asset disposals and rental income. Proceeds of $19.1 million received from the sale of an investment in the prior year are included in “Other — net” investing activities in the Condensed Consolidated Statement of Cash Flows for the period.

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 31,								August 31,
		2005				2004				2005				2004
Numerator (in thousands):
Income from continuing operations		$	3,241			$	5,900			$	29,655			$	8,836
Add back — interest on convertible subordinated notes, net of tax			—				—				3,750				—
Income from continuing operations		$	3,241			$	5,900			$	33,405			$	8,836
Denominator (in thousands):
Weighted average shares outstanding			67,102				68,419				67,849				68,210
Effect of dilutive securities:
Convertible debt			—				—				12,591				—
Stock options and other			812				847				801				847
Weighted average shares outstanding — assuming dilution			67,914				69,266				81,241				69,057
Income from continuing operations per share		$	0.05			$	0.09			$	0.44			$	0.13
Income from continuing operations per share — assuming dilution		$	0.05			$	0.09			$	0.41			$	0.13

Approximately 1.6 million and 1.7 million stock options outstanding in the three and six month periods ended August 31, 2005, respectively, were excluded because the effect would have been antidilutive (3.9 million and 4.1 million stock options outstanding in the three and six month periods ended August 31, 2004, respectively). In addition, the effect of the convertible subordinated notes has been excluded for the three months ended August 31, 2005, and for the three and six months ended August 31, 2004, because the effect would have been antidilutive. See Note 10 for further discussion.

Note 6 — Comprehensive Income

The Corporation’s total comprehensive income is as follows:

(In thousands)		Three Months Ended								Six Months Ended
		August 31,								August 31,
		2005				2004				2005				2004
Net income		$	3,241			$	6,910			$	29,655			$	11,148
Other comprehensive (loss) income:
Foreign currency translation adjustments			(2,043	)			(3,519	)			(16,187	)			(10,566	)
Unrealized gains on securities			2				253				1				253
Total comprehensive income		$	1,200			$	3,644			$	13,469			$	835

Note 7 — Trade Accounts Receivable, Net

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

(In thousands)		August 31, 2005				February 28, 2005				August 31, 2004
Allowance for seasonal sales returns		$	39,595			$	94,672			$	39,329
Allowance for doubtful accounts			17,255				16,684				17,398
Allowance for cooperative advertising and marketing funds			28,394				30,288				20,295
Allowance for rebates			46,077				50,638				44,570
		$	131,321			$	192,282			$	121,592

Note 8 — Inventories

(In thousands)		August 31, 2005				February 28, 2005				August 31, 2004
Raw materials		$	33,320			$	23,241			$	38,142
Work in process			23,502				19,719				25,792
Finished products			291,687				228,088				286,454
			348,509				271,048				350,388
Less LIFO reserve			77,444				75,890				70,606
			271,065				195,158				279,782
Display materials and factory supplies			25,068				27,716				29,195
Inventories		$	296,133			$	222,874			$	308,977

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.

Note 9 — Deferred Costs

In the normal course of its business, the Corporation enters into agreements with certain customers for the supply of greeting cards and related products. Under these agreements, the customer typically receives from the Corporation a combination of cash payments, credits, discounts, allowances and other incentive considerations to be earned by the customer as product is purchased from the Corporation over the effective time period of the agreement to meet a minimum purchase volume commitment. In the event a contract is not completed, the Corporation has a claim for unearned advances under the agreement. The Corporation periodically reviews the progress toward the commitment and adjusts the estimated amortization period accordingly to match the costs with the revenue associated with the agreement. The agreements may or may not specify the Corporation as the sole supplier of social expression products to the customer.

The Corporation classifies the total contractual amount of the incentive consideration committed to the customer but not yet earned as a deferred cost asset at the inception of an agreement, or any future amendments. Deferred costs estimated to be earned by the customer and charged to operations during the next twelve months are classified as “Prepaid expenses and other” in the Condensed Consolidated Statement of Financial Position, and the remaining amounts to be charged beyond the next twelve months are classified as “Other assets.”

A portion of the total consideration may be payable by the Corporation at the time the agreement is consummated. All future payment commitments are classified as liabilities at inception until paid. The payments that are expected to be made in the next twelve months are classified as “Other current liabilities” in the Condensed Consolidated Statement of Financial Position, and the remaining payment commitments beyond the next twelve months are classified as “Other liabilities.” The Corporation believes that it maintains adequate reserves for deferred costs related to supply agreements and does not expect that the non-completion of any particular contract would result in a material loss.

As of August 31, 2005, February 28, 2005 and August 31, 2004, deferred costs and future payment commitments are included in the following financial statement captions:

(In thousands)		August 31, 2005				February 28, 2005				August 31, 2004
Prepaid expenses and other		$	161,689			$	156,665			$	169,770
Other assets			540,121				582,401				568,247
Deferred cost assets			701,810				739,066				738,017
Other current liabilities			(96,653	)			(65,944	)			(52,621	)
Other liabilities			(80,905	)			(95,452	)			(67,549	)
Deferred cost liabilities			(177,558	)			(161,396	)			(120,170	)
Net deferred costs		$	524,252			$	577,670			$	617,847

Note 10 — Debt

On May 11, 2004, the Corporation amended and restated its senior secured credit facility. This facility was originally entered into on August 9, 2001, as a $350 million facility and was amended on July 22, 2002, to a $320 million facility. The amended and restated senior secured credit facility consists of a $200 million revolving facility maturing on May 10, 2008. There were no outstanding balances under this facility at August 31, 2005, February 28, 2005 or August 31, 2004.

The amended and restated credit facility is secured by the domestic assets of the Corporation and a 65% interest in the capital stock of certain of its foreign subsidiaries. The Corporation pays an annual commitment fee of 25 basis points on the undrawn portion of the facility. The facility contains various restrictive covenants. Some of these restrictions require that the Corporation meet specified periodic financial ratios, minimum net worth, maximum leverage, and interest coverage. The credit facility places certain restrictions on the Corporation’s ability to incur additional indebtedness, to engage in acquisitions of other businesses, to repurchase its own capital stock and to

pay shareholder dividends. These covenants are less restrictive than the covenants previously in place.

In April 2005, the Corporation amended its amended and restated senior secured credit facility dated May 11, 2004. The amendment, among other things, increased the maximum amount of dividends that the Corporation may pay to its shareholders, increased the maximum amount of its own capital stock that it may repurchase and extended the period during which the Corporation may repurchase its 11.75% senior subordinated notes due July 15, 2008.

The Corporation is also party to a three-year accounts receivable securitization financing agreement that provides for up to $200 million of financing and is secured by certain trade accounts receivable. Under the terms of the agreement, the Corporation transfers receivables to a wholly-owned consolidated subsidiary that in turn utilizes the receivables to secure borrowings through a credit facility with a financial institution. On August 2, 2004, the agreement was amended to extend the maturity date to August 1, 2007. The related interest rate is commercial paper-based. The Corporation pays an annual commitment fee of 25 basis points on the undrawn portion of the accounts receivable facility. There were no outstanding balances under this agreement at August 31, 2005, February 28, 2005 or August 31, 2004.

During the three months ended May 31, 2004, the Corporation commenced a cash tender offer for all of its outstanding 11.75% senior subordinated notes due July 15, 2008. As a result of this tender offer, a total of $186.2 million of these senior subordinated notes were repurchased and the Corporation recorded a charge of $39.1 million, included in “Interest expense” on the Condensed Consolidated Statement of Income, for the payment of the premium and other fees associated with the notes repurchased as well as for the write-off of related deferred financing costs. As part of this transaction, substantially all restrictive covenants were eliminated from the approximately $10 million remaining outstanding notes. On July 15, 2005, the Corporation called the remaining 11.75% senior subordinated notes. As a result, a charge of $0.9 million, included in “Interest expense” on the Condensed Consolidated Statement of Income, was recorded during the six months ended August 31, 2005, for the premium associated with the notes as well as for the write-off of related deferred financing costs.

At August 31, 2005, the Corporation was in compliance with its financial covenants.

At August 31, 2005, February 28, 2005 and August 31, 2004, long-term debt and their related calendar year due dates were as follows:

(In thousands)		August 31, 2005				February 28, 2005				August 31, 2004
6.10% Senior Notes, due 2028		$	298,703			$	298,503			$	298,310
11.75% Senior Subordinated Notes, due 2008			—				10,016				9,990
7.00% Convertible Subordinated Notes, due 2006			175,000				175,000				175,000
Other (due 2007-2011)			2,519				2,580				576
		$	476,222			$	486,099			$	483,876

The 7.00% convertible subordinated notes are convertible at the option of the holders into shares of the Corporation’s class A common shares at any time before the close of business on July 15, 2006, at a conversion rate of 71.9466 common shares per $1 thousand principal amount of notes.

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 31,								August 31,
(In thousands)		2005				2004				2005				2004
Service cost		$	128			$	112			$	256			$	224
Interest cost			1,811				1,851				3,622				3,692
Expected return on plan assets			(1,721	)			(1,428	)			(3,442	)			(2,843	)
Amortization of prior service cost			23				—				46				—
Amortization of actuarial loss			358				22				716				22
		$	599			$	557			$	1,198			$	1,095

		Postretirement Benefit
		Three Months Ended								Six Months Ended
		August 31,								August 31,
(In thousands)		2005				2004				2005				2004
Service cost		$	711			$	628			$	1,422			$	1,256
Interest cost			1,872				2,221				3,744				4,442
Expected return on plan assets			(1,201	)			(1,336	)			(2,402	)			(2,672	)
Amortization of prior service cost			(1,849	)			(1,559	)			(3,698	)			(3,118	)
Amortization of actuarial loss			1,771				1,546				3,542				3,092
		$	1,304			$	1,500			$	2,608			$	3,000

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act provides plan sponsors a federal subsidy for certain qualifying prescription drug benefits covered under the sponsor’s postretirement health care plans. FASB Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” (“FSP 106-2”) was issued on May 19, 2004. FSP 106-2 provides guidance on accounting for the effects of the new Medicare prescription drug legislation by employers whose prescription drug benefits are actuarially equivalent to the drug benefit under Medicare Part D. FSP 106-2 also contains basic guidance on related income tax accounting and complex rules for transition that permit various alternative prospective and retroactive transition approaches. The Corporation adopted the provisions of FSP 106-2 effective September 1, 2004. The effect of the adoption of FSP 106-2 was a reduction of the net periodic postretirement benefit cost of approximately $0.2 million and $0.4 million for the three and six months ended August 31, 2005, respectively.

The Corporation has a non-contributory profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. The profit-sharing plan expense for the six months ended August 31, 2005 was $3.5 million, compared to $2.5 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 and are contingent upon final year-end results. The Corporation matches a portion of 401(k) employee contributions contingent upon meeting specified annual operating results goals. The expenses recognized for the three and six month periods ended August 31, 2005 were $1.1 million and $1.8 million ($1.1 million and $2.3 million for the three and six month periods ended August 31, 2004), respectively.

Note 12 — Stock-Based Compensation

The Corporation follows APB Opinion No. 25 and related Interpretations in accounting for its stock options granted to employees and directors. Because the exercise price of the Corporation’s stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Corporation has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Refer to Note 3 for information regarding recent changes to the accounting guidance for stock-based compensation.

The following illustrates the pro forma effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS 123:

(In thousands, except per share amounts)		Three Months Ended								Six Months Ended
		August 31,								August 31,
		2005				2004				2005				2004
Net income as reported		$	3,241			$	6,910			$	29,655			$	11,148
Add: Stock-based compensation expense included in net income, net of tax			451				—				451				—
Deduct: Stock-based compensation expense determined under fair value based method, net of tax			1,849				1,735				2,878				3,065
Pro forma net income		$	1,843			$	5,175			$	27,228			$	8,083
Earnings per share:
As reported		$	0.05			$	0.10			$	0.44			$	0.16
Pro forma			0.03				0.08				0.40				0.12
Earnings per share — assuming dilution:
As reported		$	0.05			$	0.10			$	0.41			$	0.16
Pro forma			0.03				0.07				0.38				0.12

During the three months ended May 31, 2004, shares held in trust related to a deferred compensation plan were withdrawn from the trust. This transaction had no impact on the Corporation’s results of operations during the six months ended August 31, 2004.

Approximately 0.9 million and 1.3 million stock options were exercised during the three and six months ended August 31, 2005, respectively, compared to approximately 0.5 million and 1.6 million stock options exercised during the three and six months ended August 31, 2004, respectively.

Note 13 — Business Segment Information

The Social Expression Products segment primarily designs, manufactures and sells greeting cards and other related products through various channels of distribution, with mass retailers as the primary channel, and is managed by geographic location.

At August 31, 2005, the Corporation owned and operated 527 card and gift retail stores in the United States and Canada through its Retail Operations segment. The stores are primarily located in malls and strip shopping centers. The stores sell products purchased from the Social Expression Products segment and products purchased from other vendors.

AG Interactive is an electronic provider of social expression content through the Internet and wireless platforms.

Non-reportable operating segments primarily include the design, manufacture and sale of display fixtures.

Segment results are internally reported and evaluated at consistent exchange rates between years to eliminate the impact of foreign currency fluctuations. An exchange rate adjustment is included in the reconciliation of the segment results to the consolidated results; this adjustment represents the impact on the segment results of the difference between the exchange rates used for segment reporting and evaluation and the actual exchange rates for the periods presented.

Centrally-incurred and managed costs are not allocated back to the operating segments. The unallocated items include interest expense on centrally-incurred debt and domestic profit-sharing expense. In addition, the costs associated with corporate operations including the senior management, corporate finance, legal and human resource functions, among other costs, are included in the unallocated items.

Operating Segment Information

(In thousands)		Three Months Ended								Six Months Ended
		August 31,								August 31,
		2005				2004				2005				2004
Net Sales:
Social Expression Products		$	336,129			$	340,374			$	708,197			$	721,923
Intersegment items			(13,879	)			(17,324	)			(25,554	)			(32,148	)
Exchange rate adjustment			956				196				5,518				586
Net			323,206				323,246				688,161				690,361
Retail Operations			39,085				48,239				81,945				99,562
Exchange rate adjustment			1,557				401				2,939				617
Net			40,642				48,640				84,884				100,179
AG Interactive			19,583				12,959				47,630				22,404
Exchange rate adjustment			(98	)			—				116				—
Net			19,485				12,959				47,746				22,404
Non-reportable segments			3,156				8,187				7,926				13,578
Unallocated items — net			1,067				(948	)			2,115				(897	)
Consolidated		$	387,556			$	392,084			$	830,832			$	825,625
Segment Earnings:
Social Expression Products		$	50,413			$	60,795			$	135,378			$	155,757
Intersegment items			(10,163	)			(12,295	)			(18,697	)			(23,231	)
Exchange rate adjustment			603				202				1,355				359
Net			40,853				48,702				118,036				132,885
Retail Operations			(11,049	)			(11,376	)			(17,287	)			(15,520	)
Exchange rate adjustment			(133	)			(4	)			(175	)			11
Net			(11,182	)			(11,380	)			(17,462	)			(15,509	)
AG Interactive			485				(2,046	)			815				(1,683	)
Exchange rate adjustment			41				—				(54	)			—
Net			526				(2,046	)			761				(1,683	)
Non-reportable segments			167				(2,150	)			641				(9,056	)
Unallocated items — net			(22,280	)			(23,496	)			(50,900	)			(92,210	)
Exchange rate adjustment			203				(4	)			301				(12	)
Net			(22,077	)			(23,500	)			(50,599	)			(92,222	)
Consolidated		$	8,287			$	9,626			$	51,377			$	14,415

Other

During 2005, the Corporation recorded a severance accrual of $18.3 million related to an overhead reduction program that eliminated approximately 300 associates and the Franklin, Tennessee plant closure. Substantially all of the associates receiving payments separated from the Corporation on or prior to February 28, 2005. Approximately 70% of the severance will be paid prior to February 28, 2006, with the remaining payments extending through 2008. The remaining balance of the severance accrual was $8.7 million at August 31, 2005.

In connection with the Franklin plant closing, the Social Expression Products segment recorded an additional charge of $5.3 million during the six months ended August 31, 2005 for the remaining shutdown and relocation costs incurred during the period, including $2.1 million incurred during the second quarter.

Note 14 — Discontinued Operations

On July 30, 2004, the Corporation announced it had signed a letter of agreement to sell its Magnivision nonprescription reading glasses business to AAiFosterGrant, a unit of sunglasses maker Foster Grant. The sale reflects the Corporation’s strategy to focus its resources on business units closely related to its core social expression business. The sale closed in the third quarter of fiscal 2005 although an additional amount may be recorded during the next six months based on closing balance sheet adjustments. This adjustment is not expected to exceed 10% of the cash proceeds. During the third quarter of fiscal 2005, the Corporation received cash proceeds of $77.0 million and recorded a gain of $35.5 million for the sale of Magnivision.

Magnivision meets the definition of a “component of an entity” and has been accounted for as a discontinued operation under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, the Corporation’s condensed consolidated financial statements and related notes have been presented to reflect Magnivision as a discontinued operation for all periods presented. Magnivision was previously included within the Corporation’s “non-reportable segments.”

The following summarizes the results of discontinued operations for the three and six months ended August 31, 2004:

		Three Months				Six Months
		Ended				Ended
		August 31, 2004				August 31, 2004
(In thousands)
Net sales		$	13,024			$	25,658
Pretax income from operations			1,647				3,771
Income tax expense			637				1,459
Income from discontinued operations		$	1,010			$	2,312

“Assets of businesses held for sale” and “Liabilities of businesses held for sale” in the Condensed Consolidated Statement of Financial Position include the following:

(In thousands)		August 31, 2004
Assets of businesses held for sale:
Current assets		$	23,077
Other assets			6,566
Fixed assets			10,747
		$	40,390
Liabilities of businesses held for sale:
Current liabilities		$	2,844
Noncurrent liabilities			1,618
		$	4,462

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

Overview

During the second quarter of 2006, the Corporation continued to benefit from strong everyday card sales in North America due to ongoing initiatives, which focus on better understanding and meeting consumer needs and improving the retail shopping experience. Seasonal card units increased dramatically from the prior year quarter due to timing differences related to customers who were recently converted to scan-based trading, the change in strategy for seasonal space management and fall seasonal shipments. These seasonal shifts are not expected to significantly impact full year seasonal results. AG Interactive achieved net sales growth due to prior year acquisitions, new products in the instant messenger business and increased subscribers in the core online greeting card business. Also contributing to the quarter was the continued performance of the licensing business.

Sales in the Retail Operations segment declined from the prior year period, but margins improved as the segment relied less on promotional pricing to drive sales volume. Consolidated margins also improved as a result of product mix, more card product versus non-card product, and business mix, with an increased percentage of sales from higher margin businesses compared to the prior year second quarter. The Corporation also completed a plant closure and consolidation during the quarter and expects to realize cost savings from this activity in the next fiscal year.

Despite these positive indicators, the Corporation remains concerned with its international businesses, particularly the United Kingdom (“U.K.”) market, which remained soft during the second quarter, but improved from the first quarter. In addition to the demand reduction, general cost pressure throughout the business and customer mix are impacting international margins. The Corporation is also experiencing sales and earnings shortfalls in the promotional gift wrap business and the wireless business in Europe.

Balance sheet management, particularly from working capital, continued to provide favorable cash flow. Also during the second quarter, the Corporation repurchased debt of approximately $10 million and repurchased approximately 2 million shares of stock for $46 million under the stock repurchase program. Despite this usage from financing activities, the Corporation ended the second quarter in a strong cash position with combined cash, cash equivalents and short-term investments of $372.6 million compared to $152.8 million at the prior year quarter end.

During the three months ended August 31, 2005, the Corporation recognized income from continuing operations of $3.2 million compared to $5.9 million in the prior year quarter. The current year quarter included $2.1 million pretax for shutdown and relocation costs incurred during the period in connection with the closure of a manufacturing facility. The prior year quarter included a $10.0 million pretax gain as a result of a one-time receipt relating to the Corporation’s licensing activities.

For 2006, AG Interactive changed its fiscal year-end to coincide with the Corporation’s fiscal year-end. As a result, the six months ended August 31, 2005 included eight months of AG Interactive’s operations.

Results of Operations

Three months ended August 31, 2005 and 2004

Net income was $3.2 million, or $0.05 per share, in the quarter compared to $6.9 million, or $0.10 per share, in the prior year second quarter (all per-share amounts assume dilution). Income from discontinued operations, net of tax, contributed $1.0 million, or $0.01 per share, of the net income in the prior year second quarter.

The Corporation’s results for the three months ended August 31, 2005 and 2004 are summarized below:

						% Net								% Net
(Dollars in thousands)		2005				Sales				2004				Sales
Net sales		$	387,556				100.0	%		$	392,084				100.0	%
Material, labor and other production costs			176,316				45.5	%			186,717				47.6	%
Selling, distribution and marketing			147,328				38.0	%			146,303				37.3	%
Administrative and general			58,970				15.2	%			57,505				14.7	%
Interest expense			8,587				2.2	%			9,163				2.3	%
Other income — net			(11,932	)			(3.0	%)			(17,230	)			(4.4	%)
Total costs and expenses			379,269				97.9	%			382,458				97.5	%
Income from continuing operations before income tax expense			8,287				2.1	%			9,626				2.5	%
Income tax expense			5,046				1.3	%			3,726				1.0	%
Income from continuing operations			3,241				0.8	%			5,900				1.5	%
Income from discontinued operations, net of tax			—				0.0	%			1,010				0.3	%
Net income		$	3,241				0.8	%		$	6,910				1.8	%

For the three months ended August 31, 2005, consolidated net sales were $387.6 million, down from $392.1 million in the prior year second quarter. This 1.2% decrease was primarily the result of lower sales in the Corporation’s Retail Operations segment and the fixtures business. The Retail Operations segment was down approximately $9 million, half of which is attributable to a decrease in same-store sales and half due to fewer stores. The fixtures business decreased approximately $5 million compared to the prior year as this business unit has focused on eliminating lower margin sales. These decreases were partially offset by an increase in AG Interactive. AG Interactive sales increased approximately $7 million due to the prior year acquisitions in the wireless unit and growth in the online business. The Social Expression Products segment was relatively flat compared to the prior year period as a strong performance in the North American greeting card business was offset by declining gift wrap and international sales. Favorable foreign currency translation added approximately $2 million to net sales.

Unit and Pricing Analysis

Unit and pricing comparatives (on a sales less returns basis) for the three months ended August 31, 2005 and 2004 are summarized below:

		Increase (Decrease) From the Prior Year
		Everyday Cards								Seasonal Cards								Total Greeting Cards
		2005				2004				2005				2004				2005				2004
Unit volume			0.5	%			(2.1	%)			42.6	%			(19.7	%)			4.4	%			(3.9	%)
Selling prices			(0.9	%)			—				(5.7	%)			5.8	%			(1.1	%)			0.3	%
Overall Increase/ (Decrease)			(0.4	%)			(2.1	%)			34.5	%			(15.0	%)			3.2	%			(3.6	%)

Seasonal card unit volume increased 42.6% in the current quarter, driven primarily by the North American business unit. Approximately half of this increase is due to Father’s Day and Graduation card sales, primarily affected by timing differences with customers that implemented scan-based trading subsequent to the prior year second quarter. As noted in the Corporation’s Form 10-Q for the quarter ended May 31, 2005, the implementation of scan-based trading shifted the Corporation’s recognition of a significant portion of sales of Father’s Day and Graduation cards from the first quarter to the second quarter for these customers. Further, since the second quarter is the smallest seasonal card quarter, the unit increase in this quarter appears larger than the decrease in the first quarter on a percentage basis. The remaining increase relates to timing differences on summer seasonal product, shifting from the first quarter compared to the prior year, and earlier shipments of fall and Christmas seasonal product compared to the prior year quarter. Slightly offsetting the North America increases are timing differences of Christmas product shipments in the U.K. due to varying customer delivery date preferences. The 5.7% decrease in selling prices of seasonal cards is due to higher sales of value priced cards across all seasonal programs and the higher volume of fall products that generally include lower priced cards.

Sales of everyday card units increased 0.5% compared to the prior year quarter as continued growth in North America was slightly offset by lower unit sales from the Corporation’s international business operations, however the international business, particularly in the U.K., showed improvements compared to the results in the first quarter. The 0.9% decrease in selling prices of everyday cards was driven by a higher mix of value priced cards.

Expense Overview

Material, labor and other production costs (MLOPC) for the three months ended August 31, 2005 were $176.3 million, a decrease from $186.7 million for the same period in the prior year. As a percentage of net sales, these costs were 45.5% in the current period compared to 47.6% for the three months ended August 31, 2004. The $10.4 million decrease from the prior year is attributable to favorable mix, both product and business, and favorable volume variances partially offset by increased spending. Changes in business mix accounted for approximately $8 million of the decrease as lower margin businesses shrunk and higher margin businesses grew or held revenues flat. The Corporation’s fixtures business

experienced improved margins as that business focused on eliminating lower margin sales. The quality of sales or product mix within certain businesses reduced MLOPC by approximately $10 million. Less promotional pricing in the Retail Operations segment improved margins in that business. The overall reduced sales volume in the current period accounted for approximately $2 million of the decrease in MLOPC. Offsetting these decreases were approximately $2 million of shutdown and relocation costs for the plant closure announced in 2005, increased creative content costs of approximately $2 million and approximately $4 million for increased costs for raw materials and plant operations, particularly paper costs. Also, changes in the LIFO reserve added approximately $2 million in the current year quarter.

Selling, distribution and marketing costs for the three months ended August 31, 2005 were $147.3 million, increasing from $146.3 million for the same period in the prior year. As a percentage of net sales, these costs were 38.0% in the current period compared to 37.3% for the three months ended August 31, 2004. The $1.0 million change is due to higher licensing related expenses of approximately $4 million (as a result of higher royalty revenue) partially offset by reduced costs of approximately $3 million in the Retail Operations segment arising from fewer stores.

Administrative and general expenses were $59.0 million for the three months ended August 31, 2005, an increase from $57.5 million for the same period in the prior year. The increase of $1.5 million from the prior year period is primarily the result of increased systems development spending and administrative costs embedded in the acquisitions made during the last six months of the prior year.

Interest expense for the three months ended August 31, 2005 was $8.6 million, a decrease from $9.2 million for the same period in the prior year. The decrease of $0.6 million is due primarily to interest savings resulting from the debt repurchase in July 2005.

Other income – net was $11.9 million for the three months ended August 31, 2005, a decrease from $17.2 million for the same period in the prior year. The $5.3 million decrease is partially due to the one-time receipt of $10.0 million in the prior year period related to licensing activities partially offset by increased royalty revenue of $8.1 million in the current quarter compared to the prior year.

The effective tax rate was 60.9% and 38.7% for the three months ended August 31, 2005 and 2004, respectively. Since the second quarter has seasonally low income from continuing operations before income tax expense, any changes to the tax assets and reserves on the Condensed Consolidated Statement of Financial Position are magnified in the effective tax rate calculation. During the three months ended August 31, 2005, the Corporation eliminated deferred tax assets relating to certain foreign net operating loss carryforwards. In addition, the Corporation reduced its deferred income tax assets to reflect the change in Ohio tax laws.

Results of Operations

Six months ended August 31, 2005 and 2004

Net income was $29.7 million, or $0.41 per share, in the six months ended August 31, 2005, compared to net income of $11.1 million, or $0.16 per share, in the prior year period. Income from discontinued operations, net of tax, contributed $2.3 million, or $0.03 per share, of the net income in the prior year six months.

The Corporation’s results for the six months ended August 31, 2005 and 2004 are summarized below:

						% Net								% Net
(In thousands)		2005				Sales				2004				Sales
Net sales		$	830,832				100.0	%		$	825,625				100.0	%
Material, labor and other production costs			356,789				42.9	%			368,332				44.6	%
Selling, distribution and marketing			302,602				36.4	%			292,955				35.5	%
Administrative and general			122,098				14.7	%			121,642				14.7	%
Interest expense			18,269				2.2	%			61,857				7.5	%
Other income — net			(20,303	)			(2.4	%)			(33,576	)			(4.1	%)
Total costs and expenses			779,455				93.8	%			811,210				98.2	%
Income from continuing operations before income tax expense			51,377				6.2	%			14,415				1.8	%
Income tax expense			21,722				2.6	%			5,579				0.7	%
Income from continuing operations			29,655				3.6	%			8,836				1.1	%
Income from discontinued operations, net of tax			—				0.0	%			2,312				0.3	%
Net income		$	29,655				3.6	%		$	11,148				1.4	%

For the six months ended August 31, 2005, consolidated net sales were $830.8 million, up from $825.6 million in the same period in the prior year. This 0.6% increase is due primarily to increases in AG Interactive as well as approximately $7 million of favorable foreign currency translation. The increase in net sales of approximately $25 million for AG Interactive is due to sales from the additional two months of activity resulting from the fiscal year change and from the prior year acquisitions. Partially offsetting these increases were lower sales in the Retail Operations and Social Expression Products segments and the fixtures business. The Retail Operations segment was down approximately $17 million, half due to fewer stores and half due to the decrease in same-store sales. The Social Expression Products segment decreased approximately $7 million as unfavorable gift wrap and international sales were only partially offset by improvements in the North American greeting card business. The fixtures business decreased approximately $6 million compared to the prior year due to the business unit’s focus on eliminating lower margin sales.

Selling, distribution and marketing costs for the six months ended August 31, 2005 were $302.6 million, up from the $293.0 million for the same period in the prior year. As a percentage of net sales, these costs were 36.4% in the current period compared to 35.5% for the six months ended August 31, 2004. The $9.6 million increase from the prior year is due to increased costs of approximately $10 million in the AG Interactive segment primarily as a result of the additional two months of activity and the prior year acquisitions and higher licensing related expenses of approximately $2 million (as a result of higher royalty revenue). Also contributing to the increase are higher merchandiser and field sales expenses of approximately $3 million. These increases were partially offset by reduced costs of approximately $6 million in the Retail Operations segment due to fewer stores in the current year period.

Administrative and general expenses were $122.1 million for the six months ended August 31, 2005, an increase from $121.6 million for the same period in the prior year. The increase of $0.5 million compared to the prior year six months is due to costs embedded in the AG Interactive acquisitions and the additional two months of activity offset by lower consulting expenses.

Interest expense was $18.3 million for the six months ended August 31, 2005 down from $61.9 million for the same period in the prior year. The decrease of $43.6 million is due primarily to the debt repurchase from the first quarter of fiscal 2005. The Corporation recorded $39.1 million for the payment of the premium and other fees and the write-off of deferred financing costs associated with the repurchase of $186.2 million of the 11.75% senior subordinated notes during the prior year period. Interest savings of $4.7 million were realized due to the reduced level of debt. Partially offsetting these decreases is $0.9 million for the payment of the premium and the write-off of deferred financing costs associated with the repurchase of the remaining $10.2 million of the 11.75% senior subordinated notes during the current year period.

Other income – net was $20.3 million for the six months ended August 31, 2005, down from $33.6 million in the same period in the prior year. The decrease of $13.3 million is due primarily to the one-time receipt of $10.0 million related to the Corporation’s licensing activities and a $3.1 million gain on the sale of an investment, both in the prior year period.

The effective tax rate was 42.3% and 38.7% for the six months ended August 31, 2005 and 2004, respectively. During the six months ended August 31, 2005, the Corporation established additional tax reserves to cover anticipated examination adjustments. In addition, the Corporation reduced its deferred income tax assets to reflect the change in Ohio tax laws.

Segment Information

The Corporation is organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. The Social Expression Products segment primarily designs, manufactures and sells greeting cards and other related products through various channels of distribution, with mass retailers as the primary channel, and is managed by geographic location. As permitted under 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. At August 31, 2005, the Corporation owned and operated 527 card and gift retail stores in the United States and Canada through its Retail Operations segment. The stores are primarily located in malls and strip shopping centers. The stores sell products purchased from the Social Expression Products segment and products purchased from other vendors. AG Interactive is an electronic provider of social expression content through the Internet and wireless platforms.

The Corporation reviews segment results using consistent exchange rates between periods to eliminate the impact of foreign currency fluctuations.

Social Expression Products Segment

		Three Months Ended												Six Months Ended
		August 31,												August 31,
(Dollars in thousands)		2005				2004				% Change				2005				2004				% Change
Net sales		$	322,250			$	323,050				(0.2	%)		$	682,643			$	689,775				(1.0	%)
Segment earnings			40,250				48,500				(17.0	%)			116,681				132,526				(12.0	%)

Net sales of the Social Expression Products segment excluding the impact of foreign exchange and intersegment items, for the three months ended August 31, 2005, decreased $0.8 million or 0.2% from the same period in the prior year. For the six months ended August 31, 2005, net sales decreased $7.1 million or 1.0% from the prior year period due to decreases in the gift wrap business and the international greeting card divisions, primarily the U.K. business, which were only partially offset by improvements in the North American greeting card business, primarily due to less terms granted to customers in the current period.

Segment earnings excluding the impact of foreign exchange and intersegment items for the three months ended August 31, 2005, decreased $8.3 million or 17.0% compared to the prior year period. Segment earnings during the six months ended August 31, 2005, decreased $15.8 million or 12.0% compared to the prior year period. These results reflect the impact of soft international sales, particularly in the U.K., lower sales in the gift wrap business and increased costs for raw materials, particularly paper costs, partially offset by the improvements in the North American greeting card business. Also included were shutdown and relocation costs associated with the plant closure of approximately $2 million during the three months ended August 31, 2005 and approximately $5 million for the six month period and LIFO reserve changes of approximately $2 million in the three months and $4 million in the six months.

Retail Operations Segment

		Three Months Ended												Six Months Ended
		August 31,												August 31,
(Dollars in thousands)		2005				2004				% Change				2005				2004				% Change
Net sales		$	39,085			$	48,239				(19.0	%)		$	81,945			$	99,562				(17.7	%)
Segment loss			(11,049	)			(11,376	)			2.9	%			(17,287	)			(15,520	)			(11.4	%)