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

OR

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

AMERICAN GREETINGS CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		34-0065325
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
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 (Do not check if a smaller reporting company)		Smaller reporting company 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 December 31, 2010, the number of shares outstanding of each of the issuer’s classes of common stock was:

Class A Common		37,237,576
Class B Common		2,905,076

 

 

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			28
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								Nine Months Ended
		November 26,				November 27,				November 26,				November 27,
		2010				2009				2010				2009
Net sales		$	421,990			$	431,512			$	1,147,434			$	1,189,428
Other revenue			8,148				8,654				21,831				20,010
Total revenue			430,138				440,166				1,169,265				1,209,438
Material, labor and other production costs			199,177				204,997				502,903				525,414
Selling, distribution and marketing expenses			117,314				124,167				347,183				373,915
Administrative and general expenses			58,725				69,233				186,950				180,867
Other operating (income) expense — net			(1,048	)			(575	)			(2,578	)			25,801
Operating income			55,970				42,344				134,807				103,441
Interest expense			6,221				6,331				19,141				19,989
Interest income			(176	)			(299	)			(586	)			(1,564	)
Other non-operating income — net			(1,618	)			(1,827	)			(3,321	)			(4,160	)
Income before income tax expense			51,543				38,139				119,573				89,176
Income tax expense			19,380				8,444				48,039				26,398
Net income		$	32,163			$	29,695			$	71,534			$	62,778
Earnings per share — basic		$	0.80			$	0.75			$	1.79			$	1.59
Earnings per share — assuming dilution		$	0.78			$	0.75			$	1.75			$	1.59
Average number of shares outstanding			40,071,916				39,391,399				39,912,378				39,469,293
Average number of shares outstanding — assuming dilution			40,985,909				39,755,233				40,911,964				39,495,247
Dividends declared per share		$	0.14			$	0.12			$	0.42			$	0.24

See notes to consolidated financial statements (unaudited).

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

		(Unaudited)				(Note 1)				(Unaudited)
		November 26,				February 28,				November 27,
		2010				2010				2009
ASSETS
Current assets
Cash and cash equivalents		$	93,899			$	137,949			$	50,563
Trade accounts receivable, net			206,286				135,758				208,964
Inventories			181,511				163,956				168,103
Deferred and refundable income taxes			70,847				78,433				59,791
Assets held for sale			12,325				13,280				21,931
Prepaid expenses and other			127,598				148,048				151,842
Total current assets			692,466				677,424				661,194
Goodwill			31,686				31,106				38,177
Other assets			403,815				428,160				349,284
Deferred and refundable income taxes			146,767				148,210				173,847
Property, plant and equipment — at cost			851,636				840,696				860,670
Less accumulated depreciation			614,894				595,945				602,863
Property, plant and equipment — net			236,742				244,751				257,807
		$	1,511,476			$	1,529,651			$	1,480,309
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Debt due within one year		$	—			$	1,000			$	1,000
Accounts payable			97,899				95,434				86,835
Accrued liabilities			80,744				79,478				91,469
Accrued compensation and benefits			59,128				85,092				74,770
Income taxes payable			39,593				13,901				10,479
Other current liabilities			86,419				97,138				87,221
Total current liabilities			363,783				372,043				351,774
Long-term debt			232,078				328,723				355,974
Other liabilities			173,017				164,642				129,517
Deferred income taxes and noncurrent income taxes payable			32,824				28,179				31,633
Shareholders’ equity
Common shares — Class A			37,199				36,257				36,111
Common shares — Class B			2,905				3,223				3,232
Capital in excess of par value			486,399				461,076				456,478
Treasury stock			(952,183	)			(946,724	)			(946,569	)
Accumulated other comprehensive loss			(27,114	)			(29,815	)			(35,824	)
Retained earnings			1,162,568				1,112,047				1,097,983
Total shareholders’ equity			709,774				636,064				611,411
		$	1,511,476			$	1,529,651			$	1,480,309

See notes to consolidated financial statements (unaudited).

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

		(Unaudited)
		Nine Months Ended
		November 26,				November 27,
		2010				2009
OPERATING ACTIVITIES:
Net income		$	71,534			$	62,778
Adjustments to reconcile net income to cash flows from operating activities:
Net (gain) loss on dispositions			(254	)			27,671
Net (gain) loss on disposal of fixed assets			(1,599	)			163
Depreciation and intangible assets amortization			30,336				34,121
Deferred income taxes			3,957				20,133
Other non-cash charges			12,351				7,096
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Trade accounts receivable			(71,336	)			(124,205	)
Inventories			(16,461	)			16,651
Other current assets			(694	)			16,927
Income taxes			36,187				17,711
Deferred costs — net			19,365				1,904
Accounts payable and other liabilities			(31,541	)			(10,636	)
Other — net			5,896				3,886
Total Cash Flows From Operating Activities			57,741				74,200
INVESTING ACTIVITIES:
Property, plant and equipment additions			(19,660	)			(21,368	)
Cash payments for business acquisitions, net of cash acquired			—				(19,300	)
Proceeds from sale of fixed assets			3,835				886
Proceeds from escrow related to party goods transaction			25,151				—
Other — net			—				4,713
Total Cash Flows From Investing Activities			9,326				(35,069	)
FINANCING ACTIVITIES:
Net decrease in long-term debt			(98,250	)			(34,600	)
Net decrease in short-term debt			(1,000	)			—
Sale of stock under benefit plans			19,831				3,683
Purchase of treasury shares			(13,439	)			(11,826	)
Dividends to shareholders			(16,737	)			(14,327	)
Debt issuance costs			(3,178	)			—
Total Cash Flows From Financing Activities			(112,773	)			(57,070	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			1,656				8,286
DECREASE IN CASH AND CASH EQUIVALENTS			(44,050	)			(9,653	)
Cash and Cash Equivalents at Beginning of Year			137,949				60,216
Cash and Cash Equivalents at End of Period		$	93,899			$	50,563

See notes to consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three and Nine Months Ended November 26, 2010 and November 27, 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 430 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 $40.3 million and $50.9 million as of November 26, 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 November 26, 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 nine months ended November 26, 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 the 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								Nine Months Ended
		November				November				November				November
(In thousands)		26, 2010				27, 2009				26, 2010				27, 2009
Loss on disposition of retail stores		$	—			$	—			$	—			$	28,333
Loss (gain) on disposition of calendar product lines			—				90				—				(547	)
Gain on disposition of candy product lines			—				(115	)			—				(115	)
Miscellaneous			(1,048	)			(550	)			(2,578	)			(1,870	)
Other operating (income) expense — net		$	(1,048	)		$	(575	)		$	(2,578	)		$	25,801

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 $0.5 million. In October 2009, the Corporation sold its candy product lines and recorded a gain of $0.1 million. Proceeds received from the sales of the calendar and candy product lines of $3.1 million and $1.6 million, respectively, were included in “Other — net” investing activities on the Consolidated Statement of Cash Flows.

		Three Months Ended								Nine Months Ended
		November 26,				November 27,				November 26,				November 27,
(In thousands)		2010				2009				2010				2009
Foreign exchange gain		$	(908	)		$	(1,485	)		$	(520	)		$	(2,690	)
Rental income			(235	)			(207	)			(996	)			(955	)
(Gain) loss on asset disposal			(331	)			154				(1,599	)			163
Miscellaneous			(144	)			(289	)			(206	)			(678	)
Other non-operating income — net		$	(1,618	)		$	(1,827	)		$	(3,321	)		$	(4,160	)

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.

“Miscellaneous” includes, among other things, income/loss from equity securities.

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								Nine Months Ended
		November 26,				November 27,				November 26,				November 27,
		2010				2009				2010				2009
Numerator (in thousands):
Net income		$	32,163			$	29,695			$	71,534			$	62,778
Denominator (in thousands):
Weighted average shares outstanding			40,072				39,391				39,912				39,469
Effect of dilutive securities:
Stock options and other			914				364				1,000				26
Weighted average shares outstanding — assuming dilution			40,986				39,755				40,912				39,495
Earnings per share		$	0.80			$	0.75			$	1.79			$	1.59
Earnings per share — assuming dilution		$	0.78			$	0.75			$	1.75			$	1.59

Approximately 4.0 million and 3.2 million stock options outstanding in the three and nine month periods ended November 26, 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 (4.1 million and 6.1 million stock options outstanding in the three and nine month periods ended November 27, 2009, respectively).

The Corporation issued approximately 0.1 million Class A common shares upon exercise of employee stock options during the three months ended November 26, 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 nine months ended November 26, 2010. The Corporation issued approximately 0.2 million Class A common shares upon exercise of employee stock options during the three and nine month periods ended November 27, 2009. There were an insignificant number of Class B common shares issued upon exercise of employee stock options during the prior year three months and nine months ended November 27, 2009.

Note 6 — Comprehensive Income

The Corporation’s total comprehensive income is as follows:

		Three Months Ended								Nine Months Ended
		November 26,				November 27,				November 26,				November 27,
(In thousands)		2010				2009				2010				2009
Net income		$	32,163			$	29,695			$	71,534			$	62,778
Other comprehensive income (loss):
Foreign currency translation adjustments			4,523				5,279				5,607				33,439
Pension and postretirement benefit adjustments, net of tax			(823	)			(541	)			(2,907	)			(1,987	)
Unrealized gain on securities, net of tax			1				—				1				2
Total comprehensive income		$	35,864			$	34,433			$	74,235			$	94,232

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)		November 26, 2010				February 28, 2010				November 27, 2009
Allowance for seasonal sales returns		$	47,252			$	36,443			$	51,845
Allowance for outdated products			10,349				10,438				13,969
Allowance for doubtful accounts			4,379				2,963				3,690
Allowance for cooperative advertising and marketing funds			26,425				24,061				26,777
Allowance for rebates			26,920				29,338				33,434
		$	115,325			$	103,243			$	129,715

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 $15.6 million as of November 26, 2010, February 28, 2010 and November 27, 2009, respectively.

Note 8 — Inventories

(In thousands)		November 26, 2010				February 28, 2010				November 27, 2009
Raw materials		$	16,885			$	18,609			$	17,181
Work in process			7,842				6,622				7,403
Finished products			215,361				194,283				204,422
			240,088				219,514				229,006
Less LIFO reserve			75,818				75,491				79,506
			164,270				144,023				149,500
Display materials and factory supplies			17,241				19,933				18,603
		$	181,511			$	163,956			$	168,103

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 $48.7 million, $37.5 million and $48.1 million as of November 26, 2010, February 28, 2010 and November 27, 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)		November 26, 2010				February 28, 2010				November 27, 2009
Prepaid expenses and other		$	89,250			$	82,914			$	112,154
Other assets			284,908				310,555				245,578
Deferred cost assets			374,158				393,469				357,732
Other current liabilities			(54,048	)			(53,701	)			(50,252	)
Other liabilities			(50,900	)			(51,803	)			(1,800	)
Deferred cost liabilities			(104,948	)			(105,504	)			(52,052	)
Net deferred costs		$	269,210			$	287,965			$	305,680

The Corporation maintains an allowance for deferred costs related to supply agreements of $11.1 million, $12.4 million and $16.3 million at November 26, 2010, February 28, 2010 and November 27, 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”). 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 Corporation is also party to an amended and restated receivables purchase agreement that has available financing of up to $80 million. 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 November 26, 2010. Debt due within one year as of February 28, 2010 and November 27, 2009 was $1.0 million.

Long-term debt and their related calendar year due dates, net of unamortized discounts which totaled $22.8 million and $24.9 million as of November 26, 2010 and November 27, 2009, respectively, were as follows:

(In thousands)		November 26, 2010				February 28, 2010				November 27, 2009
7.375% senior notes, due 2016		$	212,832			$	212,184			$	211,982
7.375% notes, due 2016			19,065				18,103				17,802
Term loan facility			—				98,250				98,500
Revolving credit facility, due 2015			—				—				27,500
6.10% senior notes, due 2028			181				181				181
Other			—				5				9
		$	232,078			$	328,723			$	355,974

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 $237.4 million (at a carrying value of $232.1 million), $224.7 million (at a carrying value of $230.5 million) and $220.8 million (at a carrying value of $230.0 million) at November 26, 2010, February 28, 2010 and November 27, 2009, respectively.

As of November 26, 2010, there were no balances outstanding under the Corporation’s revolving credit facility or receivables purchase agreement, neither of which is 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 for the Corporation.

At November 26, 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 November 26, 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								Nine Months Ended
		November 26,				November 27,				November 26,				November 27,
(In thousands)		2010				2009				2010				2009
Service cost		$	214			$	193			$	715			$	576
Interest cost			2,216				2,304				6,634				6,872
Expected return on plan assets			(1,660	)			(1,416	)			(4,973	)			(4,216	)
Amortization of prior service cost			50				67				138				200
Amortization of actuarial loss			529				487				1,579				1,454
		$	1,349			$	1,635			$	4,093			$	4,886

		Postretirement Benefit
		Three Months Ended								Nine Months Ended
		November 26,				November 27,				November 26,				November 27,
(In thousands)		2010				2009				2010				2009
Service cost		$	575			$	593			$	1,725			$	1,778
Interest cost			1,550				1,840				4,650				5,520
Expected return on plan assets			(1,125	)			(1,028	)			(3,375	)			(3,083	)
Amortization of prior service credit			(1,850	)			(1,855	)			(5,550	)			(5,565	)
Amortization of actuarial loss			250				598				750				1,793
		$	(600	)		$	148			$	(1,800	)		$	443

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 nine months ended November 26, 2010 was $7.4 million, compared to $6.9 million in the prior year period. The Corporation also matches a portion of 401(k) employee contributions. The expenses recognized for the three and nine month periods ended November 26, 2010 were $1.0 million and $3.1 million ($1.2 million and $3.3 million for the three and nine month periods ended November 27, 2009), respectively. The profit-sharing plan and 401(k) matching expenses for the nine month periods are estimates as actual contributions are determined after fiscal year-end.

At November 26, 2010, February 28, 2010 and November 27, 2009, the liability for postretirement benefits other than pensions was $51.3 million, $44.0 million and $62.4 million, respectively, and is included in “Other liabilities” on the Consolidated Statement of Financial Position. At November 26, 2010, February 28, 2010 and November 27,

2009, the long-term liability for pension benefits was $59.3 million, $58.6 million and $53.5 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, November 26, 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
		November				liabilities				liabilities				inputs
		26, 2010				(Level 1)				(Level 2)				(Level 3)
Assets measured on a recurring basis:
Active employees’ medical plan trust assets		$	4,261			$	4,261			$	—			$	—
Deferred compensation plan assets (1)			6,382				6,382				—				—
Total		$	10,643			$	10,643			$	—			$	—
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 37.6% and 40.2% for the three and nine months ended November 26, 2010, respectively, and 22.1% and 29.6% for the three and nine months ended November 27, 2009, respectively. The higher than statutory rate for the nine months ended November 26, 2010 is due primarily to the impact of unfavorable settlements of audits in foreign

jurisdictions, 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 November 26, 2010, the Corporation had unrecognized tax benefits of $44.6 million that, if recognized, would have a favorable effect on the Corporation’s income tax expense of $34.1 million. During the third quarter of 2011, the Corporation’s unrecognized tax benefits decreased approximately $2.5 million due primarily to cash payments for the settlement of foreign audits. It is reasonably possible that the Corporation’s unrecognized tax benefits could decrease by approximately $9.6 million during the next twelve months 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 November 26, 2010, the Corporation recognized net expense of $0.6 million for interest and penalties on unrecognized tax benefits and refundable income taxes. As of November 26, 2010, the total amount of gross accrued interest and penalties related to unrecognized tax benefits less refundable income taxes, was a net payable of $0.2 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								Nine Months Ended
		November 26,				November 27,				November 26,				November 27,
(In thousands)		2010				2009				2010				2009
Total Revenue:
North American Social Expression Products		$	312,773			$	329,869			$	865,664			$	920,568
Intersegment items			—				—				—				(5,104	)
Exchange rate adjustment			4,748				2,761				12,324				5,174
Net			317,521				332,630				877,988				920,638
International Social Expression Products			77,601				73,972				190,364				184,613
Exchange rate adjustment			2,502				2,736				2,048				1,597
Net			80,103				76,708				192,412				186,210
Retail Operations			—				—				—				11,727
Exchange rate adjustment			—				—				—				112
Net			—				—				—				11,839
AG Interactive			19,234				19,393				56,160				56,743
Exchange rate adjustment			(1	)			84				(206	)			76
Net			19,233				19,477				55,954				56,819
Non-reportable segments			13,281				11,185				42,911				33,546
Unallocated			—				166				—				386
		$	430,138			$	440,166			$	1,169,265			$	1,209,438

		Three Months Ended								Nine Months Ended
		November 26,				November 27,				November 26,				November 27,
(In thousands)		2010				2009				2010				2009
Segment Earnings (Loss):
North American Social Expression Products		$	54,277			$	46,675			$	155,997			$	167,441
Intersegment items			—				—				—				(3,511	)
Exchange rate adjustment			2,218				1,246				5,661				2,318
Net			56,495				47,921				161,658				166,248
International Social Expression Products			10,001				9,404				14,196				12,227
Exchange rate adjustment			(19	)			154				(55	)			(15	)
Net			9,982				9,558				14,141				12,212
Retail Operations			—				—				—				(34,830	)
Exchange rate adjustment			—				—				—				(285	)
Net			—				—				—				(35,115	)
AG Interactive			5,134				1,510				10,553				5,209
Exchange rate adjustment			1				61				(160	)			7
Net			5,135				1,571				10,393				5,216
Non-reportable segments			1,438				1,634				6,907				1,872
Unallocated			(21,761	)			(22,507	)			(73,924	)			(61,550	)
Exchange rate adjustment			254				(38	)			398				293
Net			(21,507	)			(22,545	)			(73,526	)			(61,257	)
		$	51,543			$	38,139			$	119,573			$	89,176

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 nine months ended November 26, 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 $6.2 million, $14.0 million and $10.5 million at November 26, 2010, February 28, 2010 and November 27, 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 $31.4 million, $40.2 million and $33.9 million at November 26, 2010, February 28, 2010 and November 27, 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.

Note 15 — Subsequent Event

On December 2, 2010, the Corporation received a cash distribution of approximately $7 million related to its investment in the warrants of AAH Holdings 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

For the third quarter ended November 26, 2010, total revenue decreased approximately $10 million, or 2%, compared to the prior year period. Approximately 85% of the revenue decline was driven by lower sales of party goods, which, as expected, was the result of the party goods transaction completed in the prior year fourth quarter. The remaining 15% of the revenue decline was primarily the net impact of lower sales from gift packaging and other non-card products in the North American Social Expression Products segment, substantially offset by increased sales in the International Social Expression Products segment and higher sales in the fixtures business. The revenue improvement in our International Social Expression Products segment was primarily the result of higher sales of holiday boxed cards and products we distribute on behalf of third parties. Revenues in our AG Interactive segment and licensing business were virtually flat compared to the prior year quarter.

Operating income increased approximately $14 million, compared to the prior year. The prior year quarter included a charge of approximately $6 million associated with the shutdown of our distribution facility in Mexico and approximately $12 million of incremental variable compensation expense related to the then anticipated achievement at above target levels under our Key Management Annual Incentive Plan and our performance share award program. Compared to prior year, the current year included the unfavorable impact of lower revenues and higher product content costs, partially offset by lower field sales and distribution costs associated with the integration of our acquisitions of Recycled Paper Greetings (“RPG”) and the Papyrus trademark and wholesale division of Schurman Fine Papers (“Schurman”), and lower shipment volume.

Over the past several years, many consumers have been gradually shifting to value shopping resulting in a shift to a higher mix of value line cards, which lowers the average selling price of our greeting cards. We have experienced this lower average selling price trend within both the mass merchandiser and dollar store channels of distribution. We believe that this trend to a higher mix of value line cards will accelerate due to certain changes to agreements with existing retail customers in the value channel that are occurring during our fourth quarter. While we anticipate these changes will cause continued downward pressure on average selling price, we also believe that they will result in expanded distribution, card unit growth and incremental revenue gains during the coming years. We expect to incur some incremental costs associated with this expanded distribution, including upfront costs (a portion of which will be incurred in the fourth quarter) prior to any incremental revenue generated. Such costs will include, but are not limited to, fixture costs, field sales expenses and retailer allowances, as well as costs associated with implementing a new scan-based trading arrangement in one of these retailers. In total, we estimate that the foregoing factors may impact operating income during our fourth quarter ending February 28, 2011 by approximately $7 million to $11 million.

Results of Operations

Three months ended November 26, 2010 and November 27, 2009

Net income was $32.2 million, or $0.78 per share, in the third quarter compared to net income of $29.7 million, or $0.75 per share, in the prior year third quarter (all per-share amounts assume dilution).

Our results for the three months ended November 26, 2010 and November 27, 2009 are summarized below:

						% Total								% Total
(Dollars in thousands)		2010				Revenue				2009				Revenue
Net sales		$	421,990				98.1	%		$	431,512				98.0	%
Other revenue			8,148				1.9	%			8,654				2.0	%
Total revenue			430,138				100.0	%			440,166				100.0	%
Material, labor and other production costs			199,177				46.3	%			204,997				46.6	%
Selling, distribution and marketing expenses			117,314				27.3	%			124,167				28.2	%
Administrative and general expenses			58,725				13.6	%			69,233				15.7	%
Other operating income — net			(1,048	)			(0.2	%)			(575	)			(0.1	%)
Operating income			55,970				13.0	%			42,344				9.6	%
Interest expense			6,221				1.4	%			6,331				1.4	%
Interest income			(176	)			(0.0	%)			(299	)			(0.1	%)
Other non-operating income — net			(1,618	)			(0.4	%)			(1,827	)			(0.4	%)
Income before income tax expense			51,543				12.0	%			38,139				8.7	%
Income tax expense			19,380				4.5	%			8,444				1.9	%
Net income		$	32,163				7.5	%		$	29,695				6.8	%

For the three months ended November 26, 2010, consolidated net sales were $422.0 million, down from $431.5 million in the prior year third quarter. This 2.2%, or approximately $10 million, decrease was primarily the result of lower sales in our North American Social Expression Products segment of approximately $17 million. This decrease was partially offset by increases in our International Social Expression Products segment of approximately $4 million and in our fixtures business, included in non-reportable segments, of approximately $2 million.

The decline in net sales of approximately $17 million in our North American Social Expression Products segment is attributable to lower sales of party goods of approximately $9 million due to the transaction completed in the prior year fourth quarter in which we sold certain assets, equipment and processes of the DesignWare party goods product lines, and decreased sales of gift packaging and other non-card products of approximately $10 million. Partially offsetting these decreases was an improvement in seasonal card net sales of approximately $2 million.

During the three months ended November 26, 2010, sales in our International Social Expression Products segment increased approximately $4 million. This improvement was primarily driven by an increase in boxed cards associated with our Christmas program and sales of products we distribute on behalf of third parties.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, decreased $0.6 million from $8.7 million during the three months ended November 27, 2009 to $8.1 million for the three months ended November 26, 2010.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the three months ended November 26, 2010 and November 27, 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			0.4	%			5.6	%			(5.2	%)			(5.0	%)			(1.0	%)			2.8	%
Selling prices			(0.6	%)			(0.9	%)			6.8	%			1.8	%			1.2	%			(0.2	%)
Overall increase / (decrease)			(0.2	%)			4.6	%			1.2	%			(3.3	%)			0.2	%			2.6	%

During the third quarter, combined everyday and seasonal greeting card sales less returns improved 0.2% compared to the prior year quarter, including a 1.2% increase in selling prices which more than offset a 1.0% decline in unit volume. The overall increase was driven by our North American Social Expression Products segment, where improvements in seasonal card sales less returns more than offset decreases of everyday card sales less returns.

Everyday card sales less returns for the three months ended November 26, 2010 were down 0.2% compared to the prior year quarter, with increases in unit volume of 0.4% partially offsetting decreases in selling prices of 0.6%. The decrease in selling prices is primarily the result of the continued shift towards our value line cards, a trend that is likely to continue.

Seasonal card sales less returns improved 1.2% during the third quarter including 6.8% selling price improvement partially offset by a 5.2% decline in unit volume. The decrease in unit volume during the current year quarter was primarily driven by our Fall and Christmas programs.

Expense Overview

Material, labor and other production costs (“MLOPC”) for the three months ended November 26, 2010 were $199.2 million, approximately $6 million less than the prior year three months. As a percentage of total revenue, these costs were 46.3% in the current period compared to 46.6% for the three months ended November 27, 2009. Approximately $6 million of the decrease was attributable to cost savings as a result of the wind down of our Mexican operations during the third quarter of the prior year. Favorable volume variances, primarily driven by the party goods transaction in the prior year fourth quarter, were offset by increased product content costs.

Selling, distribution and marketing (“SDM”) expenses for the three months ended November 26, 2010 were $117.3 million, decreasing approximately $7 million from $124.2 million during the prior year three months. Approximately $2 million of the decrease was attributable to the elimination of costs as a result of the wind down of our Mexican operations during the third quarter of the prior year. Supply chain costs decreased approximately $5 million due to Papyrus Recycled Greetings (“PRG”) integration savings and a reduction in units shipped, specifically field sales and service operations, and distribution costs.

Administrative and general expenses were $58.7 million for the three months ended November 26, 2010, compared to $69.2 million for the prior year three months. The decrease of approximately $11 million is primarily the result of reduced variable compensation expense, including bonus and profit-sharing expense of approximately $10 million. The prior year included additional variable compensation expense as it was probable, based on the operating results as of November 27, 2009, that we were going to exceed previously established compensation targets. This situation did not occur in the current year three months.

The effective tax rate was 37.6% and 22.1% for the three months ended November 26, 2010 and November 27, 2009, respectively. The lower than statutory effective tax rate in the prior year third quarter was primarily a result of favorable impacts of the wind down of our Mexican operations and settlements with taxing authorities in foreign jurisdictions.

Results of Operations

Nine months ended November 26, 2010 and November 27, 2009

Net income was $71.5 million, or $1.75 per share, in the nine months ended November 26, 2010 compared to net income of $62.8 million, or $1.59 per share, in the prior year nine months.

Our results for the nine months ended November 26, 2010 and November 27, 2009 are summarized below:

						% Total								% Total
(Dollars in thousands)		2010				Revenue				2009				Revenue
Net sales		$	1,147,434				98.1	%		$	1,189,428				98.3	%
Other revenue			21,831				1.9	%			20,010				1.7	%
Total revenue			1,169,265				100.0	%			1,209,438				100.0	%
Material, labor and other production costs			502,903				43.0	%			525,414				43.4	%
Selling, distribution and marketing expenses			347,183				29.7	%			373,915				30.9	%
Administrative and general expenses			186,950				16.0	%			180,867				15.0	%
Other operating (income) expense — net			(2,578	)			(0.2	)%			25,801				2.1	%
Operating income			134,807				11.5	%			103,441				8.6	%
Interest expense			19,141				1.6	%			19,989				1.6	%
Interest income			(586	)			0.0	%			(1,564	)			(0.1	%)
Other non-operating income — net			(3,321	)			(0.3	%)			(4,160	)			(0.3	%)
Income before income tax expense			119,573				10.2	%			89,176				7.4	%
Income tax expense			48,039				4.1	%			26,398				2.2	%
Net income		$	71,534				6.1	%		$	62,778				5.2	%

For the nine months ended November 26, 2010, consolidated net sales were $1.15 billion, down from $1.19 billion in the prior year nine months. This 3.5%, or approximately $42 million, decline was primarily the result of decreased net sales in our North American Social Expression Products segment and our Retail Operations segment of approximately $50 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 and $6 million, respectively. Foreign currency translation also favorably impacted net sales by approximately $7 million.

Net sales in our North American Social Expression Products segment decreased approximately $50 million. This decrease is attributable to lower sales of party goods of approximately $26 million, gift packaging and other non-card products of approximately $20 million, and everyday cards of approximately $5 million. Net sales of party goods decreased due to the transaction completed in the prior year fourth quarter.

Net sales in 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 nine months ended November 26, 2010.

The increase in our International Social Expression Products segment’s net sales of approximately $6 million was driven by our United Kingdom (“U.K.”) operations where boxed cards associated with our Christmas program and sales of products we distribute on behalf of third parties, have been favorable.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, increased $1.8 million from $20.0 million during the nine months ended November 27, 2009 to $21.8 million for the nine months ended November 26, 2010.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the nine months ended November 26, 2010 and November 27, 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			(0.8	%)			5.2	%			(1.2	%)			1.1	%			(0.9	%)			4.1	%
Selling prices			(0.6	%)			1.1	%			1.6	%			2.2	%			0.0	%			1.4	%
Overall increase / (decrease)			(1.4	%)			6.4	%			0.3	%			3.3	%			(0.9	%)			5.5	%

During the nine months ended November 26, 2010, combined everyday and seasonal greeting card sales less returns declined 0.9%, compared to the prior year nine months, driven by a decrease in everyday card sales less returns of 1.4%. The overall decrease was driven by our North American Social Expression Products segment, where decreases of everyday card sales less returns continues to more than offset improvements in seasonal card sales less returns.

Everyday card sales less returns were down 1.4%, compared to the prior year nine months, including decreases in both unit volume and selling prices of 0.8% and 0.6%, respectively. A decline in selling prices across our two Social Expression Products segments 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. In addition, both of our Social Expression Products segments contributed to the decreased unit volume during the current year quarter.

Seasonal card sales less returns increased 0.3%, with improved selling prices of 1.6% offsetting a decline in unit volume of 1.2% compared to the prior year nine months. The selling price improvement was driven primarily by our prior year acquisitions.

Expense Overview

MLOPC for the nine months ended November 26, 2010 were $502.9 million, a decrease of approximately $23 million from $525.4 million for the comparable period in the prior year. As a percentage of total revenue, these costs were 43.0% in the current period compared to 43.4% for the nine months ended November 27, 2009. Approximately $5 million and $8 million of the decrease was due to the elimination of operating costs as a result of the divestiture of the retail store operations and the wind down of our Mexican operations in the prior year, respectively. The remaining approximately $10 million decrease was due to favorable volume variances as a result of a combination of the party goods transaction in the prior year fourth quarter and lower net sales of our gift packaging products. In addition, lower inventory scrap expense in the quarter was offset by higher product content costs.

SDM expenses for the nine months ended November 26, 2010 were $347.2 million, decreasing from $373.9 million for the comparable period in the prior year. The decrease of almost $27 million is due to lower spending of approximately $29 million and unfavorable foreign currency translation of approximately $2 million. The elimination of operating costs due to the disposition of our retail stores and the wind down of our Mexican operations, which both occurred in the prior year, accounted for approximately $12 million and $4 million, respectively, of the decrease in the current year nine months. Lower supply chain costs, specifically field sales and service operations costs of approximately $13 million, and freight and distribution costs of approximately $4 million were the result of PRG integration savings and a reduction in units shipped during the current year nine months. These reductions were partially offset by higher marketing and product management costs of approximately $4 million.

Administrative and general expenses were $187.0 million for the nine months ended November 26, 2010, an increase from $180.9 million for the nine months ended November 27, 2009. The increase of approximately $6 million is primarily related to continued PRG integration costs of approximately $8 million, and increased stock

compensation expense of approximately $6 million. In addition, the prior year included a benefit of approximately $8 million related to corporate owned life insurance, which did not recur in the current year nine months. These increases were partially offset by reduced variable compensation expenses of approximately $10 million, the elimination of costs associated with our retail store operations of approximately $2 million, and lower expenses related to our post retirement benefit plan of approximately $3 million.

Other operating (income) expense — net was income of $2.6 million for the nine months ended November 26, 2010 compared to expense of $25.8 million in the prior period. The prior year nine months included a loss of $28.3 million on the sale of our retail stores to Schurman and a gain of $0.5 million on the sale of our calendar product lines.

Interest expense for the nine months ended November 26, 2010 was $19.1 million, down from $20.0 million in the prior year period. The decrease of $0.9 million is primarily attributable to interest savings resulting from the $99.3 million repayment of our term loan, previously outstanding under our senior secured credit facility.

The effective tax rate was 40.2% and 29.6% for the nine months ended November 26, 2010 and November 27, 2009, respectively. The higher than statutory rate in the current nine months 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 rate in the prior year nine months is primarily a result of favorable impacts of the wind down of our Mexican operations and settlements with taxing authorities in foreign jurisdictions.

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

		Three Months Ended November								%				Nine Months Ended November								%
(Dollars in thousands)		26, 2010				27, 2009				Change				26, 2010				27, 2009				Change
Total revenue		$	312,773			$	329,869				(5.2	%)		$	865,664			$	915,464				(5.4	%)
Segment earnings			54,277				46,675				16.3	%			155,997				163,930				(4.8	%)