-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GeqhPguWgM7q/+BVBLWX34Sa7zBiha2YzxsKy8WZf8EhApCgh94ahEGxHxi20C2/ 1psERtDgUQ+mRUzADL6A/Q== 0000950116-03-003557.txt : 20030814 0000950116-03-003557.hdr.sgml : 20030814 20030814131725 ACCESSION NUMBER: 0000950116-03-003557 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CSS INDUSTRIES INC CENTRAL INDEX KEY: 0000020629 STANDARD INDUSTRIAL CLASSIFICATION: GREETING CARDS [2771] IRS NUMBER: 131920657 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02661 FILM NUMBER: 03845503 BUSINESS ADDRESS: STREET 1: 1845 WALNUT ST CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2155699900 FORMER COMPANY: FORMER CONFORMED NAME: CITY STORES CO DATE OF NAME CHANGE: 19851212 10-Q 1 ten-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q For the Quarter Ended June 30, 2003 Commission file number 1-2661 CSS INDUSTRIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its Charter) Delaware 13-1920657 - ------------------------------------ ----------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification number) 1845 Walnut Street, Philadelphia, PA 19103 - ----------------------------------------- ----------------------------------- (Address of principal executive offices) (Zip Code) (215) 569-9900 ---------------------------------------------------- (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 [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] As of June 30, 2003, there were 11,707,715 shares of common stock outstanding which excludes shares which may still be issued upon exercise of stock options. CSS INDUSTRIES, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's financial position as of June 30, 2003 and March 31, 2003, and the results of its operations and cash flows for the three months ended June 30, 2003 and 2002. The results for the three months ended June 30, 2003 are not necessarily indicative of the expected results for the full year. As certain previously reported notes and footnote disclosures have been omitted, these financial statements should be read in conjunction with the Company's latest annual report on Form 10-K and with Part II of this document.
PAGE NO. -------- Consolidated Statements of Operations and Comprehensive Loss - Three months ended June 30, 2003 and 2002 3 Condensed Consolidated Balance Sheets - June 30, 2003 and March 31, 2003 4 Consolidated Statements of Cash Flows - Three months ended June 30, 2003 and 2002 5 Notes to Consolidated Financial Statements 6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-15 Item 3. Quantitive and Qualitative Disclosures About Market Risk 15 Item 4. Controls and Procedures 15 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17
2 CSS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended June 30, (In thousands, except -------------------- per share data) 2003 2002 -------- -------- SALES $ 58,290 $ 50,557 -------- -------- COSTS AND EXPENSES Cost of sales 42,686 36,205 Selling, general and administrative expenses 21,553 20,998 Interest expense, net 705 275 Rental and other income, net (304) (141) -------- -------- 64,640 57,337 -------- -------- LOSS BEFORE INCOME TAXES (6,350) (6,780) INCOME TAX BENEFIT (2,311) (2,440) -------- -------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (4,039) (4,340) -------- -------- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF TAX) - (8,813) -------- -------- NET LOSS $ (4,039) $(13,153) ======== ======== BASIC AND DILUTED LOSS PER COMMON SHARE Before cumulative effect of accounting change $ (.35) $ (.35) Cumulative effect of accounting change - (.70) -------- -------- Basic and diluted loss per common share $ (.35) $ (1.05) ======== ======== WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING 11,632 12,522 ======== ======== CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .067 $ - ======== ======== COMPREHENSIVE LOSS Net loss $ (4,039) $(13,153) Change in fair value of interest rate swap agreements, net (1) (243) Foreign currency translation adjustment - 42 -------- -------- Comprehensive loss $ (4,040) $(13,354) ======== ======== See notes to consolidated financial statements. 3 CSS INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, March 31, (In thousands) 2003 2003 ----------- --------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 5,426 $ 51,981 Accounts receivable, net 45,739 47,583 Inventories 163,033 106,648 Current income taxes 5,112 2,398 Deferred income taxes 6,194 6,226 Other current assets 14,475 13,771 ----------- --------- Total current assets 239,979 228,607 ----------- --------- PROPERTY, PLANT AND EQUIPMENT, NET 81,618 82,731 ----------- --------- OTHER ASSETS Intangible assets, net 36,017 36,045 Other 4,247 4,578 ----------- --------- Total other assets 40,264 40,623 ----------- --------- Total assets $ 361,861 $ 351,961 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accrued customer programs $ 12,963 $ 13,334 Other current liabilities 69,230 56,311 ----------- --------- Total current liabilities 82,193 69,645 ----------- --------- LONG-TERM DEBT, NET OF CURRENT PORTION 50,000 50,063 ----------- --------- LONG-TERM OBLIGATIONS 3,785 3,684 ----------- --------- DEFERRED INCOME TAXES 7,939 7,706 ----------- --------- STOCKHOLDERS' EQUITY 217,944 220,863 ----------- --------- Total liabilities and stockholders' equity $ 361,861 $ 351,961 ========== ========= See notes to consolidated financial statements. 4 CSS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended June 30, ------------------------ (In thousands) 2003 2002 ---------- ---------- Cash flows from operating activities: Net loss $ (4,039) $ (13,153) ---------- ---------- Adjustments to reconcile net loss to net cash used for operating activities: Cumulative effect of accounting change, net of tax - 8,813 Depreciation and amortization 3,407 3,243 Provision for doubtful accounts 33 311 Deferred taxes 265 - Changes in assets and liabilities: Decrease in accounts receivable 1,810 1,307 (Increase) in inventory (56,385) (53,134) (Increase) decrease in other assets (523) 8,917 (Decrease) increase in accrued customer programs (371) 2,326 Increase in other current liabilities 13,118 10,352 (Decrease) in accrued taxes (2,714) (493) ---------- ---------- Total adjustments (41,360) (18,358) ---------- ---------- Net cash (used for) operating activities (45,399) (31,511) ---------- ---------- Cash flows from investing activities: Purchase of property, plant and equipment (2,261) (2,437) Proceeds on assets held for sale 156 - ---------- ---------- Net cash (used for) investing activities (2,105) (2,437) ---------- ---------- Cash flows from financing activities: Payments on long-term obligations (172) (267) Borrowings on notes payable - 50,520 Dividends paid (778) - Purchase of treasury stock - (36,500) Proceeds from exercise of stock options 1,899 1,916 ---------- ---------- Net cash provided by financing activities 949 15,669 ---------- ---------- Effect of exchange rate changes on cash - 42 ---------- ---------- Net (decrease) in cash and temporary investments (46,555) (18,237) Cash and cash equivalents at beginning of period 51,981 20,006 ---------- ---------- Cash and cash equivalents at end of period $ 5,426 $ 1,769 ========== ==========
See notes to consolidated financial statements. 5 CSS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003 (Unaudited) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation - The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Translation adjustments are charged or credited to a separate component of stockholders' equity. Gains and losses on foreign currency transactions are not material and are included in rental and other income, net in the consolidated statements of operations. Nature of Business - CSS is a consumer products company primarily engaged in the design, manufacture and sale to mass market retailers of seasonal, social expression products, including gift wrap, gift bags, boxed greeting cards, gift tags, tissue paper, paper and vinyl decorations, classroom exchange Valentines, decorative ribbons and bows, Halloween masks, costumes, make-ups and novelties, Easter egg dyes and novelties and educational products. Due to the seasonality of the Company's business, the majority of sales occur in the second and third quarters of the Company's fiscal year which ends March 31, and a material portion of the Company's trade receivables are due in December and January of each year. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Judgments and assessments of uncertainties are required in applying the Company's accounting policies in many areas. Such estimates include the valuation of inventory and accounts receivable reserves, the assessment of goodwill, income tax valuation and resolution of litigation. Actual results could differ from those estimates. Inventories - Inventories are generally stated at the lower of first-in, first-out (FIFO) cost or market. The remaining portion of the inventory is valued at the lower of last-in, first-out (LIFO) cost or market. Inventories consisted of the following (in thousands): June 30, March 31, 2003 2003 --------- --------- Raw material............... $ 29,924 $ 24,260 Work-in-process............ 29,096 30,183 Finished goods............. 104,013 52,205 --------- --------- $ 163,033 $ 106,648 ========= ========= 6 Revenue Recognition - The Company recognizes revenue from product sales when the goods are shipped and title and risk of loss pass to the customer. Provisions for allowances and rebates to customers, returns and other adjustments are provided in the same period that the related sales are recorded. Stock-Based Compensation - The Company applies Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock options plans. Accordingly, compensation expense is generally not recognized for its stock-based compensation plans. Had compensation expense for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company's net loss and loss per share would have been increased as follows:
Three Months Ended June 30, ---------------------- (in thousands, except per share data) 2003 2002 --------- --------- Net loss, as reported ............................. $ (4,039) $ (13,153) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ....... 627 904 --------- --------- Pro forma net loss ................................ $ (4,666) $ (14,057) ========= ========= Loss per share: Basic and diluted - as reported ................... $ (.35) $ (1.05) Basic and diluted - pro forma ..................... $ (.40) $ (1.12)
7 Net Income Per Common Share - The following table sets forth the computation of basic loss per common share and diluted loss per common share for the three months ended June 30, 2003 and 2002 (in thousands, except per share data): Three Months Ended June 30, -------------------- 2003 2002 -------- -------- Numerator: Loss before cumulative effect of accounting change ......................... $ (4,039) $ (4,340) Cumulative effect of accounting change ..... - (8,813) -------- -------- Net loss ................................... $ (4,039) $(13,153) ======== ======== Denominator: Weighted average shares outstanding for basic loss per common share ........... 11,632 12,522 Effect of dilutive stock options ........... - - -------- -------- Adjusted weighted average shares outstanding for diluted loss per common share ......... 11,632 12,522 ======== ======== Basic and diluted loss per common share: Loss before cumulative effect of accounting change ......................... $ (.35) $ (.35) Cumulative effect of accounting change ..... - (.70) -------- -------- Net loss per common share .................. $ (.35) $ (1.05) ======== ======== Statements of Cash Flows - For purposes of the consolidated statements of cash flows, the Company considers all holdings of highly liquid debt instruments with a purchased maturity of less than three months to be cash equivalents. Reclassifications - Certain prior period amounts have been reclassified to conform with the current year classification. (2) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into foreign currency forward contracts in order to reduce the impact of certain foreign currency fluctuations. Firmly committed transactions and the related receivables and payables may be hedged with foreign currency forward contracts. Gains and losses arising from foreign currency forward contracts are recognized in income or expense as offsets of gains and losses resulting from the underlying hedged transactions. As of June 30, 2003, the notional amount of open foreign currency forward contracts was $14,615,000 and the related loss was $93,000. The Company enters into interest rate swap agreements to manage its exposure to interest rate movements by effectively converting a portion of its anticipated working capital debt from variable to fixed rates. The average notional amounts of interest rate swap contracts subject to fixed rates outstanding as of June 30, 2003 for the remainder of fiscal year 2004 was $14,239,000. These agreements involve the Company receiving variable rate payments in exchange for fixed rate payments without the effect of leverage and without the exchange of the underlying face amount. Fixed interest rate payments are at a weighted average rate of 5.09% for fiscal year 2004. Variable 8 rate payments are based on one month U.S. dollar LIBOR. Interest rate differentials paid under these agreements are recognized as adjustments to interest expense and amounted to $11,000 and $16,000 for the quarters ended June 30, 2003 and 2002, respectively. The Company designates all of its interest rate swap agreements as cash flow hedges and records the fair value of its interest rate swap agreements in its consolidated balance sheet. Changes in the fair value of these agreements are recorded in other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings. Unrealized after tax net losses of $1,000 and $243,000 were recorded in other comprehensive income during the first quarter of fiscal 2004 and fiscal 2003, respectively. The fair value of interest rate swap agreements is included in other current liabilities and totaled $277,000 and $437,000 as of June 30, 2003 and March 31, 2003, respectively. (3) BUSINESS ACQUISITIONS AND DIVESTITURES: Crystal Creative Products, Inc. On October 18, 2002, a subsidiary of the Company acquired all of the capital stock of Crystal Creative Products, Inc. ("Crystal") for approximately $22,891,000, including transaction costs, and assumed and repaid $18,828,000 of outstanding debt (primarily seasonal working capital debt). Crystal, headquartered in Middletown, Ohio, is a leading designer, manufacturer and distributor of consumer convenience gift wrap products. Its product lines include gift tissue, gift bags, and related packaging products for the consumer market, as well as specialty tissues for in-store packaging of retailers and for industrial applications. A portion of the purchase price is being held in escrow for certain post closing adjustments and indemnification obligations. The acquisition was accounted for as a purchase and the excess of cost over the fair market value of the net tangible assets acquired of $10,151,000 was recorded as intangible assets, in the accompanying consolidated balance sheet. Of the $10,151,000 of acquired intangible assets, $4,500,000 was assigned to trade names that are not subject to amortization, $5,351,000 was assigned to goodwill and $300,000 was assigned to a covenant not to compete which has a useful life of five years. In July 2003, the Company finalized a restructuring plan, related to the Crystal acquisition, under which the Company will restructure its business to integrate the acquired entity with its current businesses. In connection with this plan, the Company sold a non-core portion of the Crystal business in July 2003, and will close Crystal's primary manufacturing facility in Maysville, Kentucky and a separate administration building in Middletown, Ohio. The Company will record a restructuring reserve of approximately $1,000,000 as part of purchase accounting, in the second quarter of fiscal 2004, including severance related to approximately 150 employees. As a result of this restructuring and other adjustments, goodwill is expected to increase by approximately $1,750,000. C.M. Offray & Son, Inc. On March 15, 2002, a subsidiary of the Company completed the acquisition of substantially all of the business and assets of the portion of C. M. Offray & Son, Inc. ("Offray") which manufactures and sells decorative ribbon products, floral accessories and narrow fabrics for apparel, craft and packaging applications. In consideration, the Company paid approximately $44,865,000 in cash, including transactions costs. A portion of the purchase price is being held in escrow to cover indemnification obligations. The acquisition was accounted for as a purchase and the cost approximated the fair market value of the net assets acquired; therefore, no goodwill was recorded. In conjunction with the acquisition of Offray, the Company's management approved a restructuring plan. As part of this plan, the Company accrued $2,385,000 for severance and costs related to the closure of certain facilities. As of June 30, 2003, the Company had closed Offray's distribution facility in Quebec, Canada and its warehouse in Antietam, Maryland and has communicated 9 termination of employment to approximately 125 employees. Payments, mainly for severance costs, of approximately $302,000 were made in the first quarter ended June 30, 2003. As of June 30, 2003, the remaining liability of approximately $813,000 was classified as a current liability in the accompanying consolidated balance sheet and will be paid during fiscal 2004. Selected information relating to the restructuring reserve follows (in thousands):
Contractual Obligations and Severance Facility Exit Costs Total --------- ------------------- -------- Restructuring reserve as of March 31, 2003 $ 713 $ 402 $ 1,115 Cash paid (247) (55) (302) --------- -------- -------- Restructuring reserve as of June 30, 2003 $ 466 $ 347 $ 813 ========= ======== ========
(4) GOODWILL AND INTANGIBLES: Effective July 1, 2001 and April 1, 2002, the Company adopted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets", respectively. The guidance in SFAS No. 141 supercedes APB Opinion No. 16. "Business Combinations." Upon adoption of SFAS No. 142, amortization of existing goodwill ceased. Goodwill is now subject to fair-value based impairment tests performed, at a minimum, on an annual basis. In addition, a transitional goodwill impairment test was required as of the adoption date. These impairment tests are conducted on each business of the Company where goodwill is recorded, and may require two steps. The initial step is designed to identify potential goodwill impairment by comparing an estimate of fair value for each applicable business to its respective carrying value. For those businesses where the carrying value exceeds fair value, a second step is performed to measure the amount of goodwill impairment, if any. The Company had approximately $39,715,000 in positive goodwill and $2,393,000 in negative goodwill recorded on its consolidated balance sheet at the beginning of fiscal year 2003. The negative goodwill related entirely to the acquisition of Cleo Inc ("Cleo"). Cleo was purchased on November 15, 1995 at a discount to fair value and after all long-term assets were reduced to $0 in purchase accounting, the remaining discount was recorded as negative goodwill and amortized over ten years. The $2,393,000 in negative goodwill within the Cleo reporting unit was required to be reversed upon adoption of SFAS No. 142. The Company completed the required transitional goodwill impairment test in the first quarter of 2003, and determined that $14,049,000 of goodwill recorded within the Company's Paper Magic Group, Inc. - Fall, Spring and Everyday reporting unit was impaired under the fair value impairment test approach required by SFAS No. 142. The fair value of the reporting units was estimated using the expected present value of associated future cash flows and market values of comparable businesses where available. Upon adoption of SFAS No. 142, an $8,813,000 charge, net of tax, was recognized in the first quarter of fiscal 2003 to record this impairment as well as the removal of negative goodwill and was classified as the cumulative effect of a change in accounting principle. In the fourth quarter of fiscal 2003, the Company performed the required annual impairment test of the carrying amount of goodwill and determined that no additional goodwill impairment existed. The carrying amount of goodwill at June 30, 2003 of $31,017,000 remained unchanged from March 31, 2003. In addition to goodwill, the Company has $4,500,000 of other intangible assets relating to trade names that are not subject to amortization and $500,000 of other intangible assets, net of accumulated amortization of $157,000, relating primarily to a covenant not to compete, that are 10 being amortized over periods of three to five years. Amortization expense for the quarter was $28,000. Based on the current composition of intangibles, amortization expense for each of the succeeding five years is projected to be as follows: nine months ending March 31, 2004: $113,000; years ending March 31, 2005: $151,000; 2006: $94,000; 2007: $94,000; and 2008: $38,000. (5) ACCOUNTING PRONOUNCEMENTS: SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in June 2001. SFAS No. 143 addresses accounting and reporting for legal obligations and related costs associated with the retirement of long-lived assets. The Statement requires that the fair value of the liability for an asset retirement obligation be recognized in the period incurred if a reasonable estimate of fair value can be made. The estimated retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 was adopted by the Company at the beginning of fiscal year 2004 with no impact to the Company's financial position or results of operations. In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement, among other things, rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." The Statement requires gains and losses from debt extinguishments that are used as part of the Company's risk management strategy to be classified as part of income from operations rather than as extraordinary items, net of tax. SFAS No. 145 was adopted by the Company at the beginning of fiscal year 2004 with no impact to the Company's financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." Interpretation No. 46 clarifies the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. This Interpretation is applicable for the Company in the second quarter of fiscal year 2004, which ends September 30, 2003, for interests acquired in variable interest entities prior to February 1, 2003. Based on current operations, the Company does not expect the adoption of Interpretation No. 46 to have a material effect on its financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under what circumstances a contract with an initial investment meets the characteristics of a derivative and when a derivative contains a financing component. This statement is effective for contracts entered into or modified after June 30, 2003. Based on current operations, the Company does not expect the adoption of this statement to have a material effect on its financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which requires that certain financial instruments be presented as liabilities that were previously presented as equity or as temporary equity. Such instruments include mandatory redeemable preferred and common stock, and certain options and warrants. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company adopted SFAS No. 150 on June 1, 2003. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. 11 (6) SUBSEQUENT EVENT: On May 27, 2003 the Board of Directors authorized a three-for-two split of the Company's common stock, effected by a distribution on July 10, 2003 of one share for each two shares held of record at the close of business on June 30, 2003. All earnings per share and common stock information is presented as if the stock split occurred prior to the earliest year included in these financial statements. 12 CSS INDUSTRIES, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting policies of the Company are described in the notes to the consolidated financial statements included in the Annual Report on Form 10-K. Judgments and estimates of uncertainties are required in applying the Company's accounting policies in many areas. Following are some of the areas requiring significant judgments and estimates: useful lives of plant and equipment; cash flow and valuation assumptions in performing asset impairment tests of long-lived assets and goodwill; valuation of inventory and accounts receivable reserves; income tax valuation; and estimated costs to be incurred for settlement of litigation. RESULTS OF OPERATIONS Seasonality The seasonal nature of CSS' business results in low sales and operating losses in the first and fourth quarters and high shipment levels and operating profits in the second and third quarters of the Company's fiscal year which ends March 31, thereby causing significant fluctuations in the quarterly results of operations of the Company. Stock Split On May 27, 2003 the Board of Directors authorized a three-for-two common stock split, effected by a distribution on July 10, 2003 of one share for each two shares held of record at the close of business on June 30, 2003. All earnings per share and common stock information is presented as if the stock split occurred prior to the earliest year included in these financial statements. Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002 Sales for the quarter ended June 30, 2003 increased 15% to $58,290,000 from $50,557,000 in 2002. The increase was primarily attributable to incremental sales of Crystal Creative Products, Inc. ("Crystal"), which was acquired on October 18, 2002. Excluding Crystal, sales increased $446,000, or 1%, due to increased sales of educational and other everyday products, partially offset by the shift of Christmas shipments from the first quarter into the second quarter of fiscal 2004. Cost of sales, as a percentage of sales, was 73% in 2003 compared to 72% in 2002. Excluding the impact of the Crystal acquisition, cost of sales, as a percentage of sales, improved to 70% as a result of higher margins on everyday and Halloween products. 13 Selling, general and administrative ("SG&A") expenses, as a percentage of sales, were 37% in 2003 compared to 42% in 2002. Excluding the impact of the Crystal acquisition, SG&A improved from 42% to 40% as a result of acquisition integration benefits related to the March 15, 2002 acquisition of Offray and other cost cutting measures. Interest expense, net was $705,000 in 2003 and $275,000 in 2002. The increase in interest expense was primarily due to increased borrowings, compared to the same quarter in prior year, related to the purchase of Crystal on October 18, 2002, the June 24, 2002 stock repurchase and the incremental interest related to the $50,000,000 senior notes issued on December 13, 2002. Partially offsetting these increased borrowings was cash generated from fiscal 2003 operations. Income taxes, as a percentage of loss before taxes, were 36% in 2003 and 2002. Loss before cumulative effect of change in accounting principle improved 7% to a loss of $4,039,000, or $.35 per diluted share in 2003 compared to $4,340,000, or $.35 per diluted share in 2002. The disproportionate impact in loss per diluted share reflects the lagging effect of a repurchase of 1,100,000 shares in June 2002. Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", effective with the beginning of its prior fiscal year, April 1, 2002, the Company recorded a non-cash write-off of goodwill and negative goodwill in the amount of $8,813,000, net of taxes, or $.70 per share. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2003, the Company had working capital of $157,786,000 and stockholders' equity of $217,944,000. The increase in inventories and other current liabilities and the decrease in cash from March 31, 2003 reflected the normal seasonal inventory build necessary for the fiscal 2004 shipping season. The decrease in stockholders' equity was primarily attributable to the first quarter net loss and payment of the quarterly dividend, partially offset by capital contributed upon exercise of employee stock options. The Company relies primarily on cash generated from operations and seasonal borrowings to meet its liquidity requirements. Historically, most revenues are seasonal with over 80% of sales generated in the second and third quarters. Payment for Christmas related products is usually not received until after the holiday selling season in accordance with general industry practice. As a result, short-term borrowing needs increase through December and peak prior to Christmas. Seasonal borrowings are made under a $100,000,000 unsecured revolving credit facility with five banks and a receivable purchase agreement in an amount up to $100,000,000 with an issuer of receivables-backed commercial paper. In addition, the Company has outstanding $50,000,000 of 4.48% senior notes due ratably in annual installments over five years beginning in December 2005. These financial facilities are available to fund the Company's seasonal borrowing needs and to provide the Company with sources of capital for general corporate purposes, including acquisitions as permitted under the unsecured revolving credit facility. At June 30, 2003, there was $50,000,000 of long-term borrowings outstanding related to the senior notes and no amounts outstanding under the Company's short-term credit facilities. Based on its current operating plan, the Company believes its sources of available capital are adequate to meet its ongoing cash needs for the foreseeable future. The Company has no financial guarantees or other arrangements with any third parties or related parties other than its subsidiaries. All significant intercompany transactions are eliminated in the consolidated financial statements. ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." In April 14 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." See the notes to the consolidated financial statements for information concerning the Company's implementation and impact of these standards. ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to the impact of interest rate changes and manages this exposure through the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps. The Company does not enter into contracts for trading purposes and does not use leveraged instruments. The market risks associated with debt obligations and other significant instruments as of June 30, 2003 has not materially changed from March 31, 2003 (See Item 7A of the Annual Report on Form 10-K). ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, with the participation of the Company's management, the Company's President and Chief Executive Officer and Vice President - Finance and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the President and Chief Executive Officer and Vice President - Finance and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Commission's rules and procedures. (b) Changes in Internal Controls. The evaluation referred to above did not identify any changes in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 15 CSS INDUSTRIES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 31.1 Certification of the Chief Executive Officer of CSS Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. Exhibit 31.2 Certification of the Chief Financial Officer of CSS Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. Exhibit 32.1 Certification of the Chief Executive Officer of CSS Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. Exhibit 32.2 Certification of the Chief Financial Officer of CSS Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (b) On May 22, 2003, the Company furnished (not filed) pursuant to Item 12 under Item 9 (in accordance with the interim filing guidance for these Items) the press release announcing its financial results for the year and quarter ended March 31, 2003, which was also filed as an exhibit under Item 7. 16 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CSS INDUSTRIES, INC. (Registrant) Date: August 13, 2003 By: /s/ David J. M. Erskine ------------------------ David J. M. Erskine President and Chief Executive Officer Date: August 13, 2003 By: /s/ Clifford E. Pietrafitta --------------------------------------- Clifford E. Pietrafitta Vice President - Finance, Chief Financial Officer and Principal Accounting Officer 17 EX-31 3 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, David J. M. Erskine, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CSS Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ David J. M. Erskine David J. M. Erskine, President and Chief Executive Officer 18 EX-31 4 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Clifford E. Pietrafitta, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CSS Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or person performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Clifford E. Pietrafitta Clifford E. Pietrafitta Vice President -- Finance, Chief Financial Officer and Principal Accounting Officer 19 EX-32 5 ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CSS Industries, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David J. M. Erskine, President and Chief Executive Officer, certify, pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ David J. M. Erskine - ----------------------- David J. M. Erskine President and Chief Executive Officer August 13, 2003 20 EX-32 6 ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CSS Industries, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Clifford E. Pietrafitta, Vice President - Finance and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Clifford E. Pietrafitta - --------------------------- Clifford E. Pietrafitta Vice President - Finance and Chief Financial Officer August 13, 2003 21 -----END PRIVACY-ENHANCED MESSAGE-----