SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q For the Quarter Ended Commission file number 1-2661 June 30, 2000 - --------------------- 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 __ As of June 30, 2000, there were 9,031,520 shares of Common Stock outstanding which excludes shares which may still be issued upon exercise of stock options. Page 1 of 13 CSS INDUSTRIES, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly the financial position as of June 30, 2000 and December 31, 1999, the results of operations for the three months and six months ended June 30, 2000 and 1999 and the cash flows for the six months ended June 30, 2000 and 1999. The results for the three months and six months ended June 30, 2000 and 1999 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 latest annual report on Form 10-K, with the March 31, 2000 quarterly report on Form 10-Q and with Part II of this document. PAGE NO. -------- Consolidated Statements of Operations - Three months and six months ended June 30, 2000 and 1999 3 Consolidated Condensed Balance Sheets - June 30, 2000 and December 31, 1999 4 Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 12 SIGNATURE 13 -2- CSS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, ----------------------- -------------------- 2000 1999 2000 1999 -------- ------- ------- ------- SALES $37,120 $36,761 $61,709 $63,128 ------- ------- ------- ------- COSTS AND EXPENSES Cost of sales 27,283 28,357 44,922 47,713 Selling, general and administrative expenses 15,639 13,773 31,780 29,101 Interest expense, net 630 461 1,026 1,031 Rental and other income, net (92) (15) (75) (1,178) ------- ------- ------- ------- 43,460 42,576 77,653 76,667 ------- ------ - ------- ------- LOSS BEFORE INCOME TAXES (6,340) (5,815) (15,944) (13,539) INCOME TAX BENEFIT (2,283) (2,188) (5,740) (5,077) ------- ------- -------- ------- NET LOSS $(4,057) $(3,627) $(10,204) $(8,462) ======= ======= ======== ======= NET LOSS PER COMMON SHARE Basic $(.45) $(.37) $(1.11) $(.85) ===== ===== ====== ===== Diluted $(.45) $(.37) $(1.11) $(.85) ===== ===== ====== ===== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 9,072 9,841 9,169 9,968 ===== ===== ===== ===== Diluted 9,072 9,841 9,169 9,968 ===== ===== ===== ===== CASH DIVIDENDS PER SHARE OF COMMON STOCK $ - $ - $ - $ - ======= ======= ======= ======= -3- CSS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) June 30, December 31, 2000 1999 ---------- ----------- (Unaudited) ASSETS CURRENT ASSETS Cash and temporary investments $ 2,876 $ 3,292 Accounts receivable, net 28,023 165,033 Inventories 156,551 64,884 Deferred income taxes 5,886 5,886 Other current assets 13,116 11,272 ---------- ----------- Total current assets 206,452 250,367 ---------- ----------- PROPERTY, PLANT AND EQUIPMENT, NET 58,023 55,916 ---------- ----------- OTHER ASSETS Intangible assets 38,821 39,971 Other 2,783 3,144 ---------- ----------- Total other assets 41,604 43,115 ---------- ----------- Total assets $ 306,079 $ 349,398 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 52,425 62,370 Other current liabilities 41,828 57,108 ---------- ----------- Total current liabilities 94,253 119,478 ---------- ----------- LONG-TERM OBLIGATIONS 4,261 5,307 ---------- ----------- DEFERRED INCOME TAXES 5,005 5,136 ---------- ----------- SHAREHOLDERS' EQUITY 202,560 219,477 ---------- ----------- Total liabilities and shareholders' equity $ 306,079 $ 349,398 ========== =========== See notes to consolidated financial statements. -4- CSS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30, ------------------------------ 2000 1999 --------- --------- Cash flows from operating activities: Net loss ($10,204) ($8,462) ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,609 4,659 Loss (gain) on disposal of assets, net 21 (6) Provision for doubtful accounts 237 256 Deferred tax benefit (131) (3,332) Changes in assets and liabilities: Decrease in accounts receivable 136,773 153,069 (Increase) in inventory (91,667) (71,472) (Increase) decrease in other assets (1,616) 7,137 (Decrease) in other current liabilities (348) (1,656) (Decrease) in accrued taxes (14,022) (9,711) ------- ------- Total adjustments 34,856 78,944 ------- ------- Net cash provided by operating activities 24,652 70,482 ------- ------- Cash flows from investing activities: Purchase of property, plant and equipment (6,506) (7,526) Proceeds on sale of property, plant and equipment 55 54 ------- ------- Net cash (used for) investing activities (6,451) (7,472) ------- ------- Cash flows from financing activities: Payments on long-term obligations (2,045) (1,163) Borrowing on long-term obligation 86 - Net payments on notes payable (9,945) (55,320) Purchase of treasury stock (6,777) (9,761) Proceeds from exercise of stock options 64 1,023 ------- ------- Net cash (used for) financing activities (18,617) (65,221) ------- ------- Net (decrease) in cash and temporary investments (416) (2,211) Cash and temporary investments at beginning of period 3,292 2,214 ------- ------- Cash and temporary investments at end of period $ 2,876 $ 3 ======= ======= See notes to consolidated financial statements. -5- CSS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation - The consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation and all adjustments are of a normal recurring nature. Nature of Business - CSS is a consumer products company primarily engaged in the 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 and Easter egg dyes and novelties. Due to the seasonality of the Company's business, the majority of sales occur in the third and fourth quarters 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 generally accepted accounting principles 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. 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: June 30, December 31, 2000 1999 ------------- ----------- Raw material................... $ 31,950,000 $19,848,000 Work-in-process................ 19,951,000 15,967,000 Finished goods................. 104,650,000 29,069,000 ------------- ------------ $ 156,551,000 $64,884,000 ============= =========== -6- Revenue Recognition - The Company recognizes revenues in accordance with its shipping terms. Returns and allowances are reserved for based on the Company's historical experience. Net Loss Per Common Share - Basic and diluted net loss per common share were computed based on the weighted average number of shares outstanding during the second quarter and six months ended June 30, 2000 and 1999 - 9,072,453 and 9,169,253 in 2000 and 9,841,059 and 9,967,621 in 1999. Shares used in the computation of basic and diluted net loss per common share are equal as the common stock equivalents that would normally be added to the weighted average shares outstanding for the computation of diluted net loss per share have an anti-dilutive effect when the Company has a net loss. Statements of Cash Flows - For purposes of the statements of cash flows, the Company considers all holdings of highly liquid debt instruments with original maturity of less than three months to be temporary investments. Reclassifications - Certain prior period amounts have been reclassified to conform with current year classifications. (2) BUSINESS ACQUISITIONS AND DIVESTITURES: On August 18, 1999, the Company acquired certain assets and the business of Party Professionals, Inc. Party Professionals designs and markets highly crafted latex masks, helmets and accessories sold to mass merchandisers, drug chains, party and gift shops. In consideration for these businesses, the Company paid $6,000,000 in cash and assumed and repaid $1,606,000 of outstanding debt. The acquisition was accounted for as a purchase and the excess of cost over fair market value of $6,532,000 was recorded as goodwill in the accompanying balance sheet and is being amortized over twenty years. As of December 31, 1999, the operations of Party Professionals, now known as Don Post Studios, Inc., were consolidated into existing operations of the Company. (3) TREASURY STOCK TRANSACTIONS: On February 19, 1998 the Company announced that its Board of Directors had authorized the purchase of up to 1,000,000 shares of the Company's Common Stock. On subsequent dates, the Executive Committee of the Board of Directors authorized additional repurchases totaling 1,500,000 shares on terms acceptable to management. Any such buyback is subject to compliance with regulatory requirements and relevant covenants of the Company's $300,000,000 unsecured revolving credit facility. As of June 30, 2000, the Company had repurchased 2,271,051 shares for $57,053,000, including 149,200 shares for $2,958,000 in the second quarter of 2000. As of June 30, 1999, the Company had repurchased 1,383,800 shares for $38,532,000, including the purchase of 45,000 shares for $1,047,000 in the second quarter of 1999. -7- (4) FUTURE ACCOUNTING CHANGES: The FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" in 1998, which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. SFAS No. 133 was scheduled to be effective for fiscal quarters of all fiscal years beginning after June 15, 1999; however, in June of 1999 the FASB issued SFAS No. 137 which deferred the effective date of SFAS No. 133 one year to years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities," which amends SFAS No. 133. Based on current operations, the Company does not expect the adoption of this statement to have a material effect on its financial position and results of operations. -8- CSS INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Seasonality The seasonal nature of CSS' business results in low sales and operating losses for the first two quarters and high shipment levels and operating profits for the second half of the year, thereby causing significant fluctuations in the quarterly results of operations of the Company. Stock Repurchase Program On February 19, 1998, the Company announced that its Board of Directors had authorized the purchase of up to 1,000,000 shares of the Company's Common Stock. On subsequent dates, the Executive Committee of the Board of Directors authorized additional repurchases totaling 1,500,000 shares on terms acceptable to management. Any such buy back is subject to compliance with regulatory requirements and relevant covenants of the Company's $300,000,000 unsecured revolving credit facility. As of June 30, 2000, the Company had repurchased 2,271,051 shares for $57,053,000, including 149,200 shares for $2,958,000 in the second quarter of 2000. As of June 30, 1999, the Company had repurchased 1,383,800 shares for $38,532,000, including the purchase of 45,000 shares for $1,047,000 in the second quarter of 1999. First Six Months of 2000 Compared to First Six Months of 1999 Consolidated sales for the six months ended June 30, 2000 decreased 2% to $61,709,000 from $63,128,000 in 1999. The decrease in sales was due to later timing of direct import shipments, discontinuation of certain ancillary everyday product lines and reduced closeout sales due to improved inventory management. In addition, lower sales of classroom exchange Valentine cards resulted as improvements in production allowed for the shipment of product related to the 2000 holiday in late 1999. These decreases were substantially offset by increased sales of Christmas, Halloween, educational and ribbons and bow products. Cost of sales, as a percentage of sales, was 73% in 2000 and 76% in 1999. The decrease in cost of sales, as a percentage of sales, was due to the reduction in lower margin closeout sales volume and production efficiencies. Selling, general and administrative ("SG&A") expenses, as a percentage of sales, increased to 51% from 46% in 1999. The increase in SG&A expenses, as a percentage of sales, was due to the implementation of an Enterprise Resource Planning System and the move to a more decentralized management structure. Interest expense, net decreased slightly to $1,026,000 from $1,031,000 in 1999. The decrease in interest expense was due to lower borrowing levels as a result of the cash generated from operations. The effects of the decreased borrowings were substantially offset by higher interest rates and the repurchase of the Company's common stock. Rental and other income, net decreased to $75,000 from $1,178,000 in 1999 due to the absence of a pre-tax gain related to the restructuring of a portion of the Company's deferred compensation liability in 1999. -9- Income taxes, as a percentage of income before taxes, were 36% in 2000 and 37.5% in 1999. The net loss for the six months ended June 30, 2000 was $10,204,000, or $1.11 per share, compared to a net loss of $8,462,000, or $.85 per share, in 1999. The increased loss was due to the impact of the Company's stock repurchase plan, the absence of non-recurring other income and higher SG&A expense, partially offset by higher margins. Second Quarter 2000 Compared to Second Quarter 1999 Sales for the quarter ended June 30, 2000 increased 1% to $37,120,000 from $36,761,000. The increase in sales was due to increased shipments of Christmas, Halloween, educational and ribbons and bow products. This increase was partially offset by later timing of direct import shipments compared to 1999, and the discontinuation of certain ancillary everyday product lines. Cost of sales, as a percentage of sales, was 73% in 2000 compared to 77% in 1999. The decrease in cost of sales, as a percentage of sales, was due to increased production efficiencies and lower closeout sales compared to the prior year. SG&A expenses, as a percentage of sales, increased to 42% from 37% in 1999 as a result of increased costs associated with the implementation of an Enterprise Resource Planning System and the move to a more decentralized management structure. Interest expense, net was $630,000 in 2000 compared to $461,000 in 1999. The increase in interest expense was due to borrowings required for the Company's stock repurchase plan and higher interest rates. Income taxes, as a percentage of income before taxes, were 36% in 2000 and 37.5% in 1999. The net loss for the quarter ended June 30, 2000 was $4,057,000,or $.45 per share, compared to a net loss of $3,627,000, or $.37 per share, in 1999. The increased loss was due to the impact of the Company's stock repurchase plan and higher SG&A expense, partially offset by higher margins. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2000, the Company had working capital of $112,199,000 and shareholders' equity of $202,560,000. The decrease in accounts receivable and the increase in inventories from December 31, 1999 reflected seasonal collections of Christmas accounts receivables net of current year billings and normal seasonal inventory increases necessary for the 2000 shipping season. The decrease in other current liabilities reflected payment of income taxes, sales commissions, royalties and employee benefits. The decrease in shareholders' equity was primarily attributable to the year-to-date net loss and the repurchase of 342,200 shares of the Company's stock for $6,777,000. -10- 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 half of the year. Payment for Christmas related products is usually not received until after the holiday in accordance with general industry practice. As a result, short-term borrowing needs were repaid in the first quarter of 2000 but will increase through the remainder of the year, peaking prior to Christmas. Seasonal borrowings are made under a $300,000,000 unsecured revolving credit facility with thirteen banks and financial institutions. The credit facility is available to fund the seasonal borrowing needs and to provide the Company with a source of capital for general corporate purposes. As of June 30, 2000, the Company had short-term borrowings of $52,425,000. 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. -11- CSS INDUSTRIES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of shareholders of the Registrant was held on May 2, 2000. (b) The following were elected to serve as Directors of the Registrant until the next annual meeting and until their successors shall be elected and qualify: SHARES OF VOTING STOCK ----------------------------- FOR WITHHELD ----------------------------- James H. Bromley 8,301,640 14,451 Stephen V. Dubin 8,301,640 14,451 David J.M. Erskine 8,301,640 14,451 Jack Farber 8,301,640 14,451 Richard G. Gilmore 8,298,640 17,451 Leonard E. Grossman 8,301,640 14,451 James E. Ksansnak 8,301,640 14,451 Michael L. Sanyour 8,301,640 14,451 -12- SIGNATURE 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 3, 2000 By: /s/Clifford E. Pietrafitta --------------------------------- Clifford E. Pietrafitta Vice President - Finance, Chief Financial Officer and Principal Accounting Officer -13- SIGNATURE 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 3, 2000 By: -------------------------------- Clifford E. Pietrafitta Vice President - Finance, Chief Financial Officer and Principal Accounting Officer -13-