SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
---------
For the Quarter Ended Commission file number 1-2661
June 30, 2002
- ----------------
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
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(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, 2002, there were 7,568,975 shares of Common Stock outstanding
which excludes shares which may still be issued upon exercise of stock
options.
1
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, 2002 and March 31, 2002, the
results of operations and cash flows for the three months ended June 30, 2002
and 2001. The results for the three months ended June 30, 2002 and 2001 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/A and with Part II of this document.
PAGE NO.
--------
Consolidated Statements of Operations - Three months ended
June 30, 2002 and 2001 3
Consolidated Condensed Balance Sheets - June 30, 2002 and
March 31, 2002 4
Consolidated Statements of Cash Flows - Three months ended
June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-14
Quantitive and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE
- --------- 16
2
CSS INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
(In thousands, except
per share amounts)
Three Months Ended
June 30,
------------------
2002 2001
-------- -------
SALES $50,557 $28,817
-------- -------
COSTS AND EXPENSES
Cost of sales 36,205 20,664
Selling, general and administrative expenses 20,998 14,973
Interest expense (income), net 275 (12)
Rental and other income, net (141) (52)
-------- -------
57,337 35,573
-------- -------
LOSS BEFORE INCOME TAXES (6,780) (6,756)
INCOME TAX BENEFIT (2,440) (2,432)
-------- -------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (4,340) (4,324)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NET OF TAX) (8,813) --
-------- -------
NET LOSS $(13,153) $(4,324)
======== =======
BASIC AND DILUTED LOSS PER COMMON SHARE
Before cumulative effect of accounting change $ (.52) $ (.49)
Cumulative effect of accounting change (1.06) --
-------- -------
Basic and diluted loss per common share $ (1.58) $ (.49)
======== =======
WEIGHTED AVERAGE BASIC AND DILUTED
SHARES OUTSTANDING 8,348 8,847
======== =======
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ -- $ --
======== =======
- --------------------------------------------------------------------------------
COMPREHENSIVE LOSS
Net loss $(13,153) $(4,324)
Change in fair value of interest rate swap agreements,
net (243) (118)
Foreign currency translation adjustment 42 --
-------- -------
Comprehensive loss $(13,354) $(4,442)
======== =======
3
CSS INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(In thousands)
June 30, March 31,
2002 2002
----------- ---------
(Unaudited)
ASSETS
- -------
CURRENT ASSETS
Cash and temporary investments $ 1,769 $ 20,006
Accounts receivable, net 28,403 30,021
Inventories 151,675 98,541
Income tax receivable 2,715 2,222
Deferred income taxes 6,408 6,408
Other current assets 10,256 19,471
-------- --------
Total current assets 201,226 176,669
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 78,172 80,426
-------- --------
OTHER ASSETS
Intangible assets, net 25,983 37,656
Other 3,965 3,744
-------- --------
Total other assets 29,948 41,400
-------- --------
Total assets $309,346 $298,495
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Notes payable $ 50,520 $ --
Other current liabilities 63,902 51,271
-------- --------
Total current liabilities 114,422 51,271
-------- --------
LONG-TERM OBLIGATIONS 2,358 3,138
-------- --------
DEFERRED INCOME TAXES 5,660 9,241
-------- --------
SHAREHOLDERS' EQUITY 186,906 234,845
-------- --------
Total liabilities and shareholders' equity $309,346 $298,495
======== ========
See notes to consolidated financial statements.
4
CSS INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands)
Three Months Ended
June 30,
-------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $(13,153) $ (4,324)
-------- --------
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 3,243 2,751
Loss on disposal of assets, net -- 5
Provision for doubtful accounts 311 110
Changes in assets and liabilities, net of effects from
purchase of a business:
Decrease (increase) in accounts receivable 1,307 (80)
(Increase) in inventory (53,134) (47,369)
Decrease (increase) in other assets 8,917 (18)
Increase in other current liabilities 12,678 10,153
(Decrease) in accrued taxes (493) (2,481)
-------- --------
Total adjustments (18,358) (36,929)
======== ========
Net cash (used for) operating activities (31,511) (41,253)
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,437) (4,046)
Purchase of a business -- (7,849)
Proceeds on assets held for sale -- 4,716
-------- --------
Net cash (used for) investing activities (2,437) (7,179)
-------- --------
Cash flows from financing activities:
Payments on long-term obligations (267) (2,079)
Borrowing on long-term obligation -- --
Net borrowings on notes payable 50,520 9,020
Purchase of treasury stock (36,500) --
Proceeds from exercise of stock options 1,916 413
-------- --------
Net cash provided by financing activities 15,669 7,354
-------- --------
Effect of exchange rate changes on cash 42 --
-------- --------
Net (decrease) in cash and temporary investments (18,237) (41,078)
Cash and temporary investments at beginning of period 20,006 41,687
-------- --------
Cash and temporary investments at end of period $ 1,769 $ 609
======== ========
See notes to consolidated financial statements.
5
CSS INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 2002
-------------
(Unaudited)
(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. 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 and a material portion of the Company's trade
receivables are due in December and January of each year.
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,
2002 2002
-------- ---------
Raw material $ 31,340 $25,196
Work-in-process 31,114 28,612
Finished goods 89,221 44,733
-------- -------
$151,675 $98,541
======== =======
Revenue Recognition -
--------------------
The Company recognizes revenue from product sales when the goods are
shipped and the 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.
6
Net Loss Per Common Share -
-------------------------
Basic and diluted net loss per common share is based on the weighted
average number of common shares outstanding during the quarter -
8,348,229 in 2002 and 8,846,778 in 2001.
As of June 30, 2002 and 2001, the basic and diluted earnings per share
computations are equal as the Company had a net loss for the three months
ended June 30, 2002 and 2001. Common stock equivalents are not used in
the computation of diluted earnings per share as they would have an anti-
dilutive effect in the periods presented.
Statements of Cash Flows -
------------------------
For purposes of the consolidated statements of cash flows, the Company
considers all holdings of highly liquid debt instruments and 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) 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, 2002, there were no open foreign
currency forward contracts.
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 that will be outstanding during fiscal years 2003 and 2004 are
$21,890,000 and $10,946,000, respectively, as of June 30, 2002. 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 4.96% and 5.09% for fiscal
years 2003 and 2004, respectively. Variable rate payments are based on
one month U.S. dollar LIBOR. Interest rate differentials paid or received
under these agreements are recognized as adjustments to interest expense.
The Company designates all of its interest rate swap agreements as cash
flow hedges and recognizes the fair value of its interest rate swap
agreements on the balance sheet. Changes in the fair value of these
agreements are recorded in other comprehensive income (loss) and
reclassified into earnings as the underlying hedged item affects
earnings. During the first quarter of fiscal 2003, unrealized after tax
net losses of $243,000 were recorded in other comprehensive loss.
The fair value of interest rate swap agreements is included in other
current liabilities and totaled $505,000 as of June 30, 2002.
7
(3) TREASURY STOCK TRANSACTIONS:
----------------------------
On June 24, 2002, the Company purchased an aggregate of 1,100,000 shares
of its common stock from its Chairman, members of his family and a trust
for members of his family. The terms of the purchase were negotiated on
behalf of the Company by a Special Committee of the Board of Directors
consisting of three independent directors. The Special Committee retained
an independent investment bank which rendered a fairness opinion. The
Special Committee unanimously recommended that the Company's Board of
Directors authorize the purchase, and the Board of Directors, other than
its Chairman who was not present at the meeting, unanimously authorized
the purchase. The total amount of this transaction was approximately
$36,500,000.
On February 19, 1998, the Company's Board of Directors authorized the
purchase of up to 1,000,000 shares of the Company's Common Stock.
Subsequently, the Board of Directors authorized additional repurchases
totaling 3,100,000 shares on terms acceptable to management. As of June
30, 2002, the Company had repurchased 3,899,000 shares for $107,046,000
under this program, including the purchase of 1,100,000 shares for
approximately $36,500,000 in the first quarter of 2003.
(4) AMENDMENT TO REVOLVING CREDIT FACILITY:
--------------------------------------
Effective June 21, 2002, the Company amended its unsecured revolving
credit facility increasing the facility from $75,000,000 to $100,000,000.
In connection with the increase and in order to enable the Company to
effectuate the repurchase of common stock from certain of its
shareholders, the minimum consolidated net worth financial covenant was
also amended to adjust for the aggregate amount paid by the Company for
the stock repurchase. The Company is in compliance with all financial
debt covenants.
(5) BUSINESS ACQUISITIONS AND DIVESTITURES:
--------------------------------------
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. 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.
In conjunction with the acquisition of Offray, the Company's management
approved a restructuring plan. As part of this plan, the Company accrued
$4,541,000 on the day of acquisition for severance and costs related to
the closure of certain facilities. Payments of approximately $667,000,
mainly for severance costs, were made in the first quarter of 2003. In
addition, there were noncash reductions in the restructuring accrual
during the first quarter of 2003 of approximately $1,935,000. Such
reductions are for costs related to the closure of certain facilities
that are projected to be less than originally estimated as well as
severance and certain other costs that will be expensed as incurred.
There is a corresponding reduction in property, plant and equipment for
this amount. As of June 30, 2002, the remaining liability of
approximately $1,939,000 was classified as a current liability in the
accompanying consolidated balance sheet.
8
Selected information relating to the restructuring costs follows (in
thousands):
Contractual
Obligations and
Severance Facility Exit Costs Total
--------- ------------------- -----
Initial accrual as of March 31, 2002 $2,465 $ 2,076 $ 4,541
Cash paid - 2003 (581) (86) (667)
Noncash reductions - 2003 (635) (1,300) (1,935)
------ ------- -------
Restructuring reserve as of June 30, 2002 $1,249 $ 690 $ 1,939
====== ======= =======
Tye-Sil Corporation Ltd.
On May 8, 2001, the Company acquired certain assets of Tye-Sil
Corporation Ltd. of Montreal, Quebec, Canada. Tye-Sil had been the
leading Canadian provider of gift wrap and accessories. In consideration,
the Company paid approximately $7,849,000 in cash, including transaction
costs. The acquisition was accounted for as a purchase and the cost
approximated the fair market value of the net assets acquired. Subsequent
to the acquisition, the operations of Tye-Sil were consolidated into
existing operations of the Company.
(6) IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
------------------------------------------
Adoption of SFAS No. 142
Effective July 1, 2001 and April 1, 2002, the Company adopted Statement
of Financial Accounting Standards ("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 is required as of the
adoption date. These impairment tests are conducted on each business of
the Company where goodwill is recorded, and many 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 in existence, if any.
The Company had approximately $39,715,000 in positive goodwill and
$2,393,000 in negative goodwill recorded in its consolidated balance
sheet at the beginning of fiscal year 2003. The $2,393,000 in negative
goodwill within the Cleo Inc 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.
9
The fair value of the reporting unit was estimated using the expected
present value of associated future cash flows and market values of
comparable businesses where available. Upon adoption of the Statement, a
$8,813,000 charge, net of tax, was recognized in the first quarter of
2003 to record this impairment as well as the removal of negative
goodwill and was classified as a cumulative effect of a change in
accounting principle.
The elimination of goodwill amortization would have decreased the net
loss by $318,000 for the three months ended June 30, 2001, or $.04 per
basic and diluted share for the three month period.
The changes in the carrying amount of goodwill for the quarter ended June
30, 2002 are as follows (in thousands):
Balance as of March 31, 2002 $37,322
Cumulative effect of adopting SFAS No. 142:
Impairment loss recognized (14,049)
Elimination of negative goodwill 2,393
-------
Balance as of June 30, 2002 $25,666
=======
In addition to goodwill, the Company has $317,000 of other intangible
assets, net of amortization, relating to trademarks and customer lists
that are being amortized over periods of three to five years.
Adoption of SFAS No. 144
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived
Assets." This statement retains existing requirements to recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and measures any impairment
loss as the difference between the carrying amount and the fair value of
the asset. SFAS No. 144 a) removes goodwill from its scope, b) allows for
probability-weighted cash flow estimation techniques when measuring for
impairment, c) requires that, for any assets to be abandoned, the
depreciable life be adjusted and the cumulative impact of such change
treated as an accounting change and d) an impairment loss be recognized
at the date a long-lived asset is exchanged for a similar productive
asset or distributed to owners in a spinoff if the carrying value of the
asset exceeds its fair value. SFAS No. 144 was adopted by the Company at
the beginning of fiscal year 2003 with no impact to the Company's
financial position or results of operations.
(7) EFFECT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
--------------------------------------------------
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 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. 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.
10
In April 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." This Statement 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 is effective for fiscal years beginning after May
15, 2002 with earlier adoption encouraged. 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits
and other Costs to Exit an Activity (including Certain Costs Incurred in
a Restructuring)." SFAS No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred rather than when a company commits to such an
activity and also establishes fair value as the objective for initial
measurement of the liability. The Company will adopt SFAS No. 146 for
exit or disposal activities that are initiated after April 1, 2003. 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.
11
CSS INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
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/A. 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, thereby
causing significant fluctuations in the quarterly results of operations of the
Company.
Stock Repurchase
- ----------------
On June 24, 2002, the Company purchased an aggregate of 1,100,000 shares of
its common stock from its Chairman, members of his family and a trust for
members of his family. The terms of the purchase were negotiated on behalf of
the Company by a Special Committee of the Board of Directors consisting of
three independent directors. The Special Committee retained an independent
investment bank which rendered a fairness opinion. The Special Committee
unanimously recommended that the Company's Board of Directors authorize the
purchase, and the Board of Directors, other than its Chairman who was not
present at the meeting, unanimously authorized the purchase. The total amount
of this transaction was approximately $36,500,000.
On February 19, 1998, the Company's Board of Directors authorized the
purchase of up to 1,000,000 shares of the Company's Common Stock.
Subsequently, the Board of Directors authorized additional repurchases
totaling 3,100,000 shares on terms acceptable to management. As of June 30,
2002, the Company had repurchased 3,899,000 shares for $107,046,000 under this
program, including the purchase of 1,100,000 shares for approximately
$36,500,000 in the first quarter of 2003.
12
Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001
- -------------------------------------------------------------------
Sales for the quarter ended June 30, 2002 increased 75% to $50,557,000 from
$28,817,000. The increase in sales was due to the inclusion of C.M. Offray &
Son, Inc. ("Offray") acquired on March 15, 2002. Excluding Offray, sales
decreased $1,284,000, or 4.5%, due to Halloween and Christmas shipments
shifting from the first quarter to the second quarter of fiscal 2003.
Cost of sales, as a percentage of sales, was 72% for the quarter ended June
30, 2002 and 2001. Excluding Offray, cost of sales decreased slightly
primarily due to favorable margins on mix of product shipped. Selling, general
and administrative expenses, as a percentage of sales, decreased to 42% in the
first quarter 2003, compared to 52% in the prior year quarter, primarily as a
result of the higher sales base.
Interest expense, net was $275,000 for the quarter ended June 30, 2002
compared to interest income, net of $12,000 for the quarter ended June 30,
2001. The increase in interest expense was primarily due to borrowings related
to the purchase of Offray on March 15, 2002 and stock repurchases offset by
cash received upon collection of 2001 seasonal sales.
Income taxes, as a percentage of income before taxes, were 36% in the first
quarter of 2003 and 2002.
The loss before cumulative effect of change in accounting principle
increased slightly to $4,340,000 for the quarter ended June 30, 2002, or $.52
per share, compared to a prior year net loss of $4,324,000, or $.49 per share.
The comparable loss was due to the impact of lower sales in the base business
and a modest loss at Offray, substantially offset by improved gross margins
and lower selling, general and administrative expenses (including lower
goodwill amortization) in the Company's base business. The Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets", effective April 1, 2002,
which resulted in a non-cash write-off of goodwill and negative goodwill in
the amount of $8,813,000, net of taxes, or $1.06 per share.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 2002, the Company had working capital of $86,804,000 and
shareholders' equity of $186,906,000. The increase in inventories and other
current liabilities from March 31, 2002 reflected normal seasonal inventory
build necessary for the 2002 shipping season. The decrease in other current
assets from March 31, 2002 is primarily attributable to the collection of
amounts due under a claims put agreement. The decrease in intangibles is due
to the impairment charge recognized upon adoption of SFAS No. 142 on April 1,
2002, net of the reversal of negative goodwill. The decrease in shareholders'
equity was primarily attributable to the Company's repurchase of an aggregate
of 1,100,000 shares of its common stock for approximately $36,500,000 on June
24, 2002 as well as the net loss during the quarter ended June 30, 2002.
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 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 an unsecured revolving credit facility with
five banks, which was increased from $75,000,000 to $100,000,000 effective
June 21, 2002 and a receivable purchase agreement in an amount up to
$100,000,000 with an issuer of receivables-backed commercial paper. These
financial facilities are available to fund the seasonal borrowing needs and to
provide the Company with sources of capital for general corporate purposes. As
of June 30, 2002, the Company had short-term borrowings of $50,520,000. 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.
13
NEW ACCOUNTING STANDARDS
- ------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." In April
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
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." See the notes to the consolidated financial
statements for information concerning the Company's implementation and impact
of these new standards.
ITEM 3: QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------------
The Company is exposed to the impact of interest rate changes and manage
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, 2002 has not materially changed from March 31, 2002 (See Item 7A of the
Annual Report on Form 10-K/A).
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
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PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 99.1 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 99.2 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) The Company filed a report on Form 8-K on May 28, 2002 with respect
to the dismissal of Arthur Andersen LLP as its independent public
accountants, effective June 11, 2002.
The Company filed a report on Form 8-K/A (Amendment No. 1) on June
12, 2002 to confirm that Arthur Andersen LLP was dismissed as its
independent public accountants on June 11, 2002.
The Company filed a report on Form 8-K/A (Amendment No. 2) on June
20, 2002 to confirm there were no disagreements with Arthur Andersen
LLP.
The Company filed a report on Form 8-K on June 25, 2002 with respect
to the purchase of an aggregate of 1,100,000 shares of its common
stock from its Chairman, members of his family and a trust for
members of his family.
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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 13, 2002 By: /s/Clifford E. Pietrafitta
--------------------------
Clifford E. Pietrafitta
Vice President - Finance,
Chief Financial Officer and
Principal Accounting Officer
16