UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number 1-2661
CSS INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-1920657
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1845 Walnut Street, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 569-9900
-----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
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
--- ---
(Page 1 of Cover Page)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $171,590,933. Such aggregate market value was
computed by reference to the closing price of the common stock of the
registrant on the New York Stock Exchange on September 30, 2002, being the
last trading day of the registrant's most recently completed second fiscal
quarter. Such calculation excludes the shares of common stock beneficially
owned at such date by certain directors and officers of the registrant, by the
Farber Foundation and by the Farber Family Foundation, as described under the
section entitled "CSS SECURITY OWNERSHIP" in the Proxy Statement to be filed
by the registrant for its 2003 Annual Meeting of Stockholders. In making such
calculation, registrant does not determine the affiliate or non-affiliate
status of any holders of the shares of common stock for any other purpose.
At May 27, 2003, there were outstanding 7,746,859 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 2003 Annual Meeting of
Stockholders are incorporated by reference in Part III (under Items 10, 11, 12
and 13).
(Page 2 of Cover Page)
CSS INDUSTRIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2003
INDEX
Page
----
PART I
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 3
Item 3. Legal Proceedings....................................................................... 3
Item 4. Submission of Matters to a Vote of Security Holders..................................... 4
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............... 5
Item 6. Selected Financial Data................................................................. 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 14
Item 8. Financial Statements and Supplementary Data............................................. 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 44
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 45
Item 11. Executive Compensation................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters...................................................................... 45
Item 13. Certain Relationships and Related Transactions........................................... 45
Item 14. Controls and Procedures.................................................................. 45
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 45
Signatures............................................................................................ 50
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.............................. 51
Part I
Item 1. Business.
General
CSS Industries, Inc. ("CSS" or the "Company") is a consumer products company
primarily engaged in the design, manufacture, procurement and sale to mass
market retailers of seasonal and 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-up and novelties, Easter egg dyes and
novelties and educational products. CSS provides its retail customers the
opportunity to use a single vendor for much of their seasonal product
requirements. CSS' product breadth, product innovation, creative design,
manufacturing and packaging flexibility, product quality and customer service
are key to sustaining the Company's market leadership position. A substantial
portion of CSS' products are manufactured, packaged and warehoused in twenty-
one North American facilities, with the remainder purchased primarily from
manufacturers in the Far East. The Company's products are sold to its
customers by national and regional account managers and by a network of
independent manufacturers' representatives. The Company's operating
subsidiaries include The Paper Magic Group, Inc. ("Paper Magic"), acquired by
the Company in August 1988, Berwick Industries LLC ("Berwick"), acquired in
May 1993, and Cleo Inc ("Cleo"), acquired in November 1995.
In recent years, CSS has completed several acquisitions of companies that
have been complementary to its existing businesses. During May 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. During March 2002, Berwick 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. Subsequent to the acquisition, Berwick changed its name to
Berwick Offray LLC ("Berwick Offray"). During October 2002, Cleo acquired all
of the capital stock of Crystal Creative Products, Inc. ("Crystal") which is a
leading designer, manufacturer and distributor of consumer convenience gift
wrap products.
The Company has experienced growth through a combination of acquisitions and
the improvement of existing operations. The Company's goal is to continue to
expand by developing new or complementary products, by entering new markets,
by acquiring companies that are complementary with its existing operating
business and by acquiring other businesses with leading market positions.
The Company's Internet address is www.cssindustries.com. On its web site,
the following filings are posted as soon as reasonably practicable after they
are electronically filed with or furnished to the Securities and Exchange
Commission: its annual report on Form 10-K, its quarterly reports on Form 10-
Q, its current reports on Form 8-K and any amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934. All such filings on the Company's web site are available free of
charge.
Principal Products CSS designs, manufactures and distributes a broad range
of seasonal consumer products primarily through the mass market distribution
channel. Christmas products include gift wrap, gift bags, boxed greeting
cards, gift tags, decorative tissue paper, paper and vinyl decorations, and
decorative ribbons and bows. CSS' Valentine product offerings include
classroom exchange Valentine cards and other related Valentine products, while
its Easter product offerings include Dudley's1 brand of Easter egg dyes and
related Easter seasonal products. For Halloween, CSS offers a full line of
Halloween merchandise including make-up, costumes, masks and novelties. In
addition to seasonal products, CSS also designs and markets decorative ribbons
and bows to its mass market, retail and wholesale distribution customers and
teachers' aids and other learning oriented products to the education market
through the mass market, school supply distributors and direct-to-retail
teachers' stores.
CSS manufactures and warehouses its products in twenty-one facilities
located in Pennsylvania, Maryland, South Carolina, Alabama, Tennessee, Texas,
Ohio and Kentucky. Boxed greeting cards, gift tags, paper and vinyl
decorations and classroom exchange Valentine products are primarily produced
and warehoused in four facilities in central and northeastern Pennsylvania.
Manufacturing processes include a wide range of finishing, assembly and
packaging operations. Halloween make-up and Easter egg dye products are
manufactured to specific proprietary formulae by contract manufacturers who
meet regulatory requirements for the formularization and
1
packaging of such products and are distributed from one facility in
northeastern Pennsylvania. Ribbons and bows are manufactured and warehoused in
eleven facilities located in northeastern Pennsylvania, Maryland, South
Carolina, Alabama and Texas. The manufacturing process is vertically
integrated. Non-woven ribbon and bow products are primarily made from
polypropylene resin, a petroleum-based product, which is mixed with color
pigment, melted and pressed through an extruder. Large rolls of extruded film
go through various combinations of manufacturing processes before being made
into bows or packaged on ribbon spools or reels as required by various markets
and customers. Woven fabric ribbons are manufactured domestically and sourced
from Mexico, the Far East and Latin America. Domestic woven products are
either narrow woven or converted from bulk rolls of wide width textiles.
Manufacturing of gift wrap, including web printing, finishing, rewinding and
packaging are performed in one facility in Memphis, Tennessee. Finished gift
wrap products are warehoused and shipped from both the production facility and
a separate facility in Memphis. Tissue products are primarily converted from
raw stock into packaged goods at our Maysville, Kentucky facility while
industrial tissue products are manufactured at a separate facility in
Middletown, Ohio. Tissue and gift bag products are distributed from a facility
in Hamilton, Ohio. Other products, designed to the specifications of CSS, are
imported from Pacific Rim manufacturers.
Sales and Marketing Most of CSS' products are sold in the United States and
Canada by national and regional account sales managers, inside sales
representatives, product specialists and by a network of independent
manufacturers' representatives. CSS maintains permanent showrooms in New York
City, Memphis, Minneapolis, Dallas, Atlanta and Hong Kong where major retail
buyers will typically visit for a presentation and review of the new lines.
Products are also displayed and presented in showrooms maintained by these
representatives in major cities in the United States and Canada. Relationships
are developed with key retail customers by CSS sales personnel and the
independent manufacturers' representatives. Customers are generally mass
merchandise retailers, warehouse clubs, drug and food chains, independent card
shops and retail teachers' stores. CSS' revenues are primarily seasonal with
approximately 62% of sales related to the Christmas season and the remaining
sales relating to the Halloween, Easter and Valentine's Day seasons and all-
occasion product sales. Seasonal products are generally designed and marketed
beginning approximately eighteen to twenty months before the holiday event and
manufactured during an eight to ten month production cycle. With such long
lead time requirements, timely communication with outsourcing factories,
retail customers and independent manufacturers' representatives is critical to
the timely production of seasonal products. Because the products themselves
are primarily seasonal, sales terms do not generally require payment until
after the holiday, in accordance with industry practice. In general, CSS
products are not sold under guaranteed or return privilege terms. All-occasion
ribbon and bow products are also sold through inside sales representatives or
independent manufacturers representatives to wholesale distributors and
independent small retailers who serve the floral, craft and retail packaging
trades. The Company also sells custom products to private label customers, to
other social expression companies, and to converters of the Company's ribbon
products. Custom products are sold by both independent manufacturers'
representatives and CSS sales managers.
Due to the ever increasing competitive retail environment, CSS plays a
crucial role in helping the retailer develop programs to meet revenue
objectives while appealing to consumers' tastes. These objectives are met
through the development and manufacture of custom configured and designed
products. CSS' years of experience in program development and product quality
are key competitive advantages in helping retailers meet their objectives.
Competition CSS' principal competitor in Christmas products is Plus Mark,
Inc. (a subsidiary of American Greetings Corporation). Image Arts Inc., a
subsidiary of Hallmark Cards, Inc., is also a competitor in the boxed greeting
card business. CSS competes to a limited extent, with other product offerings
of Hallmark Cards, Inc. and American Greetings Corporation. These competitors
are larger and have greater resources than the Company. In addition, CSS also
competes with various companies in each of its other seasonal product
offerings.
CSS believes its products are positioned adequately for continued growth in
their primary markets. Since competition is based primarily on price, timely
delivery, creative design and increasingly, the ability to serve major retail
customers with single, combined product shipments for each holiday event, CSS'
product driven focus combined with consistent service levels allows it to
compete effectively in its core markets.
2
Employees
At May 27, 2003, approximately 3,420 persons were employed by CSS
(increasing to approximately 5,060 as seasonal employees are added).
With the exception of the bargaining units at the gift wrap facilities in
Memphis, Tennessee and the ribbon manufacturing facilities in Hagerstown,
Maryland, which totaled approximately 730 employees as of May 27, 2003, CSS
employees are not represented by labor unions. Because of the seasonal nature
of certain of its businesses, the number of production employees fluctuates
during the year.
The Company believes that relationships with its employees are good.
Item 2. Properties.
The following table sets forth the location and approximate square footage
of the Company's major manufacturing and distribution facilities:
Approximate Square Feet
-----------------------
Location Use Owned Leased
-------- --- ----- ------
Elysburg, PA Manufacturing and distribution 253,000 --
Elysburg, PA Manufacturing 68,000 --
Danville, PA Distribution 133,000 --
Troy, PA Manufacturing and distribution 223,000 --
Canton, PA Distribution 135,000 --
Berwick, PA Manufacturing and distribution 216,000 --
Berwick, PA Manufacturing and distribution 220,000 --
Berwick, PA Distribution 226,000 --
Berwick, PA Distribution -- 521,000
Berwick, PA Distribution -- 36,000
Memphis, TN Manufacturing and distribution -- 986,000
Memphis, TN Distribution -- 366,000
Hagerstown, MD Manufacturing and distribution 284,000 --
Hagerstown, MD Manufacturing and distribution 97,000 --
Hartwell, SC Manufacturing 229,000 --
Anniston, AL Manufacturing and distribution 120,000 --
Anniston, AL Distribution -- 28,000
El Paso, TX Distribution -- 100,000
Maysville, KY Manufacturing 110,000 --
Middletown, OH Manufacturing -- 71,000
Hamilton, OH Distribution -- 240,000
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Total 2,314,000 2,348,000
========= =========
The Company also utilizes owned and leased space aggregating 160,000 square
feet for various marketing and administrative purposes. The headquarters and
principal executive office of the Company are located in Philadelphia,
Pennsylvania.
The Company is also the lessee of approximately 42,000 square feet of space
(which was related to former operations) portions of which have been subleased
by the Company, as sublessor, to various sublessees.
Item 3. Legal Proceedings.
In November 2002, Bleyer Industries, Inc. ("Bleyer") filed suit against CSS
and certain of its subsidiaries in the Supreme Court of the State of New York,
County of Nassau. The suit alleges that CSS and certain of its subsidiaries
misused certain confidential information disclosed by Bleyer pursuant to
certain confidentiality agreements entered into by CSS and Bleyer. The relief
sought consists of compensatory damages of
3
approximately $10,000,000, prejudgment interest and punitive damages. CSS
believes that the allegations in the complaint lack merit and it is vigorously
defending this litigation.
CSS and its subsidiaries are also involved in ordinary, routine pending
legal proceedings that are not considered by management to be material. In the
opinion of Company counsel and management, the ultimate liabilities resulting
from such lawsuits and claims will not materially affect the consolidated
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
4
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Principal Market for Common Stock
The common stock of the Company is listed for trading on the New York Stock
Exchange. The following table sets forth the high and low sales prices per
share of that stock for each of the quarters during fiscal 2003 and fiscal
2002.
High Low
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2003
- ----
First Quarter .............................................. $38.35 $32.09
Second Quarter ............................................. 38.70 31.68
Third Quarter .............................................. 37.60 33.10
Fourth Quarter ............................................. 36.20 28.00
2002
- ----
First Quarter .............................................. $26.35 $21.00
Second Quarter ............................................. 25.99 23.55
Third Quarter .............................................. 31.17 25.30
Fourth Quarter ............................................. 32.51 24.76
(b) Holders of Common Stock
At May 27, 2003, there were approximately 1,640 holders of the Company's
common stock.
(c) Dividends
In the fourth quarter of fiscal 2003, the Company declared a dividend of
$.10 per share to stockholders of record on the close of business on March 14,
2003. There were no other dividends declared or paid on its common stock
during any other quarter in the past two fiscal years. The ability of the
Company to pay any cash dividends on its common stock is dependent on the
Company's earnings and cash requirements and is further limited by maintaining
compliance with financial covenants contained in the Company's credit
facilities. The Company anticipates that quarterly cash dividends will
continue to be paid in the future.
At May 27, 2003, there were no shares of preferred stock outstanding.
5
Item 6. Selected Financial Data
(In thousands, except per share amounts)
Three Month
Years Periods
Ended Ended
March 31, March 31, Years Ended December 31,
--------------- --------------- -----------------------------
2003 2002 2001 2000 2000 1999 1998(a)
---- ---- ---- ---- ---- ---- -------
(Unaudited)
Statement of Operations Data:
Net Sales........................................ $532,815 $424,309 $ 26,987 $ 24,589 $421,084 $408,867 $417,526
Income (loss) before income taxes................ 40,010 33,455 (9,194) (9,604) 28,406 28,442 37,926
Income (loss) before cumulative effect
of change in accounting principle.............. 25,846 21,501 (6,080) (6,147) 18,231 18,061 24,276
Cumulative effect of change in
accounting principle........................... (8,813) -- -- -- -- -- --
Net income (loss)................................ 17,033 21,501 (6,080) (6,147) 18,231 18,061 24,276
Basic net income (loss) per common share:
Before cumulative effect of accounting
change........................................ $ 3.29 $ 2.44 $ (.69) $ (.66) $ 2.02 $ 1.85 $ 2.26
Cumulative effect of accounting change......... (1.12) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Basic net income (loss) per common share....... $ 2.17 $ 2.44 $ (.69) $ (.66) $ 2.02 $ 1.85 $ 2.26
======== ======== ======== ======== ======== ======== ========
Diluted net income (loss) per common share:
Before cumulative effect of accounting
change........................................ $ 3.14 $ 2.40 $ (.69) $ (.66) $ 2.02 $ 1.84 $ 2.21
Cumulative effect of accounting change......... (1.07) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Diluted net income (loss) per common share..... $ 2.07 $ 2.40 $ (.69) $ (.66) $ 2.02 $ 1.84 $ 2.21
======== ======== ======== ======== ======== ======== ========
Balance Sheet Data:
Working capital.................................. $158,962 $125,398 $124,171 $120,402 $133,397 $130,889 $145,165
Total assets..................................... 351,961 309,503 275,316 257,763 366,597 360,689 386,679
Short-term debt.................................. 109 200 312 424 62,961 63,488 96,198
Long-term debt................................... 50,063 165 193 434 252 537 2,131
Stockholders' equity............................. 220,863 234,845 220,945 209,575 227,091 219,477 220,493
Cash dividends declared per common share......... $ .10 -- -- -- -- -- --
(a) Results for 1998 include pre-tax income of $5,309, or net income of $3,398,
related to restructuring and other special items.
6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Business Acquisitions and Divestitures
On October 18, 2002, a subsidiary of the Company acquired all of the capital
stock of Crystal for approximately $22,891,000 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 goodwill and other intangible assets
in the accompanying consolidated balance sheet. During the fourth quarter of
fiscal 2003, goodwill increased primarily as a result of an increase of
$3,891,000 related to the finalization of amounts allocated to property, plant
and equipment that will be disposed of in fiscal 2004. The Company is in the
process of finalizing 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. The Company will
record a restructuring reserve in the first half of fiscal 2004. In connection
with this restructuring reserve, goodwill will be increased by approximately
$2,000,000.
On March 15, 2002, a subsidiary of the Company completed the acquisition of
substantially all of the business and assets of the portion of 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
transaction 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.
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.
Litigation
In November 2002, Bleyer Industries, Inc. ("Bleyer") filed suit against CSS
and certain of its subsidiaries in the Supreme Court of the State of New York,
County of Nassau. The suit alleges that CSS and certain of its subsidiaries
misused certain confidential information disclosed by Bleyer pursuant to
certain confidentiality agreements entered into by CSS and Bleyer. The relief
sought consists of compensatory damages of approximately $10,000,000,
prejudgment interest and punitive damages. CSS believes that the allegations
in the complaint lack merit and it is vigorously defending this litigation.
CSS and its subsidiaries are also involved in ordinary, routine pending
legal proceedings that are not considered by management to be material. In the
opinion of Company counsel and management, the ultimate liabilities resulting
from such lawsuits and claims will not materially affect the consolidated
financial position of the Company.
Seasonality and Change in Fiscal Year
On February 21, 2001, CSS' Board of Directors approved a change in the
Company's fiscal year end from December 31 to March 31. The transition period
commenced January 1, 2001 and ended March 31, 2001. The Company's new fiscal
year begins April 1 and ends March 31. With this change, the Company's fiscal
year now coincides with its natural revenue cycle.
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 new fiscal year,
thereby causing significant fluctuations in the quarterly results of
operations of the Company.
7
Because of the seasonality and the general industry practice of deferred
payment terms, a material portion of the Company's trade receivables are
collected in December and January, thus enabling the Company to repay the
short-term debt borrowed to fund the inventory and accounts receivable build-
up during the year.
Results of Operations
Fiscal 2003 Compared to Fiscal 2002
Consolidated sales for fiscal 2003 increased 26% to $532,815,000 from
$424,309,000 in fiscal 2002. This increase was largely a result of the
acquisitions of Crystal and Offray. Excluding these acquisitions, sales
declined 1% as improved sales of Christmas products were offset by reduced
sales of Halloween, Easter and educational products.
Cost of sales, as a percentage of sales, increased to 74% in 2003 from 73%
in 2002 as a result of the impact of acquired businesses. On a comparable
basis, excluding the impact of the recently acquired companies, cost of sales
as a percentage of sales remained consistent with 2002 results.
Selling, general and administrative expenses, as a percentage of sales,
decreased to 18% in 2003 from 19% in 2002, primarily as a result of the
effects of the Kmart Chapter 11 bankruptcy filing in 2002 and the absence of
goodwill amortization in accordance with the adoption in 2003 of SFAS No. 142,
"Goodwill and Other Intangible Assets."
Interest expense increased to $3,661,000 in 2003 from $1,898,000 in 2002
primarily as a result of increased borrowings related to acquisitions and the
repurchase of 1,100,000 shares of common stock in June 2002.
Rental and other (income) expense improved from expense of $136,000 to
income of $685,000, primarily as a result of gains on foreign currency
translation in fiscal 2003.
Income before income taxes was $40,010,000, or 8% of sales, in fiscal 2003
and $33,455,000, or 8% of sales, in fiscal 2002.
Income taxes, as a percentage of income before taxes, were 35% in 2003 and
36% in 2002. The decreased rate was primarily due to the absence of non-
deductible goodwill amortization in accordance with the adoption of SFAS No.
142 and to the reversal of a portion of the valuation allowance related to
certain state income tax benefits from net operating loss carryforwards,
offset by the absence of certain items permanently deductible for tax
purposes.
Income before cumulative change in accounting principle for the year ended
March 31, 2003 increased 20% to $25,846,000 from $21,501,000 in 2002. Income
before cumulative change in accounting principle per diluted share increased
31% to $3.14 per share from $2.40 per share in 2002. The disproportionate
increase in diluted earnings per share is the result of the repurchase of
1,100,000 shares of common stock in June 2002. The Company adopted SFAS No.
142, 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
$1.07 per diluted share.
Fiscal 2002 Compared to Calendar 2000
Consolidated sales for fiscal 2002 increased 1% to $424,309,000 from
$421,084,000 in calendar 2000. The increase was primarily due to incremental
sales from businesses acquired in fiscal 2002. Excluding incremental volume of
Tye-Sil and Offray, sales declined 3% as a cautious retail environment brought
on by a weak economy restricted seasonal purchases of large retailers.
As a percentage of sales, cost of sales improved to 73% in fiscal 2002 from
74% in calendar 2000, as improved manufacturing efficiencies and foreign
sourcing combined to improve gross margins.
Selling, general and administrative expenses, as a percentage of sales, was
19% in fiscal 2002 and 18% in calendar 2000. The increase was primarily the
result of the write-off related to the Kmart Chapter 11 bankruptcy filing of
$10,352,000, offset by the $5,436,000 gain on a Claims Put Agreement, which
enabled the Company to transfer a portion of its Kmart receivables to a third
party in the event Kmart filed for bankruptcy and the reversal of other
related expenses. See Note 10 of the Notes to Consolidated Financial
Statements for additional
8
information. Excluding this event, selling, general and administrative
expenses, as a percentage of sales, were in line with the prior year.
Interest expense decreased 63% to $1,898,000 from $5,080,000 in calendar
2000. The decrease was due to lower interest rates and reduced borrowings as a
result of operational cash flow and improved balance sheet management.
Income before income taxes was $33,455,000, or 8% of sales in fiscal 2002
and $28,406,000, or 7% of sales in calendar 2000.
Income taxes as a percentage of income before taxes were 36% in fiscal 2002
and calendar 2000.
Net income for the year ended March 31, 2002 increased 18% to $21,501,000
from $18,231,000 in calendar 2000. Net income per diluted share increased 19%
to $2.40 from $2.02 in calendar 2000.
Transition Quarter Ended March 31, 2001 Compared to Quarter Ended March 31,
2000
Consolidated sales for the three months ended March 31, 2001 were
$26,987,000 or 10% above 2000 sales of $24,589,000. The increase in sales was
primarily attributable to customer requested deferrals of Valentine and Easter
shipments from the fourth quarter of 2000 and increased sales of ribbons and
bows to the wholesale distribution channel. These increases were partially
offset by lower sales of product lines discontinued in early 2000 and lower
closeout sales.
Cost of sales, as a percentage of sales, was 74% in 2001 and 72% in 2000.
The increase in cost of sales, as a percentage of sales, was primarily due to
a charge to markdown excess inventories related to the recently completed
Easter season and to reflect revised recoverability estimates of Halloween
closeout goods.
Interest expense, net decreased to $48,000 from $396,000 in 2000. The
decrease in interest expense was primarily due to lower borrowing levels as a
result of the cash generated from operations and improved management of
working capital.
Income taxes, as a percentage of income before taxes, were 34% in 2001 and
36% in 2000. The decreased rate for the period ended March 31, 2001 reflects
the effective tax rate for the three month transition period compared to an
estimated annual effective rate utilized for the three month period ended
March 31, 2000.
The net loss for the three months ended March 31, 2001 was $6,080,000, or
$.69 per share compared to a net loss of $6,147,000, or $.66 per share, in
2000. The decreased loss was due primarily to lower interest expense.
Inflation
The financial statements are presented on a historical cost basis and do not
fully reflect the impact of prior years' inflation. The U.S. inflation rate
has been modest the past several years and the Company conducts the majority
of its business using U.S. currency. The ability to pass on inflationary costs
is uncertain due to general economic conditions and competitive situations.
The Company attempts to alleviate inflationary material and labor pressures by
increasing selling prices to help offset rising costs (subject to competitive
conditions), increasing productivity, and improving design and manufacturing
techniques.
Liquidity and Capital Resources
At March 31, 2003, the Company had working capital of $158,962,000 and
stockholders' equity of $220,863,000. The increase in accounts receivable, net
of reserves, from $41,029,000 in 2002 to $47,583,000 in 2003 was primarily a
result of additional accounts receivable of $5,415,000 related to the
acquisition of Crystal. Inventories, net of reserves, increased from
$98,541,000 to $106,648,000 due to additional inventory of $9,947,000 related
to the current year acquisition of Crystal, partially offset by the decrease
in inventory of the Company's other businesses as a result of improved
inventory management. The decrease in other current assets is due to the
current year collection of amounts due under the Claims Put Agreement entered
into in the prior year which allowed the Company to transfer a portion of its
pre-petition Kmart receivable to a third party. Capital expenditures were
$12,414,000 in fiscal 2003 compared to $10,007,000 in fiscal 2002 and
consisted primarily of costs related to purchases of machinery and equipment.
9
The Company relies primarily on cash generated from its operations and
seasonal borrowings to meet its liquidity requirements. Most CSS revenues are
seasonal with approximately 62% of sales being Christmas related. As payment
for sales of Christmas related products is usually not received until after
the respective holiday in accordance with general industry practice, short-
term borrowing needs increase throughout the second and third quarters,
peaking prior to Christmas and dropping thereafter. 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. On December 13, 2002, the Company
issued $50,000,000 of 4.48% Senior Notes due December 13, 2009. The net
proceeds received by the Company from the sale of the Senior Notes were
approximately $49,706,000 after deduction of costs associated with the sale.
The net proceeds from the Senior Notes were used to repay short-term
borrowings under the Company's unsecured revolving credit facility. These
financial facilities are available to fund the seasonal borrowing needs and to
provide the Company with sources of capital for general corporate purposes. At
March 31, 2003, there were no short-term amounts outstanding and there were
long-term borrowings of $50,000,000 related to the Senior Notes. For
information concerning these credit facilities, see Note 8 of the Notes to
Consolidated Financial Statements.
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 $36,510,000.
On February 19, 1998, the Company announced that its Board of Directors had
authorized the buyback of up to 1,000,000 shares of the Company's common
stock. Subsequently, the Executive Committee of the Board of Directors
authorized additional repurchases of 3,500,000 shares, for a total of
4,500,000 shares, on terms acceptable to management. Any such buy back is
subject to compliance with regulatory requirements and relevant covenants of
the Company's credit facilities. The Company repurchased 1,100,000 shares for
$36,510,000 and 327,000 shares for $9,409,000 in fiscal 2003 and fiscal 2002,
respectively.
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.
As of March 31, 2003, the Company's contractual obligations and commitments
are as follows (in thousands):
Less than 1 1-3 4-5 After 5
Contractual Obligations Year Years Years Years Total
- ----------------------- ----------- ------- ------- ------- -------
Short term debt........................................................... $ -- $ -- $ -- $ -- $ --
Capital lease obligations................................................. 109 63 -- -- 172
Long-term debt............................................................ -- 20,000 20,000 10,000 50,000
---- ------- ------- ------- -------
$109 $20,063 $20,000 $10,000 $50,172
==== ======= ======= ======= =======
In addition, the Company has recorded $3,684,000 in long-term obligations on
its consolidated balance sheet as of March 31, 2003, which consists of medical
post-retirement liabilities and deferred compensation arrangements.
As of March 31, 2003, the Company's off-balance sheet obligations are as
follows (in thousands):
Less than 1 1-3 4-5 After 5
Year Years Years Years Total
----------- ------- ------ ------- -------
Operating leases........................................................... $ 8,750 $10,893 $2,516 $2,394 $24,553
Letters of credit.......................................................... 4,113 -- -- -- 4,113
------- ------- ------ ------ -------
$12,863 $10,893 $2,516 $2,394 $28,666
======= ======= ====== ====== =======
10
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.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our Consolidated Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to accounts receivable reserves, inventories,
intangible assets, income taxes, restructuring and contingency accruals and
litigation. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation
of financial statements. Note 1 to the Consolidated Financial Statements,
included elsewhere in this Form 10-K, includes a summary of the significant
accounting policies and methods used in the preparation of our Consolidated
Financial Statements. The following is a brief discussion of the more
significant accounting policies and methods used by us.
Revenue
Revenue is recognized only upon delivery, when both title and risk of loss
transfer to the customer. The Company records estimated reductions to revenue
for customer programs, which may include special pricing agreements for
specific customers, volume incentives and other promotions. The Company also
records estimated reductions to revenue, based primarily on historical
experience, for customer returns and chargebacks that may arise as a result of
shipping errors, product damaged in transit or for other reasons that can only
become known subsequent to recognizing the revenue. If the amount of actual
customer returns and chargebacks were to increase or decrease significantly
from the estimated amount, revisions to the estimated allowance would be
required.
Accounts Receivable
The Company offers seasonal dating programs related to certain seasonal
product offerings pursuant to which customers that qualify for such programs
are offered extended payment terms. Customers generally do not have the right
to return product except for rights to return that the Company believes are
typical of our industry for reasons such as damaged goods, shipping errors or
similar occurrences. The Company generally is not required to repurchase
products from its customers, nor does the Company have any regular practice of
doing so. In addition, the Company minimizes its exposure to bad debts by
evaluating the creditworthiness of its major customers and purchasing credit
insurance when appropriate. Bad debt and returns and allowances reserves are
recorded as an offset to accounts receivables while reserves for customer
programs are recorded as accrued liabilities. The Company evaluates accounts
receivable related reserves and accruals monthly by specifically reviewing
customer accounts and by reference to historical experience.
Inventory Valuation
Inventories are valued at the lower of cost or market. Cost is primarily
determined by the first-in, first-out method although certain inventories are
valued based on the last-in, first-out method. The Company writes down its
inventory for estimated obsolescence in an amount equal to the difference
between the cost of the inventory and the estimated market value based upon
assumptions about future demand, market conditions, customer planograms and
sales forecasts.
11
Product Development Costs
Product development costs consist of purchases of outside artwork, printing
plates and cylinders. The Company classifies these costs as a prepaid expense.
Product development costs are incurred approximately 18 to 20 months before
the holiday event and are amortized monthly over the selling season, generally
within two to four months of the respective holiday event. Product development
expense is recorded in selling, general and administrative expense.
Goodwill
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill
is no longer subject to amortization; however, goodwill is subject to an
assessment for impairment using a two-step fair value-based test, the first
step of which must be performed at least annually, or more frequently if
events or circumstances indicate that goodwill might be impaired. The first
step compares the fair value of a reporting unit to its carrying amount,
including goodwill. If the carrying amount of the reporting unit exceeds its
fair value, the second step is performed. The second step compares the
carrying amount of the goodwill to the implied fair value of the goodwill. If
the implied fair value of goodwill is less than the carrying amount, an
impairment loss is reported as a reduction to goodwill and a charge to
operating expense, except at the transition date, when the loss is reflected
as a cumulative effect of a change in accounting principle. In determining the
fair value of the reporting units, the Company utilizes cash flow models
reflecting the expected range of future cash flow outcomes over the life of
the model. These cash flows are then discounted to the measurement date using
a risk-adjusted discount rate. The development of these cash flow models is
based on management estimates and assumptions about future operating results,
including revenues and earnings.
Accounting for Income Taxes
As part of the process of preparing our financial statements, we are
required to estimate our actual current tax expense (state, federal and
foreign), together with assessing permanent and temporary differences
resulting from differing bases and treatment of items for tax and accounting
purposes, such as the carrying value of intangibles, deductibility of
expenses, depreciation of property and equipment, and valuation of
inventories. Temporary differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheets. We
must then assess the likelihood that our deferred tax assets will be recovered
from future taxable income. Actual results could differ from this assessment
if sufficient taxable income is not generated in future periods. To the extent
we determine the need to establish a valuation allowance or increase such
allowance in a period, we must include an expense within the tax provision in
the accompanying consolidated statements of operations.
Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142. Under the new rules, goodwill
and indefinite lived intangible assets are no longer amortized but are
reviewed annually for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. The Company began to apply the new accounting rules effective
April 1, 2002. 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 the
impairment of certain goodwill, primarily related to the Company's Paper Magic
- - Fall, Spring and Everyday reporting unit, as well as the reversal of
negative goodwill related to Cleo and was classified as a cumulative effect of
a change in accounting principle.
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. SFAS No. 143 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 or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement retains existing
requirements to recognize an impairment loss only if the carrying amount
12
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 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.
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, 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. The
Company adopted the provisions of SFAS No. 145 on April 1, 2003 and believes
the adoption of SFAS No. 145 will not have a material effect on its financial
position or 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 was required to adopt the
provisions of SFAS No. 146 effective for exit or disposal activities initiated
after December 31, 2002. The adoption of SFAS No. 146 did not have a material
effect on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure requirements of SFAS No. 123 and APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. While SFAS No.
148 does not amend SFAS No. 123 to require companies to account for employee
stock options using the fair value method, the disclosure provisions of SFAS
No. 148 are applicable to all companies with stock-based employee
compensation, regardless of whether they account for that compensation using
the fair value method of SFAS No. 123 or the intrinsic value method of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. As allowed by SFAS No. 123, the Company has elected to
continue to utilize the accounting method prescribed by APB Opinion No. 25 and
has adopted the disclosure requirements of SFAS No. 148 as of March 31, 2003.
The adoption of SFAS No. 148 did not have a material effect on the Company's
financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 requires a
guarantor to include disclosure of certain obligations, and if applicable, at
the inception of the guarantee, recognize a liability for the fair value of
other certain obligations undertaken in issuing a guarantee. Interpretation
No. 45 was adopted by the Company as of January 1, 2003 and did not have a
material effect on its 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 initial investments meets
13
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 is generally effective at the beginning of
the first interim period beginning after June 15, 2003. The Company is
currently evaluating the impact that SFAS No. 150 will have on its financial
position and results of operations when adopted.
Forward-Looking and Cautionary Statements
This document contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include certain
information related to the Company's capital resources and the costs related
to operational decisions, as well as information contained elsewhere in this
report where statements are preceded by, followed by, or include the words
"believes," "expects," "anticipates" or similar expressions. For such
statements, the Company claims the protection of the safe harbor for forward-
looking statements contained in the Private Securities Litigation Reform Act
of 1995. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including
without limitation, general market conditions, increased competition, and
factors discussed elsewhere in this report and the documents incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure with regard to financial
instruments is to changes in interest rates. Pursuant to the Company's line of
credit, a change in either the lender's base rate or LIBOR would affect the
rate at which the Company could borrow funds thereunder. Based on average
borrowings of $70,002,000 for the year ended March 31, 2003, a 1% increase or
decrease in current market interest rates would have increased or decreased
interest expense by $700,020.
Approximately 3% of the Company's sales in fiscal 2003 were denominated in a
foreign currency. The Company considers its risk exposure with regard to
foreign currency fluctuations minimal as it enters into foreign currency
forward contracts to hedge the majority of firmly committed transactions and
related receivables that are denominated in a foreign currency.
14
CSS INDUSTRIES, INC.
AND SUBSIDIARIES
Item 8. Financial Statements and Supplementary Data.
INDEX
Page
----
Independent Auditors' Report ........................................... 16-17
Consolidated Balance Sheets - March 31, 2003 and 2002 .................. 18-19
Consolidated Statements of Operations and Comprehensive Income (Loss) -
for the years ended March 31, 2003 and 2002, for the three month
periods ended March 31, 2001 and 2000 and for the year ended December
31, 2000.............................................................. 20
Consolidated Statements of Cash Flows - for the years ended March 31,
2003 and 2002, for the three month periods ended March 31, 2001 and
2000 and for the year ended December 31, 2000......................... 21
Consolidated Statements of Stockholders' Equity - for the years ended
March 31, 2003 and 2002, for the three month period ended March 31,
2001 and for the year ended December 31, 2000......................... 22-23
Notes to Consolidated Financial Statements ............................. 24-43
15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CSS Industries, Inc.:
We have audited the 2003 consolidated financial statements of CSS
Industries, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audit of the 2003 consolidated financial statements, we
also have audited the 2003 consolidated financial statement schedule listed in
Item 15 of this Form 10-K. These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement
schedule based on our audit. The consolidated financial statements and
consolidated financial statement schedule of CSS Industries, Inc. and
subsidiaries for the years ended March 31, 2002 and December 31, 2000 and the
three month period ended March 31, 2001 were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified opinion on
those consolidated financial statements and consolidated financial statement
schedule, before the revisions and restatement described in Notes 1 and 2 to
the consolidated financial statements, in their report dated May 14, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the 2003 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CSS
Industries, Inc. and subsidiaries as of March 31, 2003, and the results of
their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
Also in our opinion, the related 2003 consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed above, the consolidated financial statements of CSS Industries,
Inc. and subsidiaries for the years ended March 31, 2002 and December 31, 2000
and the three month period ended March 31, 2001 were audited by other auditors
who have ceased operations. As described in Note 2, these consolidated
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, which was adopted by the Company as of April 1, 2002.
In our opinion, the disclosures for the years ended March 31, 2002 and
December 31, 2000 and the three month period ended March 31, 2001 in Note 2
are appropriate. As described in Note 1, these consolidated financial
statements have been restated to give effect to the classification of the
customer programs reserve as a liability in the Consolidated Balance Sheet.
Previously, the customer programs reserve was included in allowances as a
reduction of accounts receivable. We audited the adjustments that were applied
to revise the consolidated financial statements. In our opinion, such
adjustments are appropriate and have been properly applied. However, we were
not engaged to audit, review, or apply any procedures to the consolidated
financial statements for the years ended March 31, 2002 and December 31, 2000
and the three month period ended March 31, 2001 of CSS Industries, Inc. and
subsidiaries other than with respect to such disclosures and, accordingly, we
do not express an opinion or any other form of assurance on the consolidated
financial statements for the years ended March 31, 2002 and December 31, 2000
and the three month period ended March 31, 2001 taken as a whole.
KPMG LLP
Philadelphia, Pennsylvania
May 16, 2003, except as to
Note 16, which is as of May 27, 2003
16
To the Board of Directors and Stockholders
of CSS Industries, Inc.:
We have audited the accompanying consolidated balance sheets of CSS
Industries, Inc. (a Delaware Corporation) and subsidiaries as of March 31,
2002 and 2001 and the related consolidated statements of operations and
comprehensive income, cash flows and stockholders' equity for the years ended
March 31, 2002, December 31, 2000 and 1999, and the three month period ended
March 31, 2001. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CSS
Industries, Inc. and subsidiaries as of March 31, 2002 and 2001 and the
results of their operations and their cash flows for the years ended March 31,
2002, December 31, 2000 and 1999, and the three month period ended March 31,
2001, in conformity with accounting principles generally accepted in the
United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplemental schedule
listed in Item 14(a) is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, PA
May 14, 2002
Note: The report above is a copy of a previously issued report and has not
been reissued by Arthur Andersen LLP (Andersen). Certain financial information
for the year ended March 31, 2002, the three month period ended March 31, 2001
and the year ended December 31, 2000 was not reviewed by Andersen and
includes: (i) as described in Note 2, the inclusion of transitional
disclosures required by Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," which was adopted by the Company as of
April 1, 2002, and (ii) as described in Note 1, restatements to give effect to
the reclassification of customer programs reserve.
17
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31,
-------------------
ASSETS 2003 2002
-------- --------
CURRENT ASSETS
Cash and cash equivalents .............................. $ 51,981 $ 20,006
Accounts receivable, net of allowances of $5,926 and
$2,467 ............................................... 47,583 41,029
Inventories ............................................ 106,648 98,541
Income tax receivable .................................. 2,398 2,222
Deferred income taxes .................................. 6,226 6,408
Other current assets ................................... 13,771 19,471
-------- --------
Total current assets.................................. 228,607 187,677
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land ................................................... 2,110 1,450
Buildings, leasehold interests and improvements ........ 48,523 41,087
Machinery, equipment and other ......................... 109,090 101,605
-------- --------
159,723 144,142
Less -- Accumulated depreciation ....................... (76,992) (63,716)
-------- --------
Net property, plant and equipment..................... 82,731 80,426
-------- --------
OTHER ASSETS
Goodwill ............................................... 31,017 37,322
Intangible assets, net of accumulated amortization of
$129 and $3 .......................................... 5,028 334
Other .................................................. 4,578 3,744
-------- --------
Total other assets.................................... 40,623 41,400
-------- --------
$351,961 $309,503
======== ========
18
March 31,
--------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
--------- --------
CURRENT LIABILITIES
Note payable .......................................... $ -- $ --
Current portion of long-term debt ..................... 109 200
Accounts payable ...................................... 24,399 19,413
Accrued payroll and other compensation ................ 9,417 5,613
Accrued restructuring expenses ........................ 1,115 4,541
Accrued customer programs ............................. 13,334 11,008
Accrued other expenses ................................ 21,271 21,504
--------- --------
Total current liabilities............................ 69,645 62,279
--------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION ................. 50,063 165
--------- --------
OTHER LONG-TERM OBLIGATIONS ............................ 3,684 2,973
--------- --------
DEFERRED INCOME TAXES .................................. 7,706 9,241
--------- --------
COMMITMENTS AND CONTINGENCIES .......................... -- --
STOCKHOLDERS' EQUITY
Preferred stock, Class 2, $.01 par, 1,000,000 shares
authorized .......................................... -- --
Common stock, $.10 par, 20,000,000 shares authorized
12,366,566 shares
issued at March 31, 2003 and 2002.................... 1,237 1,237
Additional paid-in capital ............................ 31,147 29,725
Retained earnings ..................................... 303,777 287,515
Accumulated other comprehensive loss, net of tax ...... (289) (273)
Common stock in treasury, 4,643,031 and 3,781,097
shares, at cost (115,009) (83,359)
--------- --------
Total stockholders' equity........................... 220,863 234,845
--------- --------
$ 351,961 $309,503
========= ========
See notes to consolidated financial statements.
19
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
For the Years For the Three Month
Ended Periods Ended For the
March 31, March 31, Year Ended
------------------- ---------------------- December 31,
2003 2002 2001 2000 2000
-------- -------- ------- ----------- ------------
(Unaudited)
NET SALES.......................................................... $532,815 $424,309 $26,987 $24,589 $421,084
-------- -------- ------- ------- --------
COSTS AND EXPENSES
Cost of sales..................................................... 392,588 309,409 19,963 17,639 312,586
Selling, general and administrative expenses...................... 97,241 79,411 16,061 16,141 75,135
Interest expense, net of interest income of $170,
$462, $484, $90 and $123........................................ 3,661 1,898 48 396 5,080
Rental and other (income) expense, net............................ (685) 136 109 17 (123)
-------- -------- ------- ------- --------
492,805 390,854 36,181 34,193 392,678
-------- -------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................................. 40,010 33,455 (9,194) (9,604) 28,406
INCOME TAX PROVISION (BENEFIT)..................................... 14,164 11,954 (3,114) (3,457) 10,175
-------- -------- ------- ------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE................................. 25,846 21,501 (6,080) (6,147) 18,231
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX OF $2,843................................... (8,813) -- -- -- --
-------- -------- ------- ------- --------
NET INCOME (LOSS).................................................. $ 17,033 $ 21,501 $(6,080) $(6,147) $ 18,231
======== ======== ======= ======= ========
BASIC NET INCOME (LOSS) PER COMMON SHARE
Before cumulative effect of accounting change..................... $ 3.29 $ 2.44 $ (.69) $ (.66) $ 2.02
Cumulative effect of accounting change............................ (1.12) -- -- -- --
-------- -------- ------- ------- --------
Basic net income (loss) per common share.......................... $ 2.17 $ 2.44 $ (.69) $ (.66) $ 2.02
======== ======== ======= ======= ========
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Before cumulative effect of accounting change..................... $ 3.14 $ 2.40 $ (.69) $ (.66) $ 2.02
Cumulative effect of accounting change............................ (1.07) -- -- -- --
-------- -------- ------- ------- --------
Diluted net income (loss) per common share........................ $ 2.07 $ 2.40 $ (.69) $ (.66) $ 2.02
======== ======== ======= ======= ========
- -----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)
Net income (loss)................................................. $ 17,033 $ 21,501 $(6,080) $(6,147) $ 18,231
Change in fair value of interest rate
swap agreements, net............................................ (14) (196) (66) -- --
Foreign currency translation adjustment........................... (2) (11) -- -- --
-------- -------- ------- ------- --------
Comprehensive income (loss)....................................... $ 17,017 $ 21,294 $(6,146) $(6,147) $ 18,231
======== ======== ======= ======= ========
See notes to consolidated financial statements.
20
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years For the Three Month
Ended Periods Ended For the
March 31, March 31, Year Ended
--------------------- --------------------- December 31,
2003 2002 2001 2000 2000
--------- --------- -------- --------- ------------
(Unaudited)
Cash flows from operating activities:
Net income (loss)................................................ $ 17,033 $ 21,501 $ (6,080) $ (6,147) $ 18,231
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of accounting change, net
of tax........................................................ 8,813 -- -- -- --
Depreciation and amortization.................................. 13,894 11,645 2,655 2,527 10,358
Provision for doubtful accounts................................ 1,521 10,936 174 133 1,323
Deferred tax provision (benefit)............................... 1,490 2,297 (413) (51) 1,699
(Gain) on claims put agreement................................. -- (5,436) -- -- --
(Gain) loss on sale or disposal of assets...................... (7) (3) 1 (7) 35
Compensation expense on stock option issuance.................. -- -- -- -- 93
Changes in assets and liabilities, net of effects of
acquisitions:
Decrease (increase) in accounts receivable.................... 14,640 (8,192) 165,926 141,251 (19,141)
Decrease (increase) in inventories............................ 10,442 13,506 (28,140) (40,947) 10,884
Decrease (increase) in other assets........................... 7,424 (10,483) (1,199) (332) 1,428
(Decrease) increase in accounts payable....................... (4,903) (5,622) (3,350) (2,278) 2,486
Increase (decrease) in accrued taxes.......................... 792 1,371 (10,516) (11,751) (222)
(Decrease) increase in accrued expenses....................... (1,793) 13,535 (12,015) (14,910) (2,415)
--------- --------- -------- --------- ---------
Total adjustments............................................ 52,313 23,554 113,123 73,635 6,528
--------- --------- -------- --------- ---------
Net cash provided by operating activities.................... 69,346 45,055 107,043 67,488 24,759
--------- --------- -------- --------- ---------
Cash flows from investing activities:
Purchases of businesses, net of cash received of
$1 in 2003 and $295 in 2002.................................... (22,890) (52,378) -- -- --
Purchase of property, plant and equipment........................ (12,414) (10,007) (3,482) (2,586) (13,877)
Proceeds from sale of assets..................................... 30 4,251 -- 37 56
--------- --------- -------- --------- ---------
Net cash used for investing activities (35,274) (58,134) (3,482) (2,549) (13,821)
--------- --------- -------- --------- ---------
Cash flows from financing activities:
Payments on long-term obligations................................ (1,005) (1,181) (317) (1,665) (2,706)
Borrowings on long-term obligations.............................. -- 170 -- -- 86
Borrowings on notes payable...................................... 458,215 199,570 560 52,925 782,720
Payments on notes payable........................................ (458,215) (199,570) (63,175) (115,295) (782,475)
Repayment of acquisition debt.................................... (18,828) -- -- -- --
Proceeds from the issuance of long-term debt..................... 50,000 -- -- -- --
Payment of private placement transaction costs................... (294) -- -- -- --
Dividends paid................................................... (771) -- -- -- --
Purchase of treasury stock....................................... (36,510) (9,409) -- (3,819) (10,861)
Proceeds from exercise of stock options.......................... 5,313 1,829 -- 64 64
--------- --------- -------- --------- ---------
Net cash used for financing activities....................... (2,095) (8,591) (62,932) (67,790) (13,172)
--------- --------- -------- --------- ---------
Effect of exchange rate changes on cash........................... (2) (11) -- -- --
--------- --------- -------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............. 31,975 (21,681) 40,629 (2,851) (2,234)
Cash and cash equivalents at beginning of period.................. 20,006 41,687 1,058 3,292 3,292
--------- --------- -------- --------- ---------
Cash and cash equivalents at end of period........................ $ 51,981 $ 20,006 $ 41,687 $ 441 $ 1,058
========= ========= ======== ========= =========
See notes to consolidated financial statements.
21
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Preferred Stock Common Stock
----------------- -------------------
Shares Amount Shares Amount
------ ------- ---------- ------
BALANCE, JANUARY 1, 2000 ............................................................... -- $ -- 12,366,566 $1,237
Issuance of common stock upon exercise of
stock options........................................................................ -- -- -- --
Tax benefit associated with exercise of
stock options........................................................................ -- -- -- --
Compensation expense on stock option
issuance............................................................................. -- -- -- --
Increase in treasury shares ........................................................... -- -- -- --
Net income ............................................................................ -- -- -- --
------ ------- ---------- ------
BALANCE, DECEMBER 31, 2000 ............................................................. -- -- 12,366,566 1,237
Change in fair value of interest rate swap
agreements, net...................................................................... -- -- -- --
Net loss .............................................................................. -- -- -- --
------ ------- ---------- ------
BALANCE, MARCH 31, 2001 ................................................................ -- -- 12,366,566 1,237
Tax benefit associated with exercise of
stock options........................................................................ -- -- -- --
Issuance of common stock upon exercise of
stock options........................................................................ -- -- -- --
Increase in treasury shares ........................................................... -- -- -- --
Change in fair value of interst rate swap
agreements, net...................................................................... -- -- -- --
Foreign currency translation adjustment ............................................... -- -- -- --
Net income ............................................................................ -- -- -- --
------ ------- ---------- ------
BALANCE, MARCH 31, 2002 ................................................................ -- -- 12,366,566 1,237
Tax benefit associated with exercise of
stock options........................................................................ -- -- -- --
Issuance of common stock upon exercise of
stock options........................................................................ -- -- -- --
Increase in treasury shares ........................................................... -- -- -- --
Change in fair value of interest rate swap
agreements, net...................................................................... -- -- -- --
Foreign currency translation adjustment ............................................... -- -- -- --
Cash dividends declared ($.10 per share) .............................................. -- -- -- --
Net income ............................................................................ -- -- -- --
------ ------- ---------- ------
BALANCE, MARCH 31, 2003 ................................................................ -- $ -- 12,366,566 $1,237
====== ======= ========== ======
22
Common Stock
Additional Accumulated Other in Treasury
Paid-in Retained Comprehensive -----------------------
Capital Earnings Income Shares Amount Total
------- -------- ------ ------ ------ -----
$29,358 $253,882 $ -- (2,998,381) $ (65,000) $219,477
-- (53) -- 5,535 117 64
87 -- -- -- -- 87
93 -- -- -- -- 93
-- -- -- (543,200) (10,861) (10,861)
-- 18,231 -- -- -- 18,231
------- -------- ----- ---------- --------- --------
29,538 272,060 -- (3,536,046) (75,744) 227,091
-- -- (66) -- -- (66)
-- (6,080) -- -- -- (6,080)
------- -------- ----- ---------- --------- --------
29,538 265,980 (66) (3,536,046) (75,744) 220,945
187 -- -- -- -- 187
-- 34 -- 81,949 1,794 1,828
-- -- -- (327,000) (9,409) (9,409)
-- -- (196) -- -- (196)
-- -- (11) -- -- (11)
-- 21,501 -- -- -- 21,501
------- -------- ----- ---------- --------- --------
29,725 287,515 (273) (3,781,097) (83,359) 234,845
969 -- -- -- -- 969
453 -- -- 238,066 4,860 5,313
-- -- -- (1,100,000) (36,510) (36,510)
-- -- (14) -- -- (14)
-- -- (2) -- -- (2)
-- (771) -- -- -- (771)
-- 17,033 -- -- -- 17,033
------- -------- ----- ---------- --------- --------
$31,147 $303,777 $(289) (4,643,031) $(115,009) $220,863
======= ======== ===== ========== ========= ========
23
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of CSS
Industries, Inc. ("CSS" or 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)
expense, 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-up and novelties,
Easter egg dyes and novelties and educational products. CSS provides its
retail customers the opportunity to use a single vendor for much of their
seasonal product requirements. CSS' product breadth, product innovation,
creative design, manufacturing and packaging flexibility, product quality and
customer service are key to sustaining the Company's market leadership
position. A substantial portion of CSS' products are manufactured, packaged
and warehoused in twenty-one North American facilities, with the remainder
purchased primarily from manufacturers in the Far East. The Company's products
are sold to its retail customers by national and regional account managers and
product specialists and by a network of independent manufacturers'
representatives. The Company's operating subsidiaries include The Paper Magic
Group, Inc. ("Paper Magic"), Berwick Offray LLC ("Berwick"), and Cleo Inc
("Cleo").
Change in Fiscal Year
On February 21, 2001, CSS' Board of Directors approved a change in the
Company's fiscal year end from December 31 to March 31. The transition period
began January 1, 2001 and ended March 31, 2001. The Company's new fiscal year
begins April 1 and ends March 31. With this change, the Company's fiscal year
now coincides with its natural revenue cycle.
Reclassification
Prior to 2003, the Company classified the customer programs reserve as a
reduction of accounts receivable. During 2003, the Company began to classify
the customer programs reserve as a current liability and have reclassified
prior period amounts to conform with the current-year presentation. Balances
for customer program reserves are $13,334,000 and $11,008,000 as of March 31,
2003 and 2002, respectively.
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 these estimates.
Inventories
The Company records inventory at the date of taking title which generally
occurs upon receipt or prior to receipt of in-transit inventory of overseas
product. The Company adjusts unsalable and slow-moving inventory to its net
realizable value. Substantially all of the Company's inventories are 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 cost or
24
market which was $2,376,000 and $5,948,000 at March 31, 2003 and 2002,
respectively. Had all inventories been valued at the lower of FIFO cost or
market, inventories would have been greater by $1,248,000 and $1,147,000 at
March 31, 2003 and 2002, respectively. Inventories consisted of the following:
(in thousands) 2003 2002
-------- -------
Raw material ............................................. $ 24,260 $25,196
Work-in-process .......................................... 30,183 28,612
Finished goods 52,205 44,733
-------- -------
$106,648 $98,541
======== =======
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
generally on the straight-line method and is based on estimated useful lives
or terms of leases as follows:
Buildings, leasehold interests and improvements ....... Lease term to 45 years
Machinery, equipment and other ........................ 3 to 12 years
When property is retired or otherwise disposed of, the related cost and
accumulated depreciation and amortization are eliminated from the accounts.
Any gain or loss from the disposition of property, plant and equipment is
included in other income. Maintenance and repairs are expensed as incurred
while improvements are capitalized and depreciated over their estimated useful
lives. Depreciation expense was $13,768,000, $10,427,000, $2,336,000 and
$9,080,000 in the years ended March 31, 2003 and 2002, in the three month
period ended March 31, 2001 and in the year ended December 31, 2000,
respectively.
Long-Lived Assets
Effective April 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," to supply a single accounting approach for measuring
impairment of long-lived assets, including definite lived intangible assets,
businesses accounted for as a discontinued operation, assets to be sold and
assets to be disposed of other than by sale. The initial adoption of SFAS No.
144 did not have a material effect on the Company's financial position or
results of operations.
Under SFAS No. 144, long-lived assets, except for goodwill and indefinite
lived intangible assets, are reviewed for impairment when circumstances
indicate the carrying value of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of the assets to future net cash flows estimated by the Company to be
generated by such assets. If such assets are considered to be impaired, the
impairment to be recognized is the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
recorded at the lower of carrying value or estimated net realizable value.
Goodwill and Intangible Assets
When a company is acquired, the difference between the fair value of its net
assets, including intangibles, and the purchase price is goodwill. Goodwill is
recorded as an asset on the consolidated balance sheet.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. SFAS No. 142 provides that goodwill and intangible assets with
indefinite lives are no longer amortized on a recurring basis but instead are
subject to impairment testing at least annually. The Company adopted SFAS No.
142 on April 1, 2002. 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 the
impairment of certain goodwill, primarily related to the Company's Paper Magic
- - Fall, Spring and Everyday reporting unit, as well as the reversal of
negative goodwill related to Cleo, and was classified as a cumulative effect
of a change in accounting principle. In the fourth quarter
25
of fiscal 2003, the Company also performed the required annual impairment test
of the carrying amount of goodwill and determined that no goodwill impairment
existed. Application of SFAS No. 142 reduced amortization expense by
approximately $1,191,000 for fiscal 2003. Fiscal 2002, the three month period
ended March 31, 2001 and calendar 2000 included amortization expense of
$1,213,000, $318,000 and $1,272,000, respectively. Other intangible assets
with definite useful lives are required to continue to be amortized over their
respective estimated useful lives.
Prior to April 1, 2002, the Company amortized goodwill over periods not
exceeding 40 years.
In addition to goodwill, at March 31, 2003 the Company has $4,500,000 of
other intangible assets relating to trade names that are not subject to
amortization and $657,000 of other intangible assets relating primarily to a
covenant not to compete that are being amortized over periods of three to five
years.
Derivative Financial Instruments
The Company uses certain derivative financial instruments as part of its
risk management strategy to reduce interest rate and currency risk.
Derivatives are not used for trading or speculative activities. The Company
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an amendment of FASB Statement No. 133," on
January 1, 2001. The adoption of SFAS No. 133 was not material to the
consolidated statements of operations or financial position of the Company.
The Company recognizes all derivatives on the consolidated balance sheet at
fair value. On the date the derivative instrument is entered into, the Company
generally designates the derivative as either (1) a hedge of the fair value of
a recognized asset or liability or of an unrecognized firm commitment ("fair
value hedge"), or (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset
or liability ("cash flow hedge"). Changes in the fair value of a derivative
that is designated as, and meets all the required criteria for, a fair value
hedge, along with the gain or loss on the hedged asset or liability that is
attributable to the hedged risk, are recorded in current period earnings.
Changes in the fair value of a derivative that is designated as, and meets all
the required criteria for, a cash flow hedge are recorded in accumulated other
comprehensive income and reclassified into earnings as the underlying hedged
item affects earnings. The portion of the change in fair value of a derivative
associated with hedge ineffectiveness or the component of a derivative
instrument excluded from the assessment of hedge effectiveness is recorded
currently in earnings. Also, changes in the entire fair value of a derivative
that is not designated as a hedge are recorded immediately in earnings. The
Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes relating all
derivatives that are designated as fair value or cash flow hedges to specific
assets and liabilities on the consolidated balance sheet or to specific firm
commitments or forecasted transactions.
The Company also formally assesses, both at the inception of the hedge and
on an ongoing basis, whether each derivative is highly effective in offsetting
changes in fair values or cash flows of the hedged item. If it is determined
that a derivative is not highly effective as a hedge or if a derivative ceases
to be a highly effective hedge, the Company will discontinue hedge accounting
prospectively.
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
forward exchange 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. There were no open
forward exchange contracts as of March 31, 2003. The notional amount of open
forward exchange contracts as of March 31, 2002 was $26,000 and the related
gain was not material.
During 2001, the Company entered into interest rate swap agreements, with
maturities through January 2004, 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 annual notional amounts
of interest rate swap contracts subject to fixed rates were $32,838,000 and
$21,890,000 for fiscal years 2002 and 2003, respectively. The average notional
amount of interest rate swap contracts subject to fixed rates outstanding as
of March 31, 2003 for fiscal 2004 is $10,946,000. These agreements involve the
exchange of variable rate payments for fixed rate payments without the effect
of leverage and without the exchange of the underlying face amount. Fixed
interest rate payments were at a weighted average rate of 4.82% and 4.96% in
fiscal 2002 and 2003, respectively. Fixed interest
26
rate payments for existing contracts at March 31, 2003 will be at a weighted
average rate of 5.09% for fiscal 2004. 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 and
amounted to $722,000 and $583,000 for the years ended March 31, 2003 and 2002,
respectively.
The fair value of interest rate swap agreements is included in other current
liabilities and totaled $437,000 and $426,000 as of March 31, 2003 and 2002,
respectively.
Income Taxes
The Company follows the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities and the tax effects of net operating loss carryforwards. Deferred
tax assets or liabilities at the end of each period are determined using the
tax rate expected to be in effect when taxes are actually paid or recovered.
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.
Product Development Costs
Product development costs consist of purchases of outside artwork, printing
plates and cylinders. The Company classifies these costs as a prepaid expense.
Product development costs are incurred approximately 18 to 20 months before
the holiday event and are amortized monthly over the selling season, generally
within two to four months of the respective holiday event. Product development
expense is recorded in selling, general and administrative expense.
Product development costs capitalized as of March 31, 2003 and 2002 were
$5,113,000 and $5,435,000, respectively. Product development expense of
$6,424,000, $5,319,000, $369,000 and $7,847,000 was recognized in the years
ended March 31, 2003 and 2002, in the three month period ended March 31, 2001
and in the year ended December 31, 2000, respectively.
Shipping and Handling Costs
Shipping and handling costs are reported in cost of sales in the
consolidated statements of operations.
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 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 SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income (loss) and earnings (loss) per share would have been
reduced as follows:
27
For the Years For the
Ended Three Month For the
March 31, Period Ended Year Ended
------------------ March 31, December 31,
2003 2002 2001 2000
------- ------- ------------ ------------
(in thousands, except per share amounts)
Net income (loss), as reported ................................................ $17,033 $21,501 $(6,080) $18,231
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all awards, net of
related tax effects.......................................................... (3,216) (2,492) (681) (2,368)
------- ------- ------- -------
Pro forma net income (loss) ................................................... $13,817 $19,009 $(6,761) $15,863
======= ======= ======= =======
Earnings (loss) per share:
Basic - as reported ........................................................... $ 2.17 $ 2.44 $ (.69) $ 2.02
Basic - pro forma ............................................................. $ 1.76 $ 2.15 $ (.77) $ 1.76
Diluted - as reported ......................................................... $ 2.07 $ 2.40 $ (.69) $ 2.02
Diluted - pro forma ........................................................... $ 1.68 $ 2.12 $ (.77) $ 1.75
Net Income (Loss) Per Common Share
The following table sets forth the computation of basic income (loss) per
common share and diluted income (loss) per common share for the years ended
March 31, 2003 and 2002, for the three month period ended March 31, 2001 and
for the year ended December 31, 2000:
(in thousands, except per share amounts)
For the Years For the
Ended Three Month For the
March 31, Period Ended Year Ended
------------------ March 31, December 31,
2003 2002 2001 2000
------- ------- ------------ ------------
Numerator:
Income (loss) before cumulative effect of accounting
change...................................................................... $25,846 $21,501 $(6,080) $18,231
Cumulative effect of accounting change ....................................... (8,813) -- -- --
------- ------- ------- -------
Net income (loss) ............................................................ $17,033 $21,501 $(6,080) $18,231
======= ======= ======= =======
Denominator:
Weighted average shares outstanding for
basic income (loss) per common share........................................ 7,856 8,827 8,831 9,037
Effect of dilutive stock options ............................................. 369 145 -- 4
------- ------- ------- -------
Adjusted weighted average shares outstanding
for diluted income (loss) per common share.................................. 8,225 8,972 8,831 9,041
======= ======= ======= =======
Basic net income (loss) per common share:
Income (loss) before cumulative effect of
accounting change........................................................... $ 3.29 $ 2.44 $ (.69) $ 2.02
Cumulative effect of accounting change ........................................ (1.12) -- -- --
------- ------- ------- -------
Net income (loss) per common share ............................................ $ 2.17 $ 2.44 $ (.69) $ 2.02
======= ======= ======= =======
Diluted net income (loss) per common share:
Income (loss) before cumulative effect of
accounting change........................................................... $ 3.14 $ 2.40 $ (.69) $ 2.02
Cumulative effect of accounting change ........................................ (1.07) -- -- --
------- ------- ------- -------
Net income (loss) per common share ............................................ $ 2.07 $ 2.40 $ (.69) $ 2.02
======= ======= ======= =======
28
Options on 51,000 shares, 480,000 shares and 633,000 shares of common stock
were not included in computing diluted income per common share for the years
ended March 31, 2003 and 2002 and December 31, 2000, respectively, because
their effects were antidilutive. Options on 1,589,000 shares were not included
in computing diluted loss per common share for the three months ended March
31, 2001 because their effects were antidilutive due to the Company's loss
during the period.
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 maturity at
time of purchase of less than three months to be cash equivalents.
Supplemental Schedule of Cash Flow Information
(In thousands)
For the Years For the
Ended Three Month For the
March 31, Period Ended Year Ended
------------------ March 31, December 31,
2003 2002 2001 2000
------- ------- ------------ ------------
Cash paid during the year for:
Interest ..................................................................... $ 3,352 $ 2,139 $ 917 $5,290
======= ======= ====== ======
Income taxes ................................................................. $13,351 $10,705 $9,053 $9,120
======= ======= ====== ======
Details of acquisitions:
Fair value of assets acquired ................................................ $56,257 $64,499 -- --
Liabilities assumed .......................................................... 33,366 11,826 -- --
------- ------- ------ ------
Cash paid .................................................................... 22,891 52,673 -- --
Less cash acquired ........................................................... 1 295 -- --
------- ------- ------ ------
Net cash paid for acquisitions ................................................ $22,890 $52,378 $ -- $ --
======= ======= ====== ======
See Note 3 for supplemental disclosure of non-cash investing activities.
(2) GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142:
Effective July 1, 2001 and April 1, 2002, the Company adopted SFAS No. 141,
"Business Combinations," and SFAS No. 142, 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
reporting unit 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 reporting unit to
its respective carrying value. For those reporting units 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. 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 was
being amortized over ten years. The $2,393,000 of remaining 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 - 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 2003 to record this
impairment as well as the
29
reversal of negative goodwill and was classified as a 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 goodwill impairment existed.
Amortization expense for goodwill and negative goodwill for the year ended
March 31, 2002, for the three month period ended March 31, 2001 and for the
year ended December 31, 2000 was $1,213,000, $318,000 and $1,272,000,
respectively. The effects on income and income per common share of excluding
such goodwill amortization from the year ended March 31, 2002, from the three
month period ended March 31, 2001 and from the year ended December 31, 2000
follows (in thousands, except per share data):
For the Years For the
Ended Three Month For the
March 31, Period Ended Year Ended
------------------ March 31, December 31,
2003 2002 2001 2000
------- ------- ------------ ------------
Income (loss) before accounting change, as reported ........................... $25,846 $21,501 $(6,080) $18,231
Add back:
Goodwill and negative goodwill amortization, net
of income taxes.............................................................. -- 1,088 287 1,147
------- ------- ------- -------
Pro forma income (loss) before accounting change .............................. $25,846 $22,589 $(5,793) $19,378
======= ======= ======= =======
Net income (loss) as reported ................................................. $17,033 $21,501 $(6,080) $18,231
Add back:
Goodwill and negative goodwill amortization, net
of income taxes.............................................................. -- 1,088 287 1,147
------- ------- ------- -------
Pro forma net income (loss) ................................................... $17,033 $22,589 $(5,793) $19,378
======= ======= ======= =======
Pro forma income (loss) per common share before
accounting change:
Basic ........................................................................ $ 3.29 $ 2.56 $ (.66) $ 2.14
======= ======= ======= =======
Diluted ...................................................................... $ 3.14 $ 2.52 $ (.66) $ 2.14
======= ======= ======= =======
Pro forma net income (loss) per common share:
Basic ........................................................................ $ 2.17 $ 2.56 $ (.66) $ 2.14
======= ======= ======= =======
Diluted ...................................................................... $ 2.07 $ 2.52 $ (.66) $ 2.14
======= ======= ======= =======
The changes in the carrying amount of goodwill for the year ended March 31,
2003 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
-------
(11,656)
Acquisition of Crystal .................................... 5,351
-------
Balance as of March 31, 2003 .............................. $31,017
=======
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
$657,000 of other intangible assets, relating primarily to a covenant not to
compete, that are being amortized over periods of three to five years.
Accumulated amortization at March 31, 2003 was $129,000 and amortization
expense for fiscal 2003 was $126,000. The estimated amortization expense for
fiscal 2004, 2005, 2006, 2007 and 2008 is $151,000, $151,000, $94,000, $94,000
and $38,000, respectively.
30
(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 for approximately $22,891,000 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 and
competed in the seasonal end of the gift bag and tissue markets with the
Company's existing product lines. 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 goodwill and other intangible assets in the accompanying
consolidated balance sheet. During the fourth quarter of fiscal 2003, goodwill
increased primarily as a result of an increase of $3,891,000 related to the
finalization of amounts allocated to property, plant and equipment that will
be disposed of in fiscal 2004. 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 (all of which is expected to
be deductible for tax purposes) and $300,000 was assigned to a covenant not to
compete which has a useful life of five years.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
Current assets...................................................... $ 43,910
Property, plant and equipment....................................... 2,196
Intangible assets................................................... 4,800
Goodwill............................................................ 5,351
--------
Total assets acquired.............................................. 56,257
--------
Current liabilities................................................. (13,047)
Long-term debt...................................................... (18,828)
Other long-term liabilities......................................... (1,491)
--------
Total liabilities assumed.......................................... (33,366)
--------
Net assets acquired................................................ $ 22,891
========
The Company is in the process of finalizing 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. The Company will
record a restructuring reserve in the first half of fiscal 2004. In connection
with this restructuring reserve, goodwill will be increased by approximately
$2,000,000.
The unaudited consolidated results of operations of the Company and Crystal
on a pro forma basis, as though the transaction had been consummated at the
beginning of the respective periods, were as follows (in thousands):
Year Ended
March 31,
--------------------
2003 2002
-------- --------
Net sales ............................................... $568,446 $501,836
Income before cumulative effect of change in accounting
principle .............................................. 24,384 23,538
Net income .............................................. 15,571 23,538
Income per common share before cumulative effect of
accounting change:
Basic .................................................. $ 3.10 $ 2.67
Diluted ................................................ $ 2.96 $ 2.62
Income per common share:
Basic .................................................. $ 1.98 $ 2.67
Diluted ................................................ $ 1.89 $ 2.62
31
Pro forma adjustments included in the above reflect the effect of purchase
accounting adjustments on interest, depreciation and tax expense.
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 Offray which
manufactures and sells decorative ribbon products, floral accessories and
narrow fabrics for apparel, craft and packaging applications. Berwick acquired
substantially all of the business and assets of Offray for approximately
$44,865,000 in cash, including transaction costs. A portion of the purchase
price is being held in escrow to cover indemnification obligations. The
acquisition was accounted for as a purchase. In the current year, the Company
finalized the purchase price allocation relating to Offray and the purchase
price still 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
$4,541,000 on the day of acquisition for severance and costs related to the
closure of certain facilities. As of March 31, 2003, the Company had closed
Offray's distribution facility in Quebec, Canada and its warehouse in
Antietam, Maryland. As of March 31, 2003, the Company had terminated 80 of
approximately 125 employees included in the restructuring plan. Payments,
mainly for severance costs, of approximately $1,270,000 were made in the year
ended March 31, 2003. In addition, during the year, there were reductions in
the restructuring accrual of approximately $2,156,000. Such reductions were
for costs related to the closure of certain facilities that were less than
originally estimated as well as severance and certain other costs that will be
expensed as incurred. There was a corresponding reduction in property, plant
and equipment for this amount. As of March 31, 2003, the remaining liability
of approximately $1,115,000 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 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..................................................................... (990) (280) (1,270)
Noncash reductions - 2003............................................................ (762) (1,394) (2,156)
------ ------- -------
Restructuring reserve as of March 31, 2003........................................... $ 713 $ 402 $ 1,115
====== ======= =======
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.
(4) 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 $36,510,000.
On February 19, 1998, the Company announced that its Board of Directors had
authorized the buyback of up to 1,000,000 shares of the Company's Common
Stock. Subsequently, the Board of Directors authorized repurchases of an
additional 3,500,000 shares, for a total of 4,500,000 shares, on terms
acceptable to management. The
32
Company repurchased 1,100,000 shares for $36,510,000, 327,000 shares for
$9,409,000 and 543,200 shares for $10,861,000, in the fiscal years ended March
31, 2003 and 2002 and in calendar year 2000, respectively. There were no stock
repurchases for the three month transition period ended March 31, 2001.
(5) STOCK OPTION PLANS:
Under the terms of the CSS Industries, Inc. 2000 Stock Option Plan for Non-
Employee Directors ("2000 Plan"), non-qualified stock options to purchase up
to 200,000 shares of common stock are available for grant to non-employee
directors at exercise prices of not less than fair market value on the date of
grant. Options to purchase 4,000 shares of the Company's common stock are to
be granted automatically to each non-employee director on the last day that
the Company's common stock is traded in November from 2001 to 2005. Each
option will expire ten years after the date the option is granted and options
may be exercised at the rate of 25% per year commencing one year after the
date of grant. At March 31, 2003, options to acquire 174,000 shares were
available for grant under the 2000 Plan.
Under the terms of the 1994 Equity Compensation Plan ("1994 Plan"), the
Human Resources Committee ("Committee") of the Board of Directors may grant
incentive stock options, non-qualified stock options, restricted stock grants,
stock appreciation rights or combinations thereof to officers and other key
employees. Grants under the 1994 Plan may be made through November 2004 and
are exercisable at the discretion of the Committee but in no event greater
than ten years from the date of grant. Options may be exercised at the rate of
25% per year commencing one year after the date of grant. At March 31, 2003,
options to acquire 868,536 shares were available for grant under the 1994
Plan.
On May 17, 2000 the Committee authorized the amendment of the option
exercise period of each grant that would have otherwise expired on or before
January 31, 2001 to extend such period for two years, and on November 3, 2000
further authorized the amendment of the option exercise period of each grant
(including those option exercise periods extended on May 17, 2000) to ten
years from the respective date of each such grant. The Company recorded
compensation expense of $93,000 in calendar year 2000 as a result of these
amendments which represented the difference between the market value of the
shares and the exercise price on the date of the amendments.
The CSS Industries, Inc. 1995 Stock Option Plan for Non-Employee Directors
("1995 Plan"), under which non-qualified stock options to purchase up to
300,000 shares of common stock were available for grant to non-employee
directors at exercise prices of not less than fair market value on the date of
grant, expired on December 31, 2000. Options to purchase 4,000 shares of the
Company's common stock were to be granted automatically to each non-employee
director on the last day of November through the year 2000. Options may be
exercised at the rate of 25% per year commencing one year after the date of
grant. Prior to the expiration of the 1995 Plan, options to acquire 96,000
shares were granted.
33
Transactions from January 1, 2000 through March 31, 2003 under the above
plans were as follows:
Weighted Weighted
Number Option Price Average Average Life
of Shares per Share Price Remaining
--------- -------------- -------- ------------
Options outstanding at January 1, 2000 ................................... 1,007,384 $16.00 - 33.13 $25.26 2.8 years
Granted ................................................................. 373,900 19.06 - 21.50 21.20
Exercised ............................................................... (10,000) 16.00 16.00
Canceled ................................................................ (114,200) 20.13 - 33.00 23.77
--------- -------------- ------
Options outstanding at December 31, 2000 ................................. 1,257,084 17.13 - 33.13 24.26 7.1 years
Granted ................................................................. 348,100 20.38 - 21.50 21.49
Exercised ............................................................... -- -- --
Canceled ................................................................ (2,000) 21.50 21.50
--------- -------------- ------
Options outstanding at March 31, 2001 .................................... 1,603,184 17.13 - 33.13 23.66 7.3 years
Granted ................................................................. 353,100 24.41 - 31.70 25.58
Exercised ............................................................... (81,949) 18.63 - 28.63 22.31
Canceled ................................................................ (60,826) 20.13 - 28.63 23.26
--------- -------------- ------
Options outstanding at March 31, 2002 .................................... 1,813,509 17.13 - 33.13 24.11 7.2 years
Granted ................................................................. 113,000 32.51 - 36.60 34.35
Exercised ............................................................... (251,594) 17.13 - 33.00 23.15
Canceled ................................................................ (78,226) 19.06 - 32.55 23.94
--------- -------------- ------
Options outstanding at March 31, 2003 .................................... 1,596,689 $19.06 - 36.60 $25.00 6.6 years
========= ============== ======
Options exercisable at March 31, 2003 .................................... 969,438 $19.06 - 33.13 $24.61
========= ============== ======
The weighted average fair value of options granted during fiscal 2003 was
$21.66 per share ($16.26 in fiscal 2002, $12.92 in the three month transition
period ended March 31, 2001 and $11.26 in calendar year 2000).
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
For the Years For the
Ended Three Month For the
March 31, Period Ended Year Ended
--------------------- March 31, December 31,
2003 2002 2001 2000
--------- --------- ------------ ------------
Expected dividend yield at time of grant .................................. 0% 0% 0% 0%
Expected stock price volatility ........................................... 45% 44% 43% 42%
Risk-free interest rate ................................................... 5.22% 5.28% 5.50% 5.66%
Expected life of option ................................................... 9.6 years 9.9 years 8.5 years 6.7 years
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
$18.30 - $21.96 631,144 6.4 $21.23 396,618 $21.19
$21.97 - $25.62 310,200 8.2 $24.73 98,225 $24.24
$25.63 - $29.28 490,845 5.4 $27.24 436,345 $27.22
$29.29 - $32.94 63,000 6.9 $31.20 21,250 $29.88
$32.95 - $36.60 101,500 8.3 $34.64 17,000 $33.04
--------- --- ------ ------- ------
1,596,689 6.6 $25.00 969,438 $24.61
========= === ====== ======= ======
34
(6) RETIREMENT BENEFIT PLANS:
Profit Sharing Plans
The Company maintains defined contribution profit sharing and 401(k) plans
covering substantially all of its employees as of March 31, 2003. Annual
contributions under the plans are determined by the Board of Directors of the
Company or each subsidiary, as appropriate. Consolidated expense related to
the plans for the years ended March 31, 2003 and 2002, the three month period
ended March 31, 2001 and the year ended December 31, 2000 was $2,393,000,
$1,997,000, $579,000 and $2,145,000, respectively.
Pension Plans
The Company's Crystal division administers a defined benefit pension plan
covering substantially all salaried employees. The plan, acquired as part of
the Crystal acquisition on October 17, 2002, was frozen on November 2, 2002
with an intent to terminate the plan. Future benefits to Crystal division
employees will be provided by participation in an existing defined
contribution profit sharing and 401(k) plan.
The following provides a reconciliation of benefit obligations and plan
(in thousands):
Change in benefit obligation:
Benefit obligation at acquisition ................................... $2,398
Interest cost ....................................................... 61
Actuarial gain ...................................................... (6)
Adjustment in cost of settlement .................................... (3)
Benefits paid by Company ............................................ (146)
------
Benefit obligation at March 31, 2003 ................................ $2,304
======
Change in plan assets:
Fair value of plan assets at acquisition ............................ $4,753
Actual return on plan assets ........................................ 181
Benefits paid from plan assets ...................................... (146)
------
Fair value of plan assets at March 31, 2003 ......................... $4,788
======
The following table summarizes the funded status of the defined benefit
pension plan (in thousands):
March 31,
2003
---------
Fair value of plan assets .......................................... $4,788
Benefit obligation ................................................. 2,304
------
Funded status ...................................................... 2,484
Unrecognized net gain .............................................. (23)
------
Prepaid benefit cost recognized in the
consolidated balance sheet........................................ $2,461
======
Weighted-average assumptions:
Discount rate ...................................................... 4.8%
Expected return on plan assets ..................................... 7.0%
Benefit income ..................................................... $ 181
Benefits paid ...................................................... 146
Net periodic pension costs include the following components (in thousands):
Interest cost ....................................................... $ 61
Return on plan assets (expected) .................................... 166
------
Benefit cost (credit) ............................................... $(105)
======
35
(7) INCOME TAXES:
The following table summarizes the provision for U.S. federal, state and
foreign taxes on income (loss):
For the Years For the
Ended Three Month For the
March 31, Period Ended Year Ended
------------------ March 31, December 31,
2003 2002 2001 2000
------- ------- ------------ ------------
(in thousands)
Current:
Federal ............................................................ $13,922 $ 8,336 $(2,847) $ 7,412
State .............................................................. 146 38 28 130
Foreign ............................................................ 1,449 1,283 118 934
------- ------- ------- -------
15,517 9,657 (2,701) 8,476
------- ------- ------- -------
Deferred:
Federal ............................................................ (1,284) 2,220 (406) 1,699
State .............................................................. (69) 77 (7) --
------- ------- ------- -------
(1,353) 2,297 (413) 1,699
------- ------- ------- -------
$14,164 $11,954 $(3,114) $10,175
======= ======= ======= =======
The differences between the statutory and effective federal income tax rates
on income (loss) before income taxes were as follows:
For the
Years For the
Ended Three Month For the
March 31, Period Ended Year Ended
------------ March 31, December 31,
2003 2002 2001 2000
---- ---- ------------ ------------
U.S. federal statutory rate ............................................... 35.0% 35.0% (35.0)% 35.0%
State income taxes, less federal benefit .................................. .5 .2 .1 .3
Non-deductible goodwill ................................................... -- .8 .7 1.0
Other ..................................................................... (.1) (.3) (.3) (.5)
---- ---- ----- ----
35.4% 35.7% (33.9)% 35.8%
==== ==== ===== ====
36
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available net operating
loss and credit carryforwards. The following temporary differences gave rise
to net deferred income tax assets (liabilities) as of March 31, 2003 and 2002:
March 31,
------------------
2003 2002
------- --------
(in thousands)
Deferred income tax assets:
Accounts receivable ..................................... $ 748 $ 662
Inventories ............................................. 2,737 2,632
Accrued expenses ........................................ 3,556 3,929
State net operating loss and credit carryforwards ....... 5,545 6,080
Other ................................................... 3,264 399
------- --------
15,850 13,702
Valuation allowance ..................................... (5,307) (6,080)
------- --------
10,543 7,622
------- --------
Deferred income tax liabilities:
Property, plant and equipment ........................... 6,217 5,181
Unremitted earnings of foreign subsidiaries ............. 702 1,013
Other ................................................... 5,104 4,261
------- --------
12,023 10,455
------- --------
Net deferred income tax liability ....................... $(1,480) $(2,833)
======= ========
At March 31, 2003 and 2002, the Company had potential state income tax
benefits of $5,545,000 and $6,080,000, respectively, from net operating loss
and credit carryforwards that expire in various years through 2018. At March
31, 2002, the Company provided a $6,080,000 valuation allowance to offset this
deferred tax asset in full. During the year ended March 31, 2003, $773,000 of
the valuation allowance was reversed, due to increased taxable earnings for
state income tax purposes in the fiscal year and management's assessment of
the portion of the deferred tax asset that more likely than not will be
realized through future taxable earnings or implementation of tax planning
strategies.
(8) LONG-TERM DEBT AND CREDIT ARRANGEMENTS:
Long-term debt consisted of the following:
March 31,
---------------
2003 2002
------- -----
(in thousands)
4.48% Senior Notes due December 13, 2009 .................... $50,000 $ --
Other ....................................................... 172 365
------- -----
50,172 365
Less - current portion ...................................... (109) (200)
------- -----
$50,063 $ 165
======= =====
On December 13, 2002, the Company issued $50,000,000 of 4.48% Senior Notes
due December 13, 2009 (the "Senior Notes"). The Senior Notes are to be paid
ratably over five years, beginning at the end of the third year of the seven
year term of the agreement. The net proceeds received by the Company from the
sale of the Senior Notes were approximately $49,706,000 after deduction of
costs associated with the transaction. The net proceeds from the Senior Notes
were used to repay short-term borrowings under the Company's unsecured
revolving credit facility. The note purchase agreement contains covenants, the
most restrictive of which pertain to net worth, the ratio of operating cash
flow to fixed charges and the ratio of debt to capitalization. The Company is
in compliance with all covenants as of March 31, 2003.
37
On April 30, 2001, the Company replaced its expiring $300,000,000 revolving
credit facility with two new financing facilities. The Company entered into an
unsecured revolving credit facility with five banks, which was increased from
$75,000,000 to $100,000,000 effective June 21, 2002. This facility allows for
borrowings up to $100,000,000, expires on April 30, 2004 and provides that
borrowings are limited during a consecutive 30 day period in each year of the
agreement. The loan agreement contains provisions to increase or reduce the
interest pricing spread based on the achievement of certain benchmarks related
to the ratio of earnings to interest expense. At the Company's option,
interest on the facility currently accrues at (1) the greater of the prime
rate minus 0.5% or the Federal Funds Rate, or (2) LIBOR plus 1%. The revolving
credit facility provides for commitment fees of 0.25% per annum on the daily
average of the unused commitment. The loan agreement also contains covenants,
the most restrictive of which pertain to net worth, the ratio of operating
cash flow to fixed charges, the ratio of earnings to interest expense and the
ratio of debt to capitalization. The Company is in compliance with all
financial debt covenants as of March 31, 2003.
The Company also entered into a receivables purchase agreement with an
issuer of receivables-backed commercial paper. Under this arrangement, the
Company sells, on an ongoing basis and without recourse, its trade accounts
receivable to a wholly-owned special purpose subsidiary (the "SPS"), which in
turn has the option to sell, on an ongoing basis and without recourse, to the
commercial paper issuer an undivided percentage interest in the pool of
accounts receivable. Under the agreement, new trade receivables are
automatically sold to the SPS and become a part of the receivables pool. The
agreement permits the sale (and repurchase) of an undivided interest in the
accounts receivable pool for an amount of up to $100,000,000 through April 30,
2004, subject to an annual renewal. Interest on amounts financed under this
facility is based on a variable commercial paper rate plus 0.375%. The
receivables facility provides for commitment fees of 0.225% per annum on the
daily average of the unused commitment. This arrangement has been accounted
for as a financing transaction.
The weighted average interest rate under these loan agreements for the years
ended March 31, 2003 and 2002, the three months ended March 31, 2001 and the
year ended December 31, 2000 was 3.96%, 4.48%, 3.20% and 7.37%, respectively.
The average and peak borrowings were $70,002,000 and $198,765,000 for the year
ended March 31, 2003 and $32,670,000 and $101,800,000 for the year ended March
31, 2002. Additionally, outstanding letters of credit totaled $4,113,000 and
$4,883,000 at March 31, 2003 and 2002, respectively. The Company has letters
of credit that guarantee funding of workers compensation claims as well as
obligations to certain vendors.
Long-term debt matures as follows:
(in thousands)
2004 ................................................................. $ 109
2005 ................................................................. 10,063
2006 ................................................................. 10,000
2007 ................................................................. 10,000
2008 ................................................................. 10,000
Thereafter ........................................................... 10,000
-------
Total............................................................... $50,172
=======
(9) OPERATING LEASES:
The future minimum rental payments associated with all noncancelable lease
obligations are as follows:
(in thousands)
2004 $ 8,750
2005 ................................................................. 6,512
2006 ................................................................. 4,381
2007 ................................................................. 1,461
2008 ................................................................. 1,055
Thereafter ........................................................... 2,394
-------
Total............................................................... $24,553
=======
38
Rent expense was $8,963,000, $6,660,000, $1,700,000 and $7,368,000 in the
years ended March 31, 2003 and 2002, in the three month period ended March 31,
2001 and in the year ended December 31, 2000, respectively.
(10) CLAIMS PUT AGREEMENT:
The Company entered into a Claims Put Agreement (the Put Agreement) on
January 16, 2002 with an unrelated financial institution giving CSS the
ability to put Kmart trade receivables, not to exceed $16,000,000, arising
from merchandise delivered during the period September 15, 2001 through the
date of a bankruptcy event. CSS paid a premium of $480,000 to enter into this
agreement. The Kmart put option was exercisable if Kmart filed for bankruptcy.
On January 22, 2002, Kmart filed for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code. On February 21, 2002, the Company exercised the put option
giving CSS the right to collect an amount equal to the pre-petition
receivables balance outstanding with Kmart, times the purchase rate of 70%.
The Company classifies gains on these types of credit risk arrangements in
selling, general and administrative expenses (SG&A). For the year ended March
31, 2002, the Company recognized a pre-tax gain of approximately $5,436,000
for the change in the Put Agreement's value, less the premium paid. This
amount was offset by bad debt expense of approximately $10,352,000 and was
recorded in SG&A in the consolidated statement of operations.
As of March 31, 2002, the fair market value of Kmart receivables not yet
assigned to the financial institution was approximately $4,436,000 and
determined by applying the then going rate (30% of face value) for Kmart pre-
petition bankruptcy claims, as ascertained in discussions with several debt
securities firms that traded in these claims, to the net receivable balance.
The value of the Kmart put right was approximately $5,916,000 and determined
by applying the above market recovery percentage of 40% (70% recovery rate per
the Put Agreement less 30% pre-petition claim market recovery percentage) to
the net receivable balance. The fair market value of Kmart receivables not yet
assigned to the financial institution and the value of the Kmart put right
were classified as other current assets in the consolidated balance sheet as
of March 31, 2002 and were subsequently collected during fiscal 2003.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate methodologies.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
Certain of these financial instruments are with major financial institutions
and expose the Company to market and credit risks and may at times be
concentrated with certain counterparties or groups of counterparties. The
creditworthiness of counterparties is continually reviewed, and full
performance is anticipated.
The methods and assumptions used to estimate the fair value of each class of
financial instruments are set forth below:
o Cash and temporary investments, accounts receivable and accounts
payable - The carrying amounts of these items are a reasonable
estimate of their fair values at March 31, 2003 and 2002.
o Short-term borrowings - Borrowings under the revolving credit
facility have variable rates that reflect currently available terms
and conditions for similar debt. The carrying amount of this debt is
a reasonable estimate of its fair value.
o Other long-term obligations - The carrying amounts of these items
are a reasonable estimate of their fair value.
o Foreign currency contracts - The fair value is based on quotes
obtained from financial institutions. There were no foreign currency
contracts outstanding as of March 31, 2003 and as of March 31, 2002,
the fair value of foreign currency contracts was immaterial.
o Interest rate swap agreements - The fair value is based on quotes
obtained from financial institutions. The fair value of interest
rate swap agreements at March 31, 2003 and 2002 was $437,000 and
$426,000, respectively.
39
o Long-term debt - The fair value of long-term debt instruments is
estimated using a discounted cash flow analysis. As of March 31,
2003, the carrying amount of long-term debt was $50,063,000 and the
estimated fair value was estimated to be approximately $52,000,000.
As of March 31, 2002, the carrying amount of long-term debt was a
reasonable estimate of its fair value.
(12) COMMITMENTS AND CONTINGENCIES:
In November 2002, Bleyer Industries, Inc. ("Bleyer") filed suit against CSS
and certain of its subsidiaries in the Supreme Court of the State of New York,
County of Nassau. The suit alleges that CSS and certain of its subsidiaries
misused certain confidential information disclosed by Bleyer pursuant to
certain confidentiality agreements entered into by CSS and Bleyer. The relief
sought consists of compensatory damages of approximately $10,000,000,
prejudgment interest and punitive damages. CSS believes that the allegations
in the complaint lack merit and it is vigorously defending this litigation.
CSS and its subsidiaries are also involved in ordinary, routine pending
legal proceedings that are not considered by management to be material. In the
opinion of Company counsel and management, the ultimate liabilities resulting
from such lawsuits and claims will not materially affect the consolidated
financial position of the Company.
(13) SEGMENT DISCLOSURE:
The Company operates in a single reporting segment, the manufacture,
distribution and sale of non-durable seasonal consumer goods, primarily to
mass market retailers. CSS conducts substantially all of its business in the
United States.
The Company's detail of revenues from its various products is as follows:
For the Years For the
Ended Three Month For the
March 31, Period Ended Year Ended
-------------------- March 31, December 31,
2003 2002 2001 2000
-------- -------- ------------ ------------
(in thousands)
Christmas ......................................................... $331,405 $288,325 $ 3,157 $280,587
Everyday/Other .................................................... 150,251 77,120 11,511 77,360
Halloween/Easter .................................................. 51,159 58,864 12,319 63,137
-------- -------- ------- --------
Total ............................................................ $532,815 $424,309 $26,987 $421,084
======== ======== ======= ========
One customer accounted for sales of $107,915,000, or 20.3% of total sales
and one customer accounted for sales of $55,132,000, or 10.3% of total sales
in the year ended March 31, 2003. One customer accounted for sales of
$87,975,000, or 20.7% of total sales and one customer accounted for sales of
$45,030,000, or 10.6% of total sales in the year ended March 31, 2002. One
customer accounted for sales of $4,021,000, or 15% of total sales in the three
month period ended March 31, 2001, and $92,141,000, or 21.9% of total sales in
the year ended December 31, 2000.
(14) ACCOUNTING PRONOUNCEMENTS:
In June 2001, the FASB issued SFAS No. 142. Under the new rules, goodwill
and indefinite lived intangible assets are no longer amortized but are
reviewed annually for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. The Company began to apply the new accounting rules effective
April 1, 2002. 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 the
impairment of certain goodwill, primarily related to the Company's Paper Magic
- - Fall, Spring and Everyday reporting unit, as well as the reversal of
negative goodwill related to Cleo, and was classified as a cumulative effect
of a change in accounting principle.
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
40
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 or results of
operations.
In August 2001, the FASB issued SFAS No. 144. 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 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.
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, 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." SFAS No.
145 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. The Company
adopted the provisions of SFAS No. 145 on April 1, 2003 and believes the
adoption of SFAS No. 145 will not have a material effect on its financial
position or 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 was required to adopt the
provisions of SFAS No. 146 effective for exit or disposal activities initiated
after December 31, 2002. The adoption of SFAS No. 146 did not have a material
effect on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 and APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require
companies to account for employee stock options using the fair value method,
the disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic
value method of APB Opinion No. 25. As allowed by SFAS No. 123, the Company
has elected to continue to utilize the accounting method prescribed by APB
Opinion No. 25 and has adopted the disclosure requirements of SFAS No. 148 as
of March 31, 2003. The adoption of SFAS No. 148 did not have a material impact
on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 requires a
guarantor to include disclosure of certain obligations, and if applicable, at
the inception of the guarantee, recognize a liability for the fair value of
other certain obligations undertaken in issuing a guarantee. Interpretation
No. 45 was adopted by the Company as of January 1, 2003 and did not have a
material effect on its 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.
41
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 initial investments 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 is generally effective at the beginning of
the first interim period beginning after June 15, 2003. The Company is
currently evaluating the impact that SFAS No. 150 will have on its financial
position and results of operations when adopted.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except per share amounts)
Quarters
------------------------------------------
2003 First Second Third Fourth
---- -------- -------- -------- -------
Net sales ............................................................................ $ 50,557 $175,452 $250,682 $56,124
-------- -------- -------- -------
Gross profit ......................................................................... 14,352 43,940 69,386 12,549
-------- -------- -------- -------
Net (loss) income before accounting change ........................................... $ (4,340) $ 11,012 $ 25,666 $(6,492)
Cumulative effect of accounting change, net of tax ................................... (8,813) -- -- --
-------- -------- -------- -------
Net (loss) income .................................................................... $(13,153) $ 11,012 $ 25,666 $(6,492)
======== ======== ======== =======
Basic net (loss) income per common share:
Before cumulative effect of accounting change ....................................... $ (.52) $ 1.45 $ 3.36 $ (.84)
Cumulative effect of accounting change .............................................. (1.06) -- -- --
-------- -------- -------- -------
Basic net (loss) income per common share ............................................ $ (1.58) $ 1.45 $ 3.36 $ (.84)
======== ======== ======== =======
Diluted net (loss) income per common share:
Before cumulative effect of accounting change ....................................... $ (.52) $ 1.37 $ 3.19 $ (.84)
Cumulative effect of accounting change .............................................. (1.06) -- -- --
-------- -------- -------- -------
Diluted net (loss) income per common share .......................................... $ (1.58) $ 1.37 $ 3.19 $ (.84)
======== ======== ======== =======
Quarters
-----------------------------------------
2002 First Second Third Fourth
---- ------- -------- -------- -------
Net sales ............................................................................. $28,817 $134,383 $235,944 $25,165
------- -------- -------- -------
Gross profit .......................................................................... 8,153 35,661 65,745 5,341
------- -------- -------- -------
Net (loss) income ..................................................................... $(4,324) $ 8,606 $ 23,059 $(5,840)
======= ======== ======== =======
Net (loss) income per common share:
Basic ................................................................................ $ (.49) $ .97 $ 2.60 $ (.67)
======= ======== ======== =======
Diluted .............................................................................. $ (.49) $ .96 $ 2.54 $ (.67)
======= ======== ======== =======
42
Third quarter net income of 2002 included the write-off of receivables, net
of commissions and other related expense reversals, of approximately
$3,480,000 related to the Chapter 11 filing by Kmart (see Note 10).
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.
(16) SUBSEQUENT EVENT:
On May 27, 2003, the Company's Board of Directors approved a three for two
stock split distributable on July 10, 2003 to stockholders of record at the
close of business on June 30, 2003. Any fractional share interest resulting
from this distribution will be paid in cash in lieu of issuing fractional
shares in an amount based on the closing price of the Company's common stock
on June 30, 2003.
43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On May 21, 2002, the Company terminated its engagement of Arthur Andersen
LLP of Philadelphia, Pennsylvania ("Andersen") as independent auditors,
effective June 11, 2002, and on July 3, 2002, determined to engage KPMG LLP as
its new independent auditors for the fiscal year ending March 31, 2003. This
determination followed the Company's decision to seek proposals from
independent public accounting firms to audit the Company's financial
statements and was approved by the Board of Directors upon the recommendation
of the Audit Committee.
Andersen's reports on the Company's consolidated financial statements for
the fiscal year ended December 31, 2000, the transition period of January 1,
2001 - March 31, 2001 and the fiscal year ended March 31, 2002 (collectively,
the "Accounting Periods") did not contain an adverse opinion or a disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope
or accounting principles.
During each of the Accounting Periods and through the date of the Board of
Directors determination to dismiss Andersen, effective June 11, 2002, there
were no disagreements between the Company and Andersen on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to Andersen's satisfaction,
would have caused it to make reference to the subject matter of the
disagreements in connection with its reports on the Company's consolidated
financial statements with respect to the Accounting Periods. Also, during the
Accounting Periods and through June 11, 2002, there were no reportable events
as listed in Item 304(a)(1)(v) of Regulation S-K.
The Company provided Andersen with a copy of the foregoing disclosures.
Andersen's letter dated June 18, 2002, stating that it found no basis for
disagreement with such statements, was filed as Exhibit 16.2 to the Company's
Form 8-K filed June 20, 2002.
During the Accounting Periods and through June 11, 2002, the Company did not
consult with KPMG regarding the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or any other matter or reportable event listed in Items
304(a)(2)(i) and (ii) of Regulation S-K.
44
Part III
Item 10. Directors and Executive Officers of the Registrant.
See "ELECTION OF DIRECTORS" and "OUR EXECUTIVE OFFICERS" in the Proxy
Statement for the 2003 Annual Meeting of Stockholders of the Company, which
will be incorporated herein by reference.
Item 11. Executive Compensation.
See "EXECUTIVE COMPENSATION" in the Proxy Statement for the 2003 Annual
Meeting of Stockholders of the Company, which will be incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
See "CSS SECURITY OWNERSHIP" and "DISCLOSURE WITH RESPECT TO THE COMPANY'S
EQUITY COMPENSATION PLANS" in the Proxy Statement for the 2003 Annual Meeting
of Stockholders of the Company, which will be incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
See "CERTAIN TRANSACTIONS" in the Proxy Statement for the 2003 Annual
Meeting of Stockholders of the Company, which will be incorporated herein by
reference.
Item 14. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Within 90 days
prior to the filing date of 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-14 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. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation.
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Attached hereto and filed as part of this report are the financial
statement schedules and the exhibits listed below:
1. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets -- March 31, 2003 and 2002
Consolidated Statements of Operations and Comprehensive Income
(Loss) -- for the years ended
March 31, 2003 and 2002, for the three month periods ended March 31,
2001 and 2000 and for the year ended December 31, 2000
Consolidated Statements of Cash Flows -- for the years ended March
31, 2003 and 2002, for the three month periods ended March 31, 2001
and 2000 and for the year ended December 31, 2000
45
Consolidated Statements of Stockholders' Equity -- for the years
ended March 31, 2003 and 2002, for the three month period ended
March 31, 2001 and for the year ended December 31, 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
(b) Reports on Form 8-K filed during the last quarter of fiscal 2003
None
(c) Exhibits, Including Those Incorporated by Reference The following is
a list of exhibits filed as part of this annual report on Form 10-K.
Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is
indicated in parentheses.
Articles of Incorporation and By-Laws
3.1 Restated Certificate of Incorporation filed December 5,
1990. (1) (Exhibit 3.1)
3.2 Amendment to Restated Certificate of Incorporation filed
May 8, 1992. (2) (Exhibit 3.2)
3.3 Certificate eliminating Class 2, Series A, $1.35 Preferred
stock filed September 27, 1991. (3) (Exhibit 3.2)
3.4 Certificate eliminating Class 1, Series B, Convertible
Preferred Stock filed January 28, 1993. (2) (Exhibit 3.5)
3.5 By-laws of the Company, as amended to date (as last
amended February 21, 2001). (11)
(Exhibit 3.6)
Material Contracts
10.1 Asset Purchase Agreement, dated February 8, 2002, among
Berwick Industries, LLC, Daylight Acquisition Corp., Lion
Ribbon Company, Inc., C. M. Offray & Son, Inc., CVO
Corporation (Delaware), C.M. Offray & Son (Hong Kong)
Limited, Claude V. Offray, Jr., Claude V. Offray III, and
Denise A. Offray. (12) (Exhibit 2.1)
10.2 Amendment No. 1 to Asset Purchase Agreement dated March
15, 2002. (12) (Exhibit 2.2)
10.3 Interest Rate Swap Master Agreement dated as of March 19,
2001 between First Union National Bank and CSS Industries,
Inc. (13) (Exhibit 10.6)
10.4 Interest Rate Swap Master Agreement dated as of April 2,
2001 between PNC Bank, National Association and CSS
Industries, Inc. (13) (Exhibit 10.7)
10.5 Loan Agreement among CSS Industries, Inc., the Lending
Institutions listed therein, PNC Bank, National
Association as the Administrative Agent, PNC Capital
Markets, Inc. as Lead Arranger and Fleet National Bank and
First Union National Bank as Co-Documentation Agents,
dated as of April 30, 2001. (13) (Exhibit 10.8)
10.6 Receivables Purchase Agreement among CSS Funding LLC, CSS
Industries, Inc., Market Street Funding Corporation and
PNC Bank, National Association, dated as of April 30,
2001. (13) (Exhibit 10.9)
10.7 Purchase and Sale Agreement between Various Entities
Listed on Schedule I, as the Originators, CSS Industries,
Inc. and CSS Funding LLC, dated as of April 30, 2001. (13)
(Exhibit 10.10)
10.8 Waiver and Amendment to Loan Agreement dated March 11,
2002. (13) (Exhibit 10.11)
46
10.9 First Amendment to Receivables Purchase Agreement dated as
of August 24, 2001. (13) (Exhibit 10.12)
10.10 First Amendment to Purchase and Sale Agreement dated as of
August 24, 2001. (13) (Exhibit 10.13)
10.11 CSS Industries, Inc. 2000 Stock Option Plan for Non-
Employee Directors. (13) (Exhibit 10.14)
10.12 Stock Purchase Agreement, dated October 18, 2002, among
Cleo Inc and the individuals and trusts constituting all
of the shareholders of Crystal Creative Products, Inc.
(14) (Exhibit 2.1)
*10.13 Waiver and Amendment to Loan Agreement dated March 11,
2002.
*10.14 Amendment and Limited Waiver of Loan Agreement dated June
24, 2002.
*10.15 Amendment of Loan Agreement dated September 3, 2002.
*10.16 Amendment and Limited Waiver of Loan Agreement dated
December 12, 2002.
*10.17 $50,000,000 4.48% Senior Notes due December 13, 2009 Note
Purchase Agreement dated December 12, 2002.
Management Contracts, Compensatory Plans or Arrangements
10.18 CSS Industries, Inc. 1994 Equity Compensation Plan (as
last amended January 23, 1996). (8) (Exhibit 10.10)
10.19 CSS Industries, Inc. Non-Qualified Supplemental Executive
Retirement Agreements, dated March 3, 1993, with certain
executive officers of the Company. (2) (Exhibit 10.15)
10.20 CSS Industries, Inc. Non-Qualified Supplemental Executive
Retirement Plan Guidelines, dated January 25, 1994. (4)
(Exhibit 10.14)
10.21 CSS Industries, Inc. Annual Incentive Compensation
Arrangement, Administrative Guidelines, dated March 15,
1993 (as amended January 1, 2000). (10) (Exhibit 10.11)
10.22 The Paper Magic Group, Inc. Management Incentive Bonus
Program, Administrative Guidelines, dated March 15, 1993.
(2) (Exhibit 10.28)
10.23 1994 Amendment to The Paper Magic Group, Inc. Management
Incentive Bonus Program, Administrative Guidelines, dated
March 2, 1994. (4) (Exhibit 10.26)
10.24 Berwick Industries, Inc. Incentive Bonus Plan, dated
January 1, 1994. (4) (Exhibit 10.27)
10.25 Cleo Inc Management Incentive Plan, dated March 7, 1996.
(6) (Exhibit 10.23)
10.26 Berwick Industries, Inc. Non-Qualified Supplemental
Executive Retirement Plan, dated November 18, 1996. (7)
(Exhibit 10.26)
10.27 The Paper Magic Group, Inc. Non-Qualified Supplemental
Executive Retirement Plan, dated December 5, 1996. (7)
(Exhibit 10.27)
10.28 Cleo Inc Non-Qualified Supplemental Executive Retirement
Plan dated November 26, 1996. (9) (Exhibit 10.18) 10.39
Other
*21. List of Significant Subsidiaries of the Registrant.
*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.
*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.
- ---------------
*Filed with this Annual Report on Form 10-K.
47
Footnotes to List of Exhibits
(1) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 1990 and incorporated herein
by reference.
(2) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 1992 and incorporated herein
by reference.
(3) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 1991 and incorporated herein
by reference.
(4) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 1993 and incorporated herein
by reference.
(5) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 1994 and incorporated herein
by reference.
(6) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 1995 and incorporated herein
by reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 1996 and incorporated herein
by reference.
(8) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 1997 and incorporated herein
by reference.
(9) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 1998 and incorporated herein
by reference.
(10) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 1999 and incorporated herein
by reference.
(11) Filed as an exhibit to the Annual Report on Form 10-K (No. 1-2661)
for the fiscal year ended December 31, 2000 and incorporated herein
by reference.
(12) Filed as an exhibit to Form 8-K (No. 1-2661) dated March 15, 2002
and incorporated herein by reference.
(13) Filed as an exhibit to the Annual Report on Form 10-K/A (No. 1-2661)
for the fiscal year ended March 31, 2002 and incorporated herein by
reference.
(14) Filed as an exhibit to Form 8-K (No. 1-2661) dated October 18, 2002
and incorporated herein by reference.
The Company agrees to furnish supplementally a copy of omitted Schedules and
Exhibits, if any, with respect to Exhibits listed above upon request.
Stockholders who have been furnished a copy of this Report may obtain copies
of any Exhibit listed above on payment of $.50 per page for reproduction and
mailing charges by writing to the Secretary, CSS Industries, Inc., 1845 Walnut
Street, Philadelphia, Pennsylvania 19103.
48
CSS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A
-------- Column B Column C Column D Column E
--------- -------- -------- ----------
Additions
-------------------
Balance Charged
at to Costs Charged Balance
Beginning and to Other at End of
of Period Expenses Accounts Deductions Period
--------- -------- -------- ---------- ---------
Year ended March 31, 2003
Doubtful accounts receivable-customers.............................. $1,549 $ 1,521 $ 237(c) $ 1,495 $1,812
Accrued restructuring expenses...................................... 4,541 -- -- 3,426 1,115
Year ended March 31, 2002
Doubtful accounts receivable-customers.............................. $ 923 $10,936(b) $ 667(a) $10,977(b) $1,549
Accrued restructuring expenses...................................... -- -- 4,541(a) -- 4,541
Three months ended March 31, 2001
Doubtful accounts receivable-customers.............................. $1,512 $ 174 $ -- $ 763 $ 923
Year ended December 31, 2000
Doubtful accounts receivable-customers.............................. $1,647 $ 1,323 $ -- $ 1,458 $1,512
Notes: (a) Balance at acquisition of Offray.
(b) Includes gross Kmart bad debt write-off before gain on Put
Agreement of $5,436.
(c) Balance at acquisition of Crystal.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on behalf of the undersigned thereunto duly authorized.
CSS INDUSTRIES, INC.
----------------------------------------------------------
Registrant
Dated: June 5, 2003 By /s/ David J. M. Erskine
----------------------------------------------------------
David J. M. Erskine, President and Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Dated: June 5, 2003 /s/ David J. M. Erskine
----------------------------------------------------------
David J. M. Erskine, President and Chief Executive Officer
(principal executive officer)
Dated: June 5, 2003 /s/ Clifford E. Pietrafitta
----------------------------------------------------------
Clifford E. Pietrafitta, Vice President -- Finance and
Chief Financial Officer
(principal financial and accounting officer)
Dated: June 5, 2003 /s/ Jack Farber
----------------------------------------------------------
Jack Farber, Director
Dated: June 5, 2003 /s/ James H. Bromley
----------------------------------------------------------
James H. Bromley, Director
Dated: June 5, 2003 /s/ Stephen V. Dubin
----------------------------------------------------------
Stephen V. Dubin, Director
Dated: June 5, 2003 /s/ Leonard E. Grossman
----------------------------------------------------------
Leonard E. Grossman, Director
Dated: June 5, 2003 /s/ James E. Ksansnak
----------------------------------------------------------
James E. Ksansnak, Director
Dated: June 5, 2003 /s/ Rebecca C. Matthias
----------------------------------------------------------
Rebecca C. Matthias, Director
Dated: June 5, 2003 /s/ Michael L. Sanyour
----------------------------------------------------------
Michael L. Sanyour, Director
50
CERTIFICATION
I, David J. M. Erskine, certify that:
1. I have reviewed this annual report on Form 10-K of CSS Industries,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures 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
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 18, 2003
/s/ David J. M. Erskine
-----------------------------
David J. M. Erskine,
President and Chief Executive
Officer
51
CERTIFICATION
I, Clifford E. Pietrafitta, certify that:
1. I have reviewed this annual report on Form 10-K of CSS Industries,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures 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
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 18, 2003
/s/ Clifford E. Pietrafitta
-----------------------------
Clifford E. Pietrafitta,
Vice President - Finance,
Chief Financial Officer
and Principal Accounting
Officer
52