<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
For the Quarter Ended Commission file number 1-2661
June 30, 1996
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CSS INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Delaware 13-1920657
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
1845 Walnut Street, Philadelphia, PA 19103
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 569-9900
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
------- -------
As of June 30, 1996, there were 10,721,516 shares of Common Stock outstanding
which excludes shares which may still be issued upon exercise of stock options.
Page 1 of 11
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited consolidated condensed
financial statements contain all adjustments necessary to present fairly the
financial position as of June 30, 1996, December 31, 1995, the results of
operations for the three months and six months ended June 30, 1996 and 1995 and
the cash flows for the six months ended June 30, 1996 and 1995. The results for
the three months and six months ended June 30, 1996 and 1995 are not necessarily
indicative of the expected results for the full year. As certain previously
reported notes and footnote disclosures have been omitted, these financial
statements should be read in conjunction with the latest annual report on Form
10-K, with the March 31, 1996 quarterly report on Form 10-Q and with Part II of
this document.
PAGE NO.
--------
Consolidated Statements of Operations - Three months and
six months ended June 30, 1996 and 1995 3
Consolidated Condensed Balance Sheets - June 30, 1996 and
December 31, 1995 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-9
PART II - OTHER INFORMATION
Items 4. Submission of Matters to a Vote of Security Holders 10
SIGNATURE 11
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<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except
per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
1996 1995 1996 1995
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
SALES $47,305 $43,038 $94,575 $85,567
---------- ---------- --------- ----------
COSTS AND EXPENSES
Cost of sales 28,528 24,432 56,016 47,740
Selling, general and administrative expenses 20,056 16,265 41,957 34,488
Interest expense, net 1,456 367 2,955 552
Rental and other income, net (18) (359) (254) (592)
---------- ---------- --------- ----------
50,022 40,705 100,674 82,188
---------- ---------- --------- ----------
(LOSS) INCOME BEFORE INCOME
TAXES AND MINORITY INTEREST (2,717) 2,333 (6,099) 3,379
INCOME TAXES (BENEFIT) PROVISION (1,104) 949 (2,519) 1,374
---------- ---------- --------- ----------
(LOSS) INCOME BEFORE MINORITY INTEREST (1,613) 1,384 (3,580) 2,005
MINORITY INTEREST IN INCOME OF
SUBSIDIARIES, NET 144 124 262 244
---------- ---------- --------- ----------
NET (LOSS) INCOME $(1,757) $ 1,260 $(3,842) $ 1,761
========== ========== ========= ==========
NET (LOSS) INCOME PER COMMON SHARE
Primary $( .16) $ .12 $( .35) $ .16
========== ========== ========= ==========
Fully diluted $( .16) $ .12 $( .35) $ .16
========== ========== ========= ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary 11,082 10,821 11,019 10,942
========== ========== ========= ==========
Fully diluted 11,082 10,895 11,058 11,025
========== ========== ========= ==========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ - $ - $ - $ -
========== ========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands)
June 30, December 31,
1996 1995
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and temporary investments $ 3,087 $ 3,102
Marketable securities 275 800
Accounts receivable, net 33,170 174,832
Inventories 136,935 76,397
Deferred taxes 7,226 -
Other current assets 9,129 8,349
----------- -----------
Total current assets 189,822 263,480
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 49,396 44,995
----------- -----------
OTHER ASSETS
Intangible assets 49,045 50,019
Deferred income taxes 1,803 1,829
Other 14,831 14,638
----------- -----------
Total other assets 65,679 66,486
----------- -----------
Total assets $304,897 $374,961
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
TOTAL CURRENT LIABILITIES $132,121 $197,085
LONG-TERM OBLIGATIONS 19,237 20,412
MINORITY INTEREST 3,676 3,608
SHAREHOLDERS' EQUITY 149,863 153,856
----------- -----------
Total liabilities and shareholders' equity $304,897 $374,961
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended
June 30,
------------------------------
1996 1995
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ($ 3,842) $ 1,761
--------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,967 3,928
Gain on sale of assets, net (29) (107)
Gain on sale of marketable securities (146) -
Deferred tax benefit (9,299) -
Provision for doubtful accounts 551 493
Minority interest in income of subsidiaries 262 244
Changes in assets and liabilities, net of effects from
purchase of business:
Decrease in accounts receivable 141,111 27,248
(Increase) in inventory (60,538) (35,520)
(Increase) in other assets (973) (682)
(Decrease) in accrued expenses (11,984) (3,817)
--------- --------
Total adjustments 62,922 (8,213)
--------- --------
Net cash provided by (used for) operating activities 59,080 (6,452)
--------- --------
Cash flows from investing activities:
Purchase of marketable securities - (2,080)
Purchase of businesses - (8,740)
Purchase of property, plant and equipment (8,828) (5,042)
Proceeds on sale of marketable securities 424 349
Proceeds on sale of property, plant and equipment 897 28
--------- --------
Net cash (used for) investing activities (7,507) (15,485)
--------- --------
Cash flows from financing activities:
Payments on long-term obligations (6,208) (1,655)
(Repayment of) borrowings on note payable (45,288) 21,961
Purchase of treasury stock - (5,254)
Redemption of subsidiary stock from minority shareholders (194) -
Proceeds from exercise of stock options 120 4
--------- --------
Net cash (used for) provided by financing activities (51,570) 15,056
--------- --------
Effect of exchange rate changes on cash (18) 29
--------- --------
Net decrease in cash and temporary investments (15) (6,852)
Cash and temporary investments at beginning of period 3,102 8,774
--------- --------
Cash and temporary investments at end of period $ 3,087 $ 1,922
========= ========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation-
The consolidated financial statements include the accounts of the Company
and all subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation and all adjustments are
of a normal recurring nature. Translation adjustments of a foreign
subsidiary are charged or credited to a separate component of
shareholders' equity.
Nature of Business-
CSS is a diversified company with two groups of businesses - the Consumer
Products Group and the Direct Mail Business Products Group. The
Consumer Products Group is primarily engaged in the manufacture and
sale to mass market retailers of seasonal gift wrap, gift bags, boxed
greeting cards, gift tags, tissue paper and vinyl decorations,
classroom exchange Valentines, decorative ribbons and bows, Halloween
masks, costumes, make-ups and novelties and Easter egg dyes and
novelties. Due to the seasonality of the Consumer Products Group with
the majority of sales occurring in the third and fourth quarters, a
material portion of the Company's trade receivables are due in December
and January of each year. The Consumer Products Group is comprised of
The Paper Magic Group, Inc. ("Paper Magic"), acquired by the Company in
August 1988, Berwick Industries, Inc. ("Berwick"), acquired in May
1993, and Cleo Inc. ("Cleo"), acquired in November 1995. The Direct
Mail Business Products Group, composed of Rapidforms, Inc. and its
subsidiaries ("Rapidforms"), develops and sells business forms,
business supplies, in-store retail merchandising products, holiday
greeting cards and advertising specialties to small and medium sized
businesses in the United States, the United Kingdom and France,
primarily through the direct mailing of catalogs and brochures.
Rapidforms was acquired by CSS in January 1985.
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Inventories-
Inventories are stated primarily 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 market. Inventories
consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------------- -------------
<S> <C> <C>
Raw material................... $ 21,012,000 $21,926,000
Work-in-process................ 32,611,000 13,196,000
Finished goods................. 83,312,000 41,275,000
------------- -----------
$136,935,000 $76,397,000
============= ===========
</TABLE>
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<PAGE>
Revenue Recognition-
The Company recognizes revenues in accordance with its shipping terms.
Returns and allowances are reserved for based on the Company's
historical experience.
Net (Loss) Income Per Common Share-
Primary net (loss) income per common share is based on the weighted
average number of common and common equivalent shares outstanding
during the second quarter and six months ended June 30, 1996 and 1995 -
11,081,778 and 11,018,821 in 1996 and 10,820,945 and 10,942,211 in
1995. Average outstanding shares used in the computation of fully
diluted net (loss) income per share were 11,081,778 and 11,057,682 in
1996 and 10,895,245 and 11,024,911 in 1995.
Statements of Cash Flows-
For purposes of the statements of cash flows, the Company considers all
holdings of highly liquid debt instruments with original maturity of
less than three months to be temporary investments.
See Note 2 for supplemental disclosure of noncash investing activities.
(2) BUSINESS ACQUISITIONS AND DIVESTITURES:
CSS acquired all of the outstanding stock of Cleo, effective November 15,
1995, for approximately $108,500,000 in cash and $24,547,000 in short-term
notes. The purchase price includes $12,000,000 held in escrow for certain post
closing adjustments and indemnification obligations which is included in other
assets in the consolidated balance sheet. The Company and the seller have
disagreed on the disbursement of the escrow and have engaged an independent
public accounting firm to resolve the disputed items. Cleo designs, manufactures
and distributes a wide range of promotional gift wrap and gift wrap accessories
to mass market retailers in the United States and Canada. The acquisition was
accounted for as a purchase and the excess of historical book value over the
purchase price resulted in a $28,528,000 reduction to fixed assets, an accrual
for restructuring expenses of $11,000,000, and a credit to goodwill of
$7,562,000. Negative goodwill is included in intangible assets in the
accompanying consolidated balance sheet and is being amortized over ten years.
On June 6, 1995, Paper Magic acquired substantially all of the assets and
the business of Topstone Industries, Inc. ("Topstone") and Illusive Concepts,
Inc. ("Illusive Concepts"). Topstone designs, markets and distributes Halloween
masks, wigs, costumes, accessories and novelties sold to mass merchandisers,
drug chains and party stores. Illusive Concepts designs and markets highly
crafted latex masks, collectibles, accessories and decorative displays sold
primarily to party and gift shops. In consideration for the purchase of these
businesses, Paper Magic assumed and paid off $8,740,000 of outstanding debt. The
acquisition was accounted for as a purchase and the excess of cost over fair
market value of $3,558,000 was recorded as goodwill in the accompanying
consolidated balance sheet and is being amortized over forty years.
(3) SUBSEQUENT EVENT:
On August 1, 1996, CSS utilized proceeds from its $195,000,000 unsecured
revolving credit facility to redeem the outstanding principal balance of
$12,880,000 related to economic development revenue bonds assumed in connection
with the acquisition of Cleo.
-7-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On November 15, 1995 CSS acquired all of the outstanding stock of Cleo.
Cleo designs, manufactures and distributes a wide range of promotional gift wrap
and gift wrap accessories to mass market retailers in the United States and
Canada. As over 90% of Cleo's business is Christmas related, the seasonality of
the Company's operating results will be more pronounced then in the past, with
losses in the first half and higher profits in the second half. Comparisons with
prior periods will be distorted until Cleo has been a part of CSS for more than
a year.
Concurrent with the acquisition of Cleo, CSS divided its businesses into
two distinct business units - the Consumer Products Group , comprised of Paper
Magic, Berwick and Cleo, and the Direct Mail Business Products Group, comprised
of Rapidforms and its subsidiaries.
First Six Months of 1996 Compared to First Six Months of 1995
Consolidated sales for the six months ended June 30, 1996 increased by 11%
to $94,575,000 from $85,567,000 in 1995. This increase in sales was mainly
attributable to the inclusion of nonseasonal sales of Cleo. Excluding Cleo,
sales decreased 3% primarily due to the timing of Paper Magic Christmas
shipments and lower sales of nonseasonal Berwick merchandise, net of higher
direct mail sales at Rapidforms.
Cost of sales, as a percentage of sales, was 59% in 1996 compared to 56% in
1995. The increase in the percentage of cost of sales was primarily caused by
margins at Cleo which were negatively affected by the volume of closeout sales
in the first six months of 1996. Selling, general and administrative expenses as
a percentage of sales increased to 44% from 40% in 1995. The increase was the
result of lower sales at Berwick and incremental Cleo expenses on seasonally low
sales volume.
Interest expense, net of $2,955,000 increased from $552,000 in 1995
reflecting the increased seasonal borrowing needs and the acquisition debt
associated with Cleo. Rental and other income, net was $254,000 compared to
$592,000 in 1995.
Income taxes as a percentage of (loss) income before taxes and minority
interest was 41% in 1996 and 1995.
The net loss for the six months ended June 30, 1996 was $3,482,000, or $.35
per share compared to net income of $1,761,000, or $.16 per share in 1995. The
loss for the six month period primarily reflected the more pronounced seasonal
orientation of CSS results as discussed above.
Second Quarter 1996 Compared to Second Quarter 1995
Second quarter 1996 sales compared to the prior year increased by 10% to
$47,305,000 from $43,038,000 in 1995. Incremental Cleo nonseasonal sales and
higher Rapidforms direct mail sales were somewhat offset by the timing of Paper
Magic Christmas shipments and lower sales of Berwick nonseasonal merchandise.
-8-
<PAGE>
During the second quarter, cost of sales as a percentage of sales was 60%
in 1996 and 57% in 1995, while selling, general and administrative expenses as a
percentage of sales were 42% in 1996 and 38% in 1995. The reasons for the
changes in operating percentages relate primarily to lower margins on Cleo
closeout shipments and incremental expenses on seasonally low sales volume of
Cleo explained above in the six month narrative.
The increase in interest expense to $1,456,000 from $367,000 in 1995 was
due to higher debt requirements caused by the acquisition of Cleo and the
funding of Cleo's seasonal working capital requirements.
For the second quarter, the Company incurred a net loss of $1,757,000, or
$.16 per share compared to net income of $1,260,000, or $.12 per share in 1995.
The net loss is a product of the Company's more pronounced seasonal orientation.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital of $57,701,000 and
shareholders' equity of $149,863,000.
The Company relies primarily on cash generated from its operations and
seasonal borrowings to meet its liquidity requirements. Most of the Consumer
Products Group (Paper Magic, Berwick and Cleo) revenues are seasonal with more
than 80% of Consumer Products Group sales, and 75% of total Company sales
generated in the second half of the year. Payment for Christmas related products
is usually not received until after the holiday in accordance with general
industry practice. As a result, short-term borrowing needs increase throughout
the second and third quarters, peaking prior to Christmas and dropping
thereafter. Seasonal borrowings are made under a $195,000,000 unsecured
revolving credit facility with thirteen banks and financial institutions. The
facility is available to fund the seasonal borrowing needs and provide the
Company with a source of capital for general corporate purposes. At June 30,
1996, there was $81,785,000 outstanding under this facility. To supplement this
facility, the Company intends to enter into a $20,000,000 term note maturing on
December 31, 1996.
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.
-9-
<PAGE>
CSS INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders of the Registrant was held
on May 7, 1996.
(b) The following were elected to serve as Directors of the
Registrant until the next annual meeting and until their
successors shall be elected and qualify:
SHARES OF VOTING STOCK
------------------------------
FOR WITHHELD
--------- --------
James G. Baxter 9,203,852 190,193
Willard M. Bright 9,318,336 75,709
James H. Bromley 9,318,768 75,277
John R. Bunting, Jr. 9,318,368 75,677
Stephen V. Dubin 9,318,768 75,277
Jack Farber 9,318,668 75,377
Richard G. Gilmore 9,318,768 75,277
Leonard E. Grossman 9,318,468 75,577
James E. Ksansnak 9,318,768 75,277
Michael L. Sanyour 9,318,768 75,277
William C. Warren 9,318,136 75,909
(c) The result of the vote of the stockholders on the proposal to
adopt and approve the CSS Industries, Inc. 1995 Stock Option
Plan for Non-Employee Directors was as follows:
For 8,747,180
Against 567,591
Abstain 16,041
No Vote 63,233
(d) The results of the vote of the stockholders on the proposal to
adopt and approve the amendment to the CSS Industries, Inc. 1994
Equity Compensation Plan was as follows:
For 9,051,695
Against 260,801
Abstain 18,316
No Vote 63,233
-10-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSS INDUSTRIES, INC.
-----------------------------------
(Registrant)
Date: August 8, 1996 By: /s/James G. Baxter
-----------------------------------
James G. Baxter
President - Consumer Products Group,
Chief Financial Officer and
Principal Accounting Officer
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000020629
<NAME> CSS INDUSTRIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,087
<SECURITIES> 275
<RECEIVABLES> 37,642
<ALLOWANCES> 4,472
<INVENTORY> 136,935
<CURRENT-ASSETS> 189,822
<PP&E> 104,152
<DEPRECIATION> 54,756
<TOTAL-ASSETS> 304,897
<CURRENT-LIABILITIES> 132,121
<BONDS> 16,737
1,220
0
<COMMON> 0
<OTHER-SE> 148,643
<TOTAL-LIABILITY-AND-EQUITY> 304,897
<SALES> 94,575
<TOTAL-REVENUES> 94,575
<CGS> 56,016
<TOTAL-COSTS> 56,016
<OTHER-EXPENSES> 41,152
<LOSS-PROVISION> 551
<INTEREST-EXPENSE> 2,955
<INCOME-PRETAX> (6,099)
<INCOME-TAX> (2,519)
<INCOME-CONTINUING> (3,842)
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<CHANGES> 0
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<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
