<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10-Q
For the Quarter Ended Commission file number 1-2661
June 30, 2000
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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 number)
1845 Walnut Street, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
(215) 569-9900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _x_ No __
As of June 30, 2000, there were 9,031,520 shares of Common Stock outstanding
which excludes shares which may still be issued upon exercise of stock options.
Page 1 of 13
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited consolidated condensed
financial statements contain all adjustments necessary to present fairly the
financial position as of June 30, 2000 and December 31, 1999, the results of
operations for the three months and six months ended June 30, 2000 and 1999 and
the cash flows for the six months ended June 30, 2000 and 1999. The results for
the three months and six months ended June 30, 2000 and 1999 are not necessarily
indicative of the expected results for the full year. As certain previously
reported notes and footnote disclosures have been omitted, these financial
statements should be read in conjunction with the latest annual report on Form
10-K, with the March 31, 2000 quarterly report on Form 10-Q and with Part II of
this document.
PAGE NO.
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Consolidated Statements of Operations - Three months and
six months ended June 30, 2000 and 1999 3
Consolidated Condensed Balance Sheets - June 30, 2000 and
December 31, 1999 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
SIGNATURE 13
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except
per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------
2000 1999 2000 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
SALES $37,120 $36,761 $61,709 $63,128
------- ------- ------- -------
COSTS AND EXPENSES
Cost of sales 27,283 28,357 44,922 47,713
Selling, general and administrative expenses 15,639 13,773 31,780 29,101
Interest expense, net 630 461 1,026 1,031
Rental and other income, net (92) (15) (75) (1,178)
------- ------- ------- -------
43,460 42,576 77,653 76,667
------- ------ - ------- -------
LOSS BEFORE INCOME TAXES (6,340) (5,815) (15,944) (13,539)
INCOME TAX BENEFIT (2,283) (2,188) (5,740) (5,077)
------- ------- -------- -------
NET LOSS $(4,057) $(3,627) $(10,204) $(8,462)
======= ======= ======== =======
NET LOSS PER COMMON SHARE
Basic $(.45) $(.37) $(1.11) $(.85)
===== ===== ====== =====
Diluted $(.45) $(.37) $(1.11) $(.85)
===== ===== ====== =====
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 9,072 9,841 9,169 9,968
===== ===== ===== =====
Diluted 9,072 9,841 9,169 9,968
===== ===== ===== =====
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ - $ - $ - $ -
======= ======= ======= =======
</TABLE>
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands)
June 30, December 31,
2000 1999
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(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary investments $ 2,876 $ 3,292
Accounts receivable, net 28,023 165,033
Inventories 156,551 64,884
Deferred income taxes 5,886 5,886
Other current assets 13,116 11,272
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Total current assets 206,452 250,367
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PROPERTY, PLANT AND EQUIPMENT, NET 58,023 55,916
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OTHER ASSETS
Intangible assets 38,821 39,971
Other 2,783 3,144
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Total other assets 41,604 43,115
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Total assets $ 306,079 $ 349,398
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 52,425 62,370
Other current liabilities 41,828 57,108
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Total current liabilities 94,253 119,478
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LONG-TERM OBLIGATIONS 4,261 5,307
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DEFERRED INCOME TAXES 5,005 5,136
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SHAREHOLDERS' EQUITY 202,560 219,477
---------- -----------
Total liabilities and shareholders' equity $ 306,079 $ 349,398
========== ===========
</TABLE>
See notes to consolidated financial statements.
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended
June 30,
------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($10,204) ($8,462)
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,609 4,659
Loss (gain) on disposal of assets, net 21 (6)
Provision for doubtful accounts 237 256
Deferred tax benefit (131) (3,332)
Changes in assets and liabilities:
Decrease in accounts receivable 136,773 153,069
(Increase) in inventory (91,667) (71,472)
(Increase) decrease in other assets (1,616) 7,137
(Decrease) in other current liabilities (348) (1,656)
(Decrease) in accrued taxes (14,022) (9,711)
------- -------
Total adjustments 34,856 78,944
------- -------
Net cash provided by operating activities 24,652 70,482
------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment (6,506) (7,526)
Proceeds on sale of property, plant and equipment 55 54
------- -------
Net cash (used for) investing activities (6,451) (7,472)
------- -------
Cash flows from financing activities:
Payments on long-term obligations (2,045) (1,163)
Borrowing on long-term obligation 86 -
Net payments on notes payable (9,945) (55,320)
Purchase of treasury stock (6,777) (9,761)
Proceeds from exercise of stock options 64 1,023
------- -------
Net cash (used for) financing activities (18,617) (65,221)
------- -------
Net (decrease) in cash and temporary investments (416) (2,211)
Cash and temporary investments at beginning of period 3,292 2,214
------- -------
Cash and temporary investments at end of period $ 2,876 $ 3
======= =======
</TABLE>
See notes to consolidated financial statements.
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation -
The consolidated financial statements include the accounts of the Company
and all subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation and all adjustments are
of a normal recurring nature.
Nature of Business -
CSS is a consumer products company primarily engaged in the manufacture
and sale to mass market retailers of seasonal, social expression
products, including gift wrap, gift bags, boxed greeting cards, gift
tags, tissue paper, paper and vinyl decorations, classroom exchange
Valentines, decorative ribbons and bows, Halloween masks, costumes,
make-ups and novelties and Easter egg dyes and novelties. Due to the
seasonality of the Company's business, the majority of sales occur in
the third and fourth quarters and a material portion of the Company's
trade receivables are due in December and January of each year.
Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Inventories -
Inventories are generally stated at the lower of first-in, first-out (FIFO)
cost or market. The remaining portion of the inventory is valued at the
lower of last-in, first-out (LIFO) cost or market. Inventories
consisted of the following:
June 30, December 31,
2000 1999
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Raw material................... $ 31,950,000 $19,848,000
Work-in-process................ 19,951,000 15,967,000
Finished goods................. 104,650,000 29,069,000
------------- ------------
$ 156,551,000 $64,884,000
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Revenue Recognition -
The Company recognizes revenues in accordance with its shipping terms.
Returns and allowances are reserved for based on the Company's
historical experience.
Net Loss Per Common Share -
Basic and diluted net loss per common share were computed based on the
weighted average number of shares outstanding during the second quarter
and six months ended June 30, 2000 and 1999 - 9,072,453 and 9,169,253
in 2000 and 9,841,059 and 9,967,621 in 1999. Shares used in the
computation of basic and diluted net loss per common share are equal as
the common stock equivalents that would normally be added to the
weighted average shares outstanding for the computation of diluted net
loss per share have an anti-dilutive effect when the Company has a net
loss.
Statements of Cash Flows -
For purposes of the statements of cash flows, the Company considers all
holdings of highly liquid debt instruments with original maturity of
less than three months to be temporary investments.
Reclassifications -
Certain prior period amounts have been reclassified to conform with
current year classifications.
(2) BUSINESS ACQUISITIONS AND DIVESTITURES:
On August 18, 1999, the Company acquired certain assets and the business of
Party Professionals, Inc. Party Professionals designs and markets highly
crafted latex masks, helmets and accessories sold to mass merchandisers,
drug chains, party and gift shops. In consideration for these businesses,
the Company paid $6,000,000 in cash and assumed and repaid $1,606,000 of
outstanding debt. The acquisition was accounted for as a purchase and the
excess of cost over fair market value of $6,532,000 was recorded as
goodwill in the accompanying balance sheet and is being amortized over
twenty years. As of December 31, 1999, the operations of Party
Professionals, now known as Don Post Studios, Inc., were consolidated into
existing operations of the Company.
(3) TREASURY STOCK TRANSACTIONS:
On February 19, 1998 the Company announced that its Board of Directors had
authorized the purchase of up to 1,000,000 shares of the Company's Common
Stock. On subsequent dates, the Executive Committee of the Board of
Directors authorized additional repurchases totaling 1,500,000 shares on
terms acceptable to management. Any such buyback is subject to compliance
with regulatory requirements and relevant covenants of the Company's
$300,000,000 unsecured revolving credit facility. As of June 30, 2000, the
Company had repurchased 2,271,051 shares for $57,053,000, including 149,200
shares for $2,958,000 in the second quarter of 2000. As of June 30, 1999,
the Company had repurchased 1,383,800 shares for $38,532,000, including the
purchase of 45,000 shares for $1,047,000 in the second quarter of 1999.
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(4) FUTURE ACCOUNTING CHANGES:
The FASB issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" in 1998, which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure these
instruments at fair value. SFAS No. 133 was scheduled to be effective for
fiscal quarters of all fiscal years beginning after June 15, 1999; however,
in June of 1999 the FASB issued SFAS No. 137 which deferred the effective
date of SFAS No. 133 one year to years beginning after June 15, 2000. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative
Instruments and Certain Hedging Activities," which amends SFAS No. 133.
Based on current operations, the Company does not expect the adoption of
this statement to have a material effect on its financial position and
results of operations.
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Seasonality
The seasonal nature of CSS' business results in low sales and operating
losses for the first two quarters and high shipment levels and operating profits
for the second half of the year, thereby causing significant fluctuations in the
quarterly results of operations of the Company.
Stock Repurchase Program
On February 19, 1998, the Company announced that its Board of Directors had
authorized the purchase of up to 1,000,000 shares of the Company's Common Stock.
On subsequent dates, the Executive Committee of the Board of Directors
authorized additional repurchases totaling 1,500,000 shares on terms acceptable
to management. Any such buy back is subject to compliance with regulatory
requirements and relevant covenants of the Company's $300,000,000 unsecured
revolving credit facility. As of June 30, 2000, the Company had repurchased
2,271,051 shares for $57,053,000, including 149,200 shares for $2,958,000 in the
second quarter of 2000. As of June 30, 1999, the Company had repurchased
1,383,800 shares for $38,532,000, including the purchase of 45,000 shares for
$1,047,000 in the second quarter of 1999.
First Six Months of 2000 Compared to First Six Months of 1999
Consolidated sales for the six months ended June 30, 2000 decreased 2% to
$61,709,000 from $63,128,000 in 1999. The decrease in sales was due to later
timing of direct import shipments, discontinuation of certain ancillary everyday
product lines and reduced closeout sales due to improved inventory management.
In addition, lower sales of classroom exchange Valentine cards resulted as
improvements in production allowed for the shipment of product related to the
2000 holiday in late 1999. These decreases were substantially offset by
increased sales of Christmas, Halloween, educational and ribbons and bow
products.
Cost of sales, as a percentage of sales, was 73% in 2000 and 76% in 1999.
The decrease in cost of sales, as a percentage of sales, was due to the
reduction in lower margin closeout sales volume and production efficiencies.
Selling, general and administrative ("SG&A") expenses, as a percentage of sales,
increased to 51% from 46% in 1999. The increase in SG&A expenses, as a
percentage of sales, was due to the implementation of an Enterprise Resource
Planning System and the move to a more decentralized management structure.
Interest expense, net decreased slightly to $1,026,000 from $1,031,000 in
1999. The decrease in interest expense was due to lower borrowing levels as a
result of the cash generated from operations. The effects of the decreased
borrowings were substantially offset by higher interest rates and the repurchase
of the Company's common stock. Rental and other income, net decreased to $75,000
from $1,178,000 in 1999 due to the absence of a pre-tax gain related to the
restructuring of a portion of the Company's deferred compensation liability in
1999.
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Income taxes, as a percentage of income before taxes, were 36% in 2000 and
37.5% in 1999.
The net loss for the six months ended June 30, 2000 was $10,204,000, or
$1.11 per share, compared to a net loss of $8,462,000, or $.85 per share, in
1999. The increased loss was due to the impact of the Company's stock repurchase
plan, the absence of non-recurring other income and higher SG&A expense,
partially offset by higher margins.
Second Quarter 2000 Compared to Second Quarter 1999
Sales for the quarter ended June 30, 2000 increased 1% to $37,120,000 from
$36,761,000. The increase in sales was due to increased shipments of Christmas,
Halloween, educational and ribbons and bow products. This increase was partially
offset by later timing of direct import shipments compared to 1999, and the
discontinuation of certain ancillary everyday product lines.
Cost of sales, as a percentage of sales, was 73% in 2000 compared to 77% in
1999. The decrease in cost of sales, as a percentage of sales, was due to
increased production efficiencies and lower closeout sales compared to the prior
year. SG&A expenses, as a percentage of sales, increased to 42% from 37% in 1999
as a result of increased costs associated with the implementation of an
Enterprise Resource Planning System and the move to a more decentralized
management structure.
Interest expense, net was $630,000 in 2000 compared to $461,000 in 1999.
The increase in interest expense was due to borrowings required for the
Company's stock repurchase plan and higher interest rates.
Income taxes, as a percentage of income before taxes, were 36% in 2000 and
37.5% in 1999.
The net loss for the quarter ended June 30, 2000 was $4,057,000,or $.45 per
share, compared to a net loss of $3,627,000, or $.37 per share, in 1999. The
increased loss was due to the impact of the Company's stock repurchase plan and
higher SG&A expense, partially offset by higher margins.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had working capital of $112,199,000 and
shareholders' equity of $202,560,000. The decrease in accounts receivable and
the increase in inventories from December 31, 1999 reflected seasonal
collections of Christmas accounts receivables net of current year billings and
normal seasonal inventory increases necessary for the 2000 shipping season. The
decrease in other current liabilities reflected payment of income taxes, sales
commissions, royalties and employee benefits. The decrease in shareholders'
equity was primarily attributable to the year-to-date net loss and the
repurchase of 342,200 shares of the Company's stock for $6,777,000.
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The Company relies primarily on cash generated from operations and seasonal
borrowings to meet its liquidity requirements. Historically, most revenues are
seasonal with over 80% of sales generated in the second half of the year.
Payment for Christmas related products is usually not received until after the
holiday in accordance with general industry practice. As a result, short-term
borrowing needs were repaid in the first quarter of 2000 but will increase
through the remainder of the year, peaking prior to Christmas. Seasonal
borrowings are made under a $300,000,000 unsecured revolving credit facility
with thirteen banks and financial institutions. The credit facility is available
to fund the seasonal borrowing needs and to provide the Company with a source of
capital for general corporate purposes. As of June 30, 2000, the Company had
short-term borrowings of $52,425,000. Based on its current operating plan, the
Company believes its sources of available capital are adequate to meet its
ongoing cash needs for the foreseeable future.
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CSS INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders of the Registrant was held on
May 2, 2000.
(b) The following were elected to serve as Directors of the Registrant
until the next annual meeting and until their successors shall be
elected and qualify:
SHARES OF VOTING STOCK
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FOR WITHHELD
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James H. Bromley 8,301,640 14,451
Stephen V. Dubin 8,301,640 14,451
David J.M. Erskine 8,301,640 14,451
Jack Farber 8,301,640 14,451
Richard G. Gilmore 8,298,640 17,451
Leonard E. Grossman 8,301,640 14,451
James E. Ksansnak 8,301,640 14,451
Michael L. Sanyour 8,301,640 14,451
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSS INDUSTRIES, INC.
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(Registrant)
Date: August 3, 2000 By: /s/Clifford E. Pietrafitta
---------------------------------
Clifford E. Pietrafitta
Vice President - Finance,
Chief Financial Officer and
Principal Accounting Officer
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSS INDUSTRIES, INC.
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(Registrant)
Date: August 3, 2000 By:
--------------------------------
Clifford E. Pietrafitta
Vice President - Finance,
Chief Financial Officer and
Principal Accounting Officer
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