CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The significant accounting policies of the Company are described in the notes to the consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended March 31, 2009. Judgments and estimates of uncertainties are required in applying the Company's accounting policies in many areas. Following are some of the areas requiring significant judgments and estimates: revenue; cash flow and valuation assumptions in performing asset impairment tests of long-lived assets and goodwill; valuation reserves for inventory and accounts receivable; income tax accounting and the valuation of share-based awards. There have been no material changes to the critical accounting policies affecting the application of those accounting policies as noted in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2009.
RESULTS OF OPERATIONS
Seasonality
The seasonal nature of CSS' business has historically resulted in lower sales levels and operating losses in the first and fourth quarters and comparatively higher sales levels and operating profits in the second and third quarters of the Company's fiscal year, which ends March 31, thereby causing significant fluctuations in the quarterly results of operations of the Company. Six Months Ended September 30, 2009 Compared to Six Months Ended September 30, 2008
Sales for the six months ended September 30, 2009 decreased 6% to $213,950,000 from $228,808,000 in the six months ended September 30, 2008 due in part to lower sales of Christmas products primarily as a result of reduced customer purchases following weak retail sales in the preceding Christmas selling season. Sales of all occasion products have also been negatively impacted by the current economic downturn. Partially offsetting these declines were improved Halloween sales compared to the prior year and sales related to businesses acquired since the beginning of last fiscal year. Excluding sales of businesses acquired, sales declined 9%.
Cost of sales, as a percentage of sales, was 74% in 2009 and 73% in 2008. The increase was primarily due to reduced sales volume and lower gross margins on Christmas and all occasion products, partially offset by improved margins on Halloween products.
Selling, general and administrative ("SG&A") expenses decreased $3,814,000, or 7%, from the prior year period primarily related to decreased incentive compensation expenses as well as the impact of initiatives implemented by the Company to reduce spending, including the impact of a reduction in workforce initiated in March 2009.
Interest expense, net of $1,029,000 in 2009 decreased from interest expense, net of $1,200,000 in 2008 due to lower borrowing levels during the six months ended September 30, 2009 compared to the same period in the prior year.
Income taxes, as a percentage of income before taxes, were 36% in 2009 and 34% in 2008. The increase in the effective tax rate was primarily due to the absence of a benefit recorded in the second quarter of fiscal 2009 following the settlement of an outstanding tax audit.

Net income for the six months ended September 30, 2009 was $4,402,000, or $.46 per diluted share compared to $6,008,000, or $.58 per diluted share in 2008. The decrease in net income was primarily due to reduced sales volume and lower margins on Christmas and all occasion products, partially offset by improved margins on Halloween products and reduced SG&A expenses. The decline in diluted earnings per share of 21% for the six months ended September 30, 2009 was more favorable than the decline in net income due to the impact of the Company's repurchase of its stock during fiscal 2009.
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Sales for the three months ended September 30, 2009 decreased 8% to $160,273,000 from $174,161,000 in the three months ended September 30, 2008 primarily due to lower Christmas giftwrap and ribbon and bow sales and reduced all occasion product sales. Partially offsetting these declines were sales of acquired businesses, improved Halloween sales and growth in our baby memory products business. Excluding sales of businesses acquired, sales declined 9%. Cost of sales, as a percentage of sales, was 75% in 2009 and 74% in 2008. The increase was primarily due to reduced sales volume and lower gross margins on Christmas and all occasion products, partially offset by improved margins on Halloween products.
SG&A expenses decreased $1,625,000, or 6%, from the prior year period primarily due to decreased incentive compensation expenses as well as the impact of cost saving initiatives implemented early in fiscal 2010.
Interest expense, net of $661,000 in 2009 decreased from interest expense, net of $916,000 in 2008 due to lower borrowing levels during the three months ended September 30, 2009 compared to the same period in the prior year.
Income taxes, as a percentage of income before taxes, were 36% in 2009 and 34% in 2008. The increase in the effective tax rate was primarily due to the absence of a benefit recorded in the second quarter of fiscal 2009 following the settlement of an outstanding tax audit.
Net income for the three months ended September 30, 2009 was $8,892,000, or $.92 per diluted share compared to $10,504,000, or $1.03 per diluted share in 2008. The decrease in net income for the quarter ended September 30, 2009 was primarily the result of lower sales and lower gross margins on Christmas and all occasion products, partially offset by improved margins on Halloween products and reduced SG&A expenses. The decline in diluted earnings per share of 11% for the three months ended September 30, 2009 was more favorable than the decline in net income due to the impact of the Company's repurchase of its stock during fiscal 2009.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2009, the Company had working capital of $120,847,000 and stockholders' equity of $262,532,000. The increase in accounts receivable from March 31, 2009 reflected seasonal billings of current year Halloween and Christmas accounts receivables, net of current year collections. The increase in inventories and other current liabilities from March 31, 2009 was primarily a result of the normal seasonal inventory build necessary for the fiscal 2010 shipping season. Inventory levels decreased compared to the same period in the prior year as a result of improved inventory management and reduced product demand. The increase in stockholders' equity from March 31, 2009 was primarily attributable to year-to-date net income, partially offset by payments of cash dividends.

The Company relies primarily on cash generated from its operations and seasonal borrowings to meet its liquidity requirements. Historically, a significant portion of the Company's revenues have been seasonal with approximately 80% of sales recognized in the second and third quarters. As payment for sales of Christmas related products is usually not received until just before or just after the holiday selling season 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 financing requirements are met under a $110,000,000 revolving credit facility with four banks and an accounts receivable securitization facility with an issuer of receivables-backed commercial paper. This facility has a funding limit of $75,000,000 during peak seasonal periods and $25,000,000 during off-peak seasonal periods. In addition, the Company has outstanding $10,000,000 of 4.48% senior notes due in December 2009. These financing facilities are available to fund the Company's seasonal borrowing needs and to provide the Company with sources of capital for general corporate purposes, including acquisitions as permitted under the revolving credit facility. At September 30, 2009, the Company's borrowings consisted of $10,000,000 outstanding under the senior notes and $69,000,000 outstanding under the Company's short-term credit facilities. In addition, the Company has approximately $730,000 of capital leases outstanding at September 30, 2009. Based on its current operating plan, the Company believes its sources of available capital are adequate to meet its future cash needs for at least the next 12 months.
As of September 30, 2009, the Company's letter of credit commitments are as follows (in thousands):

                             Less than 1       1-3        4-5        After 5
                                Year          Years      Years        Years        Total
        Letters of credit   $       5,920          -          -             -     $ 5,920

The Company has a reimbursement obligation with respect to stand-by letters of credit that guarantee the funding of workers compensation claims and guarantee the funding of obligations to certain vendors. The Company has no financial guarantees with any third parties or related parties other than its subsidiaries.
In the ordinary course of business, the Company enters into arrangements with vendors to purchase merchandise in advance of expected delivery. These purchase orders do not contain any significant termination payments or other penalties if cancelled.
LABOR RELATIONS
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 700 employees as of September 30, 2009, 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 collective bargaining agreement with the labor union representing Cleo's production and maintenance employees at the Cleo gift wrap plant and warehouses in Memphis, Tennessee remains in effect until December 31, 2010. The collective bargaining agreement with the labor union representing the Hagerstown-based production and maintenance employees remains in effect until December 31, 2009.
ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements for information concerning recent accounting pronouncements and the impact of those standards.

FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding continued use of acquisitions to stimulate further growth; the expected future impact of legal proceedings and changes in accounting principles; the anticipated effects of measures taken by the Company to respond to sales volume, cost and price pressures; and strengthened product lines and new product initiatives. Forward-looking statements are based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management as to future events and financial performance with respect to the Company's operations. Forward-looking statements speak only as of the date made. The Company undertakes no obligation to update any forward-looking statements to reflect the events or circumstances arising after the date as of which they were made. 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 and economic conditions; increased competition (including competition from foreign products which may be imported at less than fair value and from foreign products which may benefit from foreign governmental subsidies); increased operating costs, including labor-related and energy costs and costs relating to the imposition or retrospective application of duties on imported products; currency risks and other risks associated with international markets; risks associated with acquisitions, including acquisition integration costs and the risk that the Company may not be able to integrate and derive the expected benefits from such acquisitions; risks associated with the Company's enterprise resource planning systems standardization project, including the risk that the cost of the project will exceed expectations, the risk that the expected benefits of the project will not be realized and the risk that implementation of the project will interfere with and adversely affect the Company's operations and financial performance; the risk that customers may become insolvent, may delay payments or may impose deductions or penalties on amounts owed to the Company; costs of compliance with governmental regulations and government investigations; liability associated with non-compliance with governmental regulations, including regulations pertaining to the environment, Federal and state employment laws, and import and export controls and customs laws; and other factors described more fully in the Company's annual report on Form 10-K for the fiscal year ended March 31, 2009 and elsewhere in the Company's filings with the Securities and Exchange Commission. As a result of these factors, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on behalf of, the Company.