| CSS INDUSTRIES INC Item 1A Risk Factors |
| You should carefully consider each of the risk factors we describe below, as well as other factors described in this annual report on Form 10-K and elsewhere in our SEC filings |
| Our results of operations fluctuate on a seasonal basis, and quarter to quarter comparisons may not be a good indicator of our performance |
| Seasonal demand fluctuations may adversely affect our cash flow and our ability to sell our products |
| Approximately 75prca of our sales are attributable to seasonal (Christmas, Halloween, Valentine’s Day and Easter) products, with the remainder being attributable to everyday products |
| Approximately 60prca of our sales relate to the Christmas season |
| The seasonal nature of our business results in low sales and operating losses in our first and fourth quarters, and high shipment levels and operating profits in our second and third quarters |
| As a result, our quarterly results of operations fluctuate during our fiscal year, and a quarter-to-quarter comparison is not a good indication of our performance or how we will perform in the future |
| For example, our overall results of operations in the future may fluctuate substantially based on seasonal demand for our products |
| Such variations in demand could have a material adverse effect on the timing of cash flow and therefore our ability to meet our obligations with respect to our debt and other financial commitments |
| Seasonal fluctuations also affect our inventory levels |
| We must carry significant amounts of inventory, especially before the Christmas retail selling period |
| If we are not successful in selling the inventory during the relevant period, we may have to sell the inventory at significantly reduced prices, or we may not be able to sell the inventory at all |
| We rely on a few mass market retailers, warehouse clubs and national drug store chains for a significant portion of our sales |
| The loss of sales, or a significant reduction of sales, to one or more of our large customers may adversely affect our business, results of operations and financial condition |
| Past and future consolidation 4 ______________________________________________________________________ [69]Back to Contents within the retail sector also may lead to reduced profit margins, which may adversely affect our business, results of operations and financial condition |
| A few of our customers are material to our business and operations |
| Our sales to Wal-Mart Stores, Inc |
| and its affiliates and Target Corporation accounted for approximately 27prca and 12prca of our sales, respectively, during our 2006 fiscal year |
| Our ten largest customers, which include mass market retailers, warehouse clubs and national drug store chains, accounted for approximately 63prca of our sales in our 2006 fiscal year |
| The loss of sales, or a significant reduction of sales, to one or more of our large customers may adversely affect our business, results of operations and financial condition |
| Further, in recent years there has been a great amount of consolidation among our retail customer base |
| As the retail sector consolidates, our customers become larger, and command increased leverage in negotiating prices and other terms of the sales of our products |
| Past and future consolidation may lead to reduced profit margins, which may adversely affect our business, results of operations and financial condition |
| Increases in raw material and energy costs, resulting from acts of nature, such as hurricanes, earthquakes or influenza pandemics, or other factors, may raise our cost of goods sold and adversely affect our business, results of operations and financial condition |
| Paper and petroleum-based materials are essential in the manufacture of our products, and the cost of such materials is significant to our cost of goods sold |
| Energy costs, especially fuel costs, also are significant expenses in the production and delivery of our products |
| For example, Hurricanes Katrina and Rita, which badly damaged the Gulf Coast of the United States in August and September of 2005, adversely affected fuel costs during our peak shipping season |
| Increased costs of raw materials or energy resulting from acts of nature, such as hurricanes, earthquakes or influenza pandemics, or other factors, may result in declining margins and operating results if market conditions prevent us from passing these increased costs on to our customers through timely price increases on our products |
| Risks associated with our use of foreign suppliers may adversely affect our business, results of operations and financial condition |
| For some of our product lines, particularly our Halloween product line, we use foreign suppliers to manufacture a portion of our products |
| Approximately 37prca of our sales in fiscal 2006 were related to products sourced from foreign suppliers |
| Our use of foreign suppliers exposes us to risks inherent in doing business outside of the United States, including risks associated with foreign currency fluctuations, transportation costs and delays, difficulties in maintaining and monitoring quality control, compliance with foreign laws and regulations, economic or political instability, international public health issues, and restrictions on the repatriation of profits and assets |
| Increased overseas sourcing by our competitors and our customers may reduce our market share and profit margins, adversely affecting our business, results of operations and financial condition |
| We have relatively high market shares in many of our seasonal product categories |
| Most of our product markets have shown little or no growth in recent years, and we continue to confront significant cost pressure as our competitors source certain products from overseas and certain customers increase direct sourcing from overseas factories |
| Increased overseas sourcing by our competitors and certain customers may result in a reduction of our market share and profit margins, adversely affecting our business, results of operations and financial condition |
| Bankruptcy of our key customers may increase our exposure to losses from bad debts, and may adversely affect our business, results of operations and financial condition |
| The mass market retail channel in the United States has experienced significant shifts in market share among competitors in recent years, causing large retailers to experience liquidity problems and file for bankruptcy protection |
| There is a risk that these key customers will not pay us, or that payment may be delayed because of bankruptcy or other factors beyond our control, which could increase our exposure to losses from bad debts |
| Additionally, our business, results of operations and financial 5 ______________________________________________________________________ [70]Back to Contents condition may be adversely affected if these mass market retailers were to cease doing business as a result of bankruptcy, or significantly reduce the number of stores they operate |
| Our business, results of operations and financial condition may be adversely affected by volatility in the demand for our products |
| Our success depends on the sustained demand for our products |
| Many factors affect the level of consumer spending on our products, including, among other things, general business conditions, interest rates, the availability of consumer credit, taxation, the effects of war, terrorism or threats of war or terrorism, fuel prices and consumer confidence in future economic conditions |
| Our business, and that of most of our customers, may experience periodic downturns in direct relation to downturns in the general economy |
| A general slowdown in the economies in which we sell our products, or even an uncertain economic outlook, could adversely affect consumer spending on discretionary items, such as our products, and, in turn, could adversely affect our sales, results of operations and financial condition |
| Our business, results of operations and financial condition may be adversely affected if we are unable to hire and retain sufficient qualified personnel |
| Our success depends, to a substantial extent, on the ability, experience and performance of our senior management |
| Our inability to retain our senior management team, or our inability to attract and retain qualified replacement personnel, may adversely affect us |
| We also regularly hire a large number of seasonal employees |
| Any difficulty we may encounter in hiring seasonal employees may result in significant increases in labor costs, which may have an adverse effect on our business, results of operations and financial condition |
| Our business, results of operations and financial condition may be adversely affected if we fail to extend or renegotiate our collective bargaining contracts with our labor unions as they expire from time to time, or if our unionized employees were to engage in a strike, or other work stoppage |
| Approximately 500 of our employees at our ribbon manufacturing facilities in Hagerstown, Maryland and at our gift wrap facilities in Memphis, Tennessee are represented by labor unions |
| The collective bargaining agreement with the labor union representing our production and maintenance employees in Hagerstown, Maryland will expire on December 31, 2006 |
| The collective bargaining agreement with the labor union representing our production and maintenance employees in Memphis, Tennessee will expire on December 31, 2007 |
| Although we believe our relations with our employees are satisfactory, no assurance can be given that we will be able to successfully extend or renegotiate our collective bargaining agreements as they expire from time to time |
| If we fail to extend or negotiate our collective bargaining agreements, if disputes with our unions arise, or if our unionized workers engage in a strike or other work related stoppage, we could incur higher ongoing labor costs or experience a significant disruption of operations, which could have an adverse effect on our business |
| Our acquisition strategy involves risks, and difficulties in integrating potential acquisitions may adversely affect our business, results of operations and financial condition |
| We cannot be sure that we will be able to locate suitable acquisition candidates, acquire possible acquisition candidates, acquire such candidates on commercially reasonable terms, or integrate acquired businesses successfully |
| Future acquisitions may require us to incur additional debt and contingent liabilities, which may adversely affect our business, results of operations and financial condition |
| The process of integrating acquired businesses into our existing operations may result in operating, contract and supply chain difficulties, such as the failure to retain clients or management personnel |
| Also, prior to our completion of any acquisition, we could fail to discover liabilities of the acquired business for which we may be responsible as a successor owner or operator in spite of any investigation we may make prior to the acquisition |
| Such difficulties may divert significant financial, operational and managerial resources from our existing operations, and make it more difficult to achieve our operating and strategic objectives |
| The diversion of management attention, particularly in a difficult operating environment, may adversely affect our business, results of operations and financial condition |
| 6 ______________________________________________________________________ [71]Back to Contents Our inability to protect our intellectual property rights, or infringement claims asserted against us by others, may adversely affect our business, results of operations and financial condition |
| We have a number of copyrights, patents, trademarks and intellectual property licenses which are used in connection with our products |
| While our operations are not dependent upon any individual copyright, patent, trademark or intellectual property license, we believe that the collective value of our intellectual property is substantial |
| We rely upon copyright and trademark laws in the United States and other jurisdictions and on confidentiality agreements with some of our employees and others to protect our proprietary rights |
| If our proprietary rights were infringed, our business could be adversely affected |
| In addition, our activities could infringe upon the proprietary rights of others, who could assert infringement claims against us |
| We could face costly litigation if we are forced to defend these claims |
| If we are unsuccessful in defending such claims, our business, results of operations and financial condition could be adversely affected |
| We seek to register certain of our trademarks in the United States and elsewhere |
| These registrations could be challenged by others or invalidated through administrative process or litigation |
| In addition, our confidentiality agreements with some employees or others may not provide adequate protection in the event of unauthorized use or disclosure of our proprietary information, or if our proprietary information otherwise becomes known, or is independently developed by competitors |
| Various laws and governmental regulations applicable to a manufacturer or distributor of consumer products may adversely affect our business, results of operations and financial condition |
| Our business is subject to numerous federal, state, provincial, local and foreign laws and regulations, including laws and regulations with respect to labor and employment, import and export activities, taxes, chemical usage, air emissions, wastewater and storm water discharges and the generation, handling, storage, transportation, treatment and disposal of waste materials, including hazardous materials |
| Although we believe that we are in substantial compliance with all applicable laws and regulations, because legal requirements frequently change and are subject to interpretation, we are unable to predict the ultimate cost of compliance or the consequences of non-compliance with these requirements, or the effect on our operations, any of which may be significant |
| If we fail to comply with applicable laws and regulations, we may be subject to criminal sanctions or civil remedies, including fines, injunctions, or prohibitions on importing or exporting |
| We cannot be certain that existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations, will not have an adverse effect on our business, results of operations and financial condition |
| Our business, results of operations and financial condition may be adversely affected by national or global changes in economic or political conditions |
| Our business, results of operations and financial condition may be adversely affected by national or global changes in economic or political conditions, including foreign currency fluctuations and fluctuations in inflation and interest rates, a national or international economic downturn, and any future terrorist attacks, and the national and global military, diplomatic and financial exposure to such attacks or other threats |