On December 3, 2007, the Company completed the acquisition of substantially all of the business and assets of C.R. Gibson, which is a designer, marketer and distributor of memory books, stationery, journals and notecards, infant and wedding photo albums and scrapbooks, and other gift items that commemorate life's celebrations. In consideration, the Company paid approximately $73,847,000 in cash, including transaction costs of approximately $200,000. A portion of the purchase price is being held in escrow for certain indemnification obligations. The acquisition was accounted for as a purchase and the excess of cost over the fair market value of the net tangible and identifiable intangible assets acquired of $17,409,000 was recorded as goodwill in the accompanying condensed consolidated balance sheet.
LITIGATION
CSS and its subsidiaries are involved in ordinary, routine 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 legal proceedings will not materially affect the consolidated financial position of the Company or its results of operations or cash flows.
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, 2008. 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; the valuation of share-based awards and resolution of litigation and other proceedings. 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, 2008.
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. Nine Months Ended December 31, 2008 Compared to Nine Months Ended December 31, 2007
Sales for the nine months ended December 31, 2008 decreased 4% to $425,930,000 from $441,854,000 in 2007 primarily due to reduced sales of Christmas gift wrap, gift tissue and gift bags. In addition, the current poor economic environment has resulted in reduced buying patterns, product returns and order cancellations of both the Company's seasonal and all occasion products. Partially offsetting the sales decline were sales of acquired businesses, primarily C.R. Gibson, which was acquired on December 3, 2007.
Cost of sales, as a percentage of sales, was 74% in 2008 and 73% in 2007 as higher margin sales of C.R Gibson in the current year were substantially offset by higher material costs and plant inefficiencies compared to the same period in the prior year.
Selling, general and administrative ("SG&A") expenses increased $2,725,000, or 4%, over the prior year period. The increase was primarily due to incremental costs of C.R. Gibson, partially offset by lower incentive compensation and employee benefit expenses.

Restructuring income of $275,000 in 2008 was favorable compared to restructuring income of $2,000 in 2007 due to the gain on the sale of a manufacturing facility and a distribution facility in fiscal 2009 which were part of the restructuring program related to the closure of three Pennsylvania-based facilities announced in January 2008, partially offset by restructuring expenses incurred during fiscal 2009 related to this same program.
Interest expense, net was $2,293,000 in 2008 and $720,000 in 2007. The increase in interest expense was substantially due to increased borrowings during the nine months ended December 31, 2008 compared to the same period in the prior year, primarily as a result of cash utilized to purchase C.R. Gibson on December 3, 2007 and Hampshire Paper on August 5, 2008, and repurchases of the Company's common stock, net of cash generated from operations.
Income taxes, as a percentage of income before taxes, were 35% in 2008 and 2007. Net income for the nine months ended December 31, 2008 was $22,420,000, or $2.22 per diluted share compared to $31,962,000, or $2.88 per diluted share in 2007. The reduction in net income was primarily the result of reduced sales volume, higher material costs, plant inefficiencies and higher interest expense, net of income contributed by acquired businesses. The decline in diluted earnings per share of 23% for the nine months ended December 31, 2008 was more favorable than the decline in net income due to the repurchase of stock during fiscal 2009. Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007
Sales for the three months ended December 31, 2008 decreased 11% to $197,122,000 from $222,170,000 in 2007 primarily due to reduced sales of Christmas gift wrap, gift tissue and gift bags. In addition, the current poor economic environment has resulted in reduced buying patterns, product returns and order cancellations of both the Company's seasonal and all occasion products. Partially offsetting the sales decline were sales of acquired businesses, primarily C.R. Gibson, which was acquired on December 3, 2007.
Cost of sales, as a percentage of sales, was 75% in 2008 and 72% in 2007. The increase in cost of sales was primarily due to higher material costs and plant inefficiencies compared to the same quarter in the prior year.
SG&A expenses decreased $2,441,000, or 10%, over the prior year period. The decrease was primarily due to lower incentive compensation and employee benefit expenses, partially offset by incremental costs of C.R. Gibson.
Restructuring income of $574,000 in 2008 was favorable compared to restructuring expense of $105,000 in 2007 due to the gain on the sale of a manufacturing facility and a distribution facility in the third quarter of fiscal 2009 which were part of the restructuring program related to the closure of three Pennsylvania-based facilities announced in January 2008, partially offset by restructuring expenses incurred during fiscal 2009 related to this same program. Interest expense, net of $1,093,000 in 2008 increased over interest expense, net of $810,000 in 2007 due to higher borrowing levels during the quarter compared to the same quarter in the prior year, primarily as a result of cash utilized to purchase C.R. Gibson on December 3, 2007 and Hampshire Paper on August 5, 2008, and repurchases of the Company's common stock, net of cash generated from operations.
Income taxes, as a percentage of income before taxes, were 35% in 2008 and 2007. Net income for the three months ended December 31, 2008 was $16,412,000, or $1.68 per diluted share, compared to $22,854,000, or $2.07 per diluted share in 2007. The reduction in net income was primarily the result of reduced sales volume, higher material costs, plant inefficiencies and higher interest expense, net of income contributed by acquired businesses. The decline in diluted earnings per share of 19% for the quarter ended December 31, 2008 was more favorable than the decline in net income due to the repurchase of stock during fiscal 2009.

LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2008, the Company had working capital of $121,922,000 and stockholders' equity of $265,493,000. The increase in accounts receivable from March 31, 2008 primarily reflected seasonal billings of current year Halloween and Christmas accounts receivables, net of current year collections. The decrease in inventories reflects the normal seasonal shipments during the fiscal 2009 shipping season. The decrease in assets held for sale was attributable to the sale of a manufacturing facility and a distribution facility in the third quarter of fiscal 2009. The increase in property, plant and equipment, net was primarily due to costs incurred for the enterprise resource planning system integration project announced in October 2007. The increase in goodwill and intangibles, net was due to the acquisition of the Hampshire Paper business as more fully described in Note 4. The increase in other current liabilities was primarily due to higher accounts payable and increased accruals for income taxes, sales commissions and royalties, partially offset by lower accrued employee benefits. The increase in stockholders' equity was primarily attributable to year-to-date net income, partially offset by treasury share repurchases and 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. As further described in Note 7, 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 December 31, 2008, there was $10,000,000 of borrowings outstanding related to the senior notes and $67,400,000 outstanding under the Company's short-term credit facilities. In addition, the Company has less than $500,000 of capital leases outstanding. 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 December 31, 2008, 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   $       4,523          -          -             -     $ 4,523

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.
As of December 31, 2008, the Company is committed to purchase approximately $1,200,000 of certain paper raw material products from a vendor over a one year term. The Company believes the minimum product purchases under this agreement are well within the Company's annual product requirements.
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 December 31, 2008, 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 9 to the Condensed 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, among others, statements relating to expected future costs of the Company's restructuring plan involving the closure of its facilities in Elysburg, Pennsylvania and Troy, Pennsylvania; continued use of acquisitions to stimulate further growth; the expected future impact of legal proceedings and changes in accounting principles; and the anticipated effects of measures taken by the Company to respond to cost and price pressures. 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; 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 restructuring plan to close the Company's facilities in Elysburg, Pennsylvania and Troy, Pennsylvania, including the risk that the restructuring related savings may be less than and/or costs may exceed the presently expected amounts and the risk that the closures will adversely affect the Company's ability to fulfill its customers orders on time; 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, 2008 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.