10-Q 1 a2048793z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended................................March 31, 2001 OR { }....TRANSITION REPORT PURSUANT TO SECTION 13 OR ....15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from..................to............................. Commission file number...................................................1-8681 RUSS BERRIE AND COMPANY, INC. ............................................................................... (Exact name of registrant as specified in its charter) New Jersey 22-1815337 ............................................................................... (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 111 Bauer Drive, Oakland, New Jersey 07436 ............................................................................... (Address of principal executive offices) (Zip Code) (201) 337-9000 ............................................................................... (Registrant's telephone number, including area code) ............................................................................... (Former name, former address and former fiscal year, if changed since last report) 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 -- -- The number of shares outstanding of each of the registrant's classes of common stock, as of May 7, 2001 is as follows: CLASS OUTSTANDING AT MAY 7, 2001 ----- --------------------------- Common stock, $0.10 stated value 20,067,264 RUSS BERRIE AND COMPANY, INC. INDEX
PAGE NUMBER ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet as of March 31, 2001 and December 31, 2000 3 Consolidated Statement of Income for the three months ended March 31, 2001 and 2000 4 Consolidated Statement of Cash Flows for the three months ended March 31, 2001 and 2000 5 Notes to Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13
PAGE 2 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 2001 2000 ---------- ------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents .......................... $ 90,113 $ 77,794 Marketable securities .............................. 139,087 141,032 Accounts receivable, trade, less allowances of $3,472 in 2001 and $3,460 in 2000 ............... 61,721 58,673 Inventories - net .................................. 41,146 47,430 Prepaid expenses and other current assets .......... 3,820 5,508 Deferred income taxes .............................. 6,170 6,628 --------- -------- TOTAL CURRENT ASSETS ...................... 342,057 337,065 Property, plant and equipment - net .................. 25,853 26,745 Other assets ......................................... 3,578 3,199 --------- -------- TOTAL ASSETS ............................... $ 371,488 $ 367,009 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable ................................... $ 4,473 $ 4,913 Accrued expenses ................................... 16,240 20,313 Accrued income taxes ............................... 9,523 7,192 --------- -------- TOTAL CURRENT LIABILITIES .................. 30,236 32,418 --------- -------- Commitments and contingencies Shareholders' equity Common stock: $.10 stated value; authorized 50,000,000 shares; issued 2001, 25,591,806 shares; 2000, 25,413,626 shares .......................... 2,559 2,541 Additional paid in capital ......................... 67,238 63,103 Retained earnings .................................. 385,409 381,479 Accumulated other comprehensive loss ............... (5,751) (4,310) Unearned compensation .............................. (130) (149) Treasury stock, at cost (5,557,514 shares at March 31, 2001 and December 31, 2000) ............ (108,073) (108,073) --------- -------- TOTAL SHAREHOLDERS' EQUITY ................ 341,252 334,591 --------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 371,488 $ 367,009 ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. PAGE 3 RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 2001 2000 ---- ---- (UNAUDITED) Net sales..................................................... $ 75,929 $ 78,279 Cost of sales................................................. 33,714 32,716 ------ ------ GROSS PROFIT................................................ 42,215 45,563 Selling, general and administrative expense................... 30,890 29,518 Investment and other income-net............................... 1,778 1,725 ----- ----- INCOME BEFORE TAXES........................................ 13,103 17,770 Provision for income taxes.................................... 4,380 5,931 ----- ----- NET INCOME.................................................... $ 8,723 $ 11,839 ====== ====== NET INCOME PER SHARE: Basic................................................... $ 0.44 $ 0.58 ======== ========= Diluted................................................. $ 0.43 $ 0.57 ======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. PAGE 4 RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2001 2000 ---- ---- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................. $ 8,723 $ 11,839 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................... 982 1,014 Provision for accounts receivable reserves....................... 510 625 Other............................................................ 593 71 Changes in assets and liabilities: Accounts receivable.......................................... (3,558) (5,747) Inventories - net............................................ 6,284 3,484 Prepaid expenses and other current assets.................... 1,688 110 Other assets................................................. 16 70 Accounts payable............................................. (440) (1,698) Accrued expenses............................................. (4,073) (3,892) Accrued income taxes......................................... 2,331 3,946 ----- ----- Total adjustments......................................... 4,333 (2,017) ----- ----- Net cash provided by operating activities............. 13,056 9,822 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities...................................... (25,889) (8,768) Proceeds from sale of marketable securities............................ 28,664 9,916 Proceeds from sale of property, plant and equipment.................... 26 15 Capital expenditures................................................... (743) (1,087) ----- ----- Net cash provided by investing activities............. 2,058 76 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock................................. 4,153 911 Dividends paid to shareholders......................................... (4,793) (4,521) Purchase of treasury stock............................................. - (2,099) ----- ----- Net cash (used in) financing activities............... (640) (5,709) Effect of exchange rate changes on cash and cash equivalents........... (2,155) (152) ----- ----- Net increase in cash and cash equivalents.............................. 12,319 4,037 Cash and cash equivalents at beginning of period....................... 77,794 64,908 ----- ----- Cash and cash equivalents at end of period............................. $ 90,113 $ 68,945 ====== ====== CASH PAID DURING THE PERIOD FOR: Interest..................................................... $ 26 $ 43 Income taxes................................................. $ 2,050 $ 1,985
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. PAGE 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited interim consolidated financial statements have been prepared by Russ Berrie and Company, Inc. and Subsidiaries (the "Company") in accordance with generally accepted accounting principles for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles have been condensed or omitted pursuant to such principles and regulations. The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods presented. Results for interim periods are not necessarily an indication of results to be expected for the year. This report on Form 10-Q for the three months ended March 31, 2001 should be read in conjunction with the Company's annual report on Form 10-K for its year ended December 31, 2000. Certain prior year amounts have been reclassified to conform with the current year's presentation. NOTE 2 - EARNINGS PER SHARE A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution is as follows:
THREE MONTHS ENDED MARCH 31, 2001 2000 ---- ---- Average common shares outstanding...................................... 19,939,000 20,574,000 Dilutive effect of common shares issuable (1).......................... 146,000 46,000 ---------- ---------- Average common shares outstanding assuming dilution.................... 20,085,000 20,620,000 ========== ==========
(1) Issuable under stock option plans. Stock options outstanding at March 31, 2001 and 2000 to purchase 160,625 shares and 601,139 shares, respectively, of common stock were not included in the computation of earnings per common share assuming dilution because the options' exercise prices were greater than the average market price of the common shares during the respective periods. The Notes to these consolidated financial statements reflect basic earnings per share unless otherwise stated or indicated. NOTE 3 - DIVIDENDS Cash dividends of $4,793,000 ($0.24 per share) were paid on March 23, 2001 to shareholders of record of the Company's Common Stock on March 9, 2001. Cash dividends of $4,521,000 ($0.22 per share) were paid on March 24, 2000 to shareholders of record of the Company's Common Stock on March 10, 2000. PAGE 6 NOTE 4 - COMPREHENSIVE INCOME In accordance with Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", comprehensive income, representing all changes in Shareholders' equity during the period other than changes resulting from the issuance or repurchase of the Company's common stock, payment of dividends and unearned compensation, is reconciled to net income for the three months ended March 31, 2001 and 2000 as follows:
2001 2000 ----------- --------- Net income $ 8,723,000 $11,839,000 Other comprehensive income (loss), net of taxes: Foreign currency translation adjustments (2,805,000) (408,000) Net unrealized gain (loss) on securities available-for-sale 891,000 (275,000) Net unrealized gain on foreign currency forward exchange contracts and other 473,000 - ----------- --------- Other comprehensive (loss) (1,441,000) (683,000) ----------- --------- Comprehensive income $ 7,282,000 $ 11,156,000 ========= ==========
PAGE 7 NOTE 5 - RECENT ACCOUNTING CHANGES In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain Derivatives and Certain Hedging Activities, an amendment of SFAS No. 133", establishing the accounting and reporting for derivatives and hedging activities. Under the deferral permitted by SFAS No. 137, "Accounting from Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS No. 133", SFAS No. 133 as amended by SFAS No. 138, was adopted by the Company effective January 1, 2001 and did not have a material effect on the Company's consolidated financial statements upon adoption and for the three months ended March 31, 2001. FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS Certain of the Company's foreign subsidiaries periodically enter into foreign currency forward exchange contracts ("Forward Contracts") to hedge inventory purchases, both anticipated and firm commitments, denominated in the United States dollar. These contracts reduce foreign currency risk caused by changes in exchange rates and are used to hedge these inventory purchases, generally for periods from 3 to 12 months. Since there is a direct relationship between the Forward Contracts and the currency denomination of the underlying transactions, such Forward Contracts are highly effective in hedging the cash flows of certain of the Company's foreign subsidiaries related to transactions denominated in the United States dollar. These Forward Contracts meet the criteria for cash flow hedge accounting treatment and accordingly, gains or losses, are included in other comprehensive income (loss) and are recognized in cost of sales based on the turnover of inventory. The fair value of the Forward Contracts was estimated by obtaining quotes for such contracts with similar terms, adjusted where necessary for maturity differences, and was included in the Consolidated Balance Sheet within other current assets with the corresponding offset included in accumulated other comprehensive loss. OPTIONS AND FUTURES CONTRACTS The Company periodically enters into options and futures contracts in connection with managing interest rate risk associated with a portion of its preferred securities investment portfolio. The Company does not designate these derivatives as hedges. The derivatives are marked to fair value through the Consolidated Statement of Income and the preferred securities are marked to fair value through other comprehensive income (loss). The fair value of the options and futures contracts are included in the Consolidated Balance Sheet within marketable securities. PAGE 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 The Company's net sales for the three months ended March 31, 2001 were $75,929,000 compared to $78,279,000 for the three months ended March 31, 2000. This represents a decrease of $2,350,000 or 3.0 % due primarily to the impact of changes in foreign currency exchange rates in relation to the United States dollar and the current economic environment in the United States. Net sales for the first quarter of 2001 would have been approximately $1,800,000 higher had first quarter 2000 exchange rates remained in effect for the first quarter of 2001. The Company's product line, focusing on coordinated themes of product offerings, continues to receive a positive response from customers worldwide. Net Sales for the three months ended March 31, 2000 have been restated to conform to the presentation for the three months ended March 31, 2001, reflecting the impact of the new accounting standard for shipping and handling fees and costs. Cost of sales were 44.4% of net sales for the three months ended March 31, 2001 as compared to 41.8% for the same period in 2000. This increase primarily reflects lower gross profit margins on sales of certain of the Company's product line concepts and a change in the Company's product mix. Cost of sales for the three months ended March 31, 2000 have been restated to conform to the presentation for the three months ended March 31, 2001, reflecting the impact of the new accounting standard for shipping and handling fees and costs. Selling, general and administrative expense was $30,890,000 or 40.7% of net sales for the three months ended March 31, 2001 compared to $29,518,000 or 37.7% of net sales for the three months ended March 31, 2000, an increase of $1,372,000 or 4.6% compared to the same period in the prior year. Included in selling, general and administrative expense for the three months ended March 31, 2001 was a charge of $908,000, related to stock options granted and repriced during 2000, due to the increase of the Company's stock price during the three months ended March 31, 2001. Excluding this charge, selling, general and administrative expense increased $464,000, or 1.6% to $29,982,000 or 39.5% of net sales for the three months ended March 31, 2001, due primarily to the Company's strategic investment in an expanded sales force. Selling, general and administrative expense for the three months ended March 31, 2000 has been restated to conform to the presentation for the three months ended March 31, 2001, reflecting the impact of the new accounting standard for shipping and handling fees and costs. Investment and other income of $1,778,000 for the three months ended March 31, 2001 was comparable to $1,725,000 for the three months ended March 31, 2000. The provision for income taxes as a percent of income before taxes for the three months ended March 31, 2001 remained flat at 33.4% when compared to the three months ended March 31, 2000. PAGE 9 Net income for the three months ended March 31, 2001 of $8,723,000 compares to net income of $11,839,000 for the same period last year. This represents a decrease in the amount of $3,116,000 or 26.3%, which is mainly the result of decreased net sales, lower gross profit margins and the increase in selling, general and administrative expense, as described above, offset in part by a lower provision for income taxes as a result of lower income before taxes. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company had cash and cash equivalents and marketable securities of $229,200,000 compared to cash and cash equivalents and marketable securities of $218,826,000 at December 31, 2000. At March 31, 2001, the Company had marketable securities of $139,087,000, included in the amounts above. These investments consist of U.S. government obligations, municipal obligations and preferred stock. The objective of the investment portfolio is to maximize after tax returns while minimizing risk. The Company's portfolio of preferred securities investments are subject to market fluctuations based largely, but not exclusively, on the securities' sensitivity to changes in interest rates. By maintaining a portion of the portfolio in government futures contracts and options, the Company seeks to reduce interest rate related risk. The portfolio of preferred securities and futures contracts and options are intended to produce offsetting capital gains and losses, realized and unrealized, as interest rates change. The Company enters into forward exchange contracts and currency options, principally to manage the economic currency risks associated with the purchase of inventory by its European and Canadian operations. Gains and losses, related to such contracts, were not material to its results of operations. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts. Working capital requirements during the three months ended March 31, 2001 were met entirely through internally generated funds. The Company remains in a highly liquid position and believes that the resources available from investments, operations and bank lines of credit are sufficient to meet the foreseeable requirements of its business. As of March 31, 2001, the Board of Directors had authorized the Company to repurchase 7,000,000 shares of common stock of which 5,561,400 shares have been repurchased since the beginning of the Company's stock repurchase program in March 1990. During the three months ended March 31, 2001, no shares were repurchased by the Company. Consistent with its past practices and as a normal course of business, the Company regularly reviews acquisition opportunities of varying sizes. There can be no assurance, however, that any discussions arising in connection therewith will result in definitive purchase agreements and, if they do, what the terms or timing of any such agreements would be. PAGE 10 FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q contains certain forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission (SEC) filings and otherwise. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements. These statements may be identified by the use of forward-looking words or phrases including, but not limited to, "anticipate", "believe", "expect", "intend", "may", "planned", "potential", "should", "will" or "would". The Company cautions readers that results predicted by forward-looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Specific risks and uncertainties include, but are not limited to, the Company's ability to continue to manufacture its products in the Far East, the seasonality of revenues, the actions of competitors, ability to increase production capacity, price competition, the effects of government regulation, possible delays in the introduction of new products, customer acceptance of products, issues related to the start up of the Company's Russ Trading division, changes in foreign currency exchange rates, issues related to the Company's computer systems and other factors. PAGE 11 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) During the quarter ended March 31, 2001, no reports on Form 8-K were filed. PAGE 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RUSS BERRIE AND COMPANY, INC. ----------------------------- (Registrant) 5/11/01 By /s/ John D. Wille ------- ------------------- Date John D. Wille Vice President and Chief Financial Officer PAGE 13