-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OUbPyRo3nFXrbnXlEaf4jxE/nZCWp78b6RL+i0cv5iGumDkcy8pGY2jLv5a5u+Tm iNJMmoTz5qiABxJ8Q/+WnQ== 0000950123-98-009797.txt : 19981113 0000950123-98-009797.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950123-98-009797 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RUSS BERRIE & CO INC CENTRAL INDEX KEY: 0000739878 STANDARD INDUSTRIAL CLASSIFICATION: DOLLS & STUFFED TOYS [3942] IRS NUMBER: 221815337 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08681 FILM NUMBER: 98744729 BUSINESS ADDRESS: STREET 1: 111 BAUER DR CITY: OAKLAND STATE: NJ ZIP: 07436 BUSINESS PHONE: 2013379000 MAIL ADDRESS: STREET 2: 111 BAUER DRIVE CITY: OAKLAND STATE: NJ ZIP: 07436 FORMER COMPANY: FORMER CONFORMED NAME: BERRIE RUSS & CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 RUSS BERRIE AND COMPANY, INC. 1 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 ........... September 30, 1998 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 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT OCTOBER 29, 1998 Common stock, $.10 stated value 22,237,878 2 RUSS BERRIE AND COMPANY, INC. INDEX PAGE PART I - FINANCIAL INFORMATION NUMBER Item 1. Financial Statements Consolidated Balance Sheet as of September 30, 1998 and December 31, 1997 3 Consolidated Statement of Income for the three months and the nine months ended September 30, 1998 and 1997 4 Consolidated Statement of Cash Flows for the nine months ended September 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 2 3 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
(UNAUDITED) SEPTEMBER 30, DECEMBER 31, ASSETS 1998 1997 ------ --------- --------- Current assets Cash and cash equivalents ......................... $ 52,634 $ 93,443 Marketable securities ............................. 154,944 108,558 Accounts receivable, trade, less allowances of $2,920 in 1998 and $2,233 in 1997 ............... 73,043 52,743 Inventories - net ................................. 45,956 50,204 Prepaid expenses and other current assets ......... 2,606 8,980 Deferred income taxes ............................. 4,783 9,089 --------- --------- TOTAL CURRENT ASSETS ..................... 333,966 323,017 Property, plant and equipment - net ................. 31,732 21,287 Other assets ........................................ 8,935 9,141 --------- --------- TOTAL ASSETS ............................. $ 374,633 $ 353,445 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable .................................. $ 4,497 $ 4,471 Accrued expenses .................................. 24,254 22,423 Accrued income taxes .............................. 8,042 9,765 --------- --------- TOTAL CURRENT LIABILITIES ................ 36,793 36,659 Commitments and contingencies Shareholders' equity Common stock: $.10 stated value; authorized 50,000,000 shares; issued 1998, 25,189,962 shares; 1997, 24,926,469 shares ................. 2,519 2,493 Additional paid in capital ........................ 57,479 53,184 Retained earnings ................................. 325,637 308,028 Accumulated other comprehensive income (loss) ..... 559 (999) Treasury stock, at cost (2,957,214 shares at September 30, 1998 and 2,853,714 shares at December 31, 1997) .............................. (48,354) (45,920) --------- --------- TOTAL SHAREHOLDERS' EQUITY ............... 337,840 316,786 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 374,633 $ 353,445 ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 3 4 RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 --------- --------- --------- --------- Net sales .......................................... $ 82,969 $ 87,530 $ 208,554 $ 208,080 Cost of sales ...................................... 33,647 37,475 88,646 91,347 --------- --------- --------- --------- GROSS PROFIT .................................... 49,322 50,055 119,908 116,733 Selling, general and administrative expense ........ 26,533 28,233 81,581 80,249 Investment and other income-net .................... 1,875 2,208 7,686 4,336 --------- --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ........................... 24,664 24,030 46,013 40,820 Provision for income taxes ......................... 8,437 7,989 15,733 13,520 --------- --------- --------- --------- INCOME FROM CONTINUING OPERATIONS ............... 16,227 16,041 30,280 27,300 (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES -- -- -- (1,324) GAIN ON SALE OF DISCONTINUED OPERATIONS, NET OF TAXES .................................. -- -- -- 46,700 --------- --------- --------- --------- NET INCOME ...................................... $ 16,227 $ 16,041 $ 30,280 $ 72,676 ========= ========= ========= ========= NET INCOME (LOSS) PER SHARE: Continuing operations Basic ........................................ $ 0.73 $ 0.73 $ 1.36 $ 1.24 Diluted ...................................... 0.73 0.72 1.35 1.22 Discontinued operations Basic ........................................ -- -- -- (0.06) Diluted ...................................... -- -- -- (0.06) Gain on sale of discontinued operations Basic ........................................ -- -- -- 2.12 Diluted ...................................... -- -- -- 2.08 --------- --------- --------- --------- Total Basic ................................ $ 0.73 $ 0.73 $ 1.36 $ 3.30 ========= ========= ========= ========= Diluted .............................. $ 0.73 $ 0.72 $ 1.35 $ 3.24 ========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 4 5 RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: 1998 1997 --------- --------- Net income ......................................................... $ 30,280 $ 72,676 Adjustments to reconcile net income to net cash provided by continuing operating activities: Loss - discontinued operations, net of taxes ................... -- 1,324 Gain on sale of discontinued operations, net of taxes .......... -- (46,700) Depreciation ................................................... 1,829 2,154 Amortization of intangible assets .............................. 89 112 Provision for accounts receivable reserves ..................... 1,662 1,787 Deferred income taxes .......................................... 4,306 (1,749) Net loss from sale or disposal of fixed assets ................. 142 346 Changes in assets and liabilities, net of effect of acquisitions and dispositions: Accounts receivable ...................................... (21,962) (29,349) Inventories - net ........................................ 4,248 5,320 Prepaid expenses and other current assets ................ 61 337 Other assets ............................................. 117 (299) Accounts payable ......................................... 26 2,904 Accrued expenses ......................................... 2,702 6,464 Accrued income taxes ..................................... (1,723) (12,514) --------- --------- Total adjustments ........................................ (8,503) (69,863) --------- --------- Net cash provided by continuing operating activities ............................ 21,777 2,813 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities .................................. (130,167) (183,054) Proceeds from sale of marketable securities ........................ 84,509 91,956 Proceeds from sale of fixed assets ................................. 194 162 Capital expenditures ............................................... (12,404) (2,795) Net proceeds from sale of discontinued operations .................. 5,442 134,484 --------- --------- Net cash (used in) provided by investing activities (52,426) 40,753 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ............................. 4,321 7,874 Dividends paid to shareholders ..................................... (12,671) (11,235) Purchase of treasury stock ......................................... (2,434) (8,063) --------- --------- Net cash (used in) financing activities ........... (10,784) (11,424) Effect of exchange rates ........................................... 624 (1,087) Cash provided by discontinued operations ........................... -- 10,905 --------- --------- Net (decrease) increase in cash and cash equivalents ............... (40,809) 41,960 Cash and cash equivalents at beginning of period ................... 93,443 52,257 --------- --------- Cash and cash equivalents at end of period ......................... $ 52,634 $ 94,217 ========= ========= CASH PAID DURING THE PERIOD FOR: Interest ...................................................... $ 106 $ 105 Income taxes .................................................. $ 13,150 $ 21,294
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 5 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Results for interim periods are not necessarily an indication of results to be expected for the year. On May 2, 1997, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products, Inc., to a wholly-owned subsidiary of Hasbro, Inc. These two subsidiaries represented the Company's Toy business segment. The operating results of the Toy business segment have been classified as discontinued operations and the financial statements reflect this presentation. See Note 7 regarding discontinued operations. Investment and other income-net for the nine months ended September 30, 1998 includes income of $1,828,000 before tax or $1,152,000 ($0.05 per share) after tax for the completion of a transitional agreement related to the sale, in January 1996, of the Company's subsidiary, Papel/Freelance, Inc. NOTE 2 - EARNINGS PER SHARE In the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share", which requires presentation in the Consolidated Statement of Income of both basic and diluted earnings per share. Earnings per common share (basic) as calculated in accordance with this Statement does not differ from earnings per share reported in prior periods. A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution is as follows:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Average common shares outstanding ........... 22,242,000 21,959,000 22,220,000 22,016,000 Dilutive effect of common shares issuable (1) .............................. 30,000 385,000 183,000 327,000 ---------- ---------- ---------- ---------- Average common shares outstanding assuming dilution .................................. 22,272,000 22,344,000 22,403,000 22,343,000 ========== ========== ========== ==========
(1) Issuable under stock option plans. The Notes to these consolidated financial statements reflect basic earnings per share unless otherwise stated or indicated. 6 7 NOTE 3 - DIVIDENDS Cash dividends of $4,224,222 ($0.19 per share) were paid on September 4, 1998 to shareholders of record of the Company's Common Stock on August 21, 1998. Cash dividends of $12,671,044 ($0.19 per share per quarter) were paid in the nine months ended September 30, 1998. Cash dividends of $3,740,433 ($0.17 per share) were paid on September 5, 1997 to shareholders of record of the Company's Common Stock on August 22, 1997. Cash dividends of $11,235,106 ($0.17 per share per quarter) were paid in the nine months ended September 30, 1997. NOTE 4 - PENDING ACCOUNTING CHANGES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement SFAS 133 as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the impacts of adopting SFAS 133 on the financial statements and has not determined the timing of or method of adoption, however, such adoption could increase volatility in earnings and other comprehensive income. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) which requires disclosure of certain information about operating segments, products, geographic areas and major customers in annual and interim period financial statements issued to shareholders. SFAS 131 is effective for fiscal years beginning after December 15, 1997. SFAS 131 need not be applied to interim financial statements in the initial year of application; however, comparative information for interim periods in the initial year of application are required to be reported in financial statements for interim periods in the second year of application. The adoption of SFAS 131 will have no impact on the Company's results of operations or financial position and will only affect the disclosure of segment and related information. 7 8 NOTE 5 - RECLASSIFICATIONS Certain prior year amounts in the Consolidated Statement of Cash Flows have been reclassified to conform with the current year's presentation. NOTE 6 - COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which modifies the financial statement presentation of comprehensive income and its components. Comprehensive income, representing all changes in Shareholders' equity during the period other than changes resulting from issuance or repurchase of the Company's common stock and payment of dividends, is reconciled to net income for the three and nine months ended September 30, 1998 and 1997 as follows:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net income $ 16,227,000 $ 16,041,000 $ 30,280,000 $ 72,676,000 Other comprehensive income (loss), net of taxes Foreign currency translation adjustments 432,000 (860,000) (268,000) (1,332,000) Net unrealized gain on securities available-for-sale 671,000 279,000 827,000 279,000 ------------ ------------ ------------ ------------ Other comprehensive income (loss) 1,103,000 (581,000) 559,000 (1,053,000) ------------ ------------ ------------ ------------ Comprehensive income $ 17,330,000 $ 15,460,000 $ 30,839,000 $ 71,623,000 ============ ============ ============ ============
NOTE 7 - DISCONTINUED OPERATIONS On May 2, 1997, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products, Inc., to a wholly-owned subsidiary of Hasbro, Inc. The sale transaction resulted in a gain on the sale of discontinued operations in the nine months ended September 30, 1997 of $75,300,000 before tax or $46,700,000 ($2.12 per share) after tax. The Company intends to use the proceeds of the sale to pursue acquisitions of companies within the gift industry and for general corporate purposes. Amounts included in (Loss) from discontinued operations, net of taxes, for the Toy business segment for the nine months ended September 30, 1997 are as follows:
NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------------ Net sales $ 38,614,000 (Loss) before taxes (2,483,000) Benefit for income taxes (1,159,000) ------------ (Loss), net of taxes $ (1,324,000) ============
8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF CONTINUING OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 The Company's net sales for the nine months ended September 30, 1998 were $208,554,000 compared to $208,080,000 for the nine months ended September 30, 1997. This represents an increase of $474,000 or 0.2%. Net sales for the nine months ended September 30, 1998 reflects the positive customer response to the Company's redesign of its gift product line focusing on coordinated themes of product offerings; however, this was offset by lower sales levels during the implementation of the Company's new sales strategy which involved adding a telemarketing division and transitioning responsibility for smaller accounts from our reduced direct salesforce to the Company's telemarketing division. Net sales for the nine months ended September 30, 1997 included shipments of certain bean bag products at levels that did not continue in 1998. Cost of sales were 42.5% of net sales for the nine months ended September 30, 1998 compared to 43.9% for the same period in 1997. The percentage decrease in cost of sales primarily reflects the Company's successful efforts to manage inventory levels resulting in lower sales through other than normal distribution channels and lower provisions required for inventory. Additionally, the decrease also reflects higher gross profit margins on sales of certain of the Company's product line concepts. Selling, general and administrative expense was $81,581,000 or 39.1% of net sales for the nine months ended September 30, 1998 compared to $80,249,000 or 38.6% of net sales for the nine months ended September 30, 1997. Selling, general and administrative expense for the nine months ended September 30, 1998 increased $1,332,000 or 1.7% compared to the prior year. Included in the selling, general and administrative expense for the nine months ended September 30, 1997 is a provision of $1,500,000 for costs associated with closing all remaining retail operations. Excluding this provision, selling, general and administrative expense increased $2,832,000 or 3.6%. This increase can be attributed primarily to expenses of $3,100,000 associated with the design and implementation of a new packaged computer software system. Investment and other income of $7,686,000 for the nine months ended September 30, 1998 compares to $4,336,000 for the nine months ended September 30, 1997. Included in the results for the nine months ended September 30, 1998 is income of $1,828,000 for the completion of a transitional agreement related to the sale, in January 1996, of the Company's subsidiary, Papel/Freelance, Inc. Excluding the income from this transitional agreement, investment and other income increased $1,522,000. This increase can be primarily attributed to increased investment income relative to the increase in the Company's investment portfolio as a result of the proceeds from the sale of the Toy business segment in the second quarter of 1997. The provision for income taxes as a percent of income before taxes for the nine months ended September 30, 1998 was 34.2% compared to 33.1% in the same period in the prior year. This increase can be primarily attributed to higher tax provisions related to certain foreign subsidiaries during the nine months ended September 30, 1998. 9 10 Income from continuing operations for the nine months ended September 30, 1998 of $30,280,000 increased from $27,300,000 for the same period last year. Included in the results for the nine months ended September 30, 1998 is income of $1,152,000 after tax for the completion of a transitional agreement related to the sale of the Company's subsidiary Papel/Freelance, Inc. Excluding the income from this transitional agreement, income from continuing operations increased $1,828,000 or 6.7%. This increase can be primarily attributed to improved gross profit margins and increased investment income partially offset by the increase in selling, general and administrative expense. RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 The Company's net sales for the three months ended September 30, 1998 were $82,969,000 compared to $87,530,000 for the three months ended September 30, 1997. This represents a decrease of $4,561,000 or 5.2%. Net sales for the three months ended September 30, 1998 were at the level the Company expected and were effected by the implementation of the Company's new sales strategy which involved adding a telemarketing division and transitioning responsibility for smaller accounts from our reduced direct salesforce to the Company's telemarketing division. Net sales for the three months ended September 30, 1997 included shipments of certain bean bag products at levels that did not continue in 1998. Cost of sales were 40.6% of net sales for the three months ended September 30, 1998 compared to 42.8% for the same period in 1997. The percentage decrease in cost of sales primarily reflects the Company's successful efforts to manage inventory levels resulting in lower sales through other than normal distribution channels and lower provisions required for inventory. Selling, general and administrative expense was $26,533,000 or 32.0% of net sales for the three months ended September 30, 1998 compared to $28,233,000 or 32.3% of net sales for the three months ended September 30, 1997. Selling, general and administrative expense for the three months ended September 30, 1998 decreased $1,700,000 or 6.0% compared to the prior year. This decrease can be attributed primarily to the decrease in expenses associated with the reduced salesforce and decreases in expenses required to support lower sales levels offset by expenses associated with the design and implementation of a new packaged computer software system. Investment and other income of $1,875,000 for the three months ended September 30, 1998 compares to $2,208,000 for the three months ended September 30, 1997. This decrease can be primarily attributed to the decrease in investment returns of the Company's investment portfolio. The provision for income taxes as a percent of income before taxes for the three months ended September 30, 1998 was 34.2% compared to 33.2% in the same period in the prior year. This increase can be primarily attributed to higher tax provisions related to certain foreign subsidiaries during the three months ended September 30, 1998. Income from continuing operations for the three months ended September 30, 1998 of $16,227,000 compares to income from continuing operations of $16,041,000 for the same period last year. Income from continuing operations has increased $186,000 or 1.2% despite lower sales levels due primarily to improvements in gross profit margins and the decrease in selling, general and administrative expense. 10 11 DISCONTINUED OPERATIONS On May 2, 1997, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products, Inc., to a wholly-owned subsidiary of Hasbro, Inc. These two subsidiaries represented the Company's Toy business segment. The operating results of the Toy business segment have been classified as discontinued operations and the financial statements reflect this presentation. The sale transaction resulted in a gain on the sale of discontinued operations in the nine months ended September 30, 1997 of $75,300,000 before tax or $46,700,000 ($2.12 per share) after tax. Net sales of the Company's discontinued operations for the nine months ended September 30, 1997 were $38,614,000. Loss from discontinued operations, net of taxes, for the nine months ended September 30, 1997 was $1,324,000. YEAR 2000 COMPLIANCE The Company is dependent upon information technology ("IT") systems in many aspects of its own business and relies upon other third-parties who are also dependent on IT systems. Many existing IT programs use only two digits to identify a year in the date field, which were designed and developed without considering the impact of the upcoming Year 2000. If not corrected or replaced, many computer applications could fail or create inaccurate results by or at the Year 2000 or in computations utilizing the date field (i.e. read the year 2000 as 1900 or something else). The Company has a program ("Year 2000 Program") underway, more fully described below, intended to timely identify, mitigate and/or prevent the adverse affects of the Year 2000 issue through an analysis of its own IT and non-IT systems, and to pursue the Year 2000 compliance of its critical third-party relationships. State of Readiness: The Company has substantially completed a comprehensive review of its information technology ("IT") systems and is still analyzing its non-IT systems and critical third-party relationships to identify those that may be affected by the Year 2000 issue. The Company's current Year 2000 status is as follows: - - The Company has undertaken a project to implement a new packaged computer software system for the global organization. The new enterprise-wide system will replace the current custom software that the Company utilizes to operate and manage its business. The new enterprise software system is Year 2000 compliant and the Company has obtained Year 2000 warranties or certifications from most of its major software suppliers. The implementation is expected to be completed by the first quarter of 1999 for the Company's domestic operations and by the fourth quarter of 1999 for the remainder of the Company's worldwide operations. Certain information will continue to be analyzed and historical information will be maintained using portions of the Company's current legacy systems which have been modified and tested to be Year 2000 compliant. - - The Company has developed a process for analyzing its non-IT systems and critical third-party relationships for Year 2000 compliance and expects to complete substantially all of such analysis by the first quarter of 1999. The Company is in the process of inquiring as to the Year 2000 readiness of each of such parties and seeking certifications of Year 2000 compliance from them. 11 12 Cost: The total cost of the project including hardware, packaged software and project implementation is expected to be in excess of $13,000,000 exclusive of certain of the Company's foreign operations. Hardware, software and certain project costs will be capitalized as fixed assets and amortized over their useful lives. The remainder of the costs will be expensed as incurred. At September 30, 1998, approximately $9,200,000 has been incurred of which $6,100,000 and $3,100,000 have been capitalized and expensed, respectively. All historical and future costs have been and will continue to be funded out of existing cash and cash flows from operations. Risks: Based upon currently available information, management has no reason to believe that the Company will not meet its compliance goals with respect to its IT systems and does not anticipate that the cost of effecting Year 2000 compliance, in excess of that described above, will have a material impact on the Company's financial condition, results of operations or liquidity. Nevertheless, achieving Year 2000 compliance is dependent upon many factors, some of which are not completely within the Company's control. Should either the Company's internal IT or non-IT systems or the internal systems of one of more of its critical third parties fail to achieve Year 2000 compliance, the Company's business and its results of operations could be adversely affected. Since the Company has not completed the data gathering phase, with respect to non-IT systems and critical third parties, of its Year 2000 Program, it cannot yet quantify the costs, if any, that may be required to remedy those non-IT systems or incurred in identifying and switching to compliant third parties, if necessary. Contingency Plans: The Company has certain contingency options that are available in the event of a Year 2000 failure. In the event the Company discovers that either internal IT or non-IT systems or the systems of critical third-party relationships will not be compliant, the Company will either obtain alternative IT or non-IT systems or modify its current legacy systems to become compliant, and, in the case of third parties, switch to other vendors or suppliers which have Year 2000 compliant systems. While there are certainly no fool-proof contingency plans that cover every possible failure, the Company intends to monitor and update its contingency plans and develop additional potential solutions throughout the implementation of its Year 2000 Program. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company had cash and cash equivalents and marketable securities of $207,578,000 compared to cash and cash equivalents and marketable securities of $202,001,000 at December 31, 1997. On May 2, 1997, the Company sold substantially all of the assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products, Inc. The sale resulted in proceeds of $139,926,000 at September 30, 1998, which represents the selling price less escrow balances and costs associated with the transaction. The Company intends to use the proceeds of the sale of the Toy companies to pursue acquisitions of companies within the gift industry and for general corporate purposes. 12 13 Working capital requirements during the nine months ended September 30, 1998 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. At September 30, 1998, the Company had marketable securities of $154,944,000. These investments consist primarily 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 an economic hedge consisting of government futures contracts and options, the Company seeks to reduce interest rate related risk. The portfolio of preferred securities and futures contracts and options positions are intended to produce offsetting capital gains and losses as interest rates change. The Company enters into forward exchange contracts and currency options, principally to serve as economic hedges of the currency risk associated with the purchase of inventory and the repayment of intercompany loans by its European and Canadian operations. Gains and losses, related to contracts accounted for as hedges, are reported as a component of the related transactions. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts. During the year ended December 31, 1997, the Board of Directors authorized the Company to repurchase an additional 1,000,000 shares of common stock for a total authorization of 4,000,000 shares. As of September 30, 1998, 2,951,100 shares have been repurchased since the beginning of the Company's stock repurchase program in March, 1990. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION This filing of the Form 10-Q contains 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 filings and otherwise. 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 and other factors. 13 14 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Documents filed as part of this Report. 27.1 Financial Data Schedule. b) During the quarter ended September 30, 1998, no reports on Form 8-K were filed. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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) 11/10/98 By /s/Eric R. Lohwasser Date Eric R. Lohwasser Vice President - Finance, Chief Financial Officer 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 52,634 154,944 75,963 2,920 45,956 333,966 57,294 25,562 374,633 36,793 0 0 0 2,519 335,321 374,633 208,554 208,554 0 88,646 0 0 0 46,013 15,733 30,280 0 0 0 30,280 1.36 1.35 The amount is reported as EPS BASIC, NOT PRIMARY.
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