10-Q 1 0001.txt QUARTERLY REPORT 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, 2000 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 NOVEMBER 7, 2000 ----- ------------------------------- Common stock, $0.10 stated value 19,881,803
RUSS BERRIE AND COMPANY, INC. INDEX PAGE PART I - FINANCIAL INFORMATION NUMBER ------ Item 1. Financial Statements Consolidated Balance Sheet as of September 30, 2000 and December 31, 1999 3 Consolidated Statement of Income for the three months and the nine months ended September 30, 2000 and 1999 4 Consolidated Statement of Cash Flows for the nine months ended September 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 and 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 2 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, 2000 1999 ---- ---- ASSETS ------ Current assets Cash and cash equivalents ......................... $ 55,295 $ 64,908 Marketable securities ............................. 133,970 137,143 Accounts receivable, trade, less allowances of $3,765 in 2000 and $3,731 in 1999 .............. 82,483 61,385 Inventories - net ................................. 46,036 44,307 Prepaid expenses and other current assets ......... 9,611 9,503 Deferred income taxes ............................. 6,533 6,805 --------- --------- TOTAL CURRENT ASSETS .................... 333,928 324,051 Property, plant and equipment - net ................. 26,939 28,297 Other assets ........................................ 3,284 3,072 --------- --------- TOTAL ASSETS ............................ $ 364,151 $ 355,420 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities Accounts payable .................................. $ 4,067 $ 6,228 Accrued expenses .................................. 23,420 23,488 Accrued income taxes .............................. 9,436 6,106 --------- --------- TOTAL CURRENT LIABILITIES ............... 36,923 35,822 --------- --------- Commitments and contingencies Shareholders' equity Common stock: $0.10 stated value; authorized 50,000,000 shares; issued 2000, 25,391,406 shares; 1999, 25,325,849 shares ................. 2,539 2,532 Additional paid in capital ........................ 62,293 60,957 Retained earnings ................................. 375,259 351,302 Accumulated other comprehensive (loss) ............ (5,215) (2,547) Unearned compensation ............................. (167) -- Treasury stock, at cost (5,526,214 shares at September 30, 2000 and 4,752,414 shares at December 31, 1999) ................................ (107,481) (92,646) --------- --------- TOTAL SHAREHOLDERS' EQUITY ............... 327,228 319,598 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 364,151 $ 355,420 ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 3 RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net sales ................................. $94,627 $89,837 $226,333 $212,714 Cost of Sales ............................. 38,797 35,410 93,889 86,310 ------- ------- -------- -------- GROSS PROFIT ............................ 55,830 54,427 132,444 126,404 Selling, general and administrative expense 28,588 28,973 83,700 80,808 Investment and other income-net ........... 3,236 2,182 6,764 6,928 ------- ------- -------- -------- INCOME BEFORE TAXES ..................... 30,478 27,636 55,508 52,524 Provision for income taxes ................ 9,932 9,398 18,160 18,344 ------- ------- -------- -------- NET INCOME ................................ $20,546 $18,238 $ 37,348 $ 34,180 ======= ======= ======== ======== NET INCOME PER SHARE: Basic ............................... $ 1.03 $ 0.88 $ 1.84 $ 1.61 Diluted ............................. $ 1.02 $ 0.88 $ 1.84 $ 1.60
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 4 RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................................ $ 37,348 $ 34,180 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ................................................. 2,928 3,314 Amortization of intangible assets ............................ 86 89 Amortization of premium and discount on marketable debt securities, net ..................... 361 -- Amortization of unearned compensation ........................ 25 -- Provision for accounts receivable reserves ................... 2,018 2,025 Income from contingency reserve reversal (Note 1) ............ (1,607) -- Deferred income taxes ........................................ 272 (886) Net (gain)/loss from sale or disposal of fixed assets ........ 9 (31) Changes in assets and liabilities: Accounts receivable ................................. (23,116) (28,437) Inventories - net ................................... (1,729) 4,784 Prepaid expenses and other current assets ........... (108) (48) Other assets ........................................ (298) (5) Accounts payable .................................... (2,161) (146) Accrued expenses .................................... 1,539 3,203 Accrued income taxes ................................ 3,330 5,200 -------- -------- Total adjustments ............................... (18,451) (10,938) -------- -------- Net cash provided by operating activities 18,897 23,242 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities ................................. (35,144) (39,442) Proceeds from sale of marketable securities ....................... 38,422 47,932 Proceeds from sale of fixed assets ................................ 52 67 Capital expenditures .............................................. (3,330) (7,272) -------- -------- Net cash provided by investing activities ......... -- 1,285 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ............................ 1,343 1,626 Dividends paid to shareholders .................................... (13,391) (12,752) Purchase of treasury stock ........................................ (15,027) (44,292) -------- -------- Net cash (used in) financing activities ...... (27,075) (55,418) Effect of exchange rates on cash and cash equivalents ............. (1,435) 87 -------- -------- Net (decrease) in cash and cash equivalents ....................... (9,613) (30,804) Cash and cash equivalents at beginning of period .................. 64,908 73,064 -------- -------- Cash and cash equivalents at end of period ........................ $ 55,295 $ 42,260 ======== ======== CASH PAID DURING THE PERIOD FOR: Interest ................................................ $ 100 $ 111 Income taxes ............................................ $ 14,829 $ 12,607
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 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 accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 and nine months ended September 30, 2000 should be read in conjunction with the Company's annual report on Form 10-K for its year ended December 31, 1999. Certain prior year amounts have been reclassified to conform with current year's presentation. Investment and other income-net for the three and nine months ended September 30, 2000 includes income of $1,607,000, before tax, or $1,012,000 ($0.05 per diluted share), after tax, for the reversal of certain contingency reserves related to the Company's sale of its toy business segment in May 1997. 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 NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- Average common shares outstanding ................. 20,004,000 20,654,000 20,303,000 21,247,000 Dilutive effect of common shares issuable (1) ..... 70,000 103,000 48,000 141,000 ---------- ---------- ---------- ---------- Average common shares outstanding assuming dilution 20,074,000 20,757,000 20,351,000 21,388,000 ========== ========== ========== ==========
(1) Issuable under stock option plans. NOTE 3 - DIVIDENDS Cash dividends of $4,394,000 ($0.22 per share) were paid on September 1, 2000 to shareholders of record of the Company's Common Stock on August 18, 2000. Cash dividends of $13,391,000 ($0.22 per share per quarter) were paid in the nine months ended September 30, 2000. Cash dividends of $4,110,000 ($0.20 per share) were paid on September 3, 1999 to shareholders of record of the Company's Common Stock on August 20, 1999. Cash dividends of $12,752,000 ($0.20 per share per quarter) were paid in the nine months ended September 30, 1999. 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 and nine months ended September 30, 2000 and 1999 as follows:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net income $ 20,546,000 $ 18,238,000 $ 37,348,000 $ 34,180,000 Other comprehensive income (loss), net of taxes: Foreign currency translation adjustments (1,530,000) 1,286,000 (3,134,000) 215,000 Net unrealized gain (loss) on securities available-for-sale 630,000 (392,000) 466,000 (2,033,000) ------------ ------------ ------------ ------------ Other comprehensive income (loss) (900,000) 894,000 (2,668,000) (1,818,000) ------------ ------------ ------------ ------------ Comprehensive income $ 19,646,000 $ 19,132,000 $ 34,680,000 $ 32,362,000 ============ ============ ============ ============
NOTE 5 - PENDING ACCOUNTING CHANGES ACCOUNTING FOR DERIVATIVES AND HEDGING -------------------------------------- In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS No. 133" (SFAS No. 137), which deferred the effective date of SFAS No. 133 for an additional year. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (SFAS No. 138), 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 No. 133, as amended by SFAS No. 138, 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. Under the deferral permitted by SFAS No. 137, SFAS No. 133, as amended by SFAS No. 138, is now effective for fiscal years beginning after June 15, 2000; calendar year 2001 for the Company, and cannot be applied retroactively. The Company has not yet quantified the impacts of adopting SFAS No. 133, as amended by SFAS No. 138, on the consolidated financial statements and has not determined the timing or method of adoption, however, such adoption could increase volatility in earnings and other comprehensive income. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 ------------------------------------------------------------------ The Company's net sales for the nine months ended September 30, 2000 were $226,333,000 compared to $212,714,000 for the nine months ended September 30, 1999. This represents an increase of $13,619,000, or 6.4%. Excluding the impact of changes in foreign currency exchange rates net sales for the nine months ended September 30, 2000 would have increased 7.6% compared to the same period in 1999. Net sales for the nine months ended September 30, 1999 were negatively impacted by the June 1999 conversion to a new computer system for the Company's domestic operations. The Company's product line, including recent product introductions, continues to receive a positive response from customers worldwide. In September 2000, the Company launched a new division, Russ Trading, along with a dedicated Hong Kong showroom. Orders and shipments from this initiative are expected to commence in 2001, giving the Company the ability to market new and different lines and private label merchandise to non-traditional customers of the Company, such as mass merchandisers. Cost of sales were 41.5% of net sales for the nine months ended September 30, 2000 compared to 40.6% for the same period in 1999. This percentage increase primarily reflects lower gross profit margins on sales of certain of the Company's product line concepts and greater utilization of other than normal distribution channels, offset by lower provisions required for inventory. Selling, general and administrative expense was $83,700,000 or 37.0% of net sales for the nine months ended September 30, 2000 compared to $80,808,000 or 38.0% of net sales for the nine months ended September 30, 1999. This represents an increase of $2,892,000, or 3.6%, compared to the prior year, however, as a percentage of sales, is lower than the prior year. This increase can be primarily attributed to the establishment of the Company's new subsidiary in Australia in January 2000 and higher selling and shipping costs due to increased sales. Investment and other income of $6,764,000 for the nine months ended September 30, 2000 compares to $6,928,000 for the nine months ended September 30, 1999. Included in investment and other income for the nine months ended September 30, 2000 was income of $1,607,000 for the reversal of certain contingency reserves related to the Company's sale of its toy business segment in May 1997. Excluding the income from this reserve reversal, investment and other income decreased $1,771,000. This decrease can be primarily related to decreased investment income attributable to lower investment balances and lower total returns on the Company's investment portfolio. The provision for income taxes as a percent of income before taxes for the nine months ended September 30, 2000 was 32.7% compared to 34.9% for the same period in the prior year. This decrease is due primarily to the lower effective tax rate of the Company's domestic operations, as a result of relatively higher net permanent deductions for tax reporting purposes, and lower effective tax rates of the Company's foreign operations. 8 Net income for the nine months ended September 30, 2000 of $37,348,000 compares to net income of $34,180,000 for the same period last year. Included in net income for the nine months ended September 30, 2000 was income of $1,012,000, after tax, for the reversal of certain contingency reserves related to the Company's sale of its toy business segment in May 1997. Excluding the income from this reserve reversal, net income increased $2,156,000 or 6.3%. This increase is primarily due to the increase in gross profit and the decreased effective income tax rate offset by the increase in selling, general and administrative expense and decreased investment and other income. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 ------------------------------------------------------------------- The Company's net sales for the three months ended September 30, 2000 were $94,627,000 compared to $89,837,000 for the three months ended September 30, 1999. This represents an increase of $4,790,000, or 5.3%. Excluding the impact of changes in foreign currency exchange rates, net sales for the three months ended September 30, 2000 would have increased 7.1% compared to the same period in 1999. Net sales for the three months ended September 30, 1999 were negatively impacted by the June 1999 conversion to a new computer system for the Company's domestic operations. The Company's product line, including recent product introductions, continues to receive a positive response from customers worldwide. In September 2000, the Company launched a new division, Russ Trading, along with a dedicated Hong Kong showroom. Orders and shipments from this initiative are expected to commence in 2001, giving the Company the ability to market new and different lines and private label merchandise to non-traditional customers of the Company, such as mass merchandisers. Cost of sales were 41.0% of net sales for the three months ended September 30, 2000 compared to 39.4% for the same period in 1999. This percentage increase primarily reflects lower gross profit margins on sales of certain of the Company's product line concepts and greater utilization of other than normal distribution channels, offset by lower provisions required for inventory. Selling, general and administrative expense was $28,588,000 or 30.2% of net sales for the three months ended September 30, 2000 compared to $28,973,000 or 32.3% of net sales for the three months ended September 30, 1999. This represents a decrease of $385,000, or 1.3%, compared to the prior year and as a percentage of net sales is lower than the prior year. This decrease can primarily be attributed to lower shipping and administration costs due to inefficiencies experienced in the three months ended September 30, 1999 resulting from the conversion to a new computer system for the Company's domestic operation offset by the establishment of the Company's new subsidiary in Australia in January 2000 and higher selling costs due to increased sales. Investment and other income of $3,236,000 for the three months ended September 30, 2000 compares to $2,182,000 for the three months ended September 30, 1999. Included in investment and other income for the three months ended September 30, 2000, was income of $1,607,000 million for the reversal of certain contingency reserves related to the Company's sale of its toy business segment in May 1997. Excluding the income from this reserve reversal, investment and other income decreased $553,000. This decrease can be primarily related to decreased investment income attributable to lower investment balances and lower total returns on the Company's investment portfolio. 9 The provision for income taxes as a percent of income before taxes for the three months ended September 30, 2000 was 32.6% compared to 34.0% in the same period in the prior year. This decrease is due primarily to the lower effective tax rate of the Company's domestic operations, as a result of relatively higher net permanent deductions for tax reporting purposes, and lower effective tax rates of the Company's foreign operations. Net income for the three months ended September 30, 2000 of $20,546,000 compares to net income of $18,238,000 for the same period last year. Included in the net income for the three months ended September 30, 2000 was income of $1,012,000, after tax, for the reversal of certain contingency reserves related to the Company's sale of its toy business segment in May 1997. Excluding the income from this reserve reversal, net income increased $1,296,000, or 7.1%. This increase is due primarily to the increase in gross profit, the decreased effective income tax rate and the decrease in selling, general and administrative expense offset by decreased investment and other income. YEAR 2000 ISSUE --------------- The Company has not experienced any significant business disruptions related to the transition into the Year 2000; however, it will continue to monitor its computer systems and significant third-party relationships. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- At September 30, 2000, the Company had cash and cash equivalents and marketable securities of $189,265,000 compared to cash and cash equivalents and marketable securities of $202,051,000 at December 31, 1999. Working capital requirements during the nine months ended September 30, 2000 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, 2000, the Company had marketable securities of $133,970,000 included in the amount 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 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 position are intended to produce offsetting capital gains and losses, both 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 and the repayment of intercompany loans 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. 10 In February 2000, the Board of Directors authorized the Company to repurchase 2,000,000 additional shares of common stock to bring the total authorization to 7,000,000 shares since the beginning of the Company's stock repurchase program in March, 1990. During the three months ended September 30, 2000 the Company repurchased 335,400 shares for $6,527,000. As of September 30, 2000, 5,530,100 shares have been repurchased since the beginning of the Company's stock repurchase program in March, 1990. FORWARD-LOOKING STATEMENTS -------------------------- 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 (SEC) filings and otherwise. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements. 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 recently announced Russ Trading division, changes in foreign currency exchange rates, issues related to the Company's computer systems and other factors. 11 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, 2000 no reports on Form 8-K were filed. 12 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) 11/13/00 By /s/ NICHOLAS TRUYENS ----------------------- --------------------- Date Nicholas Truyens Vice President, Chief Financial Officer 13