<PAGE> 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 March 31, 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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT APRIL 20, 1998
----- -----------------------------
<S> <C>
Common stock, $.10 stated value 22,271,018
</TABLE>
<PAGE> 2
RUSS BERRIE AND COMPANY, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION NUMBER
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1998
and December 31, 1997 3
Consolidated Statement of Income for the three month
periods ended March 31, 1998 and 1997 4
Consolidated Statement of Cash Flows for the three
month periods ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 and 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8 - 10
PART II -OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ --------- ---------
<S> <C> <C>
Current assets
Cash and cash equivalents ......................... $ 72,019 $ 93,443
Marketable securities ............................. 131,283 108,558
Accounts receivable, trade, less allowances of
$2,722 in 1998 and $2,233 in 1997 .............. 63,882 52,743
Inventories - net ................................. 41,753 50,204
Prepaid expenses and other current assets ......... 8,353 8,980
Deferred income taxes ............................. 8,980 9,089
--------- ---------
TOTAL CURRENT ASSETS ..................... 326,270 323,017
Property, plant and equipment - net ................. 22,971 21,287
Other assets ........................................ 9,080 9,141
--------- ---------
TOTAL ASSETS ............................. $ 358,321 $ 353,445
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable .................................. $ 4,232 $ 4,471
Accrued expenses .................................. 21,212 22,423
Accrued income taxes .............................. 7,057 9,765
--------- ---------
TOTAL CURRENT LIABILITIES ................ 32,501 36,659
Commitments and contingencies
Shareholders' equity
Common stock: $.10 stated value; authorized
50,000,000 shares; issued 1998, 25,148,851
shares; 1997, 24,926,469 shares ................. 2,515 2,493
Additional paid in capital ........................ 56,774 53,184
Retained earnings ................................. 313,749 308,028
Accumulated other comprehensive (loss) ............ (350) (999)
Treasury stock, at cost (2,889,714 shares at
March 31, 1998 and 2,853,714 shares at
December 31, 1997) .............................. (46,868) (45,920)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............... 325,820 316,786
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 358,321 $ 353,445
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
Net sales .......................................... $ 74,636 $ 62,071
Cost of sales ...................................... 32,737 27,464
-------- --------
GROSS PROFIT .................................... 41,899 34,607
Selling, general and administrative expense ........ 29,859 25,400
Investment and other income-net .................... 3,176 652
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES... 15,216 9,859
Provision for income taxes on continuing operations. 5,283 3,388
-------- --------
INCOME FROM CONTINUING OPERATIONS, NET OF TAXES . 9,933 6,471
(LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES -- (259)
-------- --------
NET INCOME ...................................... $ 9,933 $ 6,212
======== ========
NET INCOME (LOSS) PER SHARE:
Continuing operations
Basic ........................................ $ .45 $ .29
Diluted ...................................... .44 .29
Discontinued operations
Basic ........................................ -- (.01)
Diluted ...................................... -- (.01)
-------- --------
Total
Basic ............................ $ .45 $ .28
======== ========
Diluted .......................... $ .44 $ .28
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: 1998 1997
---- ----
<S> <C> <C>
Net income ............................................... $ 9,933 $ 6,212
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Loss - discontinued operations, net of taxes ......... -- 259
Depreciation ......................................... 602 731
Amortization of intangible assets .................... 30 38
Provision for accounts receivable reserves ........... 595 641
Deferred income taxes ................................ 109 2
Net (gain) loss from sale or disposal of fixed assets (26) 75
Changes in assets and liabilities, net of
effect of acquisitions and dispositions:
Accounts receivable ............................ (11,734) (5,715)
Inventories - net .............................. 8,451 4,325
Prepaid expenses and other current assets ...... (686) (265)
Other assets ................................... 31 42
Accounts payable ............................... (239) 868
Accrued expenses ............................... (1,211) (5,216)
Accrued income taxes ........................... (2,708) 901
-------- --------
Total adjustments ............................ (6,786) (3,314)
-------- --------
Net cash provided by continuing
operating activities ................ 3,147 2,898
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities ........................ (71,763) --
Proceeds from sale of marketable securities .............. 49,125 --
Proceeds from sale of fixed assets ....................... 139 78
Capital expenditures ..................................... (2,305) (496)
Net proceeds from sale of discontinued operations ........ 1,313 --
-------- --------
Net cash (used in) investing activities (23,491) (418)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................... 3,612 4,730
Dividends paid to shareholders ........................... (4,212) (3,772)
Purchase of treasury stock ............................... (948) --
-------- --------
Net cash (used in) provided by
financing activities ................ (1,548) 958
Effect of exchange rates ................................. 468 (1,048)
Cash provided by discontinued operations ................. -- 6,091
-------- --------
Net (decrease) increase in cash and cash equivalents ..... (21,424) 8,481
Cash and cash equivalents at beginning of period ......... 93,443 52,257
-------- --------
Cash and cash equivalents at end of period ............... $ 72,019 $ 60,738
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest ............................................ $ 46 $ 59
Income taxes ........................................ $ 7,992 $ 2,067
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 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 5 regarding
discontinued operations.
Investment and other income-net for the three months ended March 31, 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
---------- ----------
<S> <C> <C>
Average common shares outstanding ................. 22,134,851 22,084,009
Dilutive effect of common shares issuable (1) ..... 273,686 311,569
---------- ----------
Average common shares outstanding assuming dilution 22,408,537 22,395,578
========== ==========
</TABLE>
(1) Issuable under stock option plans.
The Notes to these consolidated financial statements reflect basic earnings per
share unless otherwise stated or indicated.
6
<PAGE> 7
NOTE 3 - DIVIDENDS
Cash dividends of $4,211,952 ($0.19 per share) were paid on March 16, 1998 to
shareholders of record of the Company's Common Stock on March 2, 1998. Cash
dividends of $3,771,846 ($0.17 per share) were paid in the three month period
ended March 31, 1997.
NOTE 4 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement 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 the Company's common stock and
payment of dividends, as of March 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net income ............................................... $ 9,933,000 $ 6,212,000
Other comprehensive income (loss), net of taxes
Foreign currency translation adjustments ........... (536,000) (898,000)
Net unrealized gain on securities available-for-sale 186,000 --
----------- -----------
Other comprehensive (loss) ............................... (350,000) (898,000)
----------- -----------
Comprehensive income ..................................... $ 9,583,000 $ 5,314,000
=========== ===========
</TABLE>
NOTE 5 - 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 three months ended June
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 three months ended March 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Net sales $26,452,000
(Loss) before taxes (677,000)
Benefit for income taxes (418,000)
----------
(Loss), net of taxes $ (259,000)
==========
</TABLE>
7
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
The Company's net sales for the three months ended March 31, 1998 were
$74,636,000 compared to $62,071,000 for the three months ended March 31, 1997.
This represents an increase of $12,565,000 or 20.2%. Net sales in the quarter
ended March 31, 1998 reflects the positive customer response to the Company's
redesign of its gift product line focusing on coordinated themes of product
offerings.
The Company's second quarter ended June 30, 1997 was very strong due to
significant shipments of certain bean bag products. The Company does not expect
the quarter ended June 30, 1998 to be as strong.
Cost of sales were 43.9% of net sales for the three months ended March 31, 1998
compared to 44.2% for the same period in 1997. The decrease primarily reflects
higher gross profit margins on sales of certain of the Company's product line
concepts.
Selling, general and administrative expense was $29,859,000 or 40.0% of net
sales for the three months ended March 31, 1998 compared to $25,400,000 or 40.9%
of net sales for the three months ended March 31, 1997. Selling, general and
administrative expense for the three months ended March 31, 1998 increased
$4,459,000 or $17.6% compared to the prior year. This increase can be attributed
to costs associated with the design and implementation of a new packaged
computer software system amounting to approximately $1,828,000. Also
contributing to the increase in selling, general and administrative expense are
costs of approximately $2,100,000 attributable to the increase in expenses
required to support the higher sales levels, in particular compensation and
travel costs associated with the salesforce.
Investment and other income of $3,176,000 for the three months ended March 31,
1998 compares to $652,000 for the three months ended March 31, 1997. Included in
the results for the three months ended March 31, 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
$696,000. This increase can be primarily attributed to increased investment
income relative to the Company's investment portfolio resulting from higher
investment balances as a result of the proceeds from the sale of the Toy
business segment in second quarter of 1997.
The provision for income taxes as a percent of income before taxes for the three
months ended March 31, 1998 was 34.7% compared to 34.4% in the same period in
the prior year.
Net income from continuing operations for the three months ended March 31, 1998
of $9,933,000 compares to net income from continuing operations of $6,471,000
for the same period last year. Included in the results for the three months
ended March 31, 1998 is income of $1,152,000 after tax 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, net income from continuing operations increased $2,310,000 or 35.7%.
This increase can be attributed to the increase in net sales and increased
investment income partially offset by the increase in selling,general and
administrative expense.
8
<PAGE> 9
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 three months ended June 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 three month period
ended March 31, 1997 were $26,452,000. Loss from discontinued operations, net of
taxes, for the three month period ended March 31, 1997 was $259,000.
YEAR 2000 COMPLIANCE
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
its business. The new enterprise software system is Year 2000 compliant.
The total cost of the project including hardware, packaged software and project
implementation is expected to be in excess of $10,000,000. Hardware, software
and certain project costs will be capitalized and amortized over their useful
lives. The remainder of the costs will be expensed as incurred.
The implementation is expected to be completed by the first quarter of 1999 for
the Company's domestic operations. The implementation for the remainder of the
Company's worldwide operation is expected to be completed by the fourth quarter
of 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents and marketable
securities of $203,302,000 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 $135,797,000 as of March 31, 1998, which represents the
purchase 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.
Working capital requirements during the three months ended March 31, 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 March 31, 1998, the Company had marketable securities of $131,283,000. 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.
9
<PAGE> 10
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 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 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 March 31, 1998, 2,883,600 shares have
been repurchased since the beginning of the Company's stock repurchase program
in March, 1990.
Starting in 1997, the Company, as part of its repurchase program, utilizes put
and call option instruments to establish a strategy to purchase the Company's
stock with no upfront cash investment while fixing the price required to be paid
for the shares. These instruments took the form of a costless equity collar and
were constructed as a series of purchased calls and sold puts, with the cost of
the purchased calls exactly offset by the premium earned on the sold puts.
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 ("SEC") 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.
10
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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 March 31, 1998, no reports on Form 8-K
were filed.
11
<PAGE> 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)
5/8/98 By: /s/ Eric R. Lohwasser
------------- -------------------------
Date Eric R. Lohwasser
Vice President - Finance,
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 72,019
<SECURITIES> 131,283
<RECEIVABLES> 66,604
<ALLOWANCES> 2,722
<INVENTORY> 41,753
<CURRENT-ASSETS> 326,270
<PP&E> 48,139
<DEPRECIATION> 25,168
<TOTAL-ASSETS> 358,321
<CURRENT-LIABILITIES> 32,501
<BONDS> 0
0
0
<COMMON> 2,515
<OTHER-SE> 323,305
<TOTAL-LIABILITY-AND-EQUITY> 358,321
<SALES> 74,636
<TOTAL-REVENUES> 74,636
<CGS> 0
<TOTAL-COSTS> 32,737
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,216
<INCOME-TAX> 5,283
<INCOME-CONTINUING> 9,933
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,933
<EPS-PRIMARY> 0.45<F1>
<EPS-DILUTED> 0.44
<FN>
<F1>The amount is reported as EPS BASIC, NOT PRIMARY.
</FN>
</TABLE>
