<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 ........... 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
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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
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------ --------- ---------
Current assets
<S> <C> <C>
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
========= =========
</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) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</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)
NINE MONTHS ENDED
SEPTEMBER 30,
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: 1998 1997
--------- ---------
<S> <C> <C>
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
</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 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:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</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
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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
<PAGE> 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:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
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)
============
</TABLE>
8
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 52,634
<SECURITIES> 154,944
<RECEIVABLES> 75,963
<ALLOWANCES> 2,920
<INVENTORY> 45,956
<CURRENT-ASSETS> 333,966
<PP&E> 57,294
<DEPRECIATION> 25,562
<TOTAL-ASSETS> 374,633
<CURRENT-LIABILITIES> 36,793
<BONDS> 0
0
0
<COMMON> 2,519
<OTHER-SE> 335,321
<TOTAL-LIABILITY-AND-EQUITY> 374,633
<SALES> 208,554
<TOTAL-REVENUES> 208,554
<CGS> 0
<TOTAL-COSTS> 88,646
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 46,013
<INCOME-TAX> 15,733
<INCOME-CONTINUING> 30,280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,280
<EPS-PRIMARY> 1.36<F1>
<EPS-DILUTED> 1.35
<FN>
<F1> The amount is reported as EPS BASIC, NOT PRIMARY.
</FN>
</TABLE>
