<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 June 30, 1999
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 JULY 30, 1999
----- ----------------------------
<S> <C>
Common stock, $.10 stated value 20,787,740
</TABLE>
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RUSS BERRIE AND COMPANY, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1999
and December 31, 1998 3
Consolidated Statement of Income for the three months
and the six months ended June 30, 1999 and 1998 4
Consolidated Statement of Cash Flows for the six
months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6 and 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<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)
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 47,216 $ 73,064
Marketable securities 152,486 152,759
Accounts receivable, trade, less allowances of
$3,060 in 1999 and $2,622 in 1998.................. 38,330 54,861
Inventories - net..................................... 45,400 45,201
Prepaid expenses and other current assets............. 9,040 3,006
Deferred income taxes................................. 6,157 5,325
-------- --------
TOTAL CURRENT ASSETS 298,629 334,216
Property, plant and equipment - net..................... 38,662 35,340
Other assets............................................ 2,568 8,900
-------- --------
TOTAL ASSETS $339,859 $378,456
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.................................... $ 2,843 $ 4,249
Accrued expenses.................................... 21,989 23,067
Accrued income taxes................................ 3,883 7,205
-------- --------
TOTAL CURRENT LIABILITIES 28,715 34,521
Commitments and contingencies
Shareholders' equity
Common stock: $.10 stated value; authorized
50,000,000 shares; issued 1999, 25,291,898
shares; 1998, 25,202,261 shares................... 2,529 2,520
Additional paid in capital.......................... 60,075 58,553
Retained earnings................................... 339,028 331,727
Accumulated other comprehensive (loss).............. (3,223) (511)
Treasury stock, at cost (4,508,614 shares at
June 30, 1999 and 2,957,214 shares at
December 31, 1998) (87,265) (48,354)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 311,144 343,935
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $339,859 $378,456
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ................................. $ 47,475 $ 50,949 $122,878 125,585
Cost of sales ............................. 20,624 22,262 50,901 54,999
-------- -------- -------- --------
GROSS PROFIT ........................... 26,851 28,687 71,977 70,586
Selling, general and administrative expense 23,067 25,189 51,835 55,048
Investment and other income-net ........... 2,725 2,635 4,747 5,811
-------- -------- -------- --------
INCOME BEFORE TAXES .................... 6,509 6,133 24,889 21,349
Provision for income taxes ................ 2,400 2,013 8,946 7,296
-------- -------- -------- --------
NET INCOME ................................ $ 4,109 $ 4,120 $ 15,943 $ 14,053
======== ======== ======== ========
NET INCOME PER SHARE:
Basic ............................... $ .19 $ .18 $ .74 $ .63
Diluted ............................. .19 .18 .73 .63
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
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RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 15,943 $ 14,053
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ....................................... 1,697 1,127
Amortization of intangible assets .................. 59 59
Provision for accounts receivable reserves ......... 969 994
Deferred income taxes .............................. (631) 5
Net (gain)loss from sale or disposal of fixed assets (22) 71
Changes in assets and liabilities:
Accounts receivable ........................... 15,562 11,575
Inventories - net ............................. (200) 1,253
Prepaid expenses and other current assets ..... 266 (277)
Other assets .................................. (27) 57
Accounts payable .............................. (1,406) (895)
Accrued expenses .............................. (1,078) (187)
Accrued income taxes .......................... (3,523) (6,061)
--------- ---------
Total adjustments ........................... 11,666 7,721
--------- ---------
Net cash provided by operating activities 27,609 21,774
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities ...................... (22,972) (100,128)
Proceeds from sale of marketable securities ............ 21,605 60,392
Proceeds from sale of fixed assets ..................... 22 170
Capital expenditures ................................... (5,134) (6,972)
Net proceeds from sale of discontinued operations ...... -- 5,442
--------- ---------
Net cash (used in) investing
activities ......................... (6,479) (41,096)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................. 1,531 4,172
Dividends paid to shareholders ......................... (8,642) (8,447)
Purchase of treasury stock ............................. (38,911) (948)
--------- ---------
Net cash (used in) financing activities (46,022) (5,223)
Effect of exchange rates ............................... (956) 355
--------- ---------
Net (decrease) increase in cash and cash equivalents ... (25,848) (24,190)
Cash and cash equivalents at beginning of period ....... 73,064 93,443
--------- ---------
Cash and cash equivalents at end of period ............. $ 47,216 $ 69,253
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest ........................................... $ 67 $ 77
Income taxes ....................................... $ 12,267 $ 13,352
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have been
prepared by Russ Berrie and Company, Inc. and Subsidiaries (the "Company") in
accordance with generally accepted accounting principles for interim financial
reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared under generally accepted accounting principles
have been condensed or omitted pursuant to such principles and regulations. The
information furnished reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for the interim periods
presented. Results for interim periods are not necessarily an indication of
results to be expected for the year.
This report on Form 10-Q for the three and six months ended June 30, 1999 should
be read in conjunction with the Company's annual report on Form 10-K for its
year ended December 31, 1998. Certain prior year amounts have been reclassified
to conform with current year's presentation.
Investment and other income-net for the six months ended June 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 of the Company's
subsidiary Papel/Freelance, Inc.
NOTE 2 - EARNINGS PER SHARE
A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution is as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average common shares outstanding ........... 21,095,000 22,283,000 21,556,000 22,209,000
Dilutive effect of common shares issuable (1) 168,000 195,000 161,000 240,000
---------- ---------- ---------- ----------
Average common shares outstanding
assuming dilution ......................... 21,263,000 22,478,000 21,717,000 22,449,000
========== ========== ========== ==========
</TABLE>
(1) Issuable under stock option plans.
The Notes to these consolidated financial statements reflect basic earnings per
share unless otherwise stated or indicated.
NOTE 3 - DIVIDENDS
Cash dividends of $4,239,000 ($0.20 per share) were paid on June 4, 1999 to
shareholders of record of the Company's Common Stock on May 21, 1999. Cash
dividends of $8,642,000 ($0.20 per share per quarter) were paid in the six
months ended June 30, 1999.
Cash dividends of $4,234,870 ($0.19 per share) were paid on June 5, 1998 to
shareholders of record of the Company's Common Stock on May 22, 1998. Cash
dividends of $8,446,822 ($0.19 per share per quarter) were paid in the six
months ended June 30, 1998.
6
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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 issuance or repurchase of the
Company's common stock and payment of dividends, is reconciled to net income for
the three and six months ended June 30, 1999 and 1998 as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 4,109,000 $ 4,120,000 $ 15,943,000 $ 14,053,000
Other comprehensive income (loss), net of taxes
Foreign currency translation adjustments (438,000) (164,000) (2,015,000) (700,000)
Net unrealized gain (loss) on securities
available-for-sale (1,410,000) (30,000) (1,208,000) 156,000
------------ ------------ ------------ ------------
Other comprehensive (loss) (1,848,000) (194,000) (3,223,000) (544,000)
------------ ------------ ------------ ------------
Comprehensive income $ 2,267,000 $ 3,926,000 $ 12,720,000 $ 13,509,000
============ ============ ============ ============
</TABLE>
NOTE 5 - PENDING ACCOUNTING CHANGE
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivatives and Hedging
Accounting - Deferral of the Effective Date of SFAS No. 133" (SFAS 137), which
deferred the effective date of SFAS 133 for an additional year. SFAS 133
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.
Under the deferral permitted by SFAS 137, SFAS 133 is now effective for fiscal
years beginning after June 15, 2000, or calendar year 2001 for the Company. A
company may 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.
7
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
The Company's net sales for the six months ended June 30, 1999 were $122,878,000
compared to $125,585,000 for the six months ended June 30, 1998. This represents
a decrease of $2,707,000 or 2.2%. Net sales for the six months ended June 30,
1999 were negatively impacted by the June 1999 conversion to a new computer
system for the Company's domestic operations. Orders worth approximately $5.6
million were not shipped as expected and are anticipated to be shipped in the
second half of 1999. The Company continues to work aggressively to complete the
transition to the new computer system in an effort to minimize the short term
disruption to the business. The Company's product line, focusing on coordinated
themes of product offerings, continues to receive a positive response from
customers as the Company has become more account-driven, selling its product
line, in depth, to fewer customers with a reduced salesforce.
Cost of sales were 41.4% of net sales for the six months ended June 30, 1999
compared to 43.8% for the same period in 1998. This percentage decrease
primarily reflects higher gross profit margins on sales of certain of the
Company's product line concepts.
Selling, general and administrative expense was $51,835,000 or 42.2% of net
sales for the six months ended June 30, 1999 compared to $55,048,000 or 43.8% of
net sales for the six months ended June 30, 1998. Selling, general and
administrative expense for the six months ended June 30, 1999 decreased
$3,213,000 or 5.8% compared to the prior year. This decrease is due primarily to
lower costs of the reduced salesforce and realization of cost savings from the
closing of its Petaluma, California administrative operations.
Investment and other income of $4,747,000 for the six months ended June 30, 1999
compares to $5,811,000 for the six months ended June 30, 1998. Included in
investment and other income for the six months ended June 30, 1998 was income of
$1,828,000 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, investment and other income increased $764,000. This
increase is primarily related to increased investment income attributable to the
Company's investment portfolio.
The provision for income taxes as a percent of income before taxes for the six
months ended June 30, 1999 was 35.9 % compared to 34.2% in the same period of
the prior year. This increase can be primarily attributed to tax provisions of
certain foreign subsidiaries with higher effective tax rates during the six
months ended June 30, 1999.
Net income for the six months ended June 30, 1999 of $15,943,000 compares to
$14,053,000 for the six months ended June 30, 1998. Included in the results for
the six months ended June 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, net income increased $3,042,000 or 23.6%. This increase can be
primarily attributed to increased gross profit margins, the decrease in selling,
general and administrative expenses and increased investment income from the
Company's investment portfolio.
8
<PAGE> 9
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
The Company's net sales for the three months ended June 30, 1999 were
$47,475,000 compared to $50,949,000 for the three months ended June 30, 1998.
This represents a decrease of $3,474,000 or 6.8%. Net sales for the three months
ended June 30, 1999 were negatively impacted by the June 1999 conversion to a
new computer system for the Company's domestic operations. Orders worth
approximately $5.6 million were not shipped as expected and are anticipated to
be shipped in the second half of 1999. The Company continues to work
aggressively to complete the transition to the new computer system in an effort
to minimize the short term disruption to the business. The Company's product
line, focusing on coordinated themes of product offerings, continues to receive
a positive response from customers as the Company has become more account-
driven, selling its product line, in depth, to fewer customers with a reduced
salesforce.
Cost of sales were 43.4% of net sales for the three months ended June 30, 1999
compared to 43.7% for the same period in 1998. The percentage decrease primarily
reflects higher gross profit margins in sales of certain of the Company's
product line concepts offset by higher provisions required for inventory.
Selling, general and administrative expense was $23,067,000 or 48.6% of net
sales for the three months ended June 30, 1999 compared to $25,189,000 or 49.4%
of net sales for the three months ended June 30, 1998. Selling, general and
administrative expense for the three months ended June 30, 1999 decreased
$2,122,000 or 8.4% compared to the prior year. This decrease is due primarily to
lower costs of the reduced salesforce, realization of cost savings from the
closing of its Petaluma, California administrative operations and lower
expenses, compared to the prior year, associated with the design and
implementation of the new packaged computer software system.
Investment and other income of $2,725,000 for the three months ended June 30,
1999 compares to $2,635,000 for the three months ended June 30, 1998. This
increase of 3.4% can be primarily attributed to increased investment income from
the Company's investment portfolio.
The provision for income taxes as a percent of income before taxes for the three
months ended June 30, 1999 was 36.9% compared to 32.8% in the same period in the
prior year. This increase can be primarily attributed to tax provisions of
certain foreign subsidiaries with higher effective tax rates during the three
months ended June 30, 1999.
Net income for the three months ended June 30, 1999 of $4,109,000 compares to
net income of $4,120,000, for the same period last year.
YEAR 2000 COMPLIANCE
The Company is dependent upon Information Technology (IT) systems in many
aspects of its business and relies upon 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 and 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 effects 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.
9
<PAGE> 10
STATE OF READINESS:
The Company has completed a comprehensive review of its IT systems and is
continuing to analyze the impact of its non-IT systems and critical third-party
relationships to identify and evaluate those 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 and packaged software that the Company
utilizes to operate and manage its business. Improvements in the Company's
operational efficiency are expected. The new enterprise software system is
Year 2000 compliant and the Company has obtained Year 2000 warranties or
certifications from the major software suppliers involved with its new
computer system. The implementation was completed during the second quarter
of 1999 for the Company's domestic operations. The Company's Far East
operations have modified its legacy systems and completed the installation
and testing of Year 2000 Compliance during the second quarter of 1999. For
the Company's Canadian and European operations, due to the evaluation of
certain risks, the Company has determined that it will postpone the
implementation of the new enterprise software system at these operations.
Instead, the Company will execute its previously developed contingency plan
of completing the modifications already begun of its current legacy systems
to become Year 2000 compliant. These remediation efforts related to the
legacy systems of its Canadian and European operations are substantially
complete. The Company estimates that the incremental effort to finalize
evaluation, make the necessary modifications of active programs, and test
and implement such changes will be completed by the end of the third
quarter of 1999. Additionally, certain of the Company's domestic
information will continue to be analyzed and certain historical
information will be maintained using portions of the Company's current
legacy systems which are being modified and tested to become 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 end of the third quarter
of 1999. The Company has inquired as to the Year 2000 readiness of each of
such parties determined by management to be critical or important to the
Company's business and is seeking certifications of Year 2000 compliance
from them. The Company will continue to pursue such Year 2000 compliance
certification from each critical third-party relationship and, if
necessary, begin its contingency plan of identifying alternative goods or
service providers that are able to certify Year 2000 compliance. Despite
the Company's specific efforts with respect to non-IT systems and critical
third-party relationships, there is no absolute assurance that Year 2000
risks from non-IT systems and critical third-party relationships will be
completely eliminated and will, therefore, not have a material adverse
effect on the Company's operations and financial condition.
- - The Company has retained consultants to perform an independent evaluation
of certain aspects of the overall Year 2000 Program to indentify any
remaining risks. This evaluation is scheduled to be completed by the end
of the third quarter of 1999.
COST:
The total cost of the project including hardware, packaged software and project
implementation is expected to be approximately $18,000,000 including 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 June 30, 1999, approximately $17,800,000 has been incurred of which
$11,800,000 and $6,000,000 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.
10
<PAGE> 11
RISKS:
The inability of IT and non-IT systems, in general, to accommodate dates after
1999 may cause disruptions throughout the world in the telecommunication,
banking, credit card, transportation, utility, manufacturing, and other
industries, as well as, many governmental services. If such disruptions occur,
it is possible they could have a material adverse effect on businesses in
general and on the Company in particular.
Based upon currently available information, management believes that the Company
will 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-party
relationships, or their critical third-party relationships, fail to achieve Year
2000 compliance, there could be a material adverse effect on the Company's
business and its results of operations.
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. The Company does rely heavily on numerous, foreign manufacturers with
approximately 88% of its inventory purchases being produced in the Far East. The
Company is currently assessing the status of such manufacturers and their
dependence upon IT or non-IT systems, which it expects to complete by the end of
the third quarter of 1999. There is no absolute assurance that the Company's
business operations will not be disrupted if certain of these manufacturers are
unable to timely deliver product to the Company in the Year 2000; however,
during 1998 no individual supplier accounted for more than 9% and the five
largest suppliers in the aggregate did not account for more than 32% of the
Company's purchases.
CONTINGENCY PLANS:
The Company has certain contingency options, which continue to be updated, that
are available in the event its Year 2000 Program for internal IT is not
successful. As the Company could not be assured during the second quarter of
1999 that the implementation of its new packaged computer software system would
be completed at its Canadian and European operations in the required timeframe,
the Company made a decision to complete the modifications already begun of those
legacy systems by executing its previously developed contingency plan to become
Year 2000 compliant. The Company estimates that the incremental effort to
finalize evaluation, make the necessary modifications of active programs, and
test and implement such changes will be completed by the end of the third
quarter of 1999. The Company has identified the critical business processes
required to continue to operate the business at its Canadian and European
operations. Although the Company believes that remediation of the legacy systems
for those operations will be completed within the necessary timeframe it is
identifying alternate processes (i.e. manual or alternate systems) for its
critical business processes. This evaluation will be completed by the end of the
third quarter of 1999.
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CONTINGENCY PLANS: (CONTINUED)
If the Company determines that either its non-IT systems or critical third-party
relationships will not be compliant, it will either obtain alternative non-IT
systems, or in the case of third parties, switch to other vendors or suppliers
which are Year 2000 compliant, if necessary.
While there are no 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. The Company is expending a significant amount of effort and resources
towards its Year 2000 Program; however, based upon the risks previously
identified, there is no absolute assurance that Year 2000 risks will not have a
material adverse effect on the Company's operations and financial condition
regardless of the efforts of its Year 2000 Program and various contingency
plans.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents and marketable
securities of $199,702,000 compared to cash and cash equivalents and marketable
securities of $225,823,000 at December 31, 1998.
Working capital requirements during the three months ended June 30, 1999 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 June 30, 1999, the Company had marketable securities of $152,486,000. 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.
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 option 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 manage 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.
In January 1999, the Board of Directors authorized the Company to repurchase an
additional 1,000,000 shares of common stock for a total authorization of
5,000,000 shares. During the three months ended June 30, 1999, the Company
repurchased 477,000 shares for $12,263,000. As of June 30, 1999, 4,503,000
shares have been repurchased since the beginning of the Company's stock
repurchase program in March, 1990.
12
<PAGE> 13
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. 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,
post-implementation issues related to the Company's new packaged computer
software system, the possible effects of Year 2000 issues and other factors.
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 June 30, 1999, no reports on Form 8-K were
filed.
13
<PAGE> 14
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)
8/16/99 By /s/Eric R. Lohwasser
----------- ----------------------------------
Date Eric R. Lohwasser
Vice President - Finance,
Chief Financial Officer
14
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