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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, 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 NOVEMBER 11, 1999
----- --------------------------------
<S> <C>
Common stock, $.10 stated value 20,548,446
</TABLE>
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RUSS BERRIE AND COMPANY, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION NUMBER
----------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1999 3
and December 31, 1998
Consolidated Statement of Income for the three months
and the nine months ended September 30, 1999 and 1998 4
Consolidated Statement of Cash Flows for the nine
months ended September 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 8-12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
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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 1999 1998
------ ------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 42,260 $ 73,064
Marketable securities 142,236 152,759
Accounts receivable, trade, less allowances of
$4,095 in 1999 and $2,622 in 1998................... 81,273 54,861
Inventories - net..................................... 40,417 45,201
Prepaid expenses and other current assets............. 9,355 3,006
Deferred income taxes................................. 6,412 5,325
------- -------
TOTAL CURRENT ASSETS 321,953 334,216
Property, plant and equipment - net..................... 39,392 35,340
Other assets............................................ 2,516 8,900
------- -------
TOTAL ASSETS $363,861 $378,456
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable..................................... $ 4,103 $ 4,249
Accrued expenses..................................... 26,270 23,067
Accrued income taxes................................. 12,607 7,205
------- -------
TOTAL CURRENT LIABILITIES 42,980 34,521
Commitments and contingencies
Shareholders' equity
Common stock: $.10 stated value; authorized
50,000,000 shares; issued 1999, 25,297,926
shares; 1998, 25,202,261 shares.................... 2,530 2,520
Additional paid in capital........................... 60,170 58,553
Retained earnings.................................... 353,156 331,727
Accumulated other comprehensive (loss)............... (2,329) (511)
Treasury stock, at cost (4,752,414 shares at
September 30, 1999 and 2,957,214 shares at
December 31, 1998) (92,646) (48,354)
------- -------
TOTAL SHAREHOLDERS' EQUITY 320,881 343,935
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $363,861 $378,456
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales.............................................. $89,837 $82,969 $212,714 $208,554
Cost of sales.......................................... 35,410 33,647 86,310 88,646
------ ------ ------- -------
GROSS PROFIT........................................ 54,427 49,322 126,404 119,908
Selling, general and administrative expense............ 28,973 26,533 80,808 81,581
Investment and other income-net........................ 2,182 1,875 6,928 7,686
------ ------ ------- -------
INCOME BEFORE TAXES................................. 27,636 24,664 52,524 46,013
Provision for income taxes............................. 9,398 8,437 18,344 15,733
------ ------ ------- -------
NET INCOME............................................. $18,238 $16,227 $ 34,180 $ 30,280
====== ====== ======= =======
NET INCOME PER SHARE:
Basic............................................ $ 0.88 $ 0.73 $ 1.61 $ 1.36
Diluted.......................................... 0.88 0.73 1.60 1.35
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
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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: 1999 1998
---- ----
<S> <C> <C>
Net income $34,180 $30,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................................... 3,314 1,829
Amortization of intangible assets............................... 89 89
Provision for accounts receivable reserves...................... 2,025 1,662
Deferred income taxes........................................... (886) 4,306
Net (gain) loss from sale or disposal of fixed assets........... (31) 142
Changes in assets and liabilities:
Accounts receivable........................................ (28,437) (21,962)
Inventories - net.......................................... 4,784 4,248
Prepaid expenses and other current assets.................. (48) 61
Other assets............................................... (5) 117
Accounts payable........................................... (146) 26
Accrued expenses........................................... 3,203 2,702
Accrued income taxes....................................... 5,200 (1,723)
------ ------
Total adjustments (10,938) (8,503)
Net cash provided by operating activities........... ------ ------
23,242 21,777
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities................................... (39,442) (130,167)
Proceeds from sale of marketable securities......................... 47,932 84,509
Proceeds from sale of fixed assets.................................. 67 194
Capital expenditures................................................ (7,272) (12,404)
Net proceeds from sale of discontinued operations .................. - 5,442
------ ------
Net cash provided by (used in) investing activities. 1,285 (52,426)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............................. 1,626 4,321
Dividends paid to shareholders...................................... (12,752) (12,671)
Purchase of treasury stock.......................................... (44,292) (2,434)
------ ------
Net cash (used in) financing activities............. (55,418) (10,784)
Effect of exchange rates............................................ 87 624
------ ------
Net (decrease) in cash and cash equivalents......................... (30,804) (40,809)
Cash and cash equivalents at beginning of period.................... 73,064 93,443
------ ------
Cash and cash equivalents at end of period.......................... $42,260 $52,634
====== ======
CASH PAID DURING THE PERIOD FOR:
Interest $ 111 $ 106
Income taxes $12,607 $13,150
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
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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 nine months ended September 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 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 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average common shares outstanding...................... 20,654,000 22,242,000 21,247,000 22,220,000
Dilutive effect of common shares issuable (1)........ 103,000 30,000 141,000 183,000
---------- ---------- ---------- ----------
Average common shares outstanding
assuming dilution...................................... 20,757,000 22,272,000 21,388,000 22,403,000
========== ========== ========== ==========
</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 $4,110,000 ($0.20 per share) were paid on September 3, 1999 to
shareholders of record of the Company's Common Stock on August 20, 1999. Cash
dividends of $12,752,000 ($0.20 per share per quarter) were paid in the nine
months ended September 30, 1999.
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.
NOTE 4 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement No.
130, Reporting Comprehensive Income, which modified 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
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dividends, is reconciled to net income for the three and nine months ended
September 30, 1999 and 1998 as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $18,238,000 $16,227,000 $34,180,000 $30,280,000
Other comprehensive income (loss), net of taxes
Foreign currency translation adjustments 1,286,000 432,000 215,000 830,000
Net unrealized gain (loss) on securities
available-for-sale (392,000) 671,000 (2,033,000) 728,000
----------- ----------- ----------- -----------
Total other comprehensive income (loss) 894,000 1,103,000 (1,818,000) 1,558,000
----------- ----------- ----------- -----------
Comprehensive income $19,132,000 $17,330,000 $32,362,000 $31,838,000
=========== =========== =========== ===========
</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.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
The Company's net sales for the nine months ended September 30, 1999 were
$212,714,000 compared to $208,554,000 for the nine months ended September 30,
1998. This represents an increase of $4,160,000 or 2.0%. The Company continues
to work aggressively to deal with the operational issues, caused by the domestic
implementation of the new computer system, in an effort to minimize the
disruption to the business and its customers which has negatively impacted net
sales since implementation of June 1999. 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 40.6% of net sales for the nine months ended September 30,
1999 compared to 42.5% 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 $80,808,000 or 38.0% of net
sales for the nine months ended September 30, 1999 compared to $81,581,000 or
39.1% of net sales for the nine months ended September 30, 1998. Selling,
general and administrative expense for the nine months ended September 30, 1999
decreased $773,000 or 0.9% 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
offset by higher distribution and delivery costs attributed to operational
difficulties and depreciation of the Company's new computer system.
Investment and other income of $6,928,000 for the nine months ended September
30, 1999 compares to $7,686,000 for the nine months ended September 30, 1998.
Included in the results for the nine months ended September 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 $1,070,000.
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 nine
months ended September 30, 1999 was 34.9 % compared to 34.2% in the same period
in the prior year.
Net income for the nine months ended September 30, 1999 of $34,180,000 increased
from $30,280,000 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, net income increased $5,052,000 or 17.3%. This increase can be
primarily attributed to increased gross profit, the decrease in selling, general
and administrative expense and increased investment income from the Company's
investment portfolio offset by increased income taxes.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
The Company's net sales for the three months ended September 30, 1999 were
$89,837,000 compared to $82,969,000 for the three months ended September 30,
1998. This represents an increase of $6,868,000 or 8.3%. The Company continues
to work aggressively to deal with the operational issues, caused by the domestic
implementation of the new computer system, in an effort to minimize the
disruption to the business and its customers which has negatively impacted
net sales since implementation in June 1999. 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.
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Cost of sales were 39.4% of net sales for the three months ended September 30,
1999 compared to 40.6% 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 and the Company's successful efforts to manage
inventory levels resulting in lower sales through other than normal distribution
channels.
Selling, general and administrative expense was $28,973,000 or 32.3% of net
sales for the three months ended September 30, 1999 compared to $26,533,000 or
32.0% of net sales for the three months ended September 30, 1998. Selling,
general and administrative expense for the three months ended September 30, 1999
increased $2,440,000 or 9.2% compared to the prior year. This increase is due
primarily to higher distribution and delivery costs attributable to operational
difficulties and depreciation of the Company's new computer system.
Investment and other income of $2,182,000 for the three months ended September
30, 1999 compares to $1,875,000 for the three months ended September 30, 1998.
This increase of 16.4% 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 September 30, 1999 was 34.0% compared to 34.2% in the same period
in the prior year.
Net income for the three months ended September 30, 1999 of $18,238,000
increased from $16,227,000 for the same period last year. This represents an
increase of $2,011,000 or 12.4%. This increase can be primarily attributable to
increased gross profit and investment income offset by increased selling,
general and administrative expense.
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.
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 had undertaken a project to implement a new packaged computer
software system for the global organization. During the second quarter,
the new computer system replaced the current custom and packaged software
that the Company utilized to operate and manage its domestic business. The
Company has experienced post-implementation difficulties with the new
packaged computer software system. These difficulties have affected the
service levels provided to our customers and other operational
efficiencies. Currently, customer shipments are being processed timely as
a result of alternate procedures to overcome these operational
deficiencies. The Company's efforts to resolve these difficulties are
continuing and management is evaluating all available options. The new
packaged computer software system is Year 2000 compliant and the
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Company has obtained Year 2000 warranties or certifications from the major
software suppliers involved with its new computer system. 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 with implementation of a new packaged computer
system, the Company made a decision to execute its previously developed
contingency plan of completing the modifications already begun of its
current legacy systems to become Year 2000 compliant for these operations.
These remediation efforts of the legacy systems are substantially complete
for mission-critical business processes and are underway for all other
business processes. 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 during the fourth
quarter of 1999. Additionally, certain of the Company's domestic
information is being analyzed and certain historical information is being
maintained using portions of the Company's current legacy systems which
have been modified and are being tested to ensure Year 2000 compliance.
- - 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 during the fourth 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 continues to pursue such Year 2000 compliance
certification from each critical third-party relationship and, as
necessary, has begun its contingency plan of identifying alternative goods
or service providers, where practical, 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 retained consultants to evaluate its readiness, identify
additional risks and to assist in managing the completion of its Year 2000
Program.
COST:
The total cost of the project including hardware, packaged software and
third-party project implementation was approximately $18,700,000 including
post-implementation support. Hardware, software and certain project costs were
capitalized as fixed assets and are being amortized over their useful lives. The
remainder of such costs were expensed as incurred and all remaining
post-implementation and Year 2000 remediation costs are being expensed as
incurred .
At September 30, 1999, $12,600,000 and $6,100,000 of such costs 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:
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.
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Should either the Company's internal IT or non-IT systems or the internal
systems of one or 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 during the
fourth 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. Due to the evaluation of certain risks with the planned
implementation of the new packaged computer software system at its Canadian and
European operations, 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 during
the fourth quarter of 1999. Additionally, 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 during the fourth quarter of 1999. 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, where practical, 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 September 30, 1999, the Company had cash and cash equivalents and marketable
securities of $184,496,000 compared to cash and cash equivalents and marketable
securities of
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$225,823,000 at December 31, 1998.
Working capital requirements during the nine months ended September 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 September 30, 1999, the Company had marketable securities of $142,236,000.
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 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 manage the economic currency risks associated with the purchase
of inventory and the repayment of intercompany loans by its European and
Canadian operations. Gains and losses, related to such contracts, were not
material to its results of operations. The Company does not anticipate any
material adverse impact on its results of operations or financial position from
these contracts.
In January 1999, the Board of Directors authorized the Company to repurchase
additional 1,000,000 shares of common stock for a total authorization of
5,000,000 shares. During the three months ended September 30, 1999, the Company
purchased 244,000 shares for $ 5,381,000. As of September 30, 1999, 4,746,000
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. 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, implementation
issues related to the Company's new packaged computer software system, the
possible effects of Year 2000 issues and other factors.
12
<PAGE> 13
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, 1999, no reports on Form 8-K
were filed.
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)
13
<PAGE> 14
11/15/99 By /s/Eric R. Lohwasser
-------- ---------------------------
Date Eric R. Lohwasser
Vice President - Finance,
Chief Financial Officer
14
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