UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2002

 

OR

 

o        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)

 

 

(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 ý No o

 

The number of shares outstanding of each of the registrant’s classes of common stock, as of April 30, 2002 was as follows:

 

 

RUSS BERRIE AND COMPANY, INC.

 

INDEX

 

PART I – FINANCIAL INFORMATION
Item 1.			Financial Statements
a)			Consolidated Balance Sheet as of March 31, 2002 and December 31, 2001
b)			Consolidated Statement of Income for the three months ended March 31, 2002 and 2001
c)			Consolidated Statement of Cash Flows for the three months ended March 31, 2002 and 2001
d)			Notes to Consolidated Financial Statements
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.			Quantitative and Qualitative Disclosures About Market Risk
PART II – OTHER INFORMATION
Item 1.			Legal Proceedings
Item 6.			Exhibits and Reports on Form 8-K
Signatures

 

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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, Except Per Share Data)

 

		(UNAUDITED)
		March 31, 2002			December 31, 2001
ASSETS
Current assets
Cash and cash equivalents		$	105,566		$	148,872
Marketable securities and other investments		147,683			94,181
Accounts receivable, trade, less allowances of $3,930 in 2002 and $3,454 in 2001		65,364			63,481
Inventories — net		29,638			37,374
Prepaid expenses and other current assets		5,514			4,550
Deferred income taxes		7,180			6,705
Total current assets		360,945			355,163
Property, plant and equipment — net		26,287			24,623
Inventories — long term, net		1,959			2,284
Other assets		4,489			4,574
Total assets		$	393,680		$	386,644
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	5,430		$	5,376
Accrued expenses		16,510			20,003
Accrued income taxes		10,680			6,848
Total current liabilities		32,620			32,227
Commitments and contingencies
Shareholders’ equity
Common stock:  $.10 stated value per share; authorized 50,000,000 shares; issued 2002, 26,034,615 shares; 2001, 25,862,364 shares		2,603			2,587
Additional paid in capital		77,538			73,794
Retained earnings		396,914			392,272
Accumulated other comprehensive loss		(5,785		)	(4,165		)
Unearned compensation		—			(75		)
Treasury stock, at cost (5,639,314 shares at March 31, 2002 and 5,632,014 shares at December 31, 2001)		(110,210		)	(109,996		)
Total shareholders’ equity		361,060			354,417
Total liabilities and shareholders’ equity		$	393,680		$	386,644

 

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)

 

		(UNAUDITED)
		THREE MONTHS ENDED MARCH 31,
		2002			2001
Net sales		$	77,602		$	75,929
Cost of Sales		33,716			33,714
Gross profit		43,886			42,215
Selling, general and administrative expense		30,821			30,890
Investment and other income-net		2,308			1,778
Income before taxes		15,373			13,103
Provision for income taxes		5,437			4,380
Net income		$	9,936		$	8,723
Net income per share:
Basic		$	0.49		$	0.44
Diluted		$	0.49		$	0.43

 

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)

 

		(UNAUDITED)
		THREE MONTHS ENDED MARCH 31,
		2002			2001
Cash flows from operating activities:
Net income		$	9,936		$	8,723
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,040			982
Provision for accounts receivable reserves		587			510
Other		(544		)	593
Changes in assets and liabilities:
Accounts receivable		(2,470		)	(3,558		)
Inventories — net		8,061			6,284
Prepaid expenses and other current assets		(964		)	1,688
Other assets		6			16
Accounts payable		54			(440		)
Accrued expenses		(3,493		)	(4,073		)
Accrued income taxes		3,832			2,331
Total adjustments		6,109			4,333
Net cash provided by operating activities		16,045			13,056
Cash flows from investing activities:
Purchase of marketable securities		(75,841		)	(25,889		)
Proceeds from sale of marketable securities		21,716			28,664
Proceeds from sale of fixed assets		—			26
Capital expenditures		(2,847		)	(743		)
Net cash (used in) provided by investing activities		(56,972		)	2,058
Cash flows from financing activities:
Proceeds from issuance of common stock		3,760			4,153
Dividends paid to shareholders		(5,294		)	(4,793		)
Purchase of treasury stock		(214		)	—
Net cash (used in) financing activities		(1,748		)	(640		)
Effect of exchange rate changes on cash and cash equivalents		(631		)	(2,155		)
Net (decrease) increase in cash and cash equivalents		(43,306		)	12,319
Cash and cash equivalents at beginning of period		148,872			77,794
Cash and cash equivalents at end of period		$	105,566		$	90,113
Cash paid during the period for:
Interest		$	12		$	26
Income taxes		$	1,605		$	2,050

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1 – INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying unaudited interim consolidated financial statements have been prepared by Russ Berrie and Company, Inc. and its subsidiaries (the “Company”) in accordance with accounting principles generally accepted in the United States of America 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, of a normal recurring nature and 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.

 

Net income in the Consolidated Statement of Cash Flows included non-cash charges of $120,000 and $908,000 relating to the impact of the 2000 stock option repricing for the three months ended March 31, 2002 and 2001, respectively.

 

This report on Form 10-Q for the three months ended March 31, 2002 should be read in conjunction with the Company’s Annual Report on Form 10-K for its year ended December 31, 2001.

 

NOTE 2 – MARKETABLE SECURITIES AND OTHER INVESTMENTS

 

During the three months ended March 31, 2002 the Company invested in a limited partnership which manages a portfolio of mortgage backed securities to achieve returns through yield income and price appreciation.  This investment is accounted for using the equity method and accordingly the Company’s proportionate share of the limited partnership’s income or loss is included in investment and other income-net in the Consolidated Statement of Income.  As of March 31, 2002, the Company’s investment in this limited partnership amounted to $23,570,000 and is included in marketable securities and other investments in the Consolidated Balance Sheet.

 

NOTE 3 – EARNINGS PER SHARE

 

A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution is as follows:

 

		Three Months Ended March 31,
		2002		2001
Average common shares outstanding		20,332,000		19,939,000
Dilutive effect of common shares issuable (1)		120,000		146,000
Average common shares outstanding assuming dilution		20,452,000		20,085,000

 

(1)  Issuable under stock option plans.

 

Stock options outstanding at March 31, 2001 to purchase 160,625 shares of common stock were not included in the computation of earnings per common share assuming dilution because the options’ exercise prices were greater than the average market price of the common shares.  There were no such options outstanding at March 31, 2002.

 

 

NOTE 4 – DIVIDENDS

 

Cash dividends of $5,294,000 ($0.26 per share) were paid on March 22, 2002 to shareholders of record of the Company’s Common Stock on March 8, 2002.  Cash dividends of $4,793,000 ($0.24 per share) were paid on March 23, 2001 to shareholders of record of the Company’s Common Stock on March 9, 2001.

 

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NOTE 5 – COMPREHENSIVE INCOME

 

In accordance with Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income”, comprehensive income, representing all changes in Shareholders’ equity during the period other than changes resulting from the issuance or repurchase of the Company’s common stock, payment of dividends and unearned compensation, is reconciled to net income for the three months ended March 31, 2002 and 2001 as follows:

 

		Three Months Ended March 31,
		2002			2001
Net income		$	9,936,000		$	8,723,000
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments		(771,000		)	(2,805,000		)
Net unrealized gain (loss) on securities available-for-sale		(919,000		)	891,000
Net unrealized gain on foreign currency forward exchange contracts and other		70,000			473,000
Other comprehensive income (loss)		(1,620,000		)	(1,441,000		)
Comprehensive income		$	8,316,000		$	7,282,000

 

NOTE 6 – LITIGATION

 

In the ordinary course of its business, the Company is party to various copyright, patent and trademark infringement, unfair competition, breach of contract, customs, employment and other legal actions incidental to its business, as plaintiff or defendant. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the results of operations, financial condition or cash flows of the Company, except for the matter described below.

 

An action was commenced against the Company on August 22, 2001, in the United States District Court, District of New Jersey, by Dam Things from Denmark (a/k/a Troll Company ApS.), alleging, among other things, copyright infringement by the Company of the plaintiff’s reinstated United States copyrights for its troll designs and unfair competition under common law.  The plaintiff is seeking, among other things, injunctive relief prohibiting the Company from continuing to offer for sale its troll products, cancellation of the Company’s U.S. copyright registrations with respect to its various troll products, as well as unspecified damages and attorney’s fees and expenses.  On December 3, 2001, a preliminary injunction was issued by the District Court which, as subsequently modified, prohibits the Company from manufacturing and importing its troll products into the United States and selling such products in the United States after March 28, 2002.  The issuance of the preliminary injunction was appealed by the Company and the hearing on such appeal was held on March 7, 2002.  On March 27, 2002, the Third Circuit Court of Appeals issued an order staying the preliminary injunction pending the further order of the court.  To date, no decision has been received with respect to the appeal.  The Company believes it has substantial defenses to the allegations. In 2002, the sale of troll products represented less than one-half of one percent of the Company’s net sales.  The ultimate resolution of this injunction and the timing of the disposition of this inventory cannot be determined at this time.  As such, the Company has segregated the amount of its troll products inventory, at its estimated net book value of $1,959,000 at March 31, 2002 and $2,284,000 at December 31, 2001 and has recorded it as a long-term asset in the Company’s Consolidated Balance Sheet.  The Company does not believe that the ultimate resolution of this action will have a material adverse impact on the financial condition of the Company.

 

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NOTE 7 – RECENTLY ISSUED ACCOUNTING STANDARDS

 

SFAS Nos. 142 and 144

 

SFAS No. 142, “Goodwill and Other Intangible Assets” specifies the financial accounting and reporting for goodwill and other intangible assets.  Amortization of goodwill, including goodwill recorded in past business combinations, has ceased for fiscal years beginning after December 15, 2001 and therefore there is no amortization of goodwill in the Consolidated Statement of Income for the three months ended March 31, 2002.  Goodwill recognized on or before June 30, 2001, has been assigned to one or more reporting units and shall be tested, at least annually, for impairment as of the beginning of the fiscal year in which SFAS No. 142 is initially applied in its entirety.  The Company adopted SFAS No. 142, effective January 1, 2002, and such adoption did not have a material effect on the Company’s consolidated financial statements.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years.  SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and the accounting and reporting provisions of Accounting Principals Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business.  The Company adopted SFAS No. 144 on January 1, 2002, and such adoption did not have a material effect on the Company’s consolidated financial statements.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH  31, 2002 AND MARCH  31, 2001

 

The Company’s net sales for the three months ended March 31, 2002 increased 2.2% to $77,602,000 compared to net sales of $75,929,000 for the three months ended March 31, 2001.  Net sales for the first quarter of 2002 would have been approximately $600,000 higher had first quarter 2001 exchange rates remained in effect for the first quarter of 2002.

 

Cost of sales was 43.4% of net sales for the three months ended March 31, 2002 as compared to 44.4% for the same period in 2001.  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 $30,821,000 or 39.7% of net sales for the three months ended March 31, 2002 compared to $30,890,000 or 40.7% of net sales for the three months ended March 31, 2001.  Excluding the unfavorable impact of the 2000 stock option repricing, which amounted to a charge of $120,000, in the first quarter of 2002 and $908,000 in the first quarter of 2001, selling, general and administrative expense increased $719,000, or 2.4% compared to the same period in the prior year.  The increase in selling, general and administrative expense is due primarily to the Company’s strategic investment in the development of new products, business ventures and systems, offset, in part, by a decrease in showroom related costs, as compared to the three months ended March 31, 2001.

 

Investment and other income of $2,308,000 for the three months ended March 31, 2002 compares to $1,778,000 for the three months ended March 31, 2001.  This increase is due primarily to higher returns on the Company’s investment portfolio.

 

The provision for income taxes as a percent of income before taxes for the three months ended March 31, 2002 was 35.4% compared to 33.4% in the same period for the prior year.  This increase in the effective tax rate is due primarily to higher effective tax rates for the Company’s European operations and the non recurring reduction in the Company’s state tax valuation allowance in the first quarter of 2001.

 

Net income for the three months ended March 31, 2002 of $9,936,000 compared to net income of $8,723,000 for the same period last year.  Excluding the unfavorable impact of the 2000 stock option repricing, which amounted to a charge of $78,000, after tax,  in the first quarter of 2002 and a charge of $590,000, after tax, or $0.03 per diluted share, in the first quarter of 2001, net income would have increased 7.5% and earnings per diluted share would have increased 6.5%.  The increase in net income was primarily the result of higher gross profits due to increased sales volumes, a higher margin product mix and higher investment income offset, in part, by a higher effective tax rate, as described above.

 

The Company is dependent upon information technology systems in many aspects of its business.  Beginning in the first quarter of 2002, the Company began a project to implement a new packaged computer software system for the Company and its wholly-owned subsidiaries and convert its second United States distribution facility to a new warehouse management system.  The Company’s current custom software, that has been utilized to operate and manage its business, and other third party software systems will be replaced using a strategic and phased approach.  The Company has not experienced any significant business disruptions related to the replacement of these systems and anticipates that the replacement of its current systems will not have a material adverse impact on its financial condition or results of operations.

 

In January 2002, the European Union’s common currency, the Euro, was issued and legacy currencies from participating European nations were withdrawn from circulation.  The Company has operating subsidiaries in the European Union, both participating in the establishment of the common currency and others that had elected not to participate and remain on existing currencies.  The Company’s operating subsidiaries affected by the Euro conversion have addressed the system and business issues raised by the Euro conversion.  The Euro conversion has not had, and the Company anticipates that it will not have, a material adverse impact on its financial condition, or results of operations or cash flows.

 

9

 

Liquidity and Capital Resources

 

As of March 31, 2002, the Company had cash and cash equivalents and marketable securities of $253,249,000 compared to cash and cash equivalents and marketable securities of $243,053,000 at December 31, 2001.

 

As of March 31, 2002 and December 31, 2001, the Company had marketable securities and other investments of $147,683,000 and $94,181,000 respectively, included in the amounts above.  As of March 31, 2002 these investments consist of U.S. government obligations, municipal obligations, preferred stock mutual funds and a limited partnership primarily focused on mortgage backed securities.  The objective of the investment portfolio is to maximize after tax returns while minimizing risk.  The Company’s marketable securities are subject to market fluctuations based largely, but not exclusively, on the securities’ sensitivity to changes in interest rates.

 

Working capital requirements during the three months ended March 31, 2002 were met entirely through internally generated funds.  The Company anticipates capital expenditures requirements for 2002 to be approximately $18,000,000 primarily for systems development and costs related to leasehold improvements in its new facility in the United Kingdom.  The Company remains in a highly liquid position and believes that the resources available from cash and cash equivalents, investments, operations and bank lines of credit are sufficient to meet the foreseeable requirements of its business.

 

The Company enters into forward exchange contracts, principally to manage the economic currency risks associated with the purchase of inventory by its European and Canadian subsidiaries.  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.

 

As of March 31, 2002, the Board of Directors had previously authorized the Company to repurchase 7,000,000 shares of common stock of which 5,643,200 shares have been repurchased since the beginning of the Company’s stock repurchase program in March 1990.  During the three months ended March 31, 2002, the Company repurchased 7,300 shares for $214,000.

 

The Company is subject to legal proceedings and claims arising in the ordinary course of its business that could possibly have a material adverse impact on the Company’s results of operations and cash flows.  See Note 5 of the Notes to Consolidated Financial Statements for information regarding specific litigation.

 

Consistent with its past practices and as a normal course of business, the Company regularly reviews acquisition opportunities of varying sizes.  There can be no assurance, however, that any discussions arising in connection therewith will result in definitive purchase agreements and, if they do, what the terms or timing of any such agreements would be.

 

10

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements.  Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission (SEC) filings and otherwise.  The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements.  These statements may be identified by the use of forward-looking words or phrases including, but not limited to, “anticipate”, “believe”, “expect”, “intend”, “may”, “planned”, “potential”, “should”, “will” or “would”.  The Company cautions readers that results predicted by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements.  Specific risks and uncertainties include, but are not limited to, the Company’s ability to continue to manufacture its products in the Far East, the seasonality of revenues, the actions of competitors, ability to increase production capacity, price competition, the effects of government regulation, possible delays in the introduction of new products, customer acceptance of products, issues related to the Company’s new business ventures, the ability to grow its direct sales force, changes in foreign currency exchange rates, issues related to the Company’s computer systems, the current and future outlook of the global retail market and other factors.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of March 31, 2002, there have been no material changes in the Company’s market risks from December 31, 2001.

 

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PART II OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

The information set forth in Part I, Financial Information, Item 1, “Notes to Consolidated Financial Statements, Note 6 – Litigation,"  of this Quarterly Report on Form 10-Q is incorporated herein by reference thereto.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

a)		There are no exhibits to this Quarterly Report on Form 10-Q.
b)		During the quarter ended March 31, 2002, no reports on Form 8-K were filed.

 

 

 

 

 

Items 2, 3, 4, and 5 are not applicable and have been omitted.

 

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SIGNATURES

 

Pursuant to the requirements 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)
	By	/s/ John D. Wille
Date:   May 9, 2002		John D. Wille
		Vice President and
		Chief Financial Officer

 

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