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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December
31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required] 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 of or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
111 Bauer Drive, Oakland, New Jersey 07436
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (201) 337-9000
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each Class on which registered
------------------- -------------------
Common Stock, $0.10 stated value New York Stock Exchange
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Approximate aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 18, 1998 was $314,509,167.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of March 18, 1998, was as follows:
Class Number of Shares
-------------- ----------------
Common Stock, $0.10 stated value 22,212,571
Documents Incorporated by Reference
Certain portions of the Registrant's Proxy Statement dated March 13, 1998,
relating to registrant's Annual Meeting of Shareholders to be held on April 22,
1998 (the "1998 Proxy Statement"), are incorporated by reference into Part III
of this report.
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PART I
ITEM 1. BUSINESS
Russ Berrie and Company, Inc. was incorporated in New Jersey in 1966. The term
"Company" refers to Russ Berrie and Company, Inc. and its consolidated
subsidiaries, unless the context requires otherwise. Its principal executive
offices are located at 111 Bauer Drive, Oakland, New Jersey 07436, and its
telephone number is (201) 337-9000.
The Company had operated two business segments; gift and toy through May of
1997. The gift business segment represents the Company's continuing line of
operations which principally markets a line of products under the trade name
RUSS(R). The toy business segment represented the Company's subsidiaries Cap
Toys, Inc. and OddzOn Products, Inc.
On May 2, 1997, the Company completed the sale of substantially all of the
assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products,
Inc., to a wholly-owned subsidiary of Hasbro, Inc. These two subsidiaries
represented the Company's Toy business segment. Accordingly, the Toy business
segment is reported as discontinued operations.
CONTINUING OPERATIONS
The Company designs, manufactures through third parties and markets a wide
variety of gift products to retail stores throughout the United States and
countries throughout the world.
The Company's products are designed to appeal to the emotions of consumers to
reflect their feelings of friendship, fun, love and affection. The Company
believes that its present position as one of the leaders in the gift industry is
due primarily to its imaginative product design, broad and effective marketing
of its products, efficient distribution, high product quality and commitment to
customer service.
The Company maintains a direct salesforce and distribution network to serve its
customers in the United States, Europe and Canada. Where the Company does not
maintain a direct salesforce and distribution network, the Company's products
are sold worldwide through distributors. See note 16 of the Notes to
Consolidated Financial Statements for more information regarding geographic
information.
PRODUCTS
The Company's product line of more than 6,000 items (including distinctive
variations on basic product designs) are marketed under the trade name and
trademark RUSS(R). This extensive line encompasses both seasonal and everyday
products that focus on theme or concept groupings. Products include stuffed
animals, picture frames, candles, figurines and home decor gifts based on
current fashions and trends. The Company maintains product depth in categories
such as Birthday, Anniversaries, Over-The-Hill, Fun 'N Games, Gifted Moments,
Inspirational Gifts, Lifestyles, Home Styles, Gentlemen's Gifts, Collectibles
and Baby Products. Extensive seasonal lines include products for all the major
holidays. In addition, the Company's Bright of America, Inc. subsidiary
principally markets placemats and candles as well as aromatic products such as
potpourri and incense through Scentex(R), a new division of Bright of America,
Inc., directly to mass merchandisers.
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Most of the Company's products have suggested retail prices between $1 and $30.
Product sales are highly diverse and as such, no single gift item represented
more than 2% of sales within the gift segment in 1997.
DESIGN AND PRODUCTION
The Company has a continuing program of new product development. The Company
designs most of its own products and then generally evaluates consumer response
through test marketing in selected unaffiliated retail stores. Items are added
to the product line only if they can be obtained and marketed on a basis that
meets the Company's profitability standards.
The Company believes that the breadth of its product line and the continuous
development of new products are key elements to its success and that it is
capable of designing and producing large numbers of new products annually.
The Company has approximately 165 employees responsible for product development
and design located in the United States and in the Far East. Generally, a new
design is brought to market in less than nine months after a decision is made to
produce the product. Sales of the Company's products are, in large part,
dependent on the Company's ability to identify and react quickly to changing
consumer preferences and to utilize its sales and distribution systems to bring
new products to market.
The Company engages in market research and test marketing to evaluate consumer
reactions to its gift products. Research into consumer buying trends often
suggests new products. The Company assembles information from retail stores, the
Company's salesforce and the Company's own Product Development department. The
Company continually analyzes its products to determine whether they should be
adapted into new or different products using elements of the initial design or
whether they should be removed from the product line.
Substantially all of the Company's products are produced by independent
manufacturers, generally in the Far East, under the supervision of Company
personnel. During 1997, approximately 94% of the Company's products were
produced in the Far East, and 6% in the United States. The dollar amount of
purchases in the United States predominantly represent domestically produced
displays and printed materials such as cards and calendars.
The Company utilizes approximately 140 manufacturers in the Far East, primarily
in the People's Republic of China, Taiwan, Korea, Indonesia, Philippines and
Thailand. During 1997, approximately 71% of the Company's dollar volume of
purchases was attributable to manufacturing in the People's Republic of China.
Legislation has been proposed from time to time that would revoke the
most-favored nation status (which is a designation determined annually by the
President of the United States, subject to possible override by Congress) of the
People's Republic of China. Such a revocation would cause import duties to
increase or become applicable to products imported by the Company from the
People's Republic of China.
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A significant portion of the Company's staff of approximately 300 employees in
Hong Kong, Taiwan, Korea and the cities of Shenzhen and Qingdao in the People's
Republic of China monitor the production process with responsibility for the
quality, safety and prompt delivery of Company products. Members of the
Company's Far East staff make frequent visits to the manufacturers for which
they are responsible. Many of the Company's manufacturers are small operations,
some selling exclusively to the Company. The Company believes that there are
many alternate manufacturers for the Company's products and the loss of any one
manufacturer would not significantly affect the operations of the Company. In
1997, the supplier accounting for the greatest dollar volume of the Company's
purchases accounted for approximately 11% of such purchases and the five largest
suppliers accounted for approximately 29% in the aggregate.
MARKETING
The Company's products are marketed primarily through its own direct salesforce
of more than 530 full-time employees. Products are sold directly to retail
stores in the United States and in certain foreign countries, including gift
stores, pharmacies, card shops, home decor shops, apparel stores, craft stores,
garden stores, book stores, stationery stores, hospitals, college and airport
gift shops, resort and hotel shops, florists, chain stores and military post
exchanges. During 1997, the Company sold gift products to more than 60,000
customers. No single gift customer accounted for more than 2% of gift
dollar sales.
The Company reinforces the marketing efforts of its gift product salesforce
through an active promotional program, including showrooms, participation in
trade shows, trade and consumer advertising and a program of seasonal and theme
based catalogs.
The Company believes that effective packaging and merchandising of its products
are very important to its marketing success. Many products are shipped in
colorful corrugated cartons which can be used as free-standing displays and can
be discarded when all the products have been sold. The Company also offers
semi-permanent free-standing lucite, metal and wooden displays, thereby
providing an efficient promotional vehicle for selling the Company's products.
The Company believes that customer service is an important component of its
marketing strategy and therefore has established a Customer Service Department
at each distribution facility that responds to customer requests, investigates
and resolves problems and generally assists customers.
The Company's general terms of sale are believed to be competitive in the gift
industry. The Company provides extended payment terms to customers, which does
not exceed five months, on sales of seasonal merchandise, e.g., Christmas,
Halloween, Easter and other seasons. The Company has a general policy that all
sales are final and does not sell on consignment.
During the year ended December 31, 1998, the Company will be creating a
division called Russ Baby to market through a separate direct saleforce the
Company's line of Baby gift products.
The Company maintains a direct salesforce and distribution network to serve its
customers in Great Britain, Holland, Belgium, Ireland, Spain, Germany and
Canada. The Company's products are sold worldwide, through distributors, where
the Company does not maintain a direct salesforce and distribution network. The
Company's foreign sales, including export sales from the United States,
aggregated $73,366,000, $66,840,000 and $59,000,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
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DISTRIBUTION
The Company has customers located in the United States and throughout the world.
In order to serve them quickly and effectively, the Company maintains U.S.
distribution centers in South Brunswick, New Jersey and Petaluma, California
which receive products directly from suppliers and then distribute such products
to the Company's customers. The Company also maintains a facility in the
Toronto, Canada area for its Canadian customers and facilities in Southampton,
England to serve its customers in Europe. The Company generally uses common
carriers to distribute to its customers.
SEASONALITY
In addition to its everyday gift products, the Company produces specially
designed products for holiday seasons which include: Christmas, Valentine's Day,
Easter, Halloween, Mother's Day, Thanksgiving, Graduation, Father's Day, and St.
Patrick's Day.
The pattern of the Company's gift sales is influenced by the shipment of
seasonal merchandise. The Company generally ships the majority of gift orders
each year for Christmas in the quarter ended September 30, for Valentine's Day
in the quarter ended December 31 and for Easter in the quarter ended March 31.
During 1997, gift items specially designed for individual seasons accounted for
approximately 46% of the Company's sales; no individual season accounted for
more than 18% of the Company's sales.
The following table sets forth the Company's quarterly sales during 1997, 1996
and 1995.
QUARTERLY SALES
(In Millions)
1997 1996 1995
------------ ------------ ------------
Quarter Ended ....... Sales % Sales % Sales %
- ----------------------- ------ ---- ------ ---- ------ ----
March 31 .............. $ 62.1 22.9 $ 56.5 25.0 $ 56.2 26.3
June 30 ............... $ 58.5 21.6 $ 41.8 18.5 $ 40.7 19.0
September 30 .......... $ 87.5 32.2 $ 67.9 30.0 $ 67.0 31.3
December 31 ........... $ 63.2 23.3 $ 60.0 26.5 $ 50.0 23.4
The Company has historically had higher profit margins in the quarter ended
September 30 as a result of the economies of scale which accompany the higher
sales volume. In 1996, due to the earlier consumer selling season, the Company
shipped orders for Easter 1997 in the quarter ended December 31, 1996 as well as
during the quarter ended March 31, 1997.
BACKLOG
It is characteristic of the Company's business that orders for seasonal
merchandise are taken in advance of shipment. The Company's backlog at December
31, 1997 and December 31, 1996 was $29,097,000 and $21,616,000, respectively.
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COMPETITION
The gift industry is highly competitive. The Company believes that the principal
competitive factors in the gift business are marketing ability, reliable
delivery, product design, quality, customer service and price. The Company's
principal competitors are Gund, Inc., Midwest Imports, Department 56, Inc.,
Boyds Collections LTD. (Inc.), Ganz Bros., Ty, Inc., Enesco and numerous small
suppliers. Certain of the Company's existing or potential competitors may have
financial resources that are greater than those of the Company.
COPYRIGHTS, TRADEMARKS, PATENTS AND LICENSES
The Company prints notices of claim of copyright on substantially all of its
products and has registered hundreds of its designs with the United States
Copyright Office. The Company has registered, in the United States and certain
foreign countries, the trademark RUSS(R) with a distinctive design, which is
utilized on most of its gift products. The Company believes its copyrights,
trademarks and patents are valid, and has pursued a policy of aggressively
protecting them from infringement. However, it does not consider its business
materially dependent on copyright, trademark or patent protection.
The Company enters into various license agreements relating to trademarks,
copyrights, designs and products which enable the Company to market items
compatible with its product line. The Company's licenses are generally exclusive
for specific products in specified territories. Royalties are paid on licensed
items and, in many cases, advance royalties and minimum guarantees are required
by these license agreements.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 1,550 persons. The
Company considers its employee relations to be good; substantially all of the
Company's employees are not covered by a collective bargaining agreement. The
Company's policy is to require that its management, sales and product
development and design personnel enter into confidentiality agreements and, in
the case of management and sales personnel, non-competition agreements (subject
to certain territorial limitations in the case of salespersons) which restrict
their ability to compete with the Company for a period of six months after
termination of their employment.
GOVERNMENT REGULATION
Certain of the Company's products are subject to the provisions of, among other
laws, the Federal Hazardous Substances Act and the Federal Consumer Product
Safety Act. Those laws empower the Consumer Product Safety Commission to protect
children from certain hazardous articles by regulating their use or excluding
them from the market and requiring a manufacturer to repurchase articles which
become banned. The Commission's determination is subject to judicial review.
Similar laws exist in some states and cities in the United States and in certain
foreign jurisdictions. The Company maintains a quality control program in order
to comply with applicable laws.
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DISCONTINUED OPERATIONS
On May 2, 1997, the Company completed the sale of substantially all of the
assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products,
Inc., to a wholly-owned subsidiary of Hasbro, Inc. These two subsidiaries
represented the Company's Toy business segment. The operating results of the Toy
business segment have been classified as discontinued operations, and the
financial statements have been restated to reflect this presentation.
The sale transaction resulted in a gain on the sale of discontinued operations
in the year ended December 31, 1997 of $75,300,000 before tax or $46,700,000
($2.12 per share) after tax.
Net sales of the Company's discontinued operations for the years ended December
31, 1997, 1996 and 1995 amounted to $38,614,000, $151,380,000 and $134,556,000,
respectively.
ITEM 2. PROPERTIES
The Company's continuing operations principal facilities consist of its
corporate offices in Oakland, New Jersey, and distribution centers in South
Brunswick, New Jersey; and Petaluma, California. In May of 1997, the Company
closed its Reynoldsburg, Ohio distribution center and moved the operations to
its South Brunswick, New Jersey facility. The Company believes greater
efficiencies can be achieved while maintaining a high level of service to its
customers. Additionally, office and distribution facilities are located in
Southampton, England and in the Toronto, Canada area. The Company owns the
facility used by Bright of America, Inc. in Summersville, West Virginia, one of
its facilities in Southampton, England and most of the office space it uses in
Hong Kong. The Company leases its other facilities. The facilities of the
Company are maintained in good operating condition, are adequate for the
Company's purposes and are generally fully utilized, other than those that were
closed as part of a restructuring of the Company's distribution system.
The Company's subsidiary, Amram's Distributing, Ltd. has purchased land, located
in Brampton, Ontario, Canada, for the purpose of building a new office and
distribution facility. Construction of the new facility is expected to be
completed in the fourth quarter of 1998.
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THE COMPANY'S CURRENT PRINCIPAL FACILITIES ARE AS FOLLOWS:
Lease Expiration
Location - Domestic Sq. Ft. Area (if applicable) (1)
-------------------- ------------ -------------------
Petaluma, California (2)(3)................ 234,200 June 30, 2004
Oakland, New Jersey (2)(4)................. 120,000 April 1, 2004
South Brunswick, New Jersey (2)(3)......... 513,680 May 31, 1999
Summersville, West Virginia (5)(6)......... 156,000 Not Applicable-
Owned by the Company
Lease Expiration
Location - Foreign Sq. Ft. Area (if applicable)(1)
------------------- ------------ ------------------
Chandlers Ford, England (5)................ 10,846 December 24, 2014
Southampton, England (6)................... 61,000 March 25, 2003
Southampton, England (6)................... 75,500 Not applicable -
Owned by the Company
Rexdale, Ontario, Canada (5)(6)............ 76,290 May 31, 2002
Hong Kong (5).............................. 25,630 Not applicable -
Owned by the Company
(1) Not including renewal options.
(2) Properties owned directly or indirectly by Russell Berrie or members of his
immediate family. See ITEM 13 - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS".
(3) Regional distribution center.
(4) Corporate headquarters.
(5) Subsidiary (or division) headquarters.
(6) Subsidiary (or division) distribution center.
The Company's Lakeland, Florida facility was closed as part of restructuring of
the Company's distribution system that took place prior to the year ended
December 31, 1994. This facility has been partially subleased and the lease term
expires on February 28, 1998.
The Company operates showroom facilities in Oakland, New Jersey; Los Angeles and
San Francisco, California; Atlanta, Georgia; Chicago, Illinois; Dallas, Texas;
Seattle, Washington; Montreal, Vancouver and Toronto, Canada; Brussels, Belgium;
Utrecht, Holland; and Kowloon, Hong Kong. Certain showrooms are located within
the facilities listed above, others are leased with remaining lease terms at
these facilities ranging between one and six years.
ITEM 3. LEGAL PROCEEDINGS
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, as plaintiff or
defendant.
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The Company believes that the outcome of the proceedings to which it is
currently a party will not have a material adverse effect on its business or
financial condition.
--------------------
Factors That May Affect Future Results and Financial Condition
This Annual Report on Form 10-K contains forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission ("SEC") filings and otherwise. The
Company cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
and income are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information with respect to the executive officers
of the Company. All officers are elected by the Board of Directors and may be
removed with or without cause by the Board.
NAME AGE POSITION WITH THE COMPANY
- ------------------------- --- ----------------------------------------------
Russell Berrie .......... 65 Chairman of the Board, Chief Executive
Officer and Director
Arnold S. Bloom ......... 55 Vice President, Secretary and General Counsel
Paul Cargotch ........... 53 Executive Vice President, Chief Financial
Officer, Assistant Secretary and Director*
Ricky Chan .............. 45 Senior Vice President - Product Development
and Executive Vice President-Far East
Operations
Chris Collins ........... 35 Vice President-Sales
Maureen A. Flotard ...... 38 Vice President - Business Development
Daniel J. Kochenash ..... 39 Vice President - Corporate Operations
Y.B. Lee ................ 52 Senior Vice President - Far East and President
of Far East Operations
Eric R. Lohwasser ....... 42 Vice President - Finance**
Guy M. Lombardo ......... 53 Vice President and General Manager/East
Operations
Ron Miller .............. 38 Vice President - National Accounts
James O'Reardon ......... 54 Vice President - Administration
Lloyd Winkler ........... 49 Vice President of Marketing - Russ Baby
Dror Zoreff ............. 52 Vice President - International Operations
* Mr. Paul Cargotch, Executive Vice President and Chief Financial Officer of
the Company, and a Director, has resigned effective April 17, 1998. He will
not stand for re-election to the Board of Directors of the Company.
** Mr. Eric R. Lohwasser has also been elected Chief Financial Officer of the
Company effective April 17, 1998.
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Russell Berrie, the founder of the Company, has been Chairman of the Board and
Chief Executive Officer of the Company since its incorporation in 1966.
Arnold S. Bloom has been employed by the Company as Vice President, Secretary
and General Counsel for more than the past five years.
Paul Cargotch has been employed by the Company as Executive Vice President,
Chief Financial Officer and Assistant Secretary since July 1996. Prior to that,
Mr. Cargotch was Vice President-Finance and Chief Financial Officer for more
than the past five years. Mr. Cargotch has served as a Director of the Company
since July 1996.
Ricky Chan has been employed by the Company as Senior Vice President - Product
Development since July 1995. Prior to that, Mr. Chan was Vice President -
Creative Division since January 1991.
Chris Collins has been employed as Vice President of Sales since January 1997.
Prior thereto, Mr. Collins held various managerial positions within the
Company's salesforce for more than the past five years.
Maureen A. Flotard has been employed as Vice President of Business Development
since January 1998. Ms. Flotard was Corporate Controller since July 1996 and
prior thereto was Director of Financial Planning for more than the past five
years.
Daniel J. Kochenash has been employed by the Company as Vice President of
Corporate Operations since January 1998. Prior to that, Mr. Kochenash was
Director of Operations since June 1994. Prior to joining the Company, Mr.
Kochenash was Director of Distribution at Simon & Schuster, Inc. since 1990.
Y.B. Lee has been employed by the Company as President of Far East Operations
since October 1996. Prior to that, Mr. Lee was Senior Vice President-Far East
since August 1996 and Senior Vice President - Far East Plush Division for more
than the past five years.
Eric R. Lohwasser has been employed by the Company as Vice President - Finance
since July 1996. Mr. Lohwasser was Vice President - Controller since December
1995 and prior thereto was Corporate Controller for more than the past five
years.
Guy M. Lombardo has been employed by the Company as Vice President and General
Manager/East Operations since November 1997. Prior to that, Mr. Lombardo was
Vice President - Management Information Systems for more than the past five
years.
Ron Miller has been employed as Vice President of National Accounts since March
1998. Prior thereto, Mr. Miller held various managerial positions within the
Company's salesforce for more than the past five years.
Jim O'Reardon has been employed by the Company as Vice President of
Administration since September 1997. Prior to that, Mr. O'Reardon was Director
of Administration/ Internal Audit for more than the past five years.
Lloyd Winkler has been employed as Vice President of the Russ Baby Division
since March 1998. Prior to joining the Company, Mr. Winkler was President of the
Halsey Collection, which was a ladies apparel import company, since 1992.
Dror Zoreff has been employed as Vice President of International Operations
since March 1998. Prior to joining the Company, Mr. Zoreff was the Executive
Vice President at the College of Judea & Samaria since 1989.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
At December 31, 1997, the Company's Common Stock was held by approximately 549
shareholders of record. The Company's Common Stock has been traded on the New
York Stock Exchange since its initial public offering on March 29, 1984. The
following table sets forth the high and low sale prices on the New York Stock
Exchange Composite Tape for the calendar periods indicated, as furnished by the
New York Stock Exchange:
HIGH LOW
1997 ---- ---
- ----
First Quarter..................... $ 24 1/2 $ 17 5/8
Second Quarter.................... 23 7/8 18 7/8
Third Quarter..................... 30 3/4 21 1/4
Fourth Quarter.................... 31 9/16 24 5/8
1996
- ----
First Quarter..................... $ 17 5/8 $ 12 3/4
Second Quarter.................... 18 3/8 14 3/4
Third Quarter..................... 18 1/4 14 3/4
Fourth Quarter.................... 19 1/2 15 3/4
The Board of Directors declared its first dividend to holders of the Company's
Common Stock in November, 1986. Since then, a cash dividend has been paid
quarterly. The current quarterly rate is $.19 per share, effective February
1998. Prior to that the quarterly rate was $.17 per share since February 1997
and $.15 per share since February 1993. The Board of Directors will review its
dividend policy from time to time and declaration of dividends will remain
within its sole discretion.
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ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
(Dollars in Thousands, Except Per Share Data)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
SUMMARY OF OPERATIONS
Net Sales $271,336 $226,243 $213,918 $187,387 $266,458
Cost of Sales 119,769 105,018 101,059 93,127 118,300
Income (Loss) from Continuing
Operations Before
Income Taxes* 53,664 42,555 11,407 (5,157) 16,596
Provision (Benefit) for
Income Taxes on
Continuing Operations 16,399 15,856 3,933 (2,254) 4,049
Net Income (Loss) from
Continuing Operations 37,265 26,699 7,474 (2,903) 12,547
Net (Loss) Income from
Discontinued Operations (1,324) 4,978 9,066 8,230 635
Gain on Sale of Discontinued
Operations, Net of Taxes** 46,700 - - - -
Net Income 82,641 31,677 16,540 5,327 13,182
Net Income (Loss) Per Share
Continuing Operations
Basic....................... 1.69 1.23 .35 (.14) .58
Diluted..................... 1.67 1.22 .35 (.13) .58
Discontinued Operations
Basic....................... (.06) .23 .42 .39 .03
Diluted..................... (.06) .23 .42 .38 .03
Gain on Sale of Discontinued
Operations
Basic....................... 2.12 - - - -
Diluted..................... 2.08 - - - -
------- ------- ------- -------- -------
Total
Basic....................... 3.75 1.46 .77 .25 .61
Diluted..................... 3.69 1.45 .77 .25 .61
Dividends Per Share .68 .60 .60 .60 .60
BALANCE SHEET
Working Capital $286,358 $187,373 $158,462 $152,455 $178,001
Property, Plant and Equipment 21,287 21,765 23,464 24,319 27,741
Total Assets 353,445 276,966 251,397 242,151 255,884
Shareholders' Equity 316,786 248,726 222,996 218,388 224,034
STATISTICAL
Current Ratio 8.8 7.6 6.6 7.4 6.6
Return on Average
Shareholders' Equity 29.2% 13.4% 7.5% 2.4% 5.7%
Net Profit Margin 13.7% 11.8% 3.5% (1.5%) 4.7%
Number of Employees 1,554 1,580 1,752 1,772 2,089
* 1996 includes the gain on sale of Papel/Freelance, Inc. of approximately
$4,800,000 before tax or $3,000,000 ($0.14 per share) after tax and a
reversal of a litigation provision of $4,450,000 before tax or $2,800,000
($0.13 per share) after tax.
1993 includes a restructuring charge of $5.0 million.
** 1997 includes the gain on sale of Cap Toys, Inc. and OddzOn Products, Inc.
of $75,300,000 before tax or $46,700,000 ($2.12 per share) after tax.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF CONTINUING OPERATIONS - YEARS ENDED
DECEMBER 31, 1997 AND 1996
For the year ended December 31, 1997 the Company's net sales of $271,336,000
compares to net sales for the year ended December 31, 1996 of $226,243,000. This
represents an increase of 19.9%. This increase in net sales reflects the
positive customer response to the Company's redesign of its gift product line
focusing on coordinated themes of product offerings.
Cost of sales were 44.1% of net sales in 1997 compared to 46.4% of net sales in
1996. The decrease primarily reflects higher gross profit margins on sales of
certain of the Company's product line concepts during the year ended December
31, 1997.
Selling, general and administrative expense was $104,152,000 or 38.4% of net
sales for the year ended December 31, 1997 compared to $89,827,000 or 39.7% of
net sales in 1996, an increase of $14,325,000 or 15.9%. As a percent of net
sales, the decrease in selling, general and administrative expense can be
attributed to fixed costs which were absorbed by the increase in net sales.
Included in the selling, general and administrative expense for the year ended
December 31, 1997 is a provision of $1,500,000 for costs associated with closing
all of the Company's remaining retail operations. The year ended December 31,
1996 includes a provision of $900,000 related to costs associated with closing
certain of the Company's retail stores. Excluding these provisions, selling,
general and administrative expense increased $13,725,000 or 15.4% when compared
to the prior year. This increase can be primarily attributed to the increase in
expenses required to support the higher sales levels, in particular compensation
and travel costs associated with the salesforce.
Investment and other income of $6,249,000 for the year ended December 31, 1997
compares to $6,707,000 in 1996. Included in the results for the year ended
December 31, 1996 is a gain of approximately $4,800,000 before tax related to
the sale of the Company's Papel/Freelance, Inc. subsidiary. Excluding the gain,
investment and other income increased $4,342,000 which can be primarily
attributed to increased investment income relative to the Company's investment
portfolio resulting from higher investment balances as a result of the proceeds
from the sale of the Toy business segment.
The provision for income taxes as a percent of income before taxes for the year
ended December 31, 1997 was 30.6% compared to 37.3% in the prior year. This
decrease can be primarily attributed to decreases in tax liability on certain
foreign subsidiary income during the year ended December 31, 1997 and an advance
corporation tax refund relative to the Company's United Kingdom subsidiary.
Net income from continuing operations for the year ended December 31, 1997 of
$37,265,000 compares to net income from continuing operations of $26,699,000 in
1996. Included in the results for the year ended December 31, 1996 is the gain
on the sale of the Company's subsidiary Papel/Freelance, Inc., of $3,000,000
after tax and the reversal of a litigation provision of $2,800,000 after tax.
Excluding the gain and the litigation reversal, net income from continuing
operations increased $16,366,000 or 78.3%. This increase in net income can be
attributed to the increase in net sales, improved gross profit margins,
increased investment income and lower effective tax rate partially offset by the
increase in selling, general and administrative expense.
13
14
The Company maintains a direct salesforce and distribution network to serve its
customers in Europe and Canada. Product, sales and marketing strategies in these
foreign operations are similar to those in the Company's domestic operations.
Where the Company does not maintain a direct salesforce and distribution
network, the Company's products are sold worldwide through distributors. See
Note 16 of the Notes to Consolidated Financial Statements for more information
regarding geographic information.
RESULTS OF CONTINUING OPERATIONS - YEARS ENDED
DECEMBER 31, 1996 AND 1995
For the year ended December 31, 1996 the Company's net sales of $226,243,000
compares to net sales for the year ended December 31, 1995 of $213,918,000. This
represents an increase of 5.8%. The Company's gift products subsidiary
Papel/Freelance, Inc. was sold on January 17, 1996. Net sales excluding
Papel/Freelance, Inc. for the year ended December 31, 1996 was $225,328,000
compared to $183,253,000 for the year ended December 31, 1995, an increase of
$42,075,000 or 23.0%. This increase in net sales reflects the strong acceptance
of the Company's current gift product line. In December 1996 the Company, due to
the earlier consumer selling season for Easter 1997, sold approximately
$4,900,000, which represents a portion of its Easter seasonal merchandise sales.
Historically, sales of this product would not occur until January of the
following year.
Cost of sales were 46.4% of net sales in 1996 compared to 47.2% of net sales in
1995. This decrease can be attributed to the components of cost of sales that
are fixed costs which were absorbed by the higher sales volume in the year ended
December 31, 1996.
Selling, general and administrative expense was $89,827,000 or 39.7% of net
sales for the year ended December 31, 1996 compared to $103,184,000 or 48.2% of
net sales in 1995, a decrease of $13,357,000 or 12.9%. The decrease in selling,
general and administrative expense can be primarily attributable to the
elimination of the selling, general and administrative expense of the Company's
Papel/Freelance, Inc. subsidiary, which was sold in January, 1996. The decrease
in selling, general and administrative expense as a percent of net sales can be
attributed to fixed costs as they relate to the increase in net sales.
During the year ended December 31, 1996 the Company reversed a litigation
provision of $4,450,000 before tax or $2,800,000 after tax. This reversal was
due to a settlement of certain litigation for less than what was provided for in
the year ended December 31, 1992.
Investment and other income of $6,707,000 for the year ended December 31, 1996
compares to $1,732,000 in 1995. Included in the results for the year ended
December 31, 1996 is a gain of approximately $4,800,000 before tax related to
the sale of the Company's Papel/Freelance, Inc. subsidiary.
The provision for income taxes as a percent of income before taxes for the year
ended December 31, 1996 was 37.3% compared to 34.5% in the prior year. This
increase can be attributed to increases in tax liability on certain foreign
subsidiary income during the year ended December 31, 1996.
Net income from continuing operations for the year ended December 31, 1996 of
$26,699,000 compares to net income from continuing operations of $7,474,000 in
1995. This increase in net income can be attributed to the increase in net
sales, the decrease in selling, general and administrative expense, the gain on
the sale of the Company's subsidiary Papel/Freelance, Inc., of $3,000,000 after
tax and the reversal of a litigation provision of $2,800,000 after tax,
partially offset by the increase in the effective tax rate.
14
15
DISCONTINUED OPERATIONS
On May 2, 1997, the Company completed the sale of substantially all of the
assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products,
Inc., to a wholly-owned subsidiary of Hasbro, Inc. These two subsidiaries
represented the Company's Toy business segment. The operating results of the Toy
business segment have been classified as discontinued operations and the
financial statements have been restated to reflect this presentation.
The sale transaction resulted in a gain on the sale of discontinued operations
in the year ended December 31, 1997 of $75,300,000 before tax or $46,700,000
($2.12 per share) after tax.
Net sales of the Company's discontinued operations amounted to $38,614,000 for
the year ended December 31, 1997 compared to $151,380,000 for the year ended
December 31, 1996. Net loss from discontinued operations for the year ended
December 31, 1997 of $1,324,000 compares to net income of $4,978,000 in 1996.
YEAR 2000 COMPLIANCE
The Company has undertaken a project to implement a new packaged software system
for the global organization. This new enterprise-wide system will replace the
current custom software that the Company utilizes to operate its business. The
new enterprise software system is Year 2000 compliant.
The total cost of the project including hardware, packaged software and project
implementation is expected to be in excess of $10,000,000. Hardware, software
and certain project costs will be capitalized and amortized over their useful
lives. The remainder of the costs will be expensed as incurred.
The implementation is expected to be completed by the first quarter of 1999 for
the Company's domestic operations. The implementation for the remainder of the
Company's worldwide operation is expected to be completed by the fourth quarter
of 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents and marketable
securities of $202,001,000 compared to $52,257,000 at December 31, 1996.
On May 2, 1997, the Company sold substantially all of the assets of its
wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products, Inc. The sale
resulted in proceeds of $134,484,000, which represents the purchase price less
escrow balances and costs associated with the transaction. The Company intends
to use the proceeds of the sale of the Toy companies to pursue acquisitions of
companies within the gift industry and for general corporate purposes.
As of December 31, 1997, the Company had marketable securities of $108,558,000.
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. See Note 3 of the Notes to Consolidated
Financial Statements for more information regarding financial instruments.
15
16
The Company's portfolio of preferred securities investments are subject to
market fluctuations based largely, but not exclusively, on the securities'
sensitivity to changes in interest rates. By maintaining an economic hedge
consisting of government futures contracts and options, the Company seeks to
reduce interest rate related risk. The portfolio of preferred securities and
futures contracts and options position are intended to produce offsetting
capital gains and losses as interest rates change.
The Company has available $84,771,000 in bank lines of credit that provide for
direct borrowings and letters of credit used for the purchase of inventory. At
December 31, 1997, letters of credit of $14,521,000 were outstanding. There were
no direct borrowings under the bank lines of credit. Working capital
requirements during 1997 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.
The Company enters into forward exchange contracts and currency options,
principally to serve as economic hedges of the currency risk associated with the
purchase of inventory by its European and Canadian operations. Gains and losses,
related to contracts accounted for as hedges, are reported as a component of the
related transactions. The Company does not anticipate any material adverse
impact on its results of operations or financial position from these contracts.
During the year ended December 31, 1997, the Board of Directors authorized the
Company to repurchase an additional 1,000,000 shares of common stock for a total
authorization of 4,000,000 shares. As of December 31, 1997, 2,847,600 shares
have been repurchased since the beginning of the Company's stock repurchase
program in March, 1990.
Starting in 1997, the Company, as part of its repurchase program, utilizes put
and call option instruments to establish a strategy to purchase the Company's
stock with no upfront cash investment while fixing the price required to be paid
for the shares. These instruments took the form of a costless equity collar and
were constructed as a series of purchased calls and sold puts, with the cost of
the purchased calls exactly offset by the premium earned on the sold puts.
ITEM 7A. QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required for this item is incorporated on pages 15 and 16 of
the Management's Discussion and Analysis of Results of Operations and Financial
Condition of the Company's 1997 Annual Report.
16
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Russ Berrie and Company, Inc.:
We have audited the accompanying consolidated balance sheet of Russ Berrie and
Company, Inc. (a New Jersey Corporation) and subsidiaries as of December 31,
1997 and the related consolidated statements of income, shareholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Russ Berrie and Company, Inc.
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
January 30, 1998
17
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Russ Berrie and Company, Inc.:
We have audited the consolidated balance sheet of Russ Berrie and Company, Inc.
and subsidiaries (the "Company") as of December 31, 1996 and 1995 and the
related consolidated statements of income, shareholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Russ Berrie and
Company, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Parsippany, New Jersey
January 31, 1997
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19
Quarterly Financial Information (Unaudited)
The following selected financial data for the eight quarters ended December 31,
1997 are derived from unaudited financial statements and include, in the opinion
of management, all adjustments of a normal recurring nature necessary for fair
presentation of the results for the interim periods presented. The quarter ended
June 30, 1997 includes the gain on sale of discontinued operations of
$75,300,000 before tax or $46,700,000 ($2.12 per share) after tax. The quarter
ended March 31, 1996 includes the gain on the sale of Papel/Freelance, Inc. of
approximately $4,800,000 before tax or $3,000,000 ($0.14 per share) after tax.
The quarter ended September 30, 1996 includes the reversal of a litigation
provision of $4,450,000 before tax or $2,800,000 ($0.13 per share) after tax.
For Quarters Ended
(Dollars in Thousands, Except Per Share Data)
March 31, June 30, September 30, December 31,
1997 --------- -------- ------------- ------------
Net sales.................. $62,071 $58,479 $87,530 $63,256
Gross profit............... 34,607 32,071 50,055 34,834
Net income from
continuing operations.... 6,471 4,788 16,041 9,965
Net (loss) from
discontinued operations.. (259) (1,065) - -
Gain on sale of
discontinued operations.. - 46,700 - -
------ ------ ------ ------
Net income................. $ 6,212 $50,423 $16,041 $ 9,965
====== ====== ====== ======
Net income (loss) per share
Continuing operations
Basic............... $ .29 $ .22 $ .73 $ .45
Diluted............. .29 .21 .72 .45
Discontinued operations
Basic............... (.01) (.05) - -
Diluted............. (.01) (.05) - -
Gain on sale of
discontinued operations
Basic............... - 2.12 - -
Diluted............. - 2.08 - -
------ ------ ------ ------
Total
Basic............... $ .28 $ 2.29 $ .73 $ .45
====== ====== ====== ======
Diluted............. $ .28 $ 2.24 $ .72 $ .45
====== ====== ====== ======
1996
Net sales.................. $56,566 $41,776 $67,906 $59,995
Gross profit............... 30,364 22,129 37,579 31,153
Net income from
continuing operations.... 6,915 1,144 13,515 5,125
Net income from
discontinued operations.. 681 326 2,723 1,248
------ ------ ------ ------
Net income................. $ 7,596 $ 1,470 $16,238 $ 6,373
====== ====== ====== ======
Net income per share
Continuing operations
Basic............... $ .32 $ .05 $ .62 $ .24
Diluted............. .32 .05 .62 .23
Discontinued operations..
Basic............... .03 .02 .13 .05
Diluted............. .03 .02 .13 .05
------ ------ ------ ------
Total
Basic............... $ .35 $ .07 $ .75 $ .29
====== ====== ====== ======
Diluted............. $ .35 $ .07 $ .75 $ .28
====== ====== ====== ======
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20
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31
(Dollars in Thousands, Except Per Share Data)
1997 1996 1995
-------- -------- --------
Net sales ................................... $271,336 $226,243 $213,918
Cost of sales................................ 119,769 105,018 101,059
------- ------- -------
Gross profit.............................. 151,567 121,225 112,859
Selling, general and administrative expense.. 104,152 89,827 103,184
Litigation .................................. - (4,450) -
Investment and other income-net.............. (6,249) (6,707) (1,732)
------- ------- -------
Income from continuing operations
before taxes............................ 53,664 42,555 11,407
Provision for income taxes
on continuing operations.................. 16,399 15,856 3,933
------- ------- -------
Net income from continuing operations..... 37,265 26,699 7,474
Net income (loss) from discontinued
operations.............................. (1,324) 4,978 9,066
Gain on sale of discontinued operations,
net of taxes............................ 46,700 - -
------- ------- -------
Net income................................ $ 82,641 $ 31,677 $ 16,540
======= ======= =======
Net income (loss) per share
Continuing operations
Basic................................... $ 1.69 $ 1.23 $ .35
Diluted................................. 1.67 1.22 .35
Discontinued operations
Basic................................... (.06) .23 .42
Diluted................................. (.06) .23 .42
Gain on sale of discontinued operations
Basic................................... 2.12 - -
Diluted................................. 2.08 - -
------- ------- -------
Total
Basic.............................. $ 3.75 $ 1.46 $ .77
======= ======= =======
Diluted............................ $ 3.69 $ 1.45 $ .77
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
20
21
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
Net
Unrealized
Additional Foreign Gain on
Common Paid Retained Currency Marketable Treasury
Stock In Capital Earnings Translation Securities Stock
------ ---------- -------- ----------- ---------- --------
Balance at December 31, 1994..... $2,395 $37,875 $218,103 $(2,128) - $(37,857)
Net income....................... - - 16,540 - - -
Share transactions under
stock option plans (57,668 shares) 6 771 - - - -
Cash dividends ($.60 per share).. - - (12,921) - - -
Foreign currency
translation adjustment......... - - - 212 - -
----- ------ ------- ------ -- -------
Balance at December 31, 1995..... 2,401 38,646 221,722 (1,916) - (37,857)
Net income....................... - - 31,677 - - -
Share transactions under
stock option plans (322,754 shares) 32 4,634 - - - -
Cash dividends ($.60 per share).. - - (13,026) - - -
Foreign currency
translation adjustment......... - - - 2,413 - -
----- ------ ------- ------ -- -------
Balance at December 31, 1996..... 2,433 43,280 240,373 497 - (37,857)
Net income....................... - - 82,641 - - -
Share transactions under
stock option plans (592,517 shares) 60 9,904 - - - -
Cash dividends ($.68 per share).. - - (14,986) - - -
Foreign currency
translation adjustment......... - - - (1,595) - -
Net unrealized gain on securities
available-for-sale............. - - - - 99 -
Transactions in treasury shares
(398,900 shares)............... - - - - - (8,063)
----- ------ ------- ------ -- -------
Balance at December 31, 1997..... $2,493 $53,184 $308,028 $(1,098) $99 $(45,920)
===== ====== ======= ====== == =======
The accompanying notes are an integral part of the consolidated financial
statements.
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22
CONSOLIDATED BALANCE SHEET AT DECEMBER 31
(Dollars in Thousands)
ASSETS 1997 1996
- ------- -------- --------
Current assets
Cash and cash equivalents........................... $ 93,443 $ 52,257
Marketable securities............................... 108,558 -
Accounts receivable, trade, less allowances of
$2,233 in 1997 and $2,258 in 1996................ 52,743 49,355
Inventories - net................................... 50,204 54,350
Prepaid expenses and other current assets........... 8,980 2,558
Deferred income taxes............................... 9,089 9,707
Net current assets of discontinued operations....... - 47,386
------- -------
Total current assets......................... 323,017 215,613
Property, plant and equipment - net................... 21,287 21,765
Other assets.......................................... 9,141 2,948
Net assets of discontinued operations................. - 36,640
------- -------
Total assets................................. $353,445 $276,966
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable.................................... $ 4,471 $ 3,709
Accrued expenses.................................... 22,423 18,776
Accrued income taxes................................ 9,765 5,755
------- -------
Total current liabilities.................... 36,659 28,240
Commitments and contingencies
Shareholders' equity
Common stock: $.10 stated value; authorized
50,000,000 shares; issued 1997, 24,926,469
shares; 1996, 24,333,952 shares................... 2,493 2,433
Additional paid in capital.......................... 53,184 43,280
Retained earnings................................... 308,028 240,373
Foreign currency translation adjustments............ (1,098) 497
Net unrealized gain on securities available-for-sale 99 -
Treasury stock, at cost (2,853,714 shares at
December 31, 1997 and 2,454,814 shares at
December 31, 1996)................................ (45,920) (37,857)
------- -------
Total shareholders' equity................... 316,786 248,726
------- -------
Total liabilities and shareholders' equity... $353,445 $276,966
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(Dollars in Thousands)
Cash flows from continuing operating activities: 1997 1996 1995
------- ------- -------
Net income $82,641 $31,677 $16,540
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Net loss (income) - discontinued operations..... 1,324 (4,978) (9,066)
Gain on sale of discontinued operations......... (46,700) - -
Gain on sale of subsidiary...................... - (4,800) -
Depreciation.................................... 2,846 3,220 3,775
Amortization of intangible assets............... 149 155 534
Provision for accounts receivable reserves...... 2,272 1,115 1,156
Deferred income taxes........................... 618 3,469 (202)
Net loss from sale or disposal of fixed assets.. 410 828 303
Changes in assets and liabilities, net of effect
of acquisitions and dispositions:
Accounts receivable......................... (5,660) (14,109) (6,956)
Inventories - net........................... 4,146 1,359 (7,266)
Prepaid expenses and other current assets... (109) 563 1,091
Other assets................................ (42) 303 436
Accounts payable............................ 762 536 (18)
Accrued expenses............................ 3,647 (4,690) 3,404
Accrued income taxes........................ 4,010 4,360 1,251
------ ------ ------
Total adjustments......................... (32,327) (12,669) (11,558)
------ ------ ------
Net cash provided by continuing
operating activities................. 50,314 19,008 4,982
Cash flows from investing activities:
Purchase of marketable securities................... (226,379) - -
Proceeds from sale of marketable securities......... 117,920 - 5,203
Proceeds from sale of fixed assets.................. 1,116 214 605
Capital expenditures................................ (4,293) (1,791) (3,828)
Acquisitions........................................ - - (3,352)
Net proceeds from sale of subsidiary................ - 18,325 -
Net proceeds from sale of discontinued operations... 134,484 - -
------- ------ ------
Net cash provided by (used in)
investing activities................. 22,848 16,748 (1,372)
Cash flows from financing activities:
Proceeds from issuance of common stock.............. 9,964 4,666 777
Dividends paid to shareholders...................... (14,986) (13,026) (12,921)
Purchase of treasury stock.......................... (8,063) - -
------ ------ ------
Net cash (used in) financing
activities........................... (13,085) (8,360) (12,144)
Effect of exchange rates............................ (1,196) 1,441 213
Cash (used in) provided by discontinued operations.. (17,695) (12,382) 1,886
------ ------ ------
Net increase (decrease) in cash and
cash equivalents.................................. 41,186 16,455 (6,435)
Cash and cash equivalents at beginning of year...... 52,257 35,802 42,237
------ ------ ------
Cash and cash equivalents at end of year............ $93,443 $52,257 $35,802
====== ====== ======
Cash paid during the year for:
Interest...................................... $ 197 $ 130 $ 284
Income taxes.................................. $33,882 $12,584 $10,380
The accompanying notes are an integral part of the consolidated financial
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business
Russ Berrie and Company, Inc. and its subsidiaries design, manufacture through
third parties and market a wide variety of gift products to retail stores
throughout the United States and countries throughout the world.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Russ Berrie and
Company, Inc. and its wholly-owned subsidiaries (collectively, the "Company")
after elimination of intercompany accounts and transactions.
Discontinued Operations
The Notes to these consolidated financial statements reflect the continuing
operations of the Company unless otherwise stated or indicated.
Revenue Recognition
The Company recognizes revenue from product sales, net of provisions for sales
discounts, returns and allowances, upon shipment of product to the customer.
Advertising Costs
Production costs for advertising are charged to operations in the year the
related advertising campaign begins. All other advertising costs are charged to
operations during the year in which they are incurred. Advertising costs for the
years ended December 31, 1997, 1996 and 1995 amounted to $2,112,000, $1,327,000
and $2,072,000, respectively.
Cash and Cash Equivalents
Cash equivalents consist of investments in interest bearing accounts and highly
liquid securities having a maturity of three months or less and approximate fair
market value.
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25
Inventories
Inventories, which mainly consist of finished goods, are stated at the lower of
cost (first-in, first-out) or market value.
Property
Property, plant and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives which range from three to
eighteen years. Leasehold improvements are amortized using the straight-line
method over the term of the respective lease or asset life, whichever is
shorter. Major improvements are capitalized, while expenditures for maintenance
and repairs are charged to operations as incurred. Gain or loss on retirement or
disposal of individual assets is recorded as income or expense in the period
incurred.
Goodwill and Other Intangible Assets
Included in other assets is goodwill, which represents the excess of purchase
price of acquired assets over the fair market value of net assets acquired.
Goodwill is being amortized using the straight-line method over fifteen years or
less. The Company evaluates the recoverability of goodwill based upon estimated
future income and cash flows of operating entities. Impairments would be
recognized in operating results to the extent that carrying value exceeds fair
value. Other intangible assets acquired are being amortized over the period for
which benefit is derived, which ranges from three to five years. Goodwill and
other intangible assets, net of accumulated amortization, was $620,000 and
$774,000 at December 31, 1997 and 1996, respectively. Accumulated amortization
amounted to $2,227,000 and $3,025,000 at December 31, 1997 and 1996,
respectively.
Foreign Currency Translation
Aggregate foreign exchange gains or losses resulting from the translation of
foreign subsidiaries' financial statements, for which the local currency is the
functional currency, are recorded as a separate component of shareholders'
equity. Gains and losses from foreign currency transactions are included in
investment and other income - net (See Note 8).
Accounting for Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Earnings Per Share
The Notes to these consolidated financial statements reflect basic earnings per
share unless otherwise stated or indicated. See Note 10 for more information
regarding earnings per share.
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
25
26
Note 3 - Financial Instruments
Marketable Securities
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company's marketable securities are considered available-for-sale investments.
Accordingly, these investments are carried in the accompanying balance sheet at
market value, with the difference between cost and market value recorded as a
component of shareholders' equity, net of tax. Marketable securities are
composed primarily of government fixed income securities. Additionally, included
in marketable securities is a diversified portfolio of investment grade
preferred securities.
Interest Rate Futures Contracts and Options
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's position of preferred
securities and futures contracts and options are intended to produce offsetting
capital gains and losses as interest rates change. The market value of these
instruments is reported in marketable securities with unrealized gains and
losses recorded as part of shareholders' equity.
As of December 31, 1997, marketable securities consist of the following:
Unrealized
Cost Gains (Losses) Market Value
------------- ------------- -------------
U.S. Government obligations $ 4,506,000 $ 34,000 $ 4,540,000
Municipal obligations 94,489,000 141,000 94,630,000
Preferred stock 9,151,000 34,000 9,185,000
Futures contracts and options 11,000 (110,000) (99,000)
Other 302,000 -- 302,000
------------- ------------- -------------
Total marketable securities $ 108,459,000 $ 99,000 $ 108,558,000
============= ============= =============
Unrealized gains and losses with respect to available-for-sale investments are
recorded, net of tax, in shareholders' equity. Realized gains and losses on
sales of investments, as determined on a specific identification basis, are
included in the consolidated statement of income.
Foreign Currency Contracts
The Company enters into forward exchange contracts, principally to serve as
economic hedges of the currency risk associated with the purchase of inventory
by its United Kingdom and Canadian subsidiaries. Gains and losses related to
contracts accounted for as hedges are reported as a component of the related
transactions. The Company does not trade in foreign currency contracts to
achieve short-term gains. At December 31, 1997 and 1996, the aggregate notional
amount of foreign exchange contracts was $5,800,000 and $12,000,000,
respectively. At December 31, 1997 and 1996, there were no carrying amounts
related to foreign currency contracts in the consolidated balance sheet.
26
27
At December 31, 1997, the Company's forward exchange contracts have expiration
dates which range from one to seven months. The estimated fair value of the
notional amount of the Company's forward exchange contracts based on quoted
rates as of December 31, 1997 and 1996 were $5,705,000 and $11,327,000,
respectively. The Company does not anticipate any material adverse impact on its
results of operations or financial position from these contracts.
Concentrations of Credit Risk
As part of its ongoing control procedures, the Company monitors concentrations
of credit risk associated with financial institutions with which it conducts
business. The Company avoids concentration with any single financial
institution. As of December 31, 1997, marketable securities of the Company were
actively managed by four investment managers. These investment managers operate
under guidelines which restrict the investment grade and type of investment and
furthermore limit the dollar amount that can be invested in any one instrument.
The Company also monitors the creditworthiness of its customers to which it
grants credit terms in the normal course of business. Concentrations of credit
risk associated with these trade receivables are considered minimal due to the
Company's diverse customer base. The Company does not normally require
collateral or other security to support credit sales.
Note 4 - Inventory Reserves
As of December 31, 1997 and 1996, the Company has recorded reserves to reflect
inventories at their estimated net realizable value. Management believes that
such inventories are fairly stated. The reserve balance as of December 31, 1997
and 1996 was $15,292,000 and $17,132,000, respectively.
Note 5 - Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31,
1997 1996
----------- -----------
Land......................... $ 6,199,000 $ 6,292,000
Buildings.................... 9,772,000 10,471,000
Machinery and equipment...... 18,137,000 19,754,000
Furniture and fixtures....... 4,156,000 5,106,000
Leasehold improvements....... 7,916,000 7,025,000
---------- ----------
46,180,000 48,648,000
Less accumulated depreciation
and amortization........... 24,893,000 26,883,000
---------- ----------
$21,287,000 $21,765,000
========== ==========
Note 6 - Lines of Credit
Under its existing domestic bank lines of credit, which are renewed annually,
the Company has available $70,000,000 for direct borrowings and letters of
credit at any one time.
The maximum amount available to the Company's foreign operations at December 31,
1997, under local lines of credit, is $14,771,000. These lines provide for
direct borrowings, letters of credit and overdraft facilities.
27
28
In connection with the purchase of imported merchandise, the Company, at
December 31, 1997, had letters of credit outstanding under all lines of
$14,521,000.
Note 7 - Accrued Expenses
Accrued expenses consist of the following:
December 31,
1997 1996
----------- -----------
Accrued sales commissions.......... $ 3,310,000 $ 2,923,000
Accrued litigation................. 1,250,000 1,250,000
Accrued payroll and incentive
compensation..................... 3,546,000 3,507,000
Accrued future lease obligations... 755,000 2,205,000
Accruals relating to discontinued
operations....................... 5,041,000 -
Other.............................. 8,521,000 8,891,000
---------- ----------
$22,423,000 $18,776,000
========== ==========
Note 8 - Investment and Other Income - Net
The significant components of investment and other income - net consist of the
following:
Years Ended December 31,
1997 1996 1995
---------- ---------- ----------
Investment income.............. $6,866,000 $2,210,000 $1,887,000
Interest expense............... (175,000) (121,000) (225,000)
Foreign currency transactions.. (722,000) (391,000) (73,000)
Gain on sale of subsidiary..... - 4,800,000 -
Other.......................... 280,000 209,000 143,000
--------- --------- ---------
$6,249,000 $6,707,000 $1,732,000
========= ========= =========
On January 17, 1996, the Company completed the sale of its subsidiary
Papel/Freelance, Inc. The sale resulted in a gain of approximately $4,800,000
before tax, or $3,000,000 ($0.14 per share) after tax, which was recognized in
the first quarter of 1996. An additional $2,000,000 before tax, relating to a
transitional agreement, will be received and recognized as income contingent
upon satisfaction of the terms of the agreement.
Note 9 - Income Taxes
The Company and its domestic subsidiaries file a consolidated Federal income tax
return.
Income from continuing operations before income taxes was:
Years Ended December 31,
1997 1996 1995
----------- ----------- -----------
United States $38,330,000 $29,376,000 $ 4,069,000
Foreign 15,334,000 13,179,000 7,338,000
---------- ---------- ----------
$53,664,000 $42,555,000 $11,407,000
========== ========== ==========
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29
The provision for income taxes consists of the following:
Years Ended December 31,
Current provision: 1997 1996 1995
----------- ----------- ----------
Federal............... $10,870,000 $ 8,640,000 $2,607,000
Foreign............... 4,353,000 3,003,000 1,007,000
State................. 558,000 744,000 521,000
---------- ---------- ---------
$15,781,000 $12,387,000 $4,135,000
Deferred provision:
Federal............... $ 618,000 $ 3,406,000 $ (299,000)
Foreign............... - 63,000 97,000
State................. - - -
---------- ---------- ---------
618,000 3,469,000 (202,000)
---------- ---------- ---------
$16,399,000 $15,856,000 $3,933,000
========== ========== =========
A reconciliation of the provision for income taxes with amounts computed at the
statutory Federal rate is shown below:
Years Ended December 31,
1997 1996 1995
----------- ----------- ----------
Tax at U.S. Federal statutory rate.. $18,782,000 $14,895,000 $3,993,000
State income tax net of Federal
tax benefit....................... 363,000 610,000 149,000
Foreign rate differences............ (1,014,000) 1,011,000 49,000
Charitable contributions............ (1,331,000) (686,000) -
Tax advantaged investment income.... (1,344,000) (279,000) (173,000)
U.K. advance corporation tax refund. (1,660,000) - -
Change in valuation allowance....... (765,000) (205,000) 164,000
Adjustment of estimated liabilities. 1,950,000 271,000 -
Other, net.......................... 1,418,000 239,000 (249,000)
---------- ---------- ---------
$16,399,000 $15,856,000 $3,933,000
========== ========== =========
The Company had a valuation allowance at December 31, 1997 and 1996 of
$1,219,000 and $1,984,000, respectively (primarily relating to deferred state
income taxes) to reflect the estimated amount of deferred tax assets which may
not be realized.
The components of the net deferred tax asset, net of the valuation allowance,
resulting from temporary differences between accounting for financial and tax
reporting purposes were as follows:
December 31,
1997 1996
---------- ----------
Assets:
Inventory capitalization................ $1,972,000 $2,470,000
Reserves not deducted for tax purposes.. 5,756,000 5,213,000
Accrued future lease obligations........ 329,000 723,000
Litigation.............................. 498,000 556,000
Depreciation............................ 21,000 -
Other................................... 513,000 762,000
--------- ---------
9,089,000 9,724,000
Liabilities:
Depreciation............................ - 17,000
--------- ---------
Net deferred tax asset.................. $9,089,000 $9,707,000
========= =========
Provisions are made for estimated United States and foreign income taxes, less
available tax credits and deductions, which may be incurred on the remittance of
foreign subsidiaries' undistributed earnings less those earnings deemed to be
permanently reinvested. The amount of such earnings deemed permanently
reinvested was approximately $49,659,000 as of December 31, 1997. Determination
of the net amount of unrecognized deferred tax liability with respect to these
earnings is not practicable.
29
30
Note 10 - Earnings Per Share
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which requires presentation
in the Consolidated Statement of Income of both basic and diluted earnings per
share. Earnings per common share (basic) as calculated in accordance with this
Statement does not differ from earnings per share reported in prior periods.
A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution follows:
Years Ended December 31,
1997 1996 1995
---------- ---------- ----------
Average common shares outstanding............... 22,026,059 21,697,674 21,533,402
Dilutive effect of common shares issuable (1)... 351,047 156,447 37,476
---------- ---------- ----------
Average common shares outstanding
assuming dilution............................. 22,377,106 21,854,121 21,570,878
========== ========== ==========
(1) Issuable under stock option plans.
Stock options outstanding at December 31, 1996 and 1995 to purchase 78,500 and
860,500 shares, respectively, 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
during the respective years.
Note 11 - Related Party Transactions
Certain buildings, referred to in Note 12, are leased from Russell Berrie, the
Company's majority shareholder, or entities owned or controlled by him. Rentals
under these leases for the years ended December 31, 1997, 1996 and 1995 were
$4,122,000, $4,042,000 and $4,042,000, respectively. The Company is also a
guarantor under two mortgages for property so leased with a principal amount
aggregating approximately $8,068,000 as of December 31, 1997, $2,000,000 of
which is collateralized by assets of the Company.
The Company also leased a facility from a partnership in which a director of the
Company is a general partner. Annual rentals under this lease agreement for the
years ended December 31, 1997, 1996 and 1995 were $830,000, $996,000 and
$996,000, respectively. As of December 31, 1996 the lease obligation was
included in accrued future lease obligations (See Note 7).
The Company paid to an investment banking firm, of which a Director of the
Company is a Vice Chairman, fees with regard to the sale of the Toy business
segment (See Note 18). The total amount of transaction fees paid during the year
ended December 31, 1997 amounted to $1,632,000.
30
31
Note 12 - Leases
At December 31, 1997, the Company and its subsidiaries are obligated under
operating lease agreements (principally for buildings and other leased
facilities) for remaining lease terms ranging from one to seventeen years.
Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted to
$6,415,000, $6,834,000 and $7,479,000, respectively.
The approximate aggregate minimum future rental payments as of December 31, 1997
under operating leases are as follows:
1998................... 6,044,000
1999................... 4,339,000
2000................... 3,078,000
2001................... 2,749,000
2002................... 2,430,000
Thereafter............. 4,703,000
Note 13 - Stock Repurchase Program
During the year ended December 31, 1997, the Board of Directors authorized the
Company to repurchase an additional 1,000,000 shares of common stock for a total
authorization of 4,000,000 shares. As of December 31, 1997, 2,847,600 shares
have been repurchased since the beginning of the Company's stock repurchase
program in March, 1990.
Starting in 1997, the Company, as part of its repurchase program, utilizes put
and call option instruments to establish a strategy to purchase the Company's
stock with no upfront cash investment while fixing the price required to be paid
for the shares. These instruments took the form of a costless equity collar and
were constructed as a series of purchased calls and sold puts, with the cost of
the purchased calls exactly offset by the premium earned on the sold puts. As of
December 31, 1997, the Company has call options to purchase 67,500 shares at an
average price of $22.01. The Company has sold put options covering 135,000
shares at an average price of $21.02. The term of these options expire over a
period of one year. The net fair value of these instruments as of December 31,
1997 is $289,000. The put and call options did not have a dilutive effect on
earnings per share.
Unrealized gains or losses during the term of these options have no impact on
the consolidated financial position of the Company. Upon exercise or expiration
of the options, the transaction will be recorded within shareholders' equity.
31
32
Note 14 - Stock Option and Employee Stock Purchase Plans
The Company has three Stock Option Plans and an Employee Stock Purchase Plan. As
of December 31, 1997, there were 2,769,794 shares of common stock reserved for
issuance under all stock plans. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the stock plans. Had compensation cost for the Company's three
Stock Option Plans and Employee Stock Purchase Plan been determined based on the
fair value at the grant date for the awards in 1997, 1996 and 1995 consistent
with the provisions of SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
Years Ended December 31,
1997 1996 1995
----------- ----------- -----------
Net income - as reported $82,641,000 $31,677,000 $16,540,000
Net income - pro forma $82,091,000 $30,951,000 $16,008,000
Earnings per share (basic) - as reported $3.75 $1.46 $.77
Earnings per share (basic) - pro forma $3.73 $1.43 $.74
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
all grants:
Years Ended December 31,
1997 1996 1995
------- ------- -------
Dividend yield ......................... 3.68% 3.75% 3.75%
Risk-free interest rate ................ 6.05% 6.05% 6.05%
Volatility ............................. 37.32% 32.09% 32.09%
Expected life (years) .................. 3.1 3.5 3.5
The fair value of each option granted under the Employee Stock Purchase Plan is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for all grants:
Years Ended December 31,
1997 1996 1995
------- ------- -------
Dividend yield ......................... 3.68% 3.75% 3.75%
Risk-free interest rate ................ 5.63% 5.44% 5.44%
Volatility ............................. 37.32% 32.09% 32.09%
Expected life (years) .................. 1.0 1.0 1.0
32
33
The option price for all stock option plans is equal to the closing price of the
Company's common stock as of the date the option is granted. All stock options
vest one year from the grant date. Options expire 10 years from the date of
grant. Information regarding these option plans for 1997, 1996 and 1995 is as
follows:
All Stock Option Plans
----------------------
Weighted
Average
Shares Exercise Price
------ --------------
Outstanding as of December 31, 1994........... 1,117,426 15.774
Options Granted............................... 277,186 13.750
Options Exercised............................. (38,566) 12.386
Options Cancelled............................. (105,863) 16.137
--------
Outstanding as of December 31, 1995........... 1,250,183 15.401
Options Granted............................... 360,547 13.625
Options Exercised............................. (314,476) 13.549
Options Cancelled............................. (127,478) 15.965
--------
Outstanding as of December 31, 1996........... 1,168,776 15.291
Options Granted............................... 323,852 18.500
Options Exercised............................. (565,016) 14.406
Options Cancelled............................. (165,319) 19.212
--------
Outstanding as of December 31, 1997........... 762,293 16.577
========
Option price range at December 31, 1997....... $9.59 to $18.50
Option price range for exercised shares....... $9.59 to $18.50
Options available for grant and reserved
for future issuance at December 31, 1997... 2,678,023
The weighted-average fair value of options granted, on a per share basis, during
the years 1997, 1996 and 1995 was $4.70, $3.19 and $3.22, respectively.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Number Weighted Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$14.250 2,850 Expire 1-1-98 $14.250 2,850 $14.250
12.670 3,687 1 year 12.670 3,687 12.670
10.090 4,250 2 years 10.090 4,250 10.090
9.590 4,858 3 years 9.590 4,858 9.590
12.500 15,146 4 years 12.500 15,146 12.500
17.670 217,715 5 years 17.670 217,715 17.670
14.875 96,821 6 years 14.875 96,821 14.875
13.750 68,363 7 years 13.750 68,363 13.750
13.625 83,329 8 years 13.625 83,329 13.625
18.500 265,274 9 years 18.500 0 18.500
------- -------
762,293 497,019
======= =======
33
34
Under the Employee Stock Purchase Plan, the purchase price is 90% of the closing
market price of the stock on the first business day of the Plan year.
Information regarding the Employee Stock Purchase Plan for 1997, 1996 and 1995
is as follows:
Employee Stock Purchase Plan
----------------------------
1997 1996 1995
-------- -------- --------
Exercise Price $16.65 $12.26 $12.38
Shares Issued 22,780 23,117 7,351
As of December 31, 1997, the Employee Stock Purchase Plan has 91,771 shares
reserved for future issuance.
Note 15 - 401(k) Plan
The Company maintains a 401(k) Plan to which employees may, up to certain
prescribed limits, contribute a portion of their compensation to the 401(k) Plan
and a portion of these contributions is matched by the Company. The provision
for contributions charged to operations for the years ended December 31, 1997,
1996 and 1995 was $737,000, $583,000 and $523,000, respectively.
Note 16 - Geographic Information
The Company's continuing operations comprise one business segment. Financial
data by geographic area are presented below:
1997 1996 1995
------------ ------------ ------------
Revenues:
United States............ $200,664,000 $163,906,000 $157,351,000
Europe................... 34,611,000 30,571,000 29,698,000
Other.................... 36,061,000 31,766,000 26,869,000
----------- ----------- -----------
Total.................. $271,336,000 $226,243,000 $213,918,000
=========== =========== ===========
Net Income:
United States............ $ 26,284,000 $ 18,588,000 $ 2,753,000
Europe................... 2,890,000 2,294,000 652,000
Other.................... 8,091,000 5,817,000 4,069,000
----------- ----------- -----------
Total.................. $ 37,265,000 $ 26,699,000 $ 7,474,000
=========== =========== ===========
Identifiable Assets:
United States............ $290,413,000 $121,360,000 $121,878,000
Europe................... 30,438,000 33,955,000 29,153,000
Other.................... 32,594,000 37,625,000 33,700,000
----------- ----------- -----------
Total.................. $353,445,000 $192,940,000 $184,731,000
=========== =========== ===========
Export sales to customers from the United States are not material.
34
35
Note 17 - Litigation
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
results of operations, the financial position or the cash flows of the Company.
Included in income for the year ended December 31, 1996 is a reversal of a
litigation provision of $4,450,000 before tax. This reversal was due to a
settlement of certain litigation.
Note 18 - Discontinued Operations
On May 2, 1997, the Company completed the sale of substantially all of the
assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products,
Inc., to a wholly-owned subsidiary of Hasbro, Inc. These two subsidiaries
represented the Company's Toy business segment. The Toy business segment is
reported as discontinued operations for the years ended December 31, 1997, 1996
and 1995. The sale transaction resulted in a gain on the sale of discontinued
operations in the year ended December 31, 1997 of $75,300,000 before tax or
$46,700,000 ($2.12 per share) after tax. The Company believes it has adequately
provided for any accruals related to discontinued operations.
Amounts included in net (loss) income from discontinued operations for the Toy
business segment for the years ended December 31 were as follows:
1997 1996 1995
------------ ------------ ------------
Net sales $ 38,614,000 $151,380,000 $134,556,000
(Loss) income before taxes (2,483,000) 7,804,000 14,166,000
(Benefit) provision for
income taxes (1,159,000) 2,826,000 5,100,000
------------ ------------ ------------
Net (loss) income $ (1,324,000) $ 4,978,000 $ 9,066,000
============ ============ ============
Advertising costs for discontinued operations for the years ended December 31,
1997, 1996 and 1995 amounted to $4,336,000, $27,683,000 and $15,219,000,
respectively.
Amortization costs related to intangible assets for the years ended December 31,
1997, 1996 and 1995 amounted to $851,000, $2,512,000 and $2,497,000,
respectively.
Assets and liabilities of the Toy business segment, reported as net assets of
discontinued operations at December 31, 1996 were as follows:
1996
------------
Accounts receivable, net $ 34,432,000
Inventory 21,126,000
Other current assets 6,397,000
Current liabilities (14,569,000)
------------
Net current assets of discontinued operations 47,386,000
Property, plant and equipment, net 1,855,000
Goodwill and other intangible assets-net 30,577,000
Other assets 4,208,000
------------
Net assets of discontinued operations 36,640,000
------------
Total net assets of discontinued operations $ 84,026,000
============
35
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Changes in Registrant's Certifying Accountant
The registrant has dismissed the accounting firm of Coopers & Lybrand L.L.P. of
Parsippany, New Jersey and has engaged the accounting firm of Arthur Andersen
LLP of Roseland, New Jersey as their principal independent accounting firm,
effective August 21, 1997. In accordance with applicable Securities and Exchange
Commission regulations, such dismissal was reported in the Company's filing on
Form 8-K on August 21, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Information relating to this item appears under the caption "ELECTION OF
DIRECTORS" on pages 1 and 2 and "SECTION 16 COMPLIANCE" on pages 15 and 16 of
the 1998 Proxy Statement, which is incorporated herein by reference and under
the caption "EXECUTIVE OFFICERS OF THE REGISTRANT" on pages 9 and 10 of this
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to this item appears under the caption "THE BOARD OF
DIRECTORS AND COMMITTEES OF THE BOARD" on page 3, "DIRECTOR COMPENSATION" on
pages 3 and 4, "EXECUTIVE COMPENSATION" on pages 11 through 13 and "COMPENSATION
COMMITTEE REPORT" on pages 5 and 6 in the 1998 Proxy Statement, which are
incorporated herein by reference.
36
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information relating to this item appears under the captions "SECURITY OWNERSHIP
OF MANAGEMENT" on pages 8 and 9 and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS" on pages 9 and 10 of the 1998 Proxy Statement, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Information relating to this item appears under the captions "EXECUTIVE
COMPENSATION" on pages 11 through 13, "CERTAIN TRANSACTIONS" on pages 14 and 15
and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" on page 6 of
the 1998 Proxy Statement, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K
(a) Documents filed as part of this Report.
1. Financial Statements:
Page Number in this
Report
Report of Independent Public Accountants - 1997....... 17
Report of Independent Accountants - 1996.............. 18
Consolidated Statement of Income for the
years ended December 31, 1997, 1996 and 1995............ 20
Consolidated Statement of Changes in
Shareholders' Equity for the years ended
1997, 1996 and 1995..................................... 21
Consolidated Balance Sheet at December 31,
1997 and 1996............................................ 22
Consolidated Statement of Cash Flows for the
years ended December 31, 1997, 1996 and 1995............ 23
Notes to Consolidated Financial Statements.............. 24-35
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......... S-2
Other schedules are omitted because they are either not applicable or not
required or the information is presented in the Consolidated Financial
Statements or Notes thereto.
37
38
3. Exhibits:
Exhibit No.
3.1 (a) Restated Certificate of Incorporation of the Registrant and
amendment thereto. (9)
(b) Certificate of Amendment to Restated Certificate of Incorporation of
the Company filed April 30, 1987. (23)
3.2 (a) By-Laws of the Registrant. (9)
(b) Amendment to Revised By-Laws of the Company adopted April 30, 1987.
(23)
(c) Amendment to Revised By-Laws of the Company adopted February 18,
1988. (23)
4.1 Form of Common Stock Certificate. (1)
10.1(a) Russ Berrie and Company, Inc. Stock Option and Restricted Stock
Plan. (2)
(b) Amendment to the Russ Berrie and Company, Inc. Stock Option and
Restricted Stock Plan. (11)
10.2(a) Russ Berrie and Company, Inc. Stock Option Plan for Outside
Directors. (3)
(b) Amendment to the Russ Berrie and Company, Inc. Stock Option Plan
for Outside Directors. (11)
10.3 Russ Berrie and Company, Inc. Profit Sharing Plan. (3)
10.4 Agreement dated January 26, 1982 between the Registrant and A. Curts
Cooke and amendment thereto dated March 10, 1984. (3)
- ----------
(1) Incorporated by reference to Amendment No. 2 to Registration
Statement No. 2-88797 on Form S-1, as filed on March 29, 1984.
(2) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1984.
(3) Incorporated by reference to Amendment No. 1 to Registration
Statement No. 2-8797 on Form S-1, as filed on March 13, 1984.
(9) Incorporated by reference to Amendment No. 1 to Registration
Statement No. 33-10077 on Form S-1, as filed on December 16, 1986.
(11) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1987.
(23) Incorporated by reference to Registration No. 33-51823 on Form S-8,
as filed on January 6, 1994.
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39
Exhibit No.
10.26 Lease Agreement, dated April 1, 1981, between Tri-State Realty and
Investment Company and Russ Berrie and Company, Inc. (4)
10.27 Guaranty, dated March 20, 1981, from Russ Berrie and Company, Inc.
and Russell Berrie to the New Jersey Economic Development Authority
and Midlantic National Bank as Trustee. (4)
10.28 Mortgage, dated April 6, 1981, between Tri-State Realty and
Investment Company and the New Jersey Economic Development
Authority. (4)
10.29 Credit and Security Agreement, dated as of March 1, 1981, between
the New Jersey Economic Development Authority and Tri-State Realty
and Investment Company. (4)
10.30 Assignment of Leases, Rents & Profits, dated April 6, 1981, by
Tri-State Realty and Investment Company to the New Jersey Economic
Development Authority. (4)
10.31 Note, dated April 6, 1981, made by Tri-State Realty and Investment
Company to the order of the New Jersey Economic Development
Authority in the principal amount of $2,000,000. (4)
10.32 Specimen of State of New Jersey Economic Development Authority
$2,000,000 Economic Development Bond (Tri-State Realty and
Investment Company -- 1980 Project), dated April 6, 1981. (4)
10.33 Lease, dated December 28, 1983, between Russell Berrie and Russ
Berrie and Company, Inc. (4)
10.35 Guarantee dated as of December 1, 1983, from Russ Berrie and
Company, Inc. to the New Jersey Economic Development Authority,
Bankers Trust Company as Trustee and each Holder of a Bond. (4)
10.36 Letter of Credit and Reimbursement Agreement, dated as of December
1, 1983, between Russ Berrie and Company, Inc. and Citibank, N.A.(4)
10.37 Loan Agreement, dated as of December 1, 1983, between the New Jersey
Economic Development Authority and Russell Berrie. (4)
- ----------
(4) Incorporated by reference to Registration Statement No. 2-88797
on Form S-1 as filed on February 2, 1984.
39
40
Exhibit No.
10.38 Mortgage, dated December 28, 1983, between Russell Berrie and
Citibank, N.A. (4)
10.39 Form of New Jersey Economic Development Authority Variable/Fixed
Rate Economic Development Bond (Russell Berrie -- 1983 Project). (4)
10.51 Grant Deed, dated June 28, 1982, from Russ Berrie and Company, Inc.
to Russell Berrie. (1)
10.52 Russ Berrie and Company, Inc. 1989 Employee Stock Purchase Plan.(13)
10.53 (a) Russ Berrie and Company, Inc. Stock Option Plan. (6)
(b) Amendments to the Russ Berrie and Company, Inc. Stock Option Plan.
(11)
10.68 (a) Lease Agreement, dated as of May 1, 1977, between Fred T. Reisman
and Associates Limited, Amram's Distributing, LTD, and Alfa Romeo
(Canada) Limited (8)
(b) Lease Agreement, dated April 8, 1986, between Pensionfund Realty
Limited and Amram's Distributing LTD. (9)
10.70 Amendment, dated October 29, 1985 to the restated Russ Berrie and
Company, Inc. Profit Sharing Plan. (8)
- ----------
(1) Incorporated by reference to Amendment No. 2 to Registration
Statement No. 2-88797 on Form S-1, as filed on March 29, 1984.
(4) Incorporated by reference to Registration Statement No. 2-88797
on Form S-1, as filed on February 2, 1984.
(6) Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement No. 2-96238 on Form S-8, as filed on November
6, 1985.
(8) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1985.
(9) Incorporated by reference to Amendment No. 1 to Registration
Statement No. 33-10077 of Form S-1, as filed on December 16, 1986.
(11) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1987.
(13) Incorporated by reference to Form S-8 Registration Statement No.
33-26161, as filed on December 16, 1988.
40
41
Exhibit No.
10.73 Russ Berrie and Company, Inc. Deferred Compensation Plan. (9)
10.76 (a) Lease agreement, dated September 17, 1987, between Forsgate
Industrial Complex and Russ Berrie and Company, Inc. (11)
(b) Amendment, dated March 18, 1988, between Forsgate Industrial Complex
and Russ Berrie and Company, Inc. (11)
10.77 Lease agreement, dated July 1, 1987, between Hunter Street, Inc. and
Russ Berrie and Co. (West), Inc. (11)
10.78 Lease agreement, dated October 1, 1987, between David Benjamin and
Nicole Berrie Lakeland Trust and Russ Berrie and Company, Inc. (11)
10.80 Russ Berrie and Company, Inc. 1989 Stock Option Plan. (14)
10.81 Russ Berrie and Company, Inc. 1989 Stock Option Plan for Outside
Directors. (15)
10.82 Russ Berrie and Company, Inc. 1989 Stock Option and Restricted Stock
Plan. (16)
10.83 Lease Agreement dated November 7, 1988 between A. Mantella & Sons
Limited and Amram's Distributing, Ltd. (17)
- ----------
(9) Incorporated by reference to Amendment No. 1 to Registration
Statement No. 33-10077 of Form S-1, as filed on December 16, 1986.
(11) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1987.
(14) Incorporated by reference to Form S-8 Registration Statement No.
33-27406, as filed on March 16, 1989.
(15) Incorporated by reference to Form S-8 Registration Statement No.
33-27897, as filed on April 5, 1989.
(16) Incorporated by reference to Form S-8 Registration Statement No.
33-27898, as filed on April 5, 1989.
(17) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1988.
41
42
Exhibit No.
10.84 Lease Agreement dated November 7, 1988 between Russell Berrie and
Russ Berrie and Company, Inc. (17)
10.86 Lease Agreement dated June 8, 1989 between Americana Development,
Inc. and Russ Berrie and Company, Inc. (18)
10.87 Lease dated December 25, 1989 between Kestrel Properties, Ltd. and
Russ Berrie (U.K.) Ltd. (18)
10.89 Amendment dated January 9, 1989 to Letter of Credit and
Reimbursement Agreement dated as of December 1, 1983 between Russ
Berrie and Company, Inc. and Citibank, N.A. (18)
10.91 (a) Assignment of Underlease of Unit 10 Nursling Industrial Estate,
Marks and Spencer plc to Russ Berrie (U.K.) Limited. (19)
(b) Underlease of Unit 10 Nursling Estate County of Hants. (19)
10.92 Agreement for sale and purchase of parts or shares of Sea
View Estate between Sino Rank Company Limited and Tri Russ
International (Hong Kong) Limited dated March 10, 1990.
(19)
10.95 (a) Asset Purchase Agreement dated September 18, 1990 by and among
Bright, Inc., Bright of America, Inc., Bright Crest, LTD. and
William T. Bright. (19)
(b) Non-Compete Agreement dated September 18, 1990 by and between
William T. Bright and Bright, Inc. (19)
(c) Deed of Trust dated September 18, 1990 by and among Bright, Inc.
F.T. Graff Jr. and Louis S. Southworth, III Trustees, and Bright of
America, Inc. (19)
(d) Guaranty Agreement dated September 18, 1990 executed by Russ Berrie
and Company, Inc. delivered to Bright of America, Inc. and Bright
Crest, LTD. (19)
(e) Guaranty Agreement dated September 18, 1990 executed by Russ Berrie
and Company, Inc. delivered to William T. Bright. (19)
10.97 Russ Berrie and Company, Inc. Retirement Plan Amended and Restated
Effective January 1, 1989. (19)
- ----------
(17) Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1988.
(18) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1989.
(19) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1990.
42
43
Exhibit No.
10.101 (a) Sale and Purchase Agreement dated October 16, 1991 by and among
Weaver Corp. and Papel/Freelance, Inc. (20)
(b) Non-competition Agreement made October 16, 1991 by and among Weaver
Corp., an Indiana corporation, Steven Weaver and Papel/Freelance,
Inc. a Pennsylvania corporation. (20)
10.102 Transfer of Freehold land between British Telecommunications plc and
BT Property Limited and Russ Berrie (UK) Ltd. (21)
10.103 Executive Employment Agreement dated December, 1992 between Russ
Berrie and Company, Inc. and Bernard Tenenbaum. (21)
10.104 Russ Berrie and Company, Inc. 1994 Stock Option Plan. (21)
10.105 Russ Berrie and Company, Inc. 1994 Stock Option Plan for Outside
Directors. (21)
10.106 Russ Berrie and Company, Inc. 1994 Stock Option and Restricted Stock
Plan. (21)
10.107 Russ Berrie and Company, Inc. 1994 Employee Stock Purchase Plan.
(21)
10.108 Asset Purchase Agreement dated October 1, 1993 by and between
RBTACQ, Inc. and Cap Toys, Inc. (22)
10.109 Asset Purchase Agreement I.C. September 30, 1994 by and among
RBCACQ, Inc. and OddzOn Products, Inc., Scott Stillinger and Mark
Button. (23)
10.110 Asset Purchase Agreement By and Among PF ACQUISITION CORP., ZEBRA
CAPITAL CORPORATION, PAPEL/FREELANCE, INC. and RUSS BERRIE AND
COMPANY, INC. dated December 15, 1995. (24)
10.111 Agreement dated December 17, 1996, by and between Russ Berrie and
Company, Inc. and A. Curts Cooke. (25)
10.112 Agreement dated March 24, 1997, by and between Russ Berrie and
Company, Inc. and Ricky Chan. (25)
10.113 Asset Purchase Agreement dated as of May 2, 1997 among Russ Berrie
and Company, Inc., OddzOn Products, Inc., Cap Toys, Inc., OddzOn/Cap
Toys, Inc. and Hasbro, Inc., together with exhibits thereto. (26)
10.114 First Amendment of Agreement dated June 5, 1997, by and between Russ
Berrie and Company, Inc. and A. Curts Cooke. (27)
10.115 Agreement of Purchase and Sale between Amram's Distributing Ltd. and
Metrus Properties Ltd. dated November 25, 1997. (27)
- ----------
(20) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1991.
(21) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1992.
(22) Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993.
(23) Incorporated by Reference to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994.
(24) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1995.
(25) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1996.
(26) Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.
(27) Incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1997.
43
44
Exhibit No.
21.1 List of Subsidiaries
23.1 Report of Independent Public Accountants - 1997
23.2 Report of Independent Accountants - 1996
23.3 Consent of Independent Public Accountants - 1997
27.1 Financial Data Schedule - 1997
27.2 Restated Financial Data Schedule - 1997*
27.3 Restated Financial Data Schedule - 1997*
27.4 Restated Financial Data Schedule - 1996*
* Per share data restated to meet reporting requirements under SFAS No. 128.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.
Undertaking
In order to comply with amendments to the rules governing the use of Form S-8
under the Securities Act of 1933, as amended, as set forth in Securities Act
Release No. 33-6867, the undersigned Registrant hereby undertakes as follows,
which undertaking shall be incorporated by reference into Registrant's
Registration Statements on Forms S-8 (File Nos. 2-96238, 2- 96239, 2-96240,
33-10779, 33-27406, 33-27897 and 33-27898):
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
44
45
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)
3/26/98 By /s/ Paul Cargotch
- ------------------- ----------------------------
Date Paul Cargotch
Executive Vice President,
Chief Financial Officer, Assistant
Secretary and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURES DATE
---------- ----
/s/ Russell Berrie 3/26/98
- -------------------------------------------- ---------
Russell Berrie, Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Paul Cargotch 3/26/98
- -------------------------------------------- ---------
Paul Cargotch, Executive Vice President,
Chief Financial Officer, Assistant Secretary
and Director
(Principal Financial and Accounting Officer)
45
46
SIGNATURES DATE
---------- ----
/s/ Raphael Benaroya 3/24/98
- ------------------------------ --------
Raphael Benaroya, Director
/s/ Angelica Berrie 3/20/98
- ------------------------------ --------
Angelica Berrie, Director
/s/ A. Curts Cooke 3/20/98
- ------------------------------ --------
A. Curts Cooke, Director
/s/ Ilan Kaufthal 3/27/98
- ------------------------------ --------
Ilan Kaufthal, Director
/s/ Charles Klatskin 3/20/98
- ------------------------------ --------
Charles Klatskin, Director
/s/ Joseph Kling 3/20/98
- ------------------------------ --------
Joseph Kling, Director
/s/ William A. Landman 3/20/98
- ------------------------------ --------
William A. Landman, Director
/s/ Sidney Slauson 3/20/98
- ------------------------------ --------
Sidney Slauson, Director
46
47
S-2
RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at
Beginning Charged to Balance at end
Description of Period Expenses Deductions* of Period
---------- ----------- ---------- --------------
Allowance for accounts
receivable:
Year ended December 31, 1995 2,760 1,156 1,212 2,704
Year ended December 31, 1996 2,704 1,115 1,561 2,258
Year ended December 31, 1997 2,258 2,272 2,297 2,233
Allowance for slow moving
inventory items:
Year ended December 31, 1995 17,820 4,187 3,425 18,582
Year ended December 31, 1996 18,582 2,369 3,819 17,132
Year ended December 31, 1997 17,132 2,245 4,085 15,292
*Principally account write-offs, allowances and disposal of merchandise,
respectively.
47
48
Exhibit Index
-------------
Exhibit Numbers
- ---------------
10.114 First Amendment of Agreement dated June 5, 1997,
by and between Russ Berrie and Company, Inc. and
A. Curts Cooke
10.115 Agreement of Purchase and Sale between Amram's
Distributing Ltd. and Metrus Properties Ltd.
dated November 25, 1997
21.1 List of Subsidiaries
23.1 Report of Independent Public Accountants - 1997
23.2 Report of Independent Accountants - 1996
23.3 Consent of Independent Public Accountants - 1997
27.1 Financial Data Schedule - 1997
27.2 Restated Financial Data Schedule - 1997*
27.3 Restated Financial Data Schedule - 1997*
27.4 Restated Financial Data Schedule - 1996*
*Per share data restated to meet reporting requirements under SFAS No. 128.
48