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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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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 19, 1999 was $279,689,946.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of March 19, 1999, was as follows:
CLASS NUMBER OF SHARES
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Common Stock, $0.10 stated value 21,634,471
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement dated March 12, 1999,
relating to registrant's Annual Meeting of Shareholders to be held on April 21,
1999 (the "1999 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 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 happiness, 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. In countries where the
Company does not maintain a direct salesforce and distribution network, the
Company's products are sold 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 approximately 6,000 items (including
distinctive variations on basic product designs) is 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 Bears From The Past, Stuffed Animals, Baby Products,
Gentlemen's Gifts, Collectibles, Inspirational Gifts, Over-The-Hill, Lifestyles,
Home Styles, Gifted Moments, Fun 'N Games and Anniversaries. Extensive seasonal
lines include products for all of the major holidays. In addition, the Company's
subsidiary, Bright of America, Inc., principally markets placemats and candles
as well as aromatic products such as potpourri and incense, through its
division, Scentex(R), directly to mass merchandisers.
Most of the Company's products have suggested retail prices between $3 and
$50. Product sales are highly diverse and, as such, no single item represented
more than 2% of the Company's sales in 1998.
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 170 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 effectively 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 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
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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 1998, approximately 88% of the Company's products were
produced in the Far East, and 12% in the United States. Purchases in the United
States predominantly represent domestically produced displays, candles,
placemats and printed materials such as cards and calendars.
The Company utilizes approximately 110 manufacturers in the Far East, with
facilities primarily in the People's Republic of China, Taiwan, Indonesia,
Philippines and Thailand. During 1998, approximately 83% 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 most likely cause import
duties to increase or become applicable to products imported by the Company from
the People's Republic of China.
A significant portion of the Company's staff of approximately 280 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 as well as
product development and design as described earlier. 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
1998, the supplier accounting for the greatest dollar volume of the Company's
purchases accounted for approximately 9% of such purchases and the five largest
suppliers accounted for approximately 32% in the aggregate.
Marketing
The Company's products are marketed primarily through its own direct
salesforce of approximately 510 full-time employees as of December 31, 1998.
During 1998, the Company implemented a new sales strategy, domestically, which
involved transitioning responsibility for smaller accounts from its reduced,
direct salesforce to the Company's newly created telemarketing department.
Currently, the Company has 28 full-time employees in its telemarketing
department, with plans to continue to expand this department throughout 1999.
Products are sold directly to retail stores in the United States and in certain
foreign countries, including but not limited to 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 1998,
the Company sold gift products to more than 57,000 customers. No single gift
customer accounted for more than 2% of sales.
The Company reinforces the marketing efforts of its 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. Beginning in 1999, the Company initiated a new Russ(R) Marketing 2000
Plan which recognizes our most valued customers as "Preferred Partners", based
upon attainment of certain sales levels, and offers them special benefits and
privileges including, but not limited to, access to exclusive product offerings
and dedicated customer service representatives.
The Company believes that effective packaging and merchandising of its
products are also very important to its marketing success. Many products are
shipped in colorful, corrugated cartons which can be used as freestanding
displays and then be recycled or discarded when all the products have been sold.
The Company also offers semi-permanent freestanding lucite, metal and wooden
displays, thereby providing an efficient promotional vehicle for selling the
Company's products.
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The Company believes that customer service is another essential component
of its marketing strategy and therefore has established Customer Service
Departments that respond to customer requests, investigate and resolve problems
and generally assist 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.
The Company maintains a direct salesforce and distribution network to serve
its customers in England, Holland, Belgium, Ireland, Spain, Germany, Austria 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 $78,516,000, $73,366,000 and $66,840,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
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, each 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 its products 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 1998, gift items specially designed for individual seasons accounted
for approximately 52% of the Company's sales; no individual season accounted for
more than 20% of the Company's sales.
The following table sets forth the Company's quarterly sales during 1998,
1997 and 1996.
QUARTERLY SALES
(IN MILLIONS)
1998 1997 1996
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QUARTER ENDED SALES % SALES % SALES %
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March 31...................................... $74.6 27.6 $62.1 22.9 $56.5 25.0
June 30....................................... $50.9 18.8 $58.5 21.6 $41.8 18.5
September 30.................................. $83.0 30.7 $87.5 32.2 $67.9 30.0
December 31................................... $62.0 22.9 $63.2 23.3 $60.0 26.5
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.
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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, 1998 and December 31, 1997 was $31,962,000 and $33,390,000, respectively.
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 Group Inc. 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, 1998, the Company employed approximately 1,500 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 sales management and sales personnel, non-competition agreements
(subject to certain territorial limitations) 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.
DISCONTINUED OPERATIONS
Through May of 1997, the Company had operated two business segments; gift
and toy. 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 Company's wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn
Products, Inc., represented the Company's Toy business segment.
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On May 2, 1997, the Company completed the sale of substantially all of the
assets of Cap Toys, Inc. and OddzOn Products, Inc., to a wholly-owned subsidiary
of Hasbro, Inc. Accordingly, the Toy business segment was reported as
discontinued operations.
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 and 1996 amounted to
$38,614,000 and $151,380,000, respectively.
ITEM 2. PROPERTIES
The principal facilities of the Company's operations 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's subsidiary, Amram's Distributing, Ltd., purchased land
and constructed a building located in Brampton, Ontario, Canada to serve as its
new office and distribution facility. Construction of the new facility was
completed and began to be utilized during the fourth quarter of 1998. 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 and the facility subleased in
Canada due to the construction of the new office and distribution facility.
THE COMPANY'S CURRENT PRINCIPAL FACILITIES ARE AS FOLLOWS:
LEASE EXPIRATION
LOCATION -- DOMESTIC SQ. FT. AREA (IF APPLICABLE)(1)
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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, 2004
Summersville, West Virginia(5)(6)................ 156,000 Not Applicable --
Owned by the Company
LEASE EXPIRATION
LOCATION -- FOREIGN SQ. FT. AREA (IF APPLICABLE)(1)
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Southampton, England(6).......................... 61,000 March 25, 2003
Southampton, England(5)(6)....................... 75,500 Not applicable --
Owned by the Company
Brampton, Ontario, Canada(5)(6).................. 120,000 Not applicable --
Owned by the Company
Hong Kong(5)..................................... 25,630 Not applicable --
Owned by the Company
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(1) Not including renewal options.
(2) Properties owned directly or indirectly by Russell Berrie, Chairman and
Chief Executive Officer, 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.
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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. In February 1999,
the Company also opened a new showroom in Denver, Colorado. 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.
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 certain forward-looking
statements. Additional written and oral forward-looking statements may be made
by the Company from time to time in Securities and Exchange Commission (SEC)
filings and otherwise. The Private Securities Litigation Reform Act of 1995
provides a safe-harbor for forward-looking statements. The Company cautions
readers that results predicted by forward-looking statements, including, without
limitation, those relating to the Company's future business prospects, revenues,
working capital, liquidity, capital needs, interest costs, and income are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward-looking statements.
Specific risks and uncertainties include, but are not limited to, the Company's
ability to continue to manufacture its products in the Far East, the seasonality
of revenues, the actions of competitors, ability to increase production
capacity, price competition, the effects of government regulation, possible
delays in the introduction of new products, customer acceptance of products, the
possible effects of Year 2000 issues and other factors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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
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Russell Berrie.............. 66 Chairman, Chief Executive Officer and Director
Arnold S. Bloom............. 56 Vice President, Secretary and General Counsel
Paul Cargotch............... 54 Executive Vice President, Assistant Secretary and
Director
Ricky Chan.................. 46 Senior Vice President -- Product Development and
Executive Vice President of Far East Operations
Chris Collins............... 36 Vice President -- Sales
Maureen A. Flotard.......... 39 Vice President -- Business Development
J. Michael Hope............. 53 Vice President -- Sales Administration
Daniel J. Kochenash......... 40 Vice President -- Corporate Operations
Y.B. Lee.................... 53 Senior Vice President -- Far East and President of
Far East Operations
Eric R. Lohwasser........... 43 Vice President -- Finance and Chief Financial Officer
Ronald M. Miller............ 39 Vice President -- Special Markets
James J. O'Reardon.......... 55 Vice President -- Administration
Lloyd Winkler............... 50 Vice President
Russell Berrie, the founder of the Company, has been Chairman 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
and Assistant Secretary since April 1998. Mr. Cargotch was Executive Vice
President, Chief Financial Officer and Assistant Secretary since July 1996 and
was Vice President -- Finance and Chief Financial Officer for more than five
years prior thereto. 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. Mr. Collins held various managerial positions within the Company's
salesforce for more than five years prior thereto.
Maureen A. Flotard has been employed as Vice President of Business
Development since January 1998. Ms. Flotard was Corporate Controller since July
1996 and was Director of Financial Planning for more than five years prior
thereto.
J. Michael Hope has been employed by the Company as Vice President of Sales
Administration since November 1998. Mr. Hope was Vice President and General
Manager of the Company's Petaluma Distribution Center for more than five years
prior thereto.
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. Mr. Lee was Senior Vice President -- Far East
since August 1996 and Senior Vice President -- Far East Plush Division for more
than five years prior thereto.
Eric R. Lohwasser has been employed by the Company as Vice
President -- Finance and Chief Financial Officer since April 1998. Mr. Lohwasser
was Vice President -- Finance since July 1996 and Vice President -- Controller
since December 1995 and was Corporate Controller for more than five years prior
thereto.
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Ronald M. Miller has been employed as Vice President of Special Markets
since February 1999. Mr. Miller was Vice President of National Accounts since
March 1998 and held various managerial positions within the Company's salesforce
for more than five years prior thereto.
James J. O'Reardon has been employed by the Company as Vice President of
Administration since September 1997. Mr. O'Reardon was Director of
Administration/Internal Audit for more than five years prior thereto.
Lloyd Winkler has been employed as Vice President since January 1999. Prior
to that, Mr. Winkler was Vice President of the Russ Baby Division since March
1998 and prior to joining the Company, Mr. Winkler was President of the Halsey
Collection, a ladies apparel import company, since 1992.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 1998, the Company's Common Stock was held by approximately
562 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
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1998
First Quarter............................................. $30 3/8 $23 5/8
Second Quarter............................................ 30 1/2 24 3/8
Third Quarter............................................. 27 5/8 17 1/4
Fourth Quarter............................................ 23 1/2 15 3/4
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
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 $0.20 per share, effective January
1999. Prior to that the quarterly rate was $0.19 per share since February 1998
and $0.17 per share since February 1997. The Board of Directors will review its
dividend policy from time to time and declaration of dividends will remain
within its sole discretion.
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS
Net Sales................................. $270,511 $271,336 $226,243 $213,918 $187,387
Cost of Sales............................. 115,499 119,769 105,018 101,059 93,127
Income (Loss) from Continuing Operations
Before Income Taxes*.................... 59,584 53,664 42,555 11,407 (5,157)
Provision (Benefit) for Income Taxes...... 18,988 16,399 15,856 3,933 (2,254)
Income (Loss) from Continuing
Operations.............................. 40,596 37,265 26,699 7,474 (2,903)
Income (Loss) from Discontinued
Operations, Net of Taxes................ -- (1,324) 4,978 9,066 8,230
Gain on Sale of Discontinued Operations,
Net of Taxes**.......................... -- 46,700 -- -- --
Net Income................................ 40,596 82,641 31,677 16,540 5,327
Net Income (Loss) Per Share:
Continuing Operations
Basic................................ 1.83 1.69 1.23 .35 (.14)
Diluted.............................. 1.81 1.67 1.22 .35 (.13)
Discontinued Operations
Basic................................ -- (.06) .23 .42 .39
Diluted.............................. -- (.06) .23 .42 .38
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YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Gain on Sale of Discontinued Operations
Basic................................ -- 2.12 -- -- --
Diluted.............................. -- 2.08 -- -- --
-------- -------- -------- -------- --------
Total
Basic................................ 1.83 3.75 1.46 .77 .25
Diluted.............................. 1.81 3.69 1.45 .77 .25
Dividends Per Share....................... .76 .68 .60 .60 .60
BALANCE SHEET
Working Capital........................... $299,695 $286,358 $187,373 $158,462 $152,455
Property, Plant and Equipment............. 35,340 21,287 21,765 23,464 24,319
Total Assets.............................. 378,456 353,445 276,966 251,397 242,151
Shareholders' Equity...................... 343,935 316,786 248,726 222,996 218,388
STATISTICAL
Current Ratio............................. 9.7 8.8 7.6 6.6 7.4
Return on Average Shareholders' Equity.... 12.3% 29.2% 13.4% 7.5% 2.4%
Net Profit Margin......................... 15.0% 13.7% 11.8% 3.5% (1.5)%
Number of Employees....................... 1,471 1,554 1,580 1,752 1,772
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* 1998 includes income of $1,828,000 before tax or $1,152,000 ($0.05 per share)
after tax for the completion of a transitional agreement related to the sale
of Papel/Freelance, Inc. 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.
** 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF CONTINUING OPERATIONS -- YEARS ENDED
DECEMBER 31, 1998 AND 1997
The Company's net sales for the year ended December 31, 1998 were
$270,511,000 compared to $271,336,000 for the year ended December 31, 1997. Net
sales for the year ended December 31, 1998 reflects the positive customer
response to the Company's redesign of its gift product line focusing on
coordinated themes of product offerings; however, this was offset by lower sales
levels during the implementation of the Company's new sales strategy which
involved transitioning responsibility for smaller accounts from our reduced
direct salesforce to the Company's newly created telemarketing department. Net
sales for the year ended December 31, 1997 included shipments of certain beanbag
products at levels that did not continue during the year ended December 31,
1998.
Cost of sales were 42.7% of net sales in 1998 compared to 44.1% of net
sales in 1997. The percentage decrease in cost of sales reflects the higher
gross profit margins on sales of certain of the Company's product line concepts
during the year ended December 31, 1998. The decrease also reflects the
Company's successful efforts to manage inventory levels, resulting in a reduced
need to effect sales through other than normal distribution channels and lower
provisions required for inventory.
Selling, general and administrative expense was $105,624,000 or 39.0% of
net sales for the year ended December 31, 1998 compared to $104,152,000 or 38.4%
of net sales in 1997, an increase of $1,472,000 or 1.4%. Included in the
selling, general and administrative expense for the year ended December 31, 1998
was
10
12
$3,700,000 for costs associated with the design and implementation of a new
computer software system. Included in selling, general and administrative
expense for the year ended December 31, 1997 was a provision of $1,500,000 for
costs associated with closing all remaining retail operations. Excluding these
new computer system costs in 1998 and the provision in 1997, selling, general
and administrative expense decreased $728,000 or 0.7% when compared to the prior
year.
Investment and other income of $10,196,000 for the year ended December 31,
1998 compares to $6,249,000 in 1997. The increase of $3,947,000 is 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 in the second quarter of 1997 and
income of $1,828,000 for the completion of a transitional agreement 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, 1998 was 31.9% compared to 30.6% in the prior year. This
increase can be primarily attributed to lower tax provisions related to certain
foreign subsidiaries during the year ended December 31, 1997.
Income from continuing operations for the year ended December 31, 1998 of
$40,596,000 compares to income from continuing operations of $37,265,000 in
1997. The increase of $3,331,000 or 8.9% is primarily attributed to the improved
gross profit margins and the increased investment income partially offset by the
increase in selling, general and administrative expense and income of $1,152,000
after tax for the completion of a transitional agreement related to the sale of
the Company's Papel/Freelance, Inc. subsidiary.
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, 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 remaining retail operations. 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
11
13
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.
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.
DISCONTINUED OPERATIONS
Net sales of the Company's discontinued operations for the year ended
December 31, 1997 amounted to $38,614,000. Net loss from discontinued operations
for the year ended December 31, 1997 was $1,324,000.
YEAR 2000 COMPLIANCE
The Company is dependent upon Information Technology (IT) systems in many
aspects of its business and relies upon third parties who are also dependent on
IT systems. Many existing IT programs use only two digits to identify a year in
the date field and were designed and developed without considering the impact of
the upcoming Year 2000. If not corrected or replaced, many computer applications
could fail or create inaccurate results by or at the Year 2000 or in
computations utilizing the date field (i.e. read the year 2000 as 1900 or
something else). The Company has a program (Year 2000 Program) underway, more
fully described below, intended to timely identify, mitigate and/or prevent the
adverse effects of the Year 2000 issue through an analysis of its own IT and
non-IT systems, and to pursue the Year 2000 compliance of its critical third-
party relationships.
State of Readiness:
The Company has completed a comprehensive review of its IT systems and is
still analyzing its non-IT systems and critical third-party relationships to
identify those that may be affected by the Year 2000 issue. The Company's
current Year 2000 status is as follows:
- The Company has undertaken a project to implement a new packaged computer
software system for the global organization. The new enterprise-wide
system will replace the current custom and packaged software that the
Company utilizes to operate and manage its business. Improvements in the
Company's operational efficiency are expected. The new enterprise
software system is Year 2000 compliant and the Company has obtained Year
2000 warranties or certifications from the major software suppliers
involved with its new computer system. The implementation is expected to
be completed by the end of the second quarter of 1999 for the Company's
domestic operations and by the end of 1999 for the Canadian and European
operations. The Company's Far East operations have modified its legacy
systems and are expected to complete the installation and testing by the
end of the second quarter of 1999. Certain of the Company's domestic
information will continue to be analyzed and certain historical
information will be maintained using portions of the Company's current
legacy systems which are being modified and tested to become Year 2000
compliant.
- The Company has developed a process for analyzing its non-IT systems and
critical third-party relationships for Year 2000 compliance and expects
to complete substantially all of such analysis by the end of the second
quarter of 1999. The Company has inquired or will inquire as to the Year
2000 readiness of each of such parties and is seeking certifications of
Year 2000 compliance from them. The
12
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Company will continue to pursue such Year 2000 compliance certification
from each critical third-party relationship and, if necessary, begin its
contingency plan of identifying alternative goods or service providers
that are able to certify Year 2000 compliance. Despite the Company's
specific efforts with respect to non-IT systems and critical third-party
relationships, there is no absolute assurance that Year 2000 risks from
non-IT systems and critical third-party relationships will be completely
eliminated and will, therefore, not have a material adverse effect on the
Company's operations and financial condition.
Cost:
The total cost of the project including hardware, packaged software and
project implementation is expected to be approximately $20,000,000 including the
Company's foreign operations. Hardware, software and certain project costs will
be capitalized as fixed assets and amortized over their useful lives. The
remainder of the costs will be expensed as incurred.
At December 31, 1998, approximately $13,100,000 has been incurred of which
$9,400,000 and $3,700,000 have been capitalized and expensed, respectively. All
historical and future costs have been and will continue to be funded out of
existing cash and cash flows from operations.
Risks:
The inability of IT and non-IT systems, in general, to accommodate dates
after 1999 may cause disruptions throughout the world in the telecommunication,
banking, credit card, transportation, utility, manufacturing, and other
industries, as well as, many governmental services. If such disruptions occur,
it is possible they could have a material adverse effect on businesses in
general and on the Company in particular.
Based upon currently available information, management believes that the
Company will meet its compliance goals with respect to its IT systems and does
not anticipate that the cost of effecting Year 2000 compliance, in excess of
that described above, will have a material impact on the Company's financial
condition, results of operations or liquidity. Nevertheless, achieving Year 2000
compliance is dependent upon many factors, some of which are not completely
within the Company's control. Should either the Company's internal IT or non-IT
systems or the internal systems of one of more of its critical third-party
relationships, or their critical third-party relationships, fail to achieve Year
2000 compliance, there could be a material adverse effect on the Company's
business and its results of operations.
Since the Company has not completed the data gathering phase, with respect
to non-IT systems and critical third parties, of its Year 2000 Program, it
cannot yet quantify the costs, if any, that may be required to remedy those
non-IT systems or incurred in identifying and switching to compliant third
parties, if necessary. The Company does rely heavily on numerous, foreign
manufacturers with approximately 94% of its inventory purchases being produced
in the Far East. The Company is currently assessing the status of such
manufacturers and their dependence upon IT or non-IT systems, which it expects
to complete by the end of the second quarter of 1999. There is no absolute
assurance that the Company's business operations will not be disrupted if
certain of these manufacturers are unable to timely deliver product to the
Company in the Year 2000; however, during 1998 no individual supplier accounted
for more than 9% and the five largest suppliers did not account for more than
32% of the Company's purchases.
Contingency Plans:
The Company has certain contingency options that are available in the event
its Year 2000 Program for internal IT is not successful. If the Company cannot
be assured during the second quarter of 1999, that the worldwide implementation
of its enterprise-wide system, will be completed in the required timeframe, the
Company will make a decision whether to complete the modifications already begun
of its current legacy systems to become compliant. The Company estimates that
the incremental effort to complete further evaluation, make the necessary
modifications of active programs, and test and implement such changes would be
completed by the end of the third quarter of 1999.
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15
If the Company determines that either its non-IT systems or critical
third-party relationships will not be compliant, it will either obtain
alternative non-IT systems, or in the case of third parties, switch to other
vendors or suppliers which are Year 2000 compliant, if necessary.
While there are certainly no foolproof contingency plans that cover every
possible failure, the Company intends to monitor and update its contingency
plans and develop additional potential solutions throughout the implementation
of its Year 2000 Program. The Company is expending a significant amount of
effort and resources towards its Year 2000 Program; however, based upon the
risks previously identified, there is no absolute assurance that Year 2000 risks
will not have a material adverse effect on the Company's operations and
financial condition regardless of the efforts of its Year 2000 Program and
various contingency plans.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents and
marketable securities of $225,823,000 compared to $202,001,000 at December 31,
1997.
As of December 31, 1998 and 1997, the Company had marketable securities of
$152,759,000 and $108,558,000, respectively, included in the amounts above.
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.
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 $70,000,000 in bank lines of credit that provide
for direct borrowings and letters of credit used for the purchase of inventory.
At December 31, 1998, letters of credit of $13,158,000 were outstanding. There
were no direct borrowings under the bank lines of credit. Working capital
requirements during 1998 were met entirely through internally generated funds.
The Company remains in a highly liquid position and believes that the resources
available from investments, operations and bank lines of credit are sufficient
to meet the foreseeable requirements of its business.
The Company enters into forward exchange contracts and currency options,
principally to serve as economic hedges of the currency risk associated with the
purchase of inventory and the repayment of intercompany loans by its European
and Canadian operations. Gains and losses, related to contracts accounted for as
hedges, are reported as a component of the related transactions. The Company
does not anticipate any material adverse impact on its results of operations or
financial position from these contracts.
As of December 31, 1998, the Board of Directors had authorized the Company
to repurchase 4,000,000 shares of common stock of which 2,951,000 shares have
been repurchased since the beginning of the Company's stock repurchase program
in March, 1990. In January 1999, the Board of Directors authorized the Company
to repurchase 1,000,000 additional shares to bring the total authorization to
5,000,000 shares.
FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission (SEC) filings and otherwise. The
Private Securities Litigation Reform Act of 1995 provides a safe-harbor for
forward-looking statements. 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
14
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statements. Specific risks and uncertainties include, but are not limited to,
the Company's ability to continue to manufacture its products in the Far East,
the seasonality of revenues, the actions of competitors, ability to increase
production capacity, price competition, the effects of government regulation,
possible delays in the introduction of new products, customer acceptance of
products, the possible effects of Year 2000 issues and other factors.
ITEM 7A. QUALITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A sensitivity analysis to measure potential changes in market value of the
Company's investments from a change in interest rates indicates that a one
percentage point increase in interest rates would decrease the net aggregate
market value of these investments by approximately $3,100,000 and a one
percentage point decrease in interest rates would increase the net aggregate
market value of these investments by approximately $2,600,000. A sensitivity
analysis to changes in the value of the U.S. dollar on foreign currency
denominated derivatives and monetary assets and liabilities indicates that if
the U.S. dollar uniformly weakened by 10% against all currency exposures of the
Company, income from operations would decrease by approximately $530,000.
Additional information required for this item is incorporated on page 14 of
the Management's Discussion and Analysis of Results of Operations and Financial
Condition and Note 3 of the Notes to Consolidated Financial Statements.
15
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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,
1998 and 1997, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the years then ended. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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, appearing on
pages 19 to 34 of this Form 10-K, present fairly, in all material respects, the
financial position of Russ Berrie and Company, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule appearing on page S-2 of
this Form 10-K is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 28, 1999
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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 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
consolidated 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 consolidated financial position of Russ Berrie and
Company, Inc. and subsidiaries as of December 31, 1996 and the consolidated
results of their operations and their cash flows for the year 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 four quarters ended December
31, 1998 and 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 March 31, 1998 includes income of $1,828,000 before
tax or $1,152,000 ($0.05 per share) after tax for the completion of a
transitional agreement related to the sale of Papel/Freelance, Inc. 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.
FOR QUARTERS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998
Net sales.................................... $74,636 $50,949 $82,969 $61,957
Gross profit................................. 41,899 28,687 49,322 35,104
Net income................................... $ 9,933 $ 4,120 $16,227 $10,316
Net income per share
Basic...................................... $ .45 $ .18 $ .73 $ .46
Diluted.................................... .44 .18 .73 .46
1997
Net sales.................................... $62,071 $58,479 $87,530 $63,256
Gross profit................................. 34,607 32,071 50,055 34,834
Income from continuing operations............ 6,471 4,788 16,041 9,965
(Loss) from discontinued operations, net of
taxes...................................... (259) (1,065) -- --
Gain on sale of discontinued operations, net
of taxes................................... -- 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
======= ======= ======= =======
18
20
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
-------- -------- --------
Net sales.................................................. $270,511 $271,336 $226,243
Cost of sales............................................ 115,499 119,769 105,018
-------- -------- --------
Gross profit............................................. 155,012 151,567 121,225
Selling, general and administrative expense................ 105,624 104,152 89,827
Litigation................................................. -- -- (4,450)
Investment and other income-net............................ (10,196) (6,249) (6,707)
-------- -------- --------
Income from continuing operations before income taxes.... 59,584 53,664 42,555
Provision for income taxes................................. 18,988 16,399 15,856
-------- -------- --------
Income from continuing operations........................ 40,596 37,265 26,699
Income (Loss) from discontinued operations, net of
taxes................................................. -- (1,324) 4,978
Gain on sale of discontinued operations, net of taxes.... -- 46,700 --
-------- -------- --------
Net income............................................... $ 40,596 $ 82,641 $ 31,677
======== ======== ========
Net income (loss) per share:
Continuing operations
Basic................................................. $ 1.83 $ 1.69 $ 1.23
Diluted............................................... 1.81 1.67 1.22
Discontinued operations
Basic................................................. -- (.06) .23
Diluted............................................... -- (.06) .23
Gain on sale of discontinued operations
Basic................................................. -- 2.12 --
Diluted............................................... -- 2.08 --
-------- -------- --------
Total
Basic................................................. $ 1.83 $ 3.75 $ 1.46
======== ======== ========
Diluted............................................... $ 1.81 $ 3.69 $ 1.45
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
19
21
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED OTHER
COMPREHENSIVE INCOME:
------------------------
NET
UNREALIZED
ADDITIONAL FOREIGN GAIN ON
COMMON PAID RETAINED CURRENCY MARKETABLE TREASURY
TOTAL STOCK IN CAPITAL EARNINGS TRANSLATION SECURITIES STOCK
-------- ------ ---------- -------- ----------- ---------- --------
BALANCE AT DECEMBER 31, 1995..... $222,996 $2,401 $38,646 $221,722 $(1,916) -- $(37,857)
Comprehensive income:
Net income....................... 31,677 -- -- 31,677 -- -- --
Other comprehensive income, net
of tax:
Foreign currency translation
adjustment(net of tax of
$1,435)........................ 2,413 -- -- -- 2,413 -- --
--------
Comprehensive income............. 34,090
--------
Share transactions under stock
option plans (322,754
shares)........................ 4,666 32 4,634 -- -- --
Cash dividends ($0.60 per
share)......................... (13,026) -- -- (13,026) -- -- --
-------- ------ ------- -------- ------- ---- --------
BALANCE AT DECEMBER 31, 1996..... 248,726 2,433 43,280 240,373 497 -- (37,857)
Comprehensive income:
Net income....................... 82,641 -- -- 82,641 -- -- --
Other comprehensive income, net
of tax:
Foreign currency translation
adjustment (net of tax benefit
of $700)....................... (1,595) -- -- -- (1,595) -- --
Net unrealized gain on securities
available-for-sale (net of tax
of $43)........................ 99 -- -- -- -- 99 --
--------
Comprehensive income............. 81,145
--------
Share transactions under stock
option plans (592,517
shares)........................ 9,964 60 9,904 -- -- -- --
Cash dividends ($0.68 per
share)......................... (14,986) -- -- (14,986) -- -- --
Transactions in treasury shares
(398,900 shares)............... (8,063) -- -- -- -- -- (8,063)
-------- ------ ------- -------- ------- ---- --------
BALANCE AT DECEMBER 31, 1997..... $316,786 $2,493 $53,184 $308,028 $(1,098) $ 99 $(45,920)
Comprehensive income:
Net income....................... 40,596 -- -- 40,596 -- -- --
Other comprehensive income, net
of tax:
Foreign currency translation
adjustment (net of tax of
$72)........................... 154 -- -- -- 154 -- --
Net unrealized gain on securities
available-for-sale (net of tax
of $156)....................... 334 -- -- -- -- 334 --
--------
Comprehensive income............. 41,084
--------
Share transactions under stock
option plans (275,792
shares)........................ 5,396 27 5,369 -- -- -- --
Cash dividends ($0.76 per
share)......................... (16,897) (16,897) -- -- --
Transactions in treasury shares
(103,500 shares)............... (2,434) -- -- -- -- -- (2,434)
-------- ------ ------- -------- ------- ---- --------
BALANCE AT DECEMBER 31, 1998..... $343,935 $2,520 $58,553 $331,727 $ (944) $433 $(48,354)
======== ====== ======= ======== ======= ==== ========
The accompanying notes are an integral part of the consolidated financial
statements.
20
22
CONSOLIDATED BALANCE SHEET AT DECEMBER 31
(DOLLARS IN THOUSANDS)
1998 1997
-------- --------
ASSETS
Current assets
Cash and cash equivalents................................. $ 73,064 $ 93,443
Marketable securities..................................... 152,759 108,558
Accounts receivable, trade, less allowances of $2,622 in
1998 and $2,233 in 1997................................ 54,861 52,743
Inventories -- net........................................ 45,201 50,204
Prepaid expenses and other current assets................. 3,006 8,980
Deferred income taxes..................................... 5,325 9,089
-------- --------
TOTAL CURRENT ASSETS.............................. 334,216 323,017
Property, plant and equipment -- net........................ 35,340 21,287
Other assets................................................ 8,900 9,141
-------- --------
TOTAL ASSETS...................................... $378,456 $353,445
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 4,249 $ 4,471
Accrued expenses.......................................... 23,067 22,423
Accrued income taxes...................................... 7,205 9,765
-------- --------
TOTAL CURRENT LIABILITIES......................... 34,521 36,659
Commitments and contingencies
Shareholders' equity
Common stock: $0.10 stated value; authorized 50,000,000
shares; issued 1998, 25,202,261 shares; 1997,
24,926,469 shares...................................... 2,520 2,493
Additional paid in capital................................ 58,553 53,184
Retained earnings......................................... 331,727 308,028
Accumulated other comprehensive income.................... (511) (999)
Treasury stock, at cost (2,957,214 shares at December 31,
1998 and 2,853,714 shares at December 31, 1997)........ (48,354) (45,920)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 343,935 316,786
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $378,456 $353,445
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
21
23
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
1998 1997 1996
--------- --------- -------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Net income................................................ $ 40,596 $ 82,641 $31,677
Adjustments to reconcile net income to net cash provided
by continuing operating activities:
Loss (income) -- discontinued operations, net of
taxes................................................ -- 1,324 (4,978)
Gain on sale of discontinued operations, net of taxes... -- (46,700) --
Gain on sale of subsidiary.............................. (1,828) -- (4,800)
Depreciation............................................ 2,512 2,846 3,220
Amortization of intangible assets....................... 119 149 155
Provision for accounts receivable reserves.............. 1,872 2,272 1,115
Deferred income taxes................................... 3,764 618 3,469
Net loss from sale or disposal of fixed assets.......... 129 410 828
Changes in assets and liabilities, net of effect of
dispositions:
Accounts receivable.................................. (3,990) (5,660) (14,109)
Inventories -- net................................... 5,003 4,146 1,359
Prepaid expenses and other current assets............ (339) (109) 563
Other assets......................................... 122 (42) 303
Accounts payable..................................... (222) 762 536
Accrued expenses..................................... 1,515 3,647 (4,690)
Accrued income taxes................................. (2,560) 4,010 4,360
--------- --------- -------
Total adjustments.................................. 6,097 (32,327) (12,669)
--------- --------- -------
Net cash provided by continuing operating
activities.................................... 46,693 50,314 19,008
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities......................... (158,342) (226,379) --
Proceeds from sale of marketable securities............... 114,475 117,920 --
Proceeds from sale of fixed assets........................ 202 1,116 214
Capital expenditures...................................... (16,838) (4,293) (1,791)
Net proceeds from sale of subsidiary...................... 1,828 -- 18,325
Net proceeds from sale of discontinued operations......... 5,442 134,484 --
--------- --------- -------
Net cash provided by (used in) investing
activities.................................... (53,233) 22,848 16,748
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 5,396 9,964 4,666
Dividends paid to shareholders............................ (16,897) (14,986) (13,026)
Purchase of treasury stock................................ (2,434) (8,063) --
--------- --------- -------
Net cash (used in) financing activities......... (13,935) (13,085) (8,360)
Effect of exchange rates.................................. 96 (1,196) 1,441
Cash (used in) discontinued operations.................... -- (17,695) (12,382)
--------- --------- -------
Net increase (decrease) in cash and cash equivalents...... (20,379) 41,186 16,455
Cash and cash equivalents at beginning of year............ 93,443 52,257 35,802
--------- --------- -------
Cash and cash equivalents at end of year.................. $ 73,064 $ 93,443 $52,257
========= ========= =======
CASH PAID DURING THE YEAR FOR:
Interest................................................ $ 141 $ 197 $ 130
Income taxes............................................ $ 17,784 $ 33,882 $12,584
The accompanying notes are an integral part of the consolidated financial
statements.
22
24
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, 1998, 1997 and 1996 amounted to $2,109,000, $2,112,000
and $1,327,000, 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.
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.
During 1998, the Company adopted Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1), which requires the capitalization of internal use software and other
related costs under certain circumstances. The Company is implementing an
enterprise-wide information system. External direct costs of materials and
services and payroll costs of employees working solely on the application
development stage of the project have been capitalized in accordance with SOP
98-1 (See Note 5). Capitalized costs of the project will be amortized over a
period of
23
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
one to five years commencing with when the system is placed in service. Training
and travel costs related to the system implementation are expensed as 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 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 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 $501,000 and
$620,000 at December 31, 1998 and 1997, respectively. Accumulated amortization
amounted to $1,456,000 and $2,227,000 at December 31, 1998 and 1997,
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 (SFAS) 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).
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.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB), issued SFAS
No. 130, "Reporting Comprehensive Income" (SFAF No. 130), which became effective
for the Company for the year ended December 31, 1998. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements. The Company has elected to include all
information required by SFAS No. 130 in the Consolidated Statement of Changes in
Shareholders' Equity and has reclassified earlier years presented, as required.
Segment and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," (SFAS No. 131) which became effective
for the Company during the year ended December 31, 1998. SFAS No. 131
establishes standards for the disclosure of operating segment and related
24
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
information and also requires disclosures about products and services,
geographic areas and major customers. The adoption of SFAS No. 131 did not
affect the Company's consolidated results of operations or financial position
but did affect the disclosure of segment and related information (See Note 16).
Accounting for Derivatives and Hedging
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) which establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 or
the calendar year 2000 for the Company and cannot be applied retroactively. The
Company has not yet quantified the impacts of adopting SFAS No. 133 on the
consolidated financial statements and has not determined the timing or method of
adoption; however, such adoption could increase volatility in earnings and other
comprehensive income.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
NOTE 3 -- FINANCIAL INSTRUMENTS
Marketable Securities
In accordance with SFAS 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, 1998, marketable securities consist of the following:
UNREALIZED
COST GAINS (LOSSES) MARKET VALUE
------------ -------------- ------------
U.S. Government obligations.............. $ 43,116,000 $ (6,000) $ 43,110,000
Municipal obligations.................... 99,147,000 316,000 99,463,000
Preferred stock.......................... 9,381,000 476,000 9,857,000
Futures contracts, options and other..... 480,000 (151,000) 329,000
------------ --------- ------------
Total marketable securities.... $152,124,000 $ 635,000 $152,759,000
============ ========= ============
25
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, options and other..... 313,000 (110,000) 203,000
------------ --------- ------------
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
and repayment of intercompany loans by its United Kingdom and Canadian
subsidiaries. These contracts enable the Company to buy and sell foreign
currencies in the future at fixed exchange rates. 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, 1998 and 1997, the aggregate notional
amount of foreign exchange contracts was $19,700,000 and $5,800,000,
respectively. At December 31, 1998 and 1997, there were no carrying amounts
related to foreign currency contracts in the Consolidated Balance Sheet.
At December 31, 1998, the Company's forward exchange contracts have
expiration dates which range from one to twenty months. The estimated fair value
of the notional amount of the Company's forward exchange contracts based on
quoted rates as of December 31, 1998 and 1997 were $19,722,000 and $5,705,000,
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, 1998, marketable securities of the Company were
actively managed by five 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, 1998 and 1997, 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,
1998 and 1997 was $14,048,000 and $15,292,000, respectively.
26
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
Land.............................................. $ 7,282,000 $ 6,199,000
Buildings......................................... 12,977,000 9,772,000
Machinery and equipment........................... 18,613,000 18,137,000
Furniture and fixtures............................ 4,290,000 4,156,000
Leasehold improvements............................ 7,997,000 7,916,000
----------- -----------
51,159,000 46,180,000
Less accumulated depreciation and amortization.... 25,542,000 24,893,000
----------- -----------
25,617,000 21,287,000
Construction and system development in progress... 9,723,000 --
----------- -----------
$35,340,000 $21,287,000
=========== ===========
Construction and system development in progress represents primarily the
costs capitalized on the Company's implementation of an enterprise-wide
information system in accordance with SOP 98-1.
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, 1998, under local lines of credit, is $14,007,000. These lines
provide for direct borrowings, letters of credit and overdraft facilities.
In connection with the purchase of imported merchandise, the Company, at
December 31, 1998, had letters of credit outstanding under all lines of
$13,158,000.
NOTE 7 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
Accrued sales commissions......................... $ 2,483,000 $ 3,310,000
Accrued litigation................................ 1,212,000 1,250,000
Accrued payroll and incentive compensation........ 3,354,000 3,546,000
Accruals relating to discontinued operations...... 4,898,000 5,041,000
Other............................................. 11,120,000 9,276,000
----------- -----------
$23,067,000 $22,423,000
=========== ===========
27
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- INVESTMENT AND OTHER INCOME -- NET
The significant components of investment and other income -- net consist of
the following:
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
Investment income............................. $ 9,009,000 $6,866,000 $2,210,000
Interest expense.............................. (141,000) (175,000) (121,000)
Foreign currency transactions................. (593,000) (722,000) (391,000)
Gain on sale of subsidiary.................... 1,828,000 -- 4,800,000
Other......................................... 93,000 280,000 209,000
----------- ---------- ----------
$10,196,000 $6,249,000 $6,707,000
=========== ========== ==========
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. During the year ended December 31, 1998, an
additional $1,828,000 before tax or $1,152,000 ($0.05 per share) after tax,
relating to a transitional agreement, was received and recognized as income 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,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
United States............................... $45,296,000 $38,330,000 $29,376,000
Foreign..................................... 14,288,000 15,334,000 13,179,000
----------- ----------- -----------
$59,584,000 $53,664,000 $42,555,000
=========== =========== ===========
The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
CURRENT PROVISION:
Federal..................................... $ 9,386,000 $10,870,000 $ 8,640,000
Foreign..................................... 4,610,000 4,353,000 3,003,000
State....................................... 1,430,000 558,000 744,000
----------- ----------- -----------
$15,426,000 $15,781,000 $12,387,000
----------- ----------- -----------
DEFERRED PROVISION:
Federal..................................... $ 3,597,000 $ 618,000 $ 3,406,000
Foreign..................................... (35,000) -- 63,000
State....................................... -- -- --
----------- ----------- -----------
3,562,000 618,000 3,469,000
----------- ----------- -----------
$18,988,000 $16,399,000 $15,856,000
=========== =========== ===========
28
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the provision for income taxes with amounts computed at
the statutory Federal rate is shown below:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Tax at U.S. Federal statutory rate.......... $20,854,000 $18,782,000 $14,895,000
State income tax net of Federal tax
benefit................................... 930,000 363,000 610,000
Foreign rate differences.................... (426,000) (1,014,000) 1,011,000
Charitable contributions.................... (592,000) (1,331,000) (686,000)
Tax advantaged investment income............ (2,423,000) (1,344,000) (279,000)
U.K. advance corporation tax refund......... -- (1,660,000) --
Change in valuation allowance............... (451,000) (765,000) (205,000)
Adjustment of estimated liabilities......... -- 1,950,000 271,000
Other, net.................................. 1,096,000 1,418,000 239,000
----------- ----------- -----------
$18,988,000 $16,399,000 $15,856,000
=========== =========== ===========
The Company had a valuation allowance at December 31, 1998 and 1997 of
$768,000 and $1,219,000, 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,
------------------------
1998 1997
---------- ----------
ASSETS (LIABILITIES):
Inventory capitalization............................ $1,800,000 $1,972,000
Reserves not deducted for tax purposes.............. 2,740,000 5,756,000
Accrued future lease obligations.................... 145,000 329,000
Litigation.......................................... 466,000 498,000
Depreciation........................................ (121,000) 21,000
Unrealized gain on marketable securities............ (202,000) --
Other............................................... 497,000 513,000
---------- ----------
Net deferred tax asset.............................. $5,325,000 $9,089,000
========== ==========
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 $59,372,000 as of December 31, 1998.
Determination of the net amount of unrecognized deferred tax liability with
respect to these earnings is not practicable.
NOTE 10 -- EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted SFAS 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.
29
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Average common shares outstanding.............. 22,225,000 22,026,000 21,698,000
Dilutive effect of common shares issuable(1)... 162,000 351,000 156,000
---------- ---------- ----------
Average common shares outstanding assuming
dilution..................................... 22,387,000 22,377,000 21,854,000
========== ========== ==========
- ---------------
(1) Issuable under stock option plans.
Stock options outstanding at December 31, 1998 and 1996 to purchase 213,550
and 78,500 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. At December 31, 1997 there were no such stock
options.
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, 1998, 1997 and 1996
were $3,931,000, $4,122,000 and $4,042,000, respectively. The Company is also a
guarantor under two mortgages for property so leased with a principal amount
aggregating approximately $7,943,000 as of December 31, 1998, $2,000,000 of
which is collateralized by assets of the Company.
The Company also leased a facility through October 1997 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 and 1996 were
$830,000 and $996,000, respectively.
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.
NOTE 12 -- LEASES
At December 31, 1998, 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 seven years.
Rent expense for the years ended December 31, 1998, 1997 and 1996 amounted
to $6,052,000, $6,415,000 and $6,834,000, respectively.
The approximate aggregate minimum future rental payments as of December 31,
1998 under operating leases are as follows:
1999..................................................... $5,823,000
2000..................................................... 5,618,000
2001..................................................... 5,357,000
2002..................................................... 4,922,000
2003..................................................... 4,180,000
Thereafter............................................... 1,930,000
30
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- STOCK REPURCHASE PROGRAM
As of December 31, 1998, the Board of Directors had authorized the Company
to purchase 4,000,000 shares of common stock of which 2,951,000 shares have been
repurchased since the beginning of the Company's stock repurchase program in
March, 1990. In January 1999, the Board of Directors authorized the Company to
repurchase 1,000,000 additional shares to bring the total authorization to
5,000,000 shares.
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, 1998, there were 2,586,478 shares of common stock
reserved for issuance under all stock plans. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
options granted for these 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 in 1998, 1997 and 1996, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Net income -- as reported................... $40,596,000 $82,641,000 $31,677,000
Net income -- pro forma..................... $39,686,000 $82,091,000 $30,951,000
Earnings per share (basic) -- as reported... $1.83 $3.75 $1.46
Earnings per share (basic) -- pro forma..... $1.79 $3.73 $1.43
The fair value of each option granted under the Stock Option Plans 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,
--------------------------
1998 1997 1996
------ ------ ------
Dividend yield.............................................. 2.90% 3.68% 3.75%
Risk-free interest rate..................................... 5.70% 6.05% 6.05%
Volatility.................................................. 40.37% 37.32% 32.09%
Expected life (years)....................................... 3.0 3.1 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,
--------------------------
1998 1997 1996
------ ------ ------
Dividend yield.............................................. 2.90% 3.68% 3.75%
Risk-free interest rate..................................... 5.52% 5.63% 5.44%
Volatility.................................................. 40.37% 37.32% 32.09%
Expected life (years)....................................... 1.0 1.0 1.0
31
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1998, 1997 and 1996 is as
follows:
ALL STOCK OPTION PLANS
----------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- ---------------
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
Options Granted........................................... 223,569 26.250
Options Exercised......................................... (250,386) 16.221
Options Cancelled......................................... (41,548) 19.377
----------
Outstanding as of December 31, 1998....................... 693,928 19.654
Option price range at December 31, 1998............................... $9.59 to $26.25
Option price range for exercised shares............................... $9.59 to $18.50
Options available for grant and reserved for future issuance at
December 31, 1998................................................... 2,496,002
The weighted-average fair value of options granted, on a per share basis,
during the years 1998, 1997 and 1996 was $7.31, $4.70 and $3.19, respectively.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
$12.670.............. 755 Expires 1/1/99 $12.670 755 12.670
10.090.............. 4,250 1 year 10.090 4,250 10.090
9.590.............. 3,231 2 years 9.590 3,231 9.590
12.500.............. 12,894 3 years 12.500 12,894 12.500
17.670.............. 132,841 4 years 17.670 132,841 17.670
14.875.............. 53,802 5 years 14.875 53,802 14.875
13.750.............. 36,024 6 years 13.750 36,024 13.750
13.625.............. 47,515 7 years 13.625 47,515 13.625
18.500.............. 189,066 8 years 18.500 189,066 18.500
26.250.............. 213,550 9 years 26.250 0 26.250
------- -------
693,928 480,378
32
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1998, 1997 and 1996
is as follows:
EMPLOYEE STOCK PURCHASE PLAN
1998 1997 1996
------- ------ ------
Exercise Price............................................ $23.625 $16.65 $12.26
Shares Issued............................................. 1,295 22,780 23,117
As of December 31, 1998, the Employee Stock Purchase Plan has 90,476 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, 1998,
1997 and 1996 was $733,000, $737,000 and $583,000, respectively.
NOTE 16 -- SEGMENT, GEOGRAPHIC AND RELATED INFORMATION
The Company's continuing operations comprise one operating segment,
offering an extensive line of products including stuffed animals, picture
frames, candles, figurines and home decor gifts based on current fashions and
trends. The following table represents financial data of the Company, under the
basis by which the Company has chosen to organize itself, by geographic area:
1998 1997 1996
------------ ------------ ------------
REVENUES:
United States............................ $194,270,000 $200,664,000 $163,906,000
Europe................................... 37,776,000 34,611,000 30,571,000
Other.................................... 38,465,000 36,061,000 31,766,000
------------ ------------ ------------
Total.......................... $270,511,000 $271,336,000 $226,243,000
============ ============ ============
INCOME FROM CONTINUING OPERATIONS:
United States............................ $ 30,883,000 $ 26,284,000 $ 18,588,000
Europe................................... 2,967,000 2,890,000 2,294,000
Other.................................... 6,746,000 8,091,000 5,817,000
------------ ------------ ------------
Total.......................... $ 40,596,000 $ 37,265,000 $ 26,699,000
============ ============ ============
IDENTIFIABLE ASSETS:
United States............................ $304,700,000 $290,413,000 $121,360,000
Europe................................... 36,837,000 30,438,000 33,955,000
Other.................................... 36,919,000 32,594,000 37,625,000
------------ ------------ ------------
Total.......................... $378,456,000 $353,445,000 $192,940,000
============ ============ ============
There were no material sales or transfers among geographic areas and no
material amount of export sales to customers from the United States. Outside of
the United States, no single country would be deemed material for separate
disclosure. The Company has no single customer representing greater than 10% of
consolidated revenues.
33
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and
1996. 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 contingencies 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
----------- ------------
Net sales........................................ $38,614,000 $151,380,000
(Loss) income before taxes....................... (2,483,000) 7,804,000
(Benefit) provision for income taxes............. (1,159,000) 2,826,000
----------- ------------
Net (loss) income................................ $(1,324,000) $ 4,978,000
=========== ============
Advertising costs for discontinued operations for the years ended December
31, 1997 and 1996 amounted to $4,336,000 and $27,683,000, respectively.
Amortization costs related to intangible assets for the years ended
December 31, 1997 and 1996 amounted to $851,000 and $2,512,000, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
34
36
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 through 3 and "SECTION 16 COMPLIANCE" on page 14 of the
1999 Proxy Statement, which is incorporated herein by reference and under the
caption "EXECUTIVE OFFICERS OF THE REGISTRANT" on pages 7 and 8 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 10 through 13 and "COMPENSATION
COMMITTEE REPORT" on pages 5 and 6 in the 1999 Proxy Statement, which are
incorporated herein by reference.
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 1999 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 10 through 13, "CERTAIN TRANSACTIONS" on pages 13 and 14
and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" on page 6 of
the 1999 Proxy Statement, which is incorporated herein by reference.
35
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
PAGE NUMBER
IN THIS REPORT
--------------
1. FINANCIAL STATEMENTS:
Report of Independent Public Accountants -- 1998 and 1997... 16
Report of Independent Public Accountants -- 1996............ 17
Consolidated Statement of Income for the years ended
December 31, 1998, 1997 and 1996.......................... 19
Consolidated Statement of Changes in Shareholders' Equity
for the years ended 1998, 1997 and 1996................... 20
Consolidated Balance Sheet at December 31, 1998 and 1997.... 21
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... 22
Notes to Consolidated Financial Statements.................. 23-34
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.
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)
(d) Amendment to Revised By-Laws of the Company adopted July 25,
1995.(28)
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)
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)
36
38
EXHIBIT
NO.
-------
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)
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)
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)
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)
37
39
EXHIBIT
NO.
-------
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)
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)
10.116 Russ Berrie and Company, Inc. 1999 Stock Option Plan.(28)
10.117 Russ Berrie and Company, Inc. 1999 Stock Option Plan for
Outside Directors.(28)
10.118 Russ Berrie and Company, Inc. 1999 Stock Option and
Restricted Stock Plan.(28)
38
40
EXHIBIT
NO.
-------
10.119 Russ Berrie and Company, Inc. 1999 Employee Stock Purchase
Plan.(28)
10.120 Second Amendment of Agreement dated January 13, 1999, by and
between Russ Berrie and Company, Inc. and A. Curts Cooke.
10.121 Executive Employment Agreement dated April 2, 1998 between
Russ Berrie and Company, Inc. and Paul Cargotch.
10.122 Exercise of option to extend terms of leases dated December
28, 1983 and March 7, 1988 between Russell Berrie and
Russell Berrie and Company, Inc.
21.1 List of Subsidiaries
23.1 Report of Independent Accountants -- 1996
23.2 Consent of Independent Public Accountants -- 1998 and 1997
23.3 Consent of Independent Accountants -- 1996
27.1 Financial Data Schedule -- 1998
- ---------------
(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.
2-88797 on Form S-1, as filed on March 13, 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 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.
(13) Incorporated by reference to Form S-8 Registration Statement No. 33-26161,
as filed on December 16, 1988.
(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.
(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.
(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.
(23) Incorporated by reference to Registration No. 33-51823 on Form S-8, as
filed on January 6, 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.
39
41
(28) Incorporated by reference to Form S-8 Registration Statement No. 333-70081
as filed on January 4, 1999.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1998.
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, 33-26161, 33-27406, 33-27897, 33-27898, 33-51823 and 333-70081):
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.
40
42
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)
By /s/ ERIC R. LOHWASSER
--------------------------------------
Eric R. Lohwasser
Vice President -- Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
3-26-99
- --------------------------------------------------------------------------------
Date
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
- ---------------------------------------------------
Russell Berrie, Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer) 3/30/99
/s/ PAUL CARGOTCH
- ---------------------------------------------------
Paul Cargotch, Executive Vice President,
Assistant Secretary and Director 3/22/99
/s/ RAPHAEL BENAROYA
- ---------------------------------------------------
Raphael Benaroya, Director 3/22/99
/s/ ANGELICA BERRIE
- ---------------------------------------------------
Angelica Berrie, Director 3/26/99
/s/ ILAN KAUFTHAL
- ---------------------------------------------------
Ilan Kaufthal, Director 3/23/99
/s/ CHARLES KLATSKIN
- ---------------------------------------------------
Charles Klatskin, Director 3/30/99
/s/ JOSEPH KLING
- ---------------------------------------------------
Joseph Kling, Director 3/28/99
/s/ WILLIAM A. LANDMAN
- ---------------------------------------------------
William A. Landman, Director 3/30/99
/s/ SIDNEY SLAUSON
- ---------------------------------------------------
Sidney Slauson, Director 3/22/99
/s/ JOSH WESTON
- ---------------------------------------------------
Josh Weston, Director 3/23/99
41
43
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 BALANCE AT
BEGINNING CHARGED TO END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS* OF PERIOD
----------- ---------- ---------- ----------- ----------
Allowance for accounts receivable:
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
Year ended December 31, 1998.................... 2,233 1,872 1,483 2,622
Allowance for slow moving inventory items:
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
Year ended December 31, 1998.................... 15,292 2,754 3,998 14,048
- ---------------
* Principally account write-offs, allowances and disposal of merchandise,
respectively.
S-2