UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2003 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number 1-8681
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RUSS BERRIE AND COMPANY, INC. |
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(Exact name of registrant as specified in its charter) |
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New Jersey |
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22-1815337 |
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(State or other jurisdiction of incorporation or |
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(IRS Employer Identification No.) |
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111 Bauer Drive, Oakland, New Jersey |
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07436 |
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(Address of principal executive offices) |
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(Zip Code) |
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(201) 337-9000 |
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(Registrant’s telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
The number of shares outstanding of each of the registrant’s classes of common stock, as of November 5, 2003 was as follows:
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CLASS |
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OUTSTANDING
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Common Stock, $0.10 stated value |
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20,651,100 |
RUSS BERRIE AND COMPANY, INC.
INDEX
2
PART 1 - FINANCIAL INFORMATION
RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
(Dollars in Thousands)
(UNAUDITED)
The accompanying notes are an integral part of the consolidated financial statements.
3
RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, Except Per Share Data)
(UNAUDITED)
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THREE MONTHS ENDED |
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NINE MONTHS ENDED |
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2003 |
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2002 |
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2003 |
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2002 |
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Net sales |
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$ |
87,848 |
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$ |
95,740 |
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$ |
242,566 |
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$ |
239,384 |
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Cost of Sales |
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41,228 |
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41,893 |
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112,618 |
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106,651 |
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Gross profit |
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46,620 |
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53,847 |
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129,948 |
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132,733 |
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Selling, general and administrative expense |
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32,217 |
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30,931 |
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98,032 |
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90,525 |
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Investment and other income-net |
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1,131 |
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1,216 |
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4,403 |
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5,775 |
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Income before provision for income taxes |
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15,534 |
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24,132 |
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36,319 |
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47,983 |
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Provision for income taxes |
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3,939 |
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6,533 |
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10,567 |
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13,675 |
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Net income |
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$ |
11,595 |
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$ |
17,599 |
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$ |
25,752 |
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$ |
34,308 |
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Net income per share: |
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Basic |
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$ |
0.56 |
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$ |
0.86 |
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$ |
1.25 |
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$ |
1.68 |
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Diluted |
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$ |
0.56 |
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$ |
0.86 |
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$ |
1.25 |
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$ |
1.67 |
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The accompanying notes are an integral part of the consolidated financial statements.
RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(UNAUDITED)
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NINE MONTHS ENDED |
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2003 |
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2002 |
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Cash flows from operating activities: |
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Net income |
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$ |
25,752 |
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$ |
34,308 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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4,885 |
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3,609 |
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Provision for accounts receivable reserves |
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1,448 |
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3,672 |
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Realized loss (gain) on other investments |
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1,537 |
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(97 |
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Other |
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1,147 |
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1,001 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(12,288 |
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(23,199 |
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Inventories — net |
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(4,567 |
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5,273 |
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Prepaid expenses and other current assets |
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154 |
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(255 |
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Other assets |
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(841 |
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85 |
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Accounts payable |
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(882 |
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1,097 |
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Accrued expenses |
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(1,268 |
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5,015 |
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Accrued income taxes |
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1,712 |
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693 |
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Total adjustments |
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(8,963 |
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(3,106) |
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Net cash provided by operating activities |
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16,789 |
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31,202 |
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Cash flows from investing activities: |
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Purchase of marketable securities |
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(354,196 |
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(156,320 |
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Proceeds from sale of marketable securities |
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328,259 |
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127,489 |
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Proceeds from sale of property, plant and equipment |
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17 |
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— |
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Capital expenditures |
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(6,437 |
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(13,006 |
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Payment for purchase of Sassy, Inc. |
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— |
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(46,100 |
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Net cash (used in) investing activities |
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(32,357 |
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(87,937 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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2,836 |
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5,186 |
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Dividends paid to shareholders |
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(17,289 |
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(15,921 |
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Purchase of treasury stock |
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— |
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(214 |
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Net cash (used in) financing activities |
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(14,453 |
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(10,949 |
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Effect of exchange rate changes on cash and cash equivalents |
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4,748 |
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2,701 |
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Net increase (decrease) in cash and cash equivalents |
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(25,273 |
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(64,983 |
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Cash and cash equivalents at beginning of period |
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93,513 |
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148,872 |
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Cash and cash equivalents at end of period |
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$ |
68,240 |
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$ |
83,889 |
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Cash paid during the period for: |
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Interest |
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$ |
17 |
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$ |
20 |
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Income taxes |
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$ |
8,855 |
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$ |
12,982 |
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The accompanying notes are an integral part of the consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have been prepared by Russ Berrie and Company, Inc. and its subsidiaries (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles have been condensed or omitted pursuant to such principles and regulations. The information furnished reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the interim periods presented. Results for interim periods are not necessarily an indication of results to be expected for the year.
The Company operates in two segments which consist of the Company’s core gift business and the Company’s non-core business, which includes the Company’s July 26, 2002 acquisition of Sassy, Inc. The Company’s core business designs, manufactures through third parties and markets a wide variety of gift and home décor products to retail stores throughout the United States and throughout the world via the Company’s international wholly-owned subsidiaries and distributors. The Company’s non-core businesses design and market functional consumer products
5
sold at comparable price points with comparable gross margins to each other and consists of Sassy, Inc. since its acquisition on July 26, 2002 and the Company’s wholly-owned subsidiary Bright of America, Inc. These products are sold to consumers, primarily in the United States, through mass marketers.
Certain prior year amounts have been reclassified to conform to the 2003 presentation. (See Note 8).
This Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2003 should be read in conjunction with the Company’s Quarterly Reports on Form 10-Q for the three months ended March 31, 2003 and June 30, 2003 and the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
NOTE 2 – FINANCIAL INSTRUMENTS
MARKETABLE SECURITIES AND OTHER INVESTMENTS
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 consolidated balance sheet at fair value, with the difference between cost and fair value (unrealized gain and losses) recorded as a component of shareholders’ equity, net of tax in Accumulated Other Comprehensive Income/Loss. These investments consist of U.S. government obligations, municipal obligations, preferred stock and mutual funds. The Company liquidated, in July 2003, its equity investment in a limited partnership which managed a portfolio of mortgage-backed securities to achieve returns through yield income and price appreciation. This investment, included in Other Investments in the consolidated balance sheet until its liquidation, was accounted for using the equity method and accordingly the Company’s proportionate share of the limited partnership’s income or loss amounting to a non-cash loss of $49,000 and $599,000 for the three months ended September 30, 2003 and September 30, 2002, respectively, and a non-cash loss of $1,537,000 and non-cash income of $97,000 for the nine months ended September 30, 2003 and September 30, 2002, respectively, is included in investment and other income-net in the Consolidated Statement of Income. Additionally, realized losses on sales of available-for-sale marketable securities of $112,000 and realized gains of $945,000 for the three months ended September 30, 2003 and 2002, respectively, and realized gains on sales of available-for sale marketable securities of $2,368,000 and $1,136,000 for the nine months ended September 30, 2003 and 2002, respectively, as determined on a specific identification basis, are included in investment and other income, net in the Consolidated Statement of Income.
Marketable securities consist of the following:
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As of September 30, 2003 |
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Cost |
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Gross |
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Gross |
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Fair Value |
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U.S. Government obligations |
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$ |
28,623,000 |
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$ |
44,000 |
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$ |
(87,000 |
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$ |
28,580,000 |
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Municipal obligations |
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101,499,000 |
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532,000 |
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(99,000 |
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101,932,000 |
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Preferred stock & other |
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7,817,000 |
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55,000 |
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(67,000 |
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7,805,000 |
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Equity securities |
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14,025,000 |
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143,000 |
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(270,000 |
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13,898,000 |
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Asset Backed Securities |
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3,486,000 |
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15,000 |
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(3,000 |
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3,498,000 |
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Total marketable securities |
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$ |
155,450,000 |
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$ |
789,000 |
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$ |
(526,000 |
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$ |
155,713,000 |
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As of December 31. 2002 |
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U.S. Government obligations |
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$ |
38,918,000 |
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$ |
155,000 |
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$ |
(5,000 |
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$ |
39,068,000 |
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Municipal obligations |
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52,200,000 |
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848,000 |
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(42,000 |
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53,006,000 |
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Preferred stock & other |
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12,950,000 |
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41,000 |
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(892,000 |
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12,099,000 |
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Equity securities |
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5,148,000 |
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100,000 |
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(71,000 |
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5,177,000 |
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Total marketable securities |
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$ |
109,216,000 |
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$ |
1,144,000 |
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$ |
(1,010,000 |
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$ |
109,350,000 |
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6
NOTE 3 - EARNINGS PER SHARE
A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution is as follows:
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Three Months Ended |
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Nine Months Ended |
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2003 |
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2002 |
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2003 |
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2002 |
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Weighted average common shares outstanding |
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20,628,000 |
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20,452,000 |
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20,581,000 |
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20,401,000 |
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Dilutive effect of common shares issuable under stock option plans |
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104,000 |
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103,000 |
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100,000 |
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124,000 |
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Weighted average common shares outstanding assuming dilution |
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20,732,000 |
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20,555,000 |
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20,681,000 |
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20,525,000 |
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There were no stock options outstanding at September 30, 2003 or September 30, 2002, which were not included in the computation of earnings per common share assuming dilution because none of the options’ exercise prices were greater than the average market price of the common shares.
NOTE 4 - DIVIDENDS
Cash dividends of $5,777,000 ($0.28 per share) were paid on August 29, 2003 to shareholders of record of the Company’s Common Stock on August 15, 2003. Cash dividends of $17,289,000 ($0.28 per share per quarter) were paid in the nine months ended September 30, 2003.
Cash dividends of $5,318,000 ($0.26 per share) were paid on August 30, 2002 to shareholders of record of the Company’s Common Stock on August 16, 2002. Cash dividends of $15,921,000 ($0.26 per share per quarter) were paid in the nine months ended September 30, 2002.
NOTE 5 - COMPREHENSIVE INCOME
Comprehensive Income, representing all changes in Shareholders’ equity during the period other than changes resulting from the issuance or repurchase of the Company’s common stock and payment of dividends, is reconciled to net income for the three and nine months ended September 30, 2003 and 2002 as follows:
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Three Months Ended |
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Nine Months Ended |
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2003 |
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2002 |
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2003 |
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2002 |
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Net income |
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$ |
11,595,000 |
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$ |
17,599,000 |
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$ |
25,752,000 |
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$ |
34,308,000 |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
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669,000 |
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(688,000) |
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5,630,000 |
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3,285,000 |
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Net unrealized gain (loss) on securities available-for-sale |
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372,000 |
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(141,000) |
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94,000 |
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(61,000) |
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Net unrealized gain (loss) on foreign currency forward exchange contracts and other |
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(22,000 |
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(146,000) |
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38,000 |
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550,000 |
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Other comprehensive income |
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1,019,000 |
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(975,000) |
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5,762,000 |
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3,774,000 |
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Comprehensive income |
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$ |
12,614,000 |
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$ |
16,624,000 |
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$ |
31,514,000 |
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$ |
38,082,000 |
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7
NOTE 6 – LITIGATION AND COMMITMENTS
In the ordinary course of its business, the Company is party to various copyright, patent and trademark infringement, unfair competition, breach of contract, customs, employment and other legal actions incidental to its business, as plaintiff or defendant. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially adversely affect the consolidated results of operations, financial condition or cash flows of the Company, except for the matter described below.
As previously reported in the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 2003 and June 30, 2003, an action was commenced against the Company on August 22, 2001, in the United States District Court, District of New Jersey, by Dam Things from Denmark (a/k/a Troll Company ApS.), alleging, among other things, copyright infringement by the Company of the plaintiff’s reinstated United States copyrights for its troll designs, unfair competition under common law and violation of Danish and U.S. copyrights constituting copyright infringement under the laws of the Peoples Republic of China. The plaintiff is seeking, among other things, injunctive relief prohibiting the Company from continuing to offer for sale its troll products, cancellation of the Company’s U.S. copyright registrations with respect to its various troll products, as well as unspecified damages and attorney’s fees and expenses. On December 3, 2001, a preliminary injunction was issued by the District Court which, as subsequently modified, prohibited the Company from manufacturing and importing its troll products into the United States and selling such products in the United States after a date specified by the court. The issuance of the preliminary injunction was appealed by the Company to the Third Circuit Court of Appeals. On May 14, 2002, the appeals court vacated the preliminary injunction, and the matter was remanded to the District Court. The plaintiff, on June 13, 2003, renewed its motion for preliminary injunctive relief seeking to reinstate the relief which was previously vacated by the Third Circuit Court of Appeals. The District Court had set September 8, 2003, for a hearing on this motion, but after a conference with the parties the Court requested new legal submissions from the parties and it adjourned the hearing without setting a new hearing date. The Company believes it has substantial defenses to the allegations. In the quarter ended September 30, 2003, the sale of troll products represented less than one-half of one percent of the Company’s net sales. As of December 31, 2001 in response to the issuance of the preliminary injunction, the Company had segregated the amount of its troll products inventory and recorded such inventory as a long-term asset in the Company’s Consolidated Balance Sheet. As a result of the vacation of the preliminary injunction, such inventory is no longer segregated or classified as a long-term asset. The Company does not believe that the ultimate resolution of this action will have a material adverse impact on the consolidated financial condition of the Company; however, the outcome of any litigation is uncertain. The plaintiff has advised the Company of its intention to amend the claims under the litigation to include alleged infringements of the plaintiff’s copyrights under the laws of unspecified foreign countries and to seek unspecified damages for sales of the Company’s troll products sold throughout the world. Since the new assertions have not, to date, been included in the litigation, the Company cannot evaluate them or their potential impact on the Company.
The Company has entered into letter agreements, dated July 2, 2003, with each of eleven employees of the Company, with respect to the payment of a special cash bonus to such employee in the event that an unaffiliated purchaser acquires substantially all of the Company's outstanding stock or assets through a negotiated transaction on or before December 31, 2003. Such bonus is payable only in the event that the relevant officer remains employed by the Company through the consummation of such transaction. The aggregate potential amount of the bonuses that could be payable by the Company under all such letter agreements equals $1,450,000.
NOTE 7 - ACQUISITION
On July 26, 2002, pursuant to the terms of an asset purchase agreement, a wholly-owned subsidiary of the Company acquired the business and substantially all of the assets of Sassy, Inc. (“Sassy”), a designer, manufacturer and distributor of baby and juvenile products based in Grand Rapids, Michigan, including, but not limited to, real property, tangible personal property, inventory, most accounts receivable, designated contracts, intellectual property rights, governmental authorizations and intangible rights. The assets acquired will continue to be used by the Company in Sassy’s business. In addition to the Sassy brand, the Company also gained distribution rights to certain baby soothing and comforting products from MAM Babyartikel GmbH, of Vienna, Austria. The Company purchased privately held Sassy, Inc. for approximately $46,204,000 (including acquisition costs and a working capital adjustment) using the Company’s own internal funds, based on Sassy’s current and projected earnings before interest, taxes, depreciation and amortization, and working capital. Additional payments, not expected to exceed $3,800,000, may become payable based on future performance and other measurements and will be expensed as incurred in the Company’s Consolidated Statement of Income. The results of operations of Sassy, Inc. are included in the Company’s Consolidated Statement of Income since July 26, 2002.
The Company believes that the identifiable intangible assets purchased in the acquisition valued based upon a third party valuation have an indefinite life. Goodwill of $10,388,000 was assigned to the Company’s non-core segment. The aggregate amount of goodwill expected to be deductible for tax purposes is estimated to be $10,176,000. There have been no changes in the carrying amount of goodwill during the three and nine months ended September 30, 2003.
8
The following unaudited pro forma consolidated results of operations for the three months and nine months ended September 30, 2002 assumes the acquisition of Sassy, Inc. occurred as of January 1, 2002.
|
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Three months ended |
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Nine months ended |
|
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|
Net sales |
|
$ |
98,597,000 |
|
$ |
265,865,000 |
|
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Net income |
|
17,900,000 |
|
36,420,000 |
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Net income per share: |
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|
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Basic |
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$ |
0.88 |
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$ |
1.79 |
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Diluted |
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$ |
0.87 |
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$ |
1.77 |
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The above amounts are based upon certain assumptions and estimates, and do not reflect any benefits from combined operations. The pro forma results have not been audited and do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, and may not be indicative of the results of future combined operations.
NOTE 8 – SEGMENTS OF THE COMPANY AND RELATED INFORMATION
The Company operates in two segments which consist of the Company’s core gift business and the Company’s non-core business, which includes the Company’s July 26, 2002 acquisition of Sassy, Inc. This segmentation of the Company’s operations reflects how the Company’s Chief Executive Officer currently views the results of operations. There are no intersegment revenues to eliminate. Prior to the acquisition of Sassy, Inc., the Company had only one reportable segment, as such, the Company has reclassified the prior year’s single segment information to be consistent with the current period’s presentation.
The Company’s core business designs, manufactures through third parties and markets a wide variety of gift and home décor products to retail stores throughout the United States and throughout the world via the Company’s international wholly-owned subsidiaries and distributors. The Company’s non-core business designs and markets functional consumer products sold at comparable price points with comparable gross margins to each other and consists of the Company’s wholly-owned subsidiaries, Sassy, Inc. and Bright of America, Inc. The products are sold to consumers, primarily in the United States, through mass marketers.
9
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
Core: |
|
|
|
|
|
|
|
|
|
||||
|
Net sales |
|
$ |
73,681,000 |
|
$ |
83,761,000 |
|
$ |
199,285,000 |
|
$ |
223,077,000 |
|
|
Income before income taxes |
|
13,007,000 |
|
22,258,000 |
|
30,244,000 |
|
45,465,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Non-core: |
|
|
|
|
|
|
|
|
|
||||
|
Net Sales |
|
14,167,000 |
|
11,979,000 |
|
43,281,000 |
|
16,307,000 |
|
||||
|
Income before income taxes |
|
2,527,000 |
|
1,874,000 |
|
6,075,000 |
|
2,518,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Consolidated: |
|
|
|
|
|
|
|
|
|
||||
|
Net Sales |
|
87,848,000 |
|
95,740,000 |
|
242,566,000 |
|
239,384,000 |
|
||||
|
Income before income taxes |
|
15,534,000 |
|
24,132,000 |
|
36,319,000 |
|
47,983,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, total assets of each segment were as follows:
|
|
|
September 30, |
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
Core |
$ |
375,861,000 |
|
$ |
363,820,000 |
|
|
Non-core |
|
71,215,000 |
|
66,632,000 |
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
447,076,000 |
|
$ |
430,452,000 |
|
NOTE 9—INVESTMENT AND OTHER INCOME – NET
The significant components of investment and other income—net consist of the following:
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
Investment income |
|
$ |
926,000 |
|
$ |
1,688,000 |
|
$ |
4,201,000 |
|
$ |
5,770,000 |
|
|
Interest (expense) income |
|
(4,000 |
) |
27,000 |
|
(17,000 |
) |
(20,000 |
) |
||||
|
Foreign currency transactions, net |
|
69,000 |
|
(530,000 |
) |
13,000 |
|
(81,000 |
) |
||||
|
Other |
|
140,000 |
|
31,000 |
|
206,000 |
|
106,000 |
|
||||
|
Total |
|
$ |
1,131,000 |
|
$ |
1,216,000 |
|
$ |
4,403,000 |
|
$ |
5,775,000 |
|
NOTE 10 - ACCOUNTING FOR STOCK OPTIONS
During the fourth quarter of 2002, the Company adopted the disclosure provisions of SFAS No. 148. The Company had previously adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and, therefore, accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations using the intrinsic value method of accounting. Accordingly, no compensation cost has been recognized for the options granted under these Stock Plans except for the application of Financial Accounting Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation”, which resulted in non cash income of $75,000 and $236,000 during the three months ended September 30, 2003 and September 30, 2002, respectively, and non cash charges of $7,000 and $49,000 during the nine months ended September 30, 2003 and September 30, 2002, respectively, which is included in selling, general and administrative expenses in the Consolidated Statement of Income. These charges relate only to the options granted during 2000 that were repriced as of February 29, 2000 upon approval of the Board of Directors and Shareholders. Had compensation cost for the Company’s Stock Plans been determined based on the fair value recognition provisions of SFAS No. 123 at the grant date, in the three and nine months ended September 30, 2003 and 2002, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:
10
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
Net income-as reported |
|
$ |
11,595,000 |
|
$ |
17,599,000 |
|
$ |
25,752,000 |
|
$ |
34,308,000 |
|
|
Deduction for stock-based compensation expense determined under fair value method net of tax-pro forma |
|
392,905 |
|
518,264 |
|
620,240 |
|
651,104 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income-pro forma |
|
11,202,095 |
|
17,080,736 |
|
25,131,760 |
|
33,656,896 |
|
||||
|
Earnings per share (basic) - as reported |
|
.56 |
|
.86 |
|
1.25 |
|
1.68 |
|
||||
|
Earnings per share (basic) – pro forma |
|
.54 |
|
.84 |
|
1.22 |
|
1.65 |
|
||||
|
Earnings per share (diluted) – as reported |
|
.56 |
|
.86 |
|
1.25 |
|
1.67 |
|
||||
|
Earnings per share (diluted) – pro forma |
|
.54 |
|
.83 |
|
1.22 |
|
1.64 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
Dividend yield |
|
3.22 |
% |
3.36 |
% |
3.22 |
% |
3.36 |
% |
||||
|
Risk-free interest rate |
|
2.09 |
% |
3.69 |
% |
2.09 |
% |
3.69 |
% |
||||
|
Volatility |
|
32.64 |
% |
86.94 |
% |
18.72 |
% |
34.6 |
% |
||||
|
Expected life (years) |
|
2.9 |
|
3.3 |
|
2.9 |
|
3.3 |
|
||||
|
Weighted average fair value of options granted during the year |
|
$ |
6.37 |
|
$ |
15.85 |
|
$ |
3.49 |
|
$ |
6.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11 - FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS
Certain of the Company’s foreign subsidiaries periodically enter into foreign currency forward exchange contracts (“Forward Contracts”) to hedge inventory purchases, both anticipated and firm commitments, denominated in the United States dollar. These contracts reduce foreign currency risk caused by changes in exchange rates and are used to hedge these inventory purchases, generally for periods up to 13 months. At September 30, 2003, the Company’s Forward Contracts have expiration dates which range from one to eight months.
Since there is a direct relationship between the Forward Contracts and the currency denomination of the underlying transaction, such Forward Contracts are highly effective in hedging the cash flows of certain of the Company’s foreign subsidiaries related to transactions denominated in the United States dollar. These Forward Contracts meet the criteria for cash flow hedge accounting treatment and accordingly, gains or losses are included in other comprehensive income (loss) and are recognized in cost of sales based on the turnover of inventory.
NOTE 12 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 will require the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also will record a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company adopted SFAS No. 143 on January 1, 2003 and such adoption did not have a material effect on the Company’s consolidated financial statements.
11
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS No. 146 with respect to the aforementioned activities occurring during the quarter ended September 30, 2003, and such adoption did not have a material impact on the Company’s consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on the Company’s consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of this Interpretation did not have a material effect on the Company’s consolidated financial statements.
In April 2003, the FASB issued No. 149, “Amendment of Statement 133 on Derivatives Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” The changes are for decisions made as part of the derivatives implementation group process that effectively required amendments to Statement 133, in connection with other board projects dealing with financial instruments, and in connection with implementation issues raised in relation to the application of the definition of a derivative, in particular, the meaning of an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors, the meaning of underlying, and the characteristics of a derivative that contains financing components. SFAS No. 149 will be effective for contracts entered into or modified after June 30, 2003 except for implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective dates, and for hedging relationships designated after June 30, 2003 and all provisions of this Statement should be applied prospectively. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150, Accounting for Certain Financials Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Previously, many of these instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of non public entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company does not believe the adoption of this statement will have a material impact on its consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The financial and business analysis below provides information which the Company believes is relevant to an assessment and understanding of the Company’s consolidated financial condition, changes in financial condition
12
and results of operations. This financial and business analysis should be read in conjunction with the Notes to the Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
SEGMENTS
The Company operates in two segments which consist of the Company’s core gift business and the Company’s non-core business, which includes the Company’s July 26, 2002 acquisition of Sassy, Inc. The Company’s core business designs, manufactures through third parties and markets a wide variety of gift and home décor products to retail stores throughout the United States and throughout the world via the Company’s international wholly-owned subsidiaries and distributors. The Company’s non-core businesses design and market functional consumer products sold at comparable price points with comparable gross margins to each other and consists of Sassy, Inc. since its acquisition on July 26, 2002 and the Company’s wholly-owned subsidiary Bright of America, Inc. These products are sold to consumers, primarily in the United States, through mass marketers.
RESULTS OF OPERATIONS—NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
The Company’s consolidated net sales for the nine months ended September 30, 2003 increased 1.3% to $242,566,000 compared to consolidated net sales of $239,384,000 for the nine months ended September 30, 2002. The net sales increase was primarily attributable to the Company’s non-core segment, specifically, from sales generated by Sassy, Inc., whose results of operations are included since its acquisition on July 26, 2002, offset in part by the decline in net sales in the Company’s core segment in its United States and certain international markets.
The Company’s core segment’s net sales for the nine months ended September 30, 2003 decreased 10.7% to $199,285,000 compared to core net sales of $223,077,000 for the nine months ended September 30, 2002 primarily as a result of the continuing difficult retail environment in its United States and certain international markets. Net sales in the Company’s core segment benefited from foreign exchange rates by approximately $7,400,000 for the nine months ended September 30, 2003. The Company’s non-core segment’s net sales for the nine months ended September 30, 2003 increased to $43,281,000 compared to non-core net sales of $16,307,000 for the nine months ended September 30, 2002 as a result of the acquisition of Sassy, Inc.
Consolidated cost of sales were 46.4% of consolidated net sales for the nine months ended September 30, 2003 as compared to 44.6% of consolidated net sales for the nine months ended September 30, 2002. Cost of sales for the Company’s core segment were 42.4% of net sales for such segment for the nine months ended September 30, 2003 as compared to 43.2% of net sales for the nine months ended September 30, 2002 due primarily to lower charitable donations of inventory in the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002. Cost of sales for the Company’s non-core segment were 65.1% of net sales for such segment for the nine months ended September 30, 2003 as compared to 63.0% of net sales for the nine months ended September 30, 2002 primarily due to the addition of Sassy, Inc.
Consolidated selling, general and administrative expense was $98,032,000 or 40.4% of consolidated net sales for the nine months ended September 30, 2003 compared to $90,525,000 or 37.8% of consolidated net sales for the nine months ended September 30, 2002. This increase in consolidated selling, general and administrative expense is due primarily to the addition of Sassy, Inc. to its non-core segment, a $1,300,000 restructuring charge for headcount reductions and closure of certain of the Company’s showrooms completed during the third quarter which is expected to result in reduced overhead prospectively, and higher systems related costs in its core segment. See “Liquidity and Capital Resources” below.
Consolidated investment and other income of $4,403,000 for the nine months ended September 30, 2003 compares to $5,775,000 for the nine months ended September 30, 2002, a decrease of $1,372,000, or 23.8%. This decrease was primarily the result of lower investment income, offset, in part, by foreign exchange gains for the nine months ended September 30, 2003 as compared to foreign exchange losses for the nine months ended September 30, 2002 in the Company’s core segment (See Notes 2 and 9 to the Notes to the Consolidated Financial Statements).
13
The consolidated provision for income taxes as a percent of income before taxes for the nine months ended September 30, 2003 was 29.1% compared to 28.5% for the nine months ended September 30, 2002. The increase in the effective income tax rate is due primarily to a lower amount of charitable donations resulting in a reduced income tax benefit as compared to the nine months ended September 30, 2002.
Consolidated net income for the nine months ended September 30, 2003 was $25,752,000 compared to consolidated net income of $34,308,000 for the nine months ended September 30, 2002, representing a decrease of $8,556,000 or 24.9% and a decrease of $0.42, or 25.1%, per diluted share (See Note 3 to the Notes to the Consolidated Financial Statements). The decrease in consolidated net income was primarily the result of decreased sales in the Company’s core segment, increased consolidated selling, general and administrative expense and lower investment and other income, slightly offset by increased sales in the Company’s non-core segment, as described above.
RESULTS OF OPERATIONS—THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
The Company’s consolidated net sales for the three months ended September 30, 2003 declined 8.2% to $87,848,000 compared to consolidated net sales of $95,740,000 for the three months ended September 30, 2002. The net sales decrease was primarily attributable to the decline in net sales in the Company’s core segment in its United States and certain international markets, offset, in part, by the increase in sales in the Company’s non-core segment, specifically, from sales generated by Sassy, Inc., whose results of operations are included since its acquisition on July 26, 2002.
The Company’s core segment’s net sales for the three months ended September 30, 2003 decreased 12.0% to $73,681,000 compared to core net sales of $83,761,000 for the three months ended September 30, 2002 primarily as a result of the continuing difficult retail environment in its United States and certain international markets. Net sales in the Company’s core segment benefited from foreign exchange rates by approximately $2,700,000 in the three months ended September 30, 2003. The Company’s non-core segment’s net sales for the three months ended September 30, 2003 increased to $14,167,000 compared to non-core net sales of $11,979,000 for the three months ended September 30, 2002 as a result of the acquisition of Sassy, Inc.
Consolidated cost of sales increased to 46.9% of consolidated net sales for the three months ended September 30, 2003, as compared to 43.8% of consolidated net sales for the three months ended September 30, 2002. Cost of sales for the Company’s core segment were 43.5% of net sales for such segment for the three months ended September 30, 2003 as compared to 40.8% of net sales for the three months ended September 30, 2002, due primarily to lower gross profit margins on sales of certain of the Company’s core product line concepts and higher inventory reserve requirements. Cost of sales for the Company’s non-core segment were 65.0% of net sales for such segment for the three months ended September 30, 2003 as compared to 64.4% of net sales for the three months ended September 30, 2002, due primarily to the addition of Sassy, Inc. in the comparable three months of the prior year.
Consolidated selling, general and administrative expense was $32,217,000 or 36.7% of consolidated net sales for the three months ended September 30, 2003 compared to $30,931,000 or 32.3% of consolidated net sales for the three months ended September 30, 2002. This increase in consolidated selling, general and administrative expense is due primarily to a $1,300,000 restructuring charge resulting from headcount reductions and closure of certain of the Company’s showrooms completed in the third quarter which are expected to result in reduced overhead prospectively, higher systems related costs in its core segment and the addition of Sassy, Inc. to its non-core segment, offset, in part, by lower costs in the Company’s core business for the three months ended September 30, 2003.
Consolidated investment and other income of $1,131,000 for the three months ended September 30, 2003 compares to $1,216,000 for the three months ended September 30, 2002, a decrease of $85,000, or 7.0%. This decrease was primarily the result of lower investment income, offset, in part, by foreign exchange gains for the three months ended September 30, 2003 as compared to foreign exchange losses in the three months ended September 30, 2002 in the Company’s core segment (See Notes 2 and 9 to the Notes to the Consolidated Financial Statements).
14
The consolidated provision for income taxes as a percent of income before taxes for the three months ended September 30, 2003 was 25.4% compared to 27.1% for the three months ended September 30, 2002. The decrease in the effective income tax rate is due primarily to the finalization of audits of U.S. tax returns through 1999, true up of the Company’s tax provision to its recently filed U.S. tax return and lower effective tax rates of certain of its international subsidiaries.
Consolidated net income for the three months ended September 30, 2003 was $11,595,000 compared to consolidated net income of $17,599,000 for the three months ended September 30, 2002, representing a decrease of $6,004,000 or 34.1% and a decrease of $0.30 or 34.9% per diluted share (See Note 3 to the Notes to the Consolidated Financial Statements). The decrease in consolidated net income was primarily the result of the sales decline in the core segment, increased consolidated selling, general and administrative expense and lower investment and other income, offset, in part, by the lower effective income tax rate, as discussed above.
The Company is dependent upon information technology systems in many aspects of its business. During 2002, the Company began a project to implement a new Enterprise Resource Planning (“ERP”) system for the Company’s core businesses and successfully completed the replacement of its warehouse management system in its South Brunswick, New Jersey and Petaluma, California, Canadian and European distribution facilities in addition to the implementation of the purchasing module of its new ERP system worldwide. The Company’s prior custom software that had been utilized to operate and manage its business and other third party software systems are being replaced using a strategic and phased approach. The Company’s worldwide headquarters in the United States completed the implementation of the finance module of the new ERP system in the first quarter of 2003 and transitioned to the order management and inventory modules during the second quarter of 2003. The Company’s international subsidiaries have begun to phase-in certain aspects of the Company’s new ERP system and the transition to order management, inventory and finance modules is now anticipated by the end of the fourth quarter of 2004. This delay is meant to continue to enable the Company to enhance its proficiency in utilizing the new system and to help ensure the efficiency of the international implementations. The Company has experienced certain startup issues but has not experienced any significant business disruptions related to the replacement of these systems.
Liquidity and Capital Resources
As of September 30, 2003, the Company had cash, cash equivalents, marketable securities and other investments of $223,953,000 as compared to $225,751,000 at December 31, 2002.
As of September 30, 2003 and December 31, 2002, the Company had marketable securities and other investments of $155,713,000 and $132,238,000 respectively, included in the amounts above. This increase is primarily a result of the Company’s investment of additional cash and cash equivalents in marketable securities. As of September 30, 2003 these investments consist of U.S. government obligations, municipal obligations, preferred stock, mutual funds and equity securities. The objective of the investment portfolio is to maximize after-tax returns while minimizing risk. The Company’s marketable securities are subject to market fluctuations based largely, but not exclusively, on the securities’ sensitivity to changes in interest rates. For more information regarding marketable securities and other investments, see Note 2 of the Notes to Consolidated Financial Statements.
Working capital requirements during the quarter ended September 30, 2003 were met entirely through internally generated funds. The Company anticipates capital expenditure requirements for 2003 to be approximately $8,000,000, primarily for systems development costs. Capital expenditures for the quarter ended September 30, 2003 of $2,391,000 and $6,437,000 for the nine months ended September 30, 2003 were primarily for systems development. The Company remains in a highly liquid position and believes that the resources available from cash and cash equivalents, marketable securities, operations and bank lines of credit are sufficient to meet the foreseeable requirements of its business.
Certain buildings, including the newly constructed facility in the United Kingdom, are leased from entities or parties owned or controlled by, or related to the late Russell Berrie, one of the Company’s former directors, who was also Chairman and Chief Executive Officer of the Company and a significant shareholder, until his death on December 25, 2002. Ms. Angelica Berrie, Chief Executive Officer, Director of the Company and the widow of Mr. Berrie, is the beneficial owner of the landlord of the UK facility as distributee under a trust established by the late Mr. Berrie, subject to administration by the executors of the Estate of Russell Berrie and by the trustees of said
15
trust. The lease, which commenced in April 2002, is for a term of twenty years and includes a tenant’s option to terminate the lease at the end of the tenth year. The Company occupied the facility in June 2002. Annual base rental is approximately $1,600,000 with rent reviews at the end of every fifth year of the lease, adjusted to an open market rental value. A discussion of other related party information including debt guarantees is included in Item 13, “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS”, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
The Company enters into forward exchange contracts, principally to manage the economic currency risks associated with the purchase of inventory by its European, Canadian and Australian subsidiaries. Gains and losses related to such contracts were not material to its results of operations or cash flows. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts.
As of September 30, 2003, the Board of Directors had previously authorized the Company to repurchase 7,000,000 shares of common stock of which 5,643,200 shares have been repurchased since the beginning of the Company’s stock repurchase program in March 1990. During the quarter ended September 30, 2003, no shares were repurchased by the Company.
Cash dividends of $5,777,000 ($0.28 per share) and $5,318,000 ($0.26 per share) were paid in the quarters ended September 30, 2003 and September 30, 2002, respectively. Cash dividends of $17,289,000 ($0.28 per share per quarter) and $15,921,000 ($0.26 per share per quarter) were paid in the nine months ended September 30, 2003 and September 30, 2002, respectively.
The Company is subject to legal proceedings and claims arising in the ordinary course of its business that could possibly have a material adverse impact on the Company’s results of operations and cash flows. See Note 6 of the Notes to Consolidated Financial Statements for information regarding specific litigation.
In connection with the Company’s continuing expansion of its operations in the People’s Republic of China (“PRC”), the Company completed a voluntary review of the activities of its offices in the PRC to assess their compliance with applicable laws and regulations. As a result of this review, management became aware of some potential operational and tax compliance issues under applicable PRC laws and regulations and is taking appropriate corrective actions. As a result, although the relevant PRC authorities have broad discretion with respect to the imposition of sanctions on noncompliant companies, the Company does not expect the consequences, if any, of these matters to have a material impact on its results of operations, financial condition or cash flows.
Consistent with its past practices and in the normal course of its business, the Company regularly reviews acquisition opportunities of varying sizes. There can be no assurance, however, that any discussions arising in connection therewith will result in definitive purchase agreements and, if they do, what the terms or timing of any such agreements would be.
The Board of Directors is exploring various strategic alternatives that may be available to the Company and has engaged Bear Stearns to act as its financial advisor in this connection. At this time, there can be no assurance as to when or if these preliminary efforts will lead to a transaction. The Company’s financial advisor believes that it is unlikely that any transaction in the foreseeable future would value the Company significantly in excess of its current market capitalization.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure about Critical Accounting Policies”, issued by the Securities and Exchange Commission (“SEC”), advises companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 of the Notes to Consolidated Financial Statements on the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, includes a summary of the significant accounting policies and methods used in the preparation of the Company’s Consolidated Financial Statements. The following is a brief discussion of those accounting policies and methods used by the Company which require subjective judgments and are considered critical to the understanding of the Company’s consolidated financial condition, results of operations and cash flows.
Marketable Securities and Other Investments
The Company has a significant amount of marketable securities, all of which are considered as available-for-sale investments, in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Accordingly, these investments, except for the investment in the limited partnership, which was
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liquidated in July 2003, are carried in the accompanying consolidated balance sheet at fair value, with the difference between cost and fair value recorded as a component of shareholders’ equity, net of tax, in Accumulated Other Comprehensive Income/Loss. The investment in the limited partnership was accounted for using the equity method and accordingly the Company’s proportionate share of the limited partnership’s income or loss amounting to a non-cash loss of $49,000 for the quarter ended September 30, 2003, which is included in investment and other income-net in the Consolidated Statement of Income. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statement of Income. As of September 30, 2003, marketable securities were comprised primarily of U.S. government obligations, municipal obligations, preferred stock, mutual funds and other equity securities. The Company’s marketable securities are subject to market fluctuations based largely, but not exclusively, on the securities’ sensitivity to changes in interest rates.
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Accounts Receivable, Trade and Revenue Recognition
In the normal course of business, the Company extends credit to customers which satisfy established credit criteria. The Company believes that it does not have a significant concentration of credit risk due to the significant diversity of its customer base. Accounts receivable, trade, as shown on the Consolidated Balance Sheet, is net of allowances, discounts and estimated bad debts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectibility based on historical trends and an evaluation of the impact of current and projected economic conditions.
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended. SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of a sales arrangement exists; (2) delivery has occurred or services rendered; (3) the amount of revenue is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the amounts billed to the Company’s customers for products delivered and services rendered and the collectibility of those revenues.
Inventory
The Company values inventory at the lower of the actual cost or its current estimated market value. The Company regularly reviews inventory quantities on hand, by item, and records a provision for excess inventory based primarily on the Company’s historical experience and estimated forecast of product demand using historical and recent ordering data relative to the quantity on hand for each item. A significant decrease in demand for the Company’s products could result in an increase in the amount of excess inventory quantities on hand, however, the Company manages inventory and monitors product purchasing to minimize this risk.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows.
Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
Accrued Liabilities
The preparation of the Company’s consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make certain estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent liabilities at the date of the financial statements. Such liabilities include, but are not limited to, accruals for various legal matters, tax accruals and valuation allowances, self-funded medical claims for its domestic business, product liability claims, sales commissions and bonuses and management incentive compensation plans. The settlement of the actual liabilities could differ from the estimates included in the Company’s consolidated financial statements.
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RECENTLY ISSUED ACCOUNTING STANDARDS
The information set forth in Part I, Financial Information, Item 1, Notes to Consolidated Financial Statements, Note 12 - “Recently Issued Accounting Standards”, of this Quarterly Report on Form 10-Q is incorporated herein by reference thereto.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission (SEC) filings and otherwise. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements. These statements may be identified by the use of forward-looking words or phrases including, but not limited to, “anticipate”, “believe”, “expect”, “intend”, “may”, “planned”, “potential”, “should”, “will” or “would”. The Company cautions readers that results predicted by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Specific risks and uncertainties include, but are not limited to, the Company’s ability to continue to manufacture its products in the Far East, the seasonality of revenues, the actions of competitors, ability to increase production capacity, price competition, the effects of government regulation, results of any enforcement action by the People Republic of China (“PRC”) authorities with respect to the Company’s PRC operations, the resolution of various legal matters, possible delays in the introduction of new products, customer acceptance of products, issues related to the Company’s new business ventures, changes in foreign currency exchange rates, issues related to the Company’s computer systems, the current and future outlook of the global retail market, and other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2003, there have been no material changes in the Company’s market risks as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Based on the evaluation required by paragraph (b) of Rule 13a-15 or 15d-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act), are effective.
There has been no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The information set forth in Part I, Financial Information, Item 1, “Notes to Consolidated Financial Statements, Note 6 — Litigation,” of this Quarterly Report on Form 10-Q is incorporated herein by reference thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits to this Quarterly Report on Form 10-Q.
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10.72 Letter dated July 2, 2003 between the Company and Arnold Bloom regarding retention bonus.
10.73 Letter dated July 2, 2003 between the Company and Chris Robinson regarding retention bonus.
10.74 Letter dated July 2, 2003 between the Company and Curts Cooke regarding retention bonus.
10.75 Letter dated July 2, 2003 between the Company and Dan Schlotterbeck regarding retention bonus.
10.76 Letter dated July 2, 2003 between the Company and Eva Goldenberg regarding retention bonus.
10.77 Letter dated July 2, 2003 between the Company and Jack Toolan regarding retention bonus.
10.78 Letter dated July 2, 2003 between the Company and Jeff Bialosky regarding retention bonus
10.79 Letter dated July 2, 2003 between the Company and John Wille regarding retention bonus
10.80 Letter dated July 2, 2003 between the Company and Michael Saunders regarding retention bonus
10.81 Letter dated July 2, 2003 between the Company and Ricky Chan regarding retention bonus
10.82 Letter dated July 2, 2003 between the Company and Tom Higgerson regarding retention bonus
10.83 Executive Employment Agreement dated September 22, 2003 between Russ Berrie and Company, Inc. and John T. Toolan
10.84 Stock Option Agreement dated September 8, 2003 between Russ Berrie and Company, Inc. and Geff Lee.
10.85 Stock Option Agreement dated September 5, 2003 between Russ Berrie and Company, Inc. and Dennis Nesta.
31.1 Certification of CEO required by Section 302 of the Sarbanes Oxley Act of 2002.
31.2 Certification of CFO required by Section 302 of the Sarbanes Oxley Act of 2002.
32.1 Certification of CEO required by Section 906 of the Sarbanes Oxley Act of 2002.
32.2 Certification of CFO required by Section 906 of the Sarbanes Oxley Act of 2002.
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During the quarter ended September 30, 2003, the Company filed a current report on Form 8-K on July 31, 2003 under Item 7. Financial Statements, Pro Forma Financial Information and Exhibits and Item 12. Results of Operations and Financial Condition, with respect to the issuance of a press release covering results of operations and financial condition for the second quarter of 2003. |
Items 2, 3, 4 and 5 are not applicable and have been omitted.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: November 14, 2003 |
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John D. Wille |
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Vice President and |
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