1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended ........... March 31, 1997 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .................to........................... Commission file number ................................................1-8681 RUSS BERRIE AND COMPANY, INC. ................................................................................ (Exact name of registrant as specified in its charter) New Jersey 22-1815337 ................................................................................ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 111 Bauer Drive, Oakland, New Jersey 07436 ................................................................................ (Address of principal executive offices) (Zip Code) (201) 337-9000 ................................................................................ (Registrant's telephone number, including area code) ................................................................................ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT APRIL 10, 1997 ----- ----------------------------- Common stock, $.10 stated value 22,209,491 2 RUSS BERRIE AND COMPANY, INC. INDEX PAGE PART I - FINANCIAL INFORMATION NUMBER - ------------------------------ ------ Item 1. Financial Statements Consolidated Balance Sheet as of March 31, 1997 and December 31, 1996 3 Consolidated Statement of Income for the three month periods ended March 31, 1997 and 1996 4 Consolidated Statement of Cash Flows for the three month periods ended March 31, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 and 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 and 9 PART II - OTHER INFORMATION 10 Item 6. Exhibits and Reports on Form 8-K Signatures 11 2 3 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) (UNAUDITED) ASSETS MARCH 31, DECEMBER 31, 1997 1996 ------------- ------------ Current assets Cash and cash equivalents ................... $ 60,738 $ 52,257 Accounts receivable, trade, less allowances; $2,473 in 1997 and $2,258 in 1996 ........ 54,429 49,355 Inventories - net ........................... 50,025 54,350 Prepaid expenses and other current assets ... 2,824 2,558 Deferred income taxes ....................... 9,705 9,707 Net current assets of discontinued operations 42,093 47,386 --------- --------- TOTAL CURRENT ASSETS ............ 219,814 215,613 Property, plant and equipment - net ........... 21,029 21,765 Other assets .................................. 2,868 2,948 Net assets of discontinued operations ......... 35,583 36,640 --------- --------- TOTAL ASSETS .................... $ 279,294 $ 276,966 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable ............................ $ 4,577 $ 3,709 Accrued expenses ............................ 13,560 18,776 Accrued income taxes ........................ 6,656 5,755 --------- --------- TOTAL CURRENT LIABILITIES ....... 24,793 28,240 Commitments and contingencies Shareholders' equity Common stock: $.10 stated value; authorized 50,000,000 shares; issued 1997, 24,671,582 shares; 1996, 24,333,952 shares ........... 2,467 2,433 Additional paid in capital .................. 47,976 43,280 Retained earnings ........................... 242,813 240,373 Foreign currency translation adjustments .... (898) 497 Treasury stock, at cost (2,454,814 shares) .. (37,857) (37,857) --------- --------- TOTAL SHAREHOLDERS' EQUITY ....... 254,501 248,726 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............. $ 279,294 $ 276,966 ========= ========= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 3 4 RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1997 1996 ------ ----- Net sales ......................................... $ 62,071 $56,566 Cost of sales ..................................... 27,464 26,202 -------- ------- GROSS PROFIT .................................. 34,607 30,364 Selling, general and administrative expense ....... 25,400 24,572 Investment and other income-net ................... 652 5,228 -------- ------- INCOME FROM CONTINUING OPERATIONS BEFORE TAXES ................................. 9,859 11,020 Provision for income taxes on continuing operations ........................ 3,388 4,105 -------- ------- NET INCOME FROM CONTINUING OPERATIONS .......... 6,471 6,915 NET (LOSS) INCOME FROM DISCONTINUED OPERATIONS . (259) 681 -------- ------- NET INCOME ..................................... $ 6,212 $ 7,596 ======== ======= NET (LOSS) INCOME PER SHARE Continuing operations ........................... $ 0.29 $ 0.32 Discontinued operations ......................... (0.01) 0.03 -------- ------- Total ...................................... $ 0.28 $ 0.35 ======== ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 4 5 RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) THREE MONTHS ENDED MARCH 31, CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: 1997 1996 ---- ---- Net income ........................................... $ 6,212 $ 7,596 Adjustments to reconcile net income to net cash provided by continuing operating activities: Net loss (income) - discontinued operations ...... 259 (681) Depreciation ..................................... 731 817 Amortization of intangible assets ................ 38 40 Provision for accounts receivable reserves ....... 641 400 Gain on sale of subsidiary ....................... -- (4,800) Gains from sale or disposal of fixed assets ...... 75 114 Changes in assets and liabilities, net of effect of acquisitions and dispositions: Accounts receivable .......................... (5,715) (9,946) Inventories .................................. 4,325 3,206 Deferred income taxes ........................ 2 (1) Prepaid expenses and other current assets .... (265) (9) Other assets ................................. 42 429 Accounts payable ............................. 868 (390) Accrued expenses ............................. (5,216) (3,427) Accrued income taxes ......................... 901 3,598 -------- -------- Total adjustments .......................... (3,314) (10,650) -------- -------- Net cash provided by (used in) continuing operating activities .................. 2,898 (3,054) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed assets ................... 78 61 Capital expenditures ................................. (496) (622) Sale of subsidiary ................................... -- 18,858 -------- -------- Net cash provided by (used in) investing activities .................. (418) 18,297 CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock ............................. 4,730 940 Dividends ............................................ (3,772) (3,241) -------- -------- Net cash provided by (used in) financing activities .................. 958 (2,301) Effect of exchange rates ............................. (1,048) (375) Cash provided by discontinued operations ............................ 6,091 236 -------- -------- Net increase in cash and cash equivalents ............ 8,481 12,803 Cash and cash equivalents at beginning of year ....... 52,257 35,802 -------- -------- Cash and cash equivalents at end of year ............. $ 60,738 $ 48,605 ======== ======== CASH PAID DURING THE PERIOD FOR: Interest ........................................ $ 59 $ 40 Income taxes .................................... $ 2,067 $ 896 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 5 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Results for interim periods are not necessarily an indication of results to be expected for the year. On May 2, 1997, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products, Inc., to a wholly-owned subsidiary of Hasbro, Inc. These two subsidiaries represented the Company's Toy business segment. The operating results of the Toy business segment have been classified as discontinued operations and the financial statements have been restated to reflect this presentation. See note 4 regarding discontinued operations. Investment and other income-net for the three months ended March 31, 1996 includes the gain on the sale of the Company's subsidiary Papel/Freelance, Inc. of approximately $4,800,000 before tax or $3,000,000 ($0.14 per share) after tax. An additional $2,000,000 before tax gain will be recognized contingent upon satisfaction of the terms of a transitional agreement. Selling, general and administrative expense for the three months ended March 31, 1996 includes a provision of $900,000 before tax or $575,000 ($0.03 per share) after tax for costs associated with closing certain of the Company's retail stores. NOTE 2 The weighted average number of shares outstanding during the three month periods ended March 31, 1997 and 1996 were 22,084,009 and 21,586,017 shares, respectively. Employee stock option plans did not have a material dilutive effect on the earnings per share calculation. NOTE 3 Cash dividends of $3,771,846 ($.17 per share) were paid on March 17, 1997 to shareholders of record of the Company's Common Stock on March 3, 1997. Cash dividends of $3,240,665 ($.15 per share) were paid in the three month period ended March 31, 1996. 6 7 NOTE 4 -SUBSEQUENT EVENT - 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. for a purchase price of $166,650,000, subject to adjustment based on the net tangible value of the assets sold on the day of closing. The Company intends to use the proceeds of the sale to pursue acquisitions of companies within the gift industry and for general corporate purposes, including the repurchase of a portion of the Company's outstanding stock, pursuant to the previously announced stock purchase plan. Amounts included in net income from discontinued operations for the Toy business segment for the three months ended March 31 are as follows: THREE MONTHS ENDED MARCH 31, 1997 1996 - ---------------------------- ---- ---- Net sales $ 26,452,000 $26,315,000 (Loss) income before taxes (677,000) 1,067,000 (Benefit) provision for income taxes (418,000) 386,000 ------------ ----------- Net (loss) income $ (259,000) $ 681,000 ============ =========== 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 The Company's net sales for the three months ended March 31, 1997 were $62,071,000 compared to $56,566,000 for the three months ended March 31, 1996. This represents an increase of $5,505,000 or 9.7%. This increase in net sales reflects the continuing positive customer response to the Company's gift product line. Cost of sales were 44.2% of net sales for the three months ended March 31, 1997 compared to 46.3% for the same period in 1996. The decrease primarily reflects lower product costs achieved through the expansion of sourcing within the Peoples Republic of China. Selling, general and administrative expense was $25,400,000 or 40.9% of net sales for the three months ended March 31, 1997 compared to $24,572,000 or 43.4% of net sales for the three months ended March 31, 1996. As a percent of net sales, the decrease in selling, general and administrative expense can be attributed to fixed costs as they relate to the increase in net sales. Included in the selling, general and administrative expense for the three months ended March 31, 1996 is a provision of $900,000 related to costs associated with closing certain of the Company's retail stores. Excluding this provision, selling, general and administrative expense increased $1,728,000 or 7.3% when compared to the prior year. This increase can be attributed to the increase in expenses required to support the higher sales levels and in particular the costs associated with the expansion of the salesforce. Investment and other income of $652,000 for three months ended March 31, 1997 compares to $5,228,000 for the three months ended March 31, 1996. Included in the results for the three months ended March 31, 1996 is a gain of approximately $4,800,000 before tax related to the sale of the Company's Papel/Freelance, Inc. subsidiary. The provision for income taxes as a percent of income before taxes for the three months ended March 31, 1997 was 34.4% compared to 37.3% in the same period in the prior year. This decrease can be primarily attributed to lower tax provisions related to certain foreign subsidiaries during the three months ended March 31, 1997. Net income from continuing operations for the three months ended March 31, 1997 of $6,471,000 compares to net income from continuing operations of $6,915,000 for the same period last year. Included in the results for the three months ended March 31, 1996 is the gain on the sale of the Company's subsidiary Papel/Freelance, Inc., of $3,000,000 after tax. Excluding this gain, net income from continuing operations has increased $2,556,000 or 65.2%. 8 9 DISCONTINUED OPERATIONS/SUBSEQUENT EVENT 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. for a purchase price of $166,650,000, subject to adjustment based on the net tangible value of the assets sold on the day of closing. These two subsidiaries represented the Company's Toy business segment. The operating results of the Toy business segment have been classified as discontinued operations and the financial statements have been restated to reflect this presentation. As of March 31, 1997, total net assets of discontinued operations amounted to $77,676,000. The sale transaction will result in a gain based on the net tangible value of the assets sold on the day of closing less costs associated with the transaction. Net sales of the Company's discontinued operations amounted to $26,452,000 for the three months ended March 31, 1997 compared to $26,315,000 for the three months ended March 31, 1996. Net loss from discontinued operations for the three months ended March 31, 1997 of $259,000 compares to net income of $681,000 in 1996. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997, the Company had cash and cash equivalents of $60,738,000 compared to cash and cash equivalents of $52,257,000 at December 31, 1996. Working capital requirements during the three months ended March 31, 1997 were met entirely through internally generated funds. The Company remains in a highly liquid position and believes that the resources available from 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 hedge the currency risk associated with the purchase of inventory by certain foreign subsidiaries. Gains and losses are reported as a component of the related transaction. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts. The Company intends to use the proceeds of the sale of the toy companies to pursue acquisitions of companies within the gift industry and for general corporate purposes, including the repurchase of a portion of the Company's outstanding stock, pursuant to the previously announced stock purchase program. 9 10 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION SEE NOTE 4 TO CONSOLIDATED FINANCIAL STATEMENTS. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) 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. b) During the quarter ended March 31, 1997, no reports on Form 8-K were filed. 10 11 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) May 15, 1997 By /s/ Paul Cargotch --------------- --------------------------------------- Date Paul Cargotch Executive Vice President, Chief Financial Officer, Assistant Secretary and Director 11 12 EXHIBIT INDEX EXHIBIT NUMBER 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. 12