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 June 30, 1999 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 JULY 30, 1999 ----- ---------------------------- Common stock, $.10 stated value 20,787,740 2 RUSS BERRIE AND COMPANY, INC. INDEX PAGE NUMBER ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet as of June 30, 1999 and December 31, 1998 3 Consolidated Statement of Income for the three months and the six months ended June 30, 1999 and 1998 4 Consolidated Statement of Cash Flows for the six months ended June 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 and 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 3 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) (UNAUDITED) JUNE 30, DECEMBER 31, ASSETS 1999 1998 ------ ---- ---- Current assets Cash and cash equivalents $ 47,216 $ 73,064 Marketable securities 152,486 152,759 Accounts receivable, trade, less allowances of $3,060 in 1999 and $2,622 in 1998.................. 38,330 54,861 Inventories - net..................................... 45,400 45,201 Prepaid expenses and other current assets............. 9,040 3,006 Deferred income taxes................................. 6,157 5,325 -------- -------- TOTAL CURRENT ASSETS 298,629 334,216 Property, plant and equipment - net..................... 38,662 35,340 Other assets............................................ 2,568 8,900 -------- -------- TOTAL ASSETS $339,859 $378,456 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable.................................... $ 2,843 $ 4,249 Accrued expenses.................................... 21,989 23,067 Accrued income taxes................................ 3,883 7,205 -------- -------- TOTAL CURRENT LIABILITIES 28,715 34,521 Commitments and contingencies Shareholders' equity Common stock: $.10 stated value; authorized 50,000,000 shares; issued 1999, 25,291,898 shares; 1998, 25,202,261 shares................... 2,529 2,520 Additional paid in capital.......................... 60,075 58,553 Retained earnings................................... 339,028 331,727 Accumulated other comprehensive (loss).............. (3,223) (511) Treasury stock, at cost (4,508,614 shares at June 30, 1999 and 2,957,214 shares at December 31, 1998) (87,265) (48,354) -------- -------- TOTAL SHAREHOLDERS' EQUITY 311,144 343,935 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $339,859 $378,456 ======== ======== 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) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales ................................. $ 47,475 $ 50,949 $122,878 125,585 Cost of sales ............................. 20,624 22,262 50,901 54,999 -------- -------- -------- -------- GROSS PROFIT ........................... 26,851 28,687 71,977 70,586 Selling, general and administrative expense 23,067 25,189 51,835 55,048 Investment and other income-net ........... 2,725 2,635 4,747 5,811 -------- -------- -------- -------- INCOME BEFORE TAXES .................... 6,509 6,133 24,889 21,349 Provision for income taxes ................ 2,400 2,013 8,946 7,296 -------- -------- -------- -------- NET INCOME ................................ $ 4,109 $ 4,120 $ 15,943 $ 14,053 ======== ======== ======== ======== NET INCOME PER SHARE: Basic ............................... $ .19 $ .18 $ .74 $ .63 Diluted ............................. .19 .18 .73 .63 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) SIX MONTHS ENDED JUNE 30, 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................. $ 15,943 $ 14,053 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ....................................... 1,697 1,127 Amortization of intangible assets .................. 59 59 Provision for accounts receivable reserves ......... 969 994 Deferred income taxes .............................. (631) 5 Net (gain)loss from sale or disposal of fixed assets (22) 71 Changes in assets and liabilities: Accounts receivable ........................... 15,562 11,575 Inventories - net ............................. (200) 1,253 Prepaid expenses and other current assets ..... 266 (277) Other assets .................................. (27) 57 Accounts payable .............................. (1,406) (895) Accrued expenses .............................. (1,078) (187) Accrued income taxes .......................... (3,523) (6,061) --------- --------- Total adjustments ........................... 11,666 7,721 --------- --------- Net cash provided by operating activities 27,609 21,774 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities ...................... (22,972) (100,128) Proceeds from sale of marketable securities ............ 21,605 60,392 Proceeds from sale of fixed assets ..................... 22 170 Capital expenditures ................................... (5,134) (6,972) Net proceeds from sale of discontinued operations ...... -- 5,442 --------- --------- Net cash (used in) investing activities ......................... (6,479) (41,096) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ................. 1,531 4,172 Dividends paid to shareholders ......................... (8,642) (8,447) Purchase of treasury stock ............................. (38,911) (948) --------- --------- Net cash (used in) financing activities (46,022) (5,223) Effect of exchange rates ............................... (956) 355 --------- --------- Net (decrease) increase in cash and cash equivalents ... (25,848) (24,190) Cash and cash equivalents at beginning of period ....... 73,064 93,443 --------- --------- Cash and cash equivalents at end of period ............. $ 47,216 $ 69,253 ========= ========= CASH PAID DURING THE PERIOD FOR: Interest ........................................... $ 67 $ 77 Income taxes ....................................... $ 12,267 $ 13,352 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 5 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited interim consolidated financial statements have been prepared by Russ Berrie and Company, Inc. and Subsidiaries (the "Company") in accordance with generally accepted accounting principles for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles have been condensed or omitted pursuant to such principles and regulations. The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods presented. Results for interim periods are not necessarily an indication of results to be expected for the year. This report on Form 10-Q for the three and six months ended June 30, 1999 should be read in conjunction with the Company's annual report on Form 10-K for its year ended December 31, 1998. Certain prior year amounts have been reclassified to conform with current year's presentation. Investment and other income-net for the six months ended June 30, 1998 includes income of $1,828,000 before tax or $1,152,000 ($0.05 per share) after tax for the completion of a transitional agreement related to the sale of the Company's subsidiary Papel/Freelance, Inc. NOTE 2 - EARNINGS PER SHARE A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution is as follows: THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Average common shares outstanding ........... 21,095,000 22,283,000 21,556,000 22,209,000 Dilutive effect of common shares issuable (1) 168,000 195,000 161,000 240,000 ---------- ---------- ---------- ---------- Average common shares outstanding assuming dilution ......................... 21,263,000 22,478,000 21,717,000 22,449,000 ========== ========== ========== ========== (1) Issuable under stock option plans. The Notes to these consolidated financial statements reflect basic earnings per share unless otherwise stated or indicated. NOTE 3 - DIVIDENDS Cash dividends of $4,239,000 ($0.20 per share) were paid on June 4, 1999 to shareholders of record of the Company's Common Stock on May 21, 1999. Cash dividends of $8,642,000 ($0.20 per share per quarter) were paid in the six months ended June 30, 1999. Cash dividends of $4,234,870 ($0.19 per share) were paid on June 5, 1998 to shareholders of record of the Company's Common Stock on May 22, 1998. Cash dividends of $8,446,822 ($0.19 per share per quarter) were paid in the six months ended June 30, 1998. 6 7 NOTE 4 - COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted the provisions of Statement No. 130, Reporting Comprehensive Income, which modifies the financial statement presentation of comprehensive income and its components. Comprehensive income, representing all changes in Shareholders' equity during the period other than changes resulting from issuance or repurchase of the Company's common stock and payment of dividends, is reconciled to net income for the three and six months ended June 30, 1999 and 1998 as follows: THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net income $ 4,109,000 $ 4,120,000 $ 15,943,000 $ 14,053,000 Other comprehensive income (loss), net of taxes Foreign currency translation adjustments (438,000) (164,000) (2,015,000) (700,000) Net unrealized gain (loss) on securities available-for-sale (1,410,000) (30,000) (1,208,000) 156,000 ------------ ------------ ------------ ------------ Other comprehensive (loss) (1,848,000) (194,000) (3,223,000) (544,000) ------------ ------------ ------------ ------------ Comprehensive income $ 2,267,000 $ 3,926,000 $ 12,720,000 $ 13,509,000 ============ ============ ============ ============ NOTE 5 - PENDING ACCOUNTING CHANGE In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivatives and Hedging Accounting - Deferral of the Effective Date of SFAS No. 133" (SFAS 137), which deferred the effective date of SFAS 133 for an additional year. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Under the deferral permitted by SFAS 137, SFAS 133 is now effective for fiscal years beginning after June 15, 2000, or calendar year 2001 for the Company. A company may implement SFAS 133 as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the impacts of adopting SFAS 133 on the financial statements and has not determined the timing of or method of adoption, however, such adoption could increase volatility in earnings and other comprehensive income. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 The Company's net sales for the six months ended June 30, 1999 were $122,878,000 compared to $125,585,000 for the six months ended June 30, 1998. This represents a decrease of $2,707,000 or 2.2%. Net sales for the six months ended June 30, 1999 were negatively impacted by the June 1999 conversion to a new computer system for the Company's domestic operations. Orders worth approximately $5.6 million were not shipped as expected and are anticipated to be shipped in the second half of 1999. The Company continues to work aggressively to complete the transition to the new computer system in an effort to minimize the short term disruption to the business. The Company's product line, focusing on coordinated themes of product offerings, continues to receive a positive response from customers as the Company has become more account-driven, selling its product line, in depth, to fewer customers with a reduced salesforce. Cost of sales were 41.4% of net sales for the six months ended June 30, 1999 compared to 43.8% for the same period in 1998. This percentage decrease primarily reflects higher gross profit margins on sales of certain of the Company's product line concepts. Selling, general and administrative expense was $51,835,000 or 42.2% of net sales for the six months ended June 30, 1999 compared to $55,048,000 or 43.8% of net sales for the six months ended June 30, 1998. Selling, general and administrative expense for the six months ended June 30, 1999 decreased $3,213,000 or 5.8% compared to the prior year. This decrease is due primarily to lower costs of the reduced salesforce and realization of cost savings from the closing of its Petaluma, California administrative operations. Investment and other income of $4,747,000 for the six months ended June 30, 1999 compares to $5,811,000 for the six months ended June 30, 1998. Included in investment and other income for the six months ended June 30, 1998 was income of $1,828,000 for the completion of a transitional agreement related to the sale of the Company's subsidiary, Papel/Freelance, Inc. Excluding the income from this transitional agreement, investment and other income increased $764,000. This increase is primarily related to increased investment income attributable to the Company's investment portfolio. The provision for income taxes as a percent of income before taxes for the six months ended June 30, 1999 was 35.9 % compared to 34.2% in the same period of the prior year. This increase can be primarily attributed to tax provisions of certain foreign subsidiaries with higher effective tax rates during the six months ended June 30, 1999. Net income for the six months ended June 30, 1999 of $15,943,000 compares to $14,053,000 for the six months ended June 30, 1998. Included in the results for the six months ended June 30, 1998 is income of $1,152,000, after tax, for the completion of a transitional agreement related to the sale of the Company's subsidiary, Papel/Freelance, Inc. Excluding the income from this transitional agreement, net income increased $3,042,000 or 23.6%. This increase can be primarily attributed to increased gross profit margins, the decrease in selling, general and administrative expenses and increased investment income from the Company's investment portfolio. 8 9 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 The Company's net sales for the three months ended June 30, 1999 were $47,475,000 compared to $50,949,000 for the three months ended June 30, 1998. This represents a decrease of $3,474,000 or 6.8%. Net sales for the three months ended June 30, 1999 were negatively impacted by the June 1999 conversion to a new computer system for the Company's domestic operations. Orders worth approximately $5.6 million were not shipped as expected and are anticipated to be shipped in the second half of 1999. The Company continues to work aggressively to complete the transition to the new computer system in an effort to minimize the short term disruption to the business. The Company's product line, focusing on coordinated themes of product offerings, continues to receive a positive response from customers as the Company has become more account- driven, selling its product line, in depth, to fewer customers with a reduced salesforce. Cost of sales were 43.4% of net sales for the three months ended June 30, 1999 compared to 43.7% for the same period in 1998. The percentage decrease primarily reflects higher gross profit margins in sales of certain of the Company's product line concepts offset by higher provisions required for inventory. Selling, general and administrative expense was $23,067,000 or 48.6% of net sales for the three months ended June 30, 1999 compared to $25,189,000 or 49.4% of net sales for the three months ended June 30, 1998. Selling, general and administrative expense for the three months ended June 30, 1999 decreased $2,122,000 or 8.4% compared to the prior year. This decrease is due primarily to lower costs of the reduced salesforce, realization of cost savings from the closing of its Petaluma, California administrative operations and lower expenses, compared to the prior year, associated with the design and implementation of the new packaged computer software system. Investment and other income of $2,725,000 for the three months ended June 30, 1999 compares to $2,635,000 for the three months ended June 30, 1998. This increase of 3.4% can be primarily attributed to increased investment income from the Company's investment portfolio. The provision for income taxes as a percent of income before taxes for the three months ended June 30, 1999 was 36.9% compared to 32.8% in the same period in the prior year. This increase can be primarily attributed to tax provisions of certain foreign subsidiaries with higher effective tax rates during the three months ended June 30, 1999. Net income for the three months ended June 30, 1999 of $4,109,000 compares to net income of $4,120,000, for the same period last year. YEAR 2000 COMPLIANCE The Company is dependent upon Information Technology (IT) systems in many aspects of its business and relies upon third parties who are also dependent on IT systems. Many existing IT programs use only two digits to identify a year in the date field and were designed and developed without considering the impact of the upcoming Year 2000. If not corrected or replaced, many computer applications could fail or create inaccurate results by or at the Year 2000 or in computations utilizing the date field (i.e. read the year 2000 as 1900 or something else). The Company has a program (Year 2000 Program) underway, more fully described below, intended to timely identify, mitigate and/or prevent the adverse effects of the Year 2000 issue through an analysis of its own IT and non-IT systems, and to pursue the Year 2000 compliance of its critical third-party relationships. 9 10 STATE OF READINESS: The Company has completed a comprehensive review of its IT systems and is continuing to analyze the impact of its non-IT systems and critical third-party relationships to identify and evaluate those affected by the Year 2000 issue. The Company's current Year 2000 status is as follows: - - The Company has undertaken a project to implement a new packaged computer software system for the global organization. The new enterprise-wide system will replace the current custom and packaged software that the Company utilizes to operate and manage its business. Improvements in the Company's operational efficiency are expected. The new enterprise software system is Year 2000 compliant and the Company has obtained Year 2000 warranties or certifications from the major software suppliers involved with its new computer system. The implementation was completed during the second quarter of 1999 for the Company's domestic operations. The Company's Far East operations have modified its legacy systems and completed the installation and testing of Year 2000 Compliance during the second quarter of 1999. For the Company's Canadian and European operations, due to the evaluation of certain risks, the Company has determined that it will postpone the implementation of the new enterprise software system at these operations. Instead, the Company will execute its previously developed contingency plan of completing the modifications already begun of its current legacy systems to become Year 2000 compliant. These remediation efforts related to the legacy systems of its Canadian and European operations are substantially complete. The Company estimates that the incremental effort to finalize evaluation, make the necessary modifications of active programs, and test and implement such changes will be completed by the end of the third quarter of 1999. Additionally, certain of the Company's domestic information will continue to be analyzed and certain historical information will be maintained using portions of the Company's current legacy systems which are being modified and tested to become Year 2000 compliant. - - The Company has developed a process for analyzing its non-IT systems and critical third-party relationships for Year 2000 compliance and expects to complete substantially all of such analysis by the end of the third quarter of 1999. The Company has inquired as to the Year 2000 readiness of each of such parties determined by management to be critical or important to the Company's business and is seeking certifications of Year 2000 compliance from them. The Company will continue to pursue such Year 2000 compliance certification from each critical third-party relationship and, if necessary, begin its contingency plan of identifying alternative goods or service providers that are able to certify Year 2000 compliance. Despite the Company's specific efforts with respect to non-IT systems and critical third-party relationships, there is no absolute assurance that Year 2000 risks from non-IT systems and critical third-party relationships will be completely eliminated and will, therefore, not have a material adverse effect on the Company's operations and financial condition. - - The Company has retained consultants to perform an independent evaluation of certain aspects of the overall Year 2000 Program to indentify any remaining risks. This evaluation is scheduled to be completed by the end of the third quarter of 1999. COST: The total cost of the project including hardware, packaged software and project implementation is expected to be approximately $18,000,000 including the Company's foreign operations. Hardware, software and certain project costs will be capitalized as fixed assets and amortized over their useful lives. The remainder of the costs will be expensed as incurred. At June 30, 1999, approximately $17,800,000 has been incurred of which $11,800,000 and $6,000,000 have been capitalized and expensed, respectively. All historical and future costs have been and will continue to be funded out of existing cash and cash flows from operations. 10 11 RISKS: The inability of IT and non-IT systems, in general, to accommodate dates after 1999 may cause disruptions throughout the world in the telecommunication, banking, credit card, transportation, utility, manufacturing, and other industries, as well as, many governmental services. If such disruptions occur, it is possible they could have a material adverse effect on businesses in general and on the Company in particular. Based upon currently available information, management believes that the Company will meet its compliance goals with respect to its IT systems and does not anticipate that the cost of effecting Year 2000 compliance, in excess of that described above, will have a material impact on the Company's financial condition, results of operations or liquidity. Nevertheless, achieving Year 2000 compliance is dependent upon many factors, some of which are not completely within the Company's control. Should either the Company's internal IT or non-IT systems or the internal systems of one of more of its critical third-party relationships, or their critical third-party relationships, fail to achieve Year 2000 compliance, there could be a material adverse effect on the Company's business and its results of operations. Since the Company has not completed the data gathering phase, with respect to non-IT systems and critical third parties, of its Year 2000 Program, it cannot yet quantify the costs, if any, that may be required to remedy those non-IT systems or incurred in identifying and switching to compliant third parties, if necessary. The Company does rely heavily on numerous, foreign manufacturers with approximately 88% of its inventory purchases being produced in the Far East. The Company is currently assessing the status of such manufacturers and their dependence upon IT or non-IT systems, which it expects to complete by the end of the third quarter of 1999. There is no absolute assurance that the Company's business operations will not be disrupted if certain of these manufacturers are unable to timely deliver product to the Company in the Year 2000; however, during 1998 no individual supplier accounted for more than 9% and the five largest suppliers in the aggregate did not account for more than 32% of the Company's purchases. CONTINGENCY PLANS: The Company has certain contingency options, which continue to be updated, that are available in the event its Year 2000 Program for internal IT is not successful. As the Company could not be assured during the second quarter of 1999 that the implementation of its new packaged computer software system would be completed at its Canadian and European operations in the required timeframe, the Company made a decision to complete the modifications already begun of those legacy systems by executing its previously developed contingency plan to become Year 2000 compliant. The Company estimates that the incremental effort to finalize evaluation, make the necessary modifications of active programs, and test and implement such changes will be completed by the end of the third quarter of 1999. The Company has identified the critical business processes required to continue to operate the business at its Canadian and European operations. Although the Company believes that remediation of the legacy systems for those operations will be completed within the necessary timeframe it is identifying alternate processes (i.e. manual or alternate systems) for its critical business processes. This evaluation will be completed by the end of the third quarter of 1999. 11 12 CONTINGENCY PLANS: (CONTINUED) If the Company determines that either its non-IT systems or critical third-party relationships will not be compliant, it will either obtain alternative non-IT systems, or in the case of third parties, switch to other vendors or suppliers which are Year 2000 compliant, if necessary. While there are no contingency plans that cover every possible failure, the Company intends to monitor and update its contingency plans and develop additional potential solutions throughout the implementation of its Year 2000 Program. The Company is expending a significant amount of effort and resources towards its Year 2000 Program; however, based upon the risks previously identified, there is no absolute assurance that Year 2000 risks will not have a material adverse effect on the Company's operations and financial condition regardless of the efforts of its Year 2000 Program and various contingency plans. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, the Company had cash and cash equivalents and marketable securities of $199,702,000 compared to cash and cash equivalents and marketable securities of $225,823,000 at December 31, 1998. Working capital requirements during the three months ended June 30, 1999 were met entirely through internally generated funds. The Company remains in a highly liquid position and believes that the resources available from investments, operations and bank lines of credit are sufficient to meet the foreseeable requirements of its business. At June 30, 1999, the Company had marketable securities of $152,486,000. These investments consist of U.S. government obligations, municipal obligations and preferred stock. The objective of the investment portfolio is to maximize after tax returns while minimizing risk. The Company's portfolio of preferred securities investments are subject to market fluctuations based largely, but not exclusively, on the securities' sensitivity to changes in interest rates. By maintaining an economic hedge consisting of government futures contracts and options, the Company seeks to reduce interest rate related risk. The portfolio of preferred securities and futures contracts and option positions are intended to produce offsetting capital gains and losses as interest rates change. The Company enters into forward exchange contracts and currency options, principally to manage economic currency risks associated with the purchase of inventory and the repayment of intercompany loans by its European and Canadian operations. Gains and losses, related to such contracts, were not material to its results of operations. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts. In January 1999, the Board of Directors authorized the Company to repurchase an additional 1,000,000 shares of common stock for a total authorization of 5,000,000 shares. During the three months ended June 30, 1999, the Company repurchased 477,000 shares for $12,263,000. As of June 30, 1999, 4,503,000 shares have been repurchased since the beginning of the Company's stock repurchase program in March, 1990. 12 13 FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION This filing of the Form 10-Q contains forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements. The Company cautions readers that results predicted by forward-looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Specific risks and uncertainties include, but are not limited to, the Company's ability to continue to manufacture its products in the Far East, the seasonality of revenues, the actions of competitors, ability to increase production capacity, price competition, the effects of government regulation, possible delays in the introduction of new products, customer acceptance of products, post-implementation issues related to the Company's new packaged computer software system, the possible effects of Year 2000 issues and other factors. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Documents filed as part of this Report. 27.1 Financial Data Schedule. b) During the quarter ended June 30, 1999, no reports on Form 8-K were filed. 13 14 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) 8/16/99 By /s/Eric R. Lohwasser ----------- ---------------------------------- Date Eric R. Lohwasser Vice President - Finance, Chief Financial Officer 14