- ------------------------------------------------------------------------
The introduction of the revised "How Many Licks?" ad was accompanied by
extensive media coverage. First introduced in 1969, this theme has proven to be
one of the most memorable and longest running tag lines in advertising history.
The appeal of this message is evidenced by the many thousands of letters we have
received from consumers who are sure they have discovered just how many licks it
does take, and who wish to share their findings with us. Our president,
responded to numerous invitations from popular radio and TV programs and news
papers to comment on this phenomenon and promote our products to broad
audiences.
The company also benefited from numerous positive articles about the company
appearing in national media and local newspapers throughout the country such as
CNN, Forbes and USA Today. Also, we continue to receive an outpouring of
complimentary letters from loyal consumers who have enjoyed our products
throughout the years.
Manufacturing
The very favorable earnings increases experienced in 1997 reflect, in part,
productivity gains in our manufacturing operations. These gains are attributable
not only to increased economies of scale due to relatively higher production
volume but also to the "payback" realized from past investments in more
efficient and more highly automated manufacturing equipment.
Such investments remain an ongoing priority of the company. A number of
significant projects of this type were undertaken in 1997, designed to increase
product quality, efficiency and production capacity.
In our domestic plants, packaging equipment that operates at higher speeds and
with greater precision was added and we expanded cooking, cooling, cutting and
wrapping capacity for several items that have experienced continuing growth over
the past several years. We also reengineered a significant manufacturing line
and some key ingredient blending operations to generate productivity
improvements. Further modernization efforts were made at our plant in Mexico as
well.
We achieved other operating efficiencies through the investment in human
capital. Our engineers and operations managers continue to share "best practice"
methodologies across facilities and processes in order to ensure optimal
corporate-wide results. This team approach is fostered by senior management
initiatives and performance awards that recognize company-wide as well as
individual accomplishments. Ingenuity and team performance are rewarded in all
levels of management.
Warehousing and Distribution
Efficiencies from higher sales volumes were amplified in our warehousing and
distribution operations. Improvements made through past reengineering efforts in
these operations bore fruit as we were able to multiply lower unit distribution
costs across higher sales volumes and attain savings in excess of earlier
projections.
We continued the implementation of newly automated inventory tracking systems
and completed several key phases of this project in Chicago, with promising
results.
Purchasing
Commodity prices were generally favorable in 1997 and the markets for our key
ingredients were stable. The fluctuations that did occur had been largely
mitigated by timely fixed price contracts we had previously entered into and by
ongoing hedging activities.
Packaging material costs, including films, cartons, corrugated containers and
waxed paper, were also favorable. We continued to seek competitive bids to
leverage the high volume of annual purchases we make of these items and lower
our per unit costs.
International
Our Mexican and Canadian subsidiaries both reported sales increases over the
prior year. In Mexico, an especially strong fourth quarter was posted reflecting
another solid Christmas selling season. This was bolstered by the introduction
of a successful new line extension item.
In Canada, we continued to see profitable sales growth due to distribution gains
across multiple trade classes. Our export sales to other world markets continue
despite currency devaluations in many countries.
- ------------------------------------------------------------------------
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(in thousands except per share, percentage and ratio figures)
- --------------------------------------------------------------------------------
[GRAPH]
[GRAPH]
FINANCIAL REVIEW
This financial review discusses the company's financial condition, results of
operations, liquidity and capital resources. It should be read in conjunction
with the Consolidated Financial Statements and related footnotes following
hereafter.
FINANCIAL CONDITION
Our financial condition was further strengthened by the record operating results
we achieved in 1997. Net earnings for the year increased by 28.5% to $60,682 and
shareholders' equity grew by 12.2 % to $351,163. Cash and investments in
marketable securities increased by $37,861 during the year.
Cash generated from operating activities was used to fund share repurchases of
$14,401, capital expenditures of $8,611 and cash dividends of $7,303. The cash
dividend rate was increased by 17.2% in 1997, which marked the fifty-fifth
consecutive year in which cash dividends have been paid.
A 3% stock dividend was also distributed to shareholders during the year. This
was the thirty-third consecutive year that a stock dividend has been
distributed.
Our financial position in 1997 compared to 1996, measured by commonly used
financial ratios, is as follows: the current ratio fell from 4.2:1 to 3.9:1.
This reflects the classification of $39,738 of our investments in marketable
securities at year end as non-current due to their maturity dates. For the same
reason, working capital of $153,355 remained approximately even with the prior
year figure of $153,329.
Current liabilities to net worth remained comparable at 15.3% vs. 15.4% as did
debt to equity at 2.1% vs. 2.4%. The company continues to finance its operations
with funds generated from operations rather than with borrowed funds.
Our history of successful operations, coupled with our conservative financial
posture, has left us well positioned to respond quickly to future growth
opportunities that may arise. In this regard, the company is aggressively
seeking acquisitions to complement our existing operations.
RESULTS OF OPERATIONS
1997 vs. 1996
1997 was our twenty-first consecutive year of record sales achievement. Sales of
$375,594 were up 10.2% over 1996 sales of $340,909 and increases were seen in
each quarter. The third quarter, driven by Halloween sales, continued to be our
largest selling period and surpassed levels attained in previous years.
Halloween sales also carried over and drove a double digit sales increase in the
fourth quarter.
Throughout the year, sales were favorably impacted by successful promotional
programs as we continued to broaden distribution in mass merchandisers and other
select trade classes with our core product offerings. Line extensions, new
products and seasonal packs all contributed to added sales.
Sales growth occurred in our two most significant foreign operations as well. In
Mexico, the introduction of a new assortment complemented the already strong
business we have developed for the Christmas holiday season in that market.
- --------------------------------------------------------------------------------
5
- --------------------------------------------------------------------------------
[GRAPH]
[GRAPH]
Sales growth in our Canadian operation is attributable to further distribution
gains in the mass merchandiser and grocery trade classes. Also, the Bunch Pop,
an attractive cluster of seven Tootsie Pops priced to deliver good consumer
value, was successfully introduced.
Cost of goods sold, as a percentage of sales, decreased from 52.4% to 50.1%.
This improvement reflects lower costs for certain packaging and ingredients as
well as higher production efficiencies associated with increased volumes in
relation to fixed costs. The company continues to focus on cost control
throughout all levels of its operations.
Gross margin dollars grew by 15.3% to $187,281, and increased as a percent of
sales from 47.6% to 49.9%, due to the factors cited above. Gross margins in the
third and fourth quarters continue to be somewhat lower due to the seasonal
nature of our business and to the product mix sold in those quarters.
Operating expenses, comprised of marketing, selling, advertising, physical
distribution, general and administrative expenses and goodwill amortization, as
a percentage of sales, declined slightly from 26.7% to 25.9%. This improvement
is due to distribution and warehousing efficiencies and effective expense
control programs aimed at holding down costs. Earnings from operations increased
by 25.9% to $90,087, or 24.0% of sales, as a result of favorable gross margins
and operating expenses.
Other income increased by $1,708 to $5,274, primarily reflecting lower interest
expense and higher interest income due to lower average borrowings and increased
investments in marketable securities, respectively. As a majority of our
interest income is not subject to federal income tax, the effective tax rate
declined from 37.1% to 36.4%.
Consolidated net earnings rose to a new company record of $60,682. Earnings per
share increased 30% to $2.58 from the previous record of $1.99 reached in 1996.
Our net earnings as a percent of sales increased to 16.2% from 13.8%. 1997 was
the sixteenth consecutive year of record earnings achievement for the company.
1996 vs. 1995
1996 represented our twentieth consecutive year of record sales. Reaching
$340,909, sales increased 9.0% over 1995 sales of $312,660. While the third
quarter continued to be our largest selling period, another successful Halloween
season drove double digit sales gains in both the third quarter and fourth
quarters of 1996.
Sales gains were attributable to successful promotional programs and broadened
distribution in mass merchandisers and other trade classes. These efforts were
augmented by niche marketing strategies including seasonal packs, line
extensions and new product offerings.
Foreign sales also grew in 1996. Increases in Mexico were attributable to both
price increases and volume growth. Canadian sales gains were achieved by
increased distribution in mass merchandisers and other trade classes as well as
new product introductions to that market.
Cost of goods sold as a percentage of sales decreased from 53.3% to 52.4%. This
reflected an easing of
- --------------------------------------------------------------------------------
6
- --------------------------------------------------------------------------------
[GRAPH]
[GRAPH]
the packaging cost increases seen in 1995 as well as higher operating
efficiencies due to increased production volume. Consequently, gross margin,
which was $162,420 or 11.3% higher than in 1995, improved as a percentage of
sales from 46.7% to 47.6%.
Gross margins were again lower in the third and fourth quarters due to the
seasonality and product mix factors cited above.
Operating expenses as a percentage of sales were 26.7%, a decrease of .3% versus
1995 and reflective of our ongoing expense control measures. Earnings from
operations were $71,532, or 21.0% of sales in 1996 versus 19.6% in 1995,
reflecting the combined effects of an increased gross margin percentage and
lower operating costs as a percentage of sales.
Other income increased to $3,566, primarily due to increased investment income.
The effective tax rate of 37.1% was comparable to that of 1995.
Consolidated net earnings rose 16.9% to a new company record of $47,207, or
$1.99 per share, from the previous record of $40,368, or $1.70 per share in
1995. This represented the fifteenth consecutive year of record earnings for the
company.
Liquidity and Capital Resources
The company's financial resources grew during the year as cash and marketable
securities increased by $37,861 to a year end total $182,018. This total
includes marketable securities which have maturities greater than one year and
are not classified as current.
Cash flows from operating activities were $68,176 in 1997, $76,710 in 1996 and
$50,851 in 1995. Higher profits and depreciation in 1997 were offset by
increases in accounts receivable and inventory and by the timing of tax
payments.
Cash flows from investing activities in 1997 reflect a net increase of $23,087
in investments in marketable securities and capital expenditures of $8,611,
$9,791 and $4,640 in 1997, 1996 and 1995, respectively.
Cash flows from financing activities consist of share purchases of $14,401 in
1997, the pay-off of a $20,000 note in 1996 and cash dividends of $7,303, $6,211
and $5,292 in 1997, 1996 and 1995, respectively. 1997 was the fifty-fifth
consecutive year in which we have paid cash dividends.
Year 2000 Conversion
The company recognizes the need to ensure that its operations will not be
adversely impacted by software failures arising from calculations using the year
2000 date. Accordingly, we have established a process for evaluating and
managing the risks and costs associated with this problem.
We believe that these risks and costs will be minimal for the financial and
operational systems we use, and do not expect year 2000 compliance to have a
material impact on the company or its operations.
The results of these operations and our financial condition are expressed in the
following financial statements.
- --------------------------------------------------------------------------------
7
CONSOLIDATED STATEMENT OF
EARNINGS AND RETAINED EARNINGS
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
(in thousands except per share data)
- --------------------------------------------------------------------------------------------------------------------
For the year ended December 31,
1997 1996 1995
------------ ------------ ------------
Net sales................................................................. $375,594 $340,909 $312,660
Cost of goods sold........................................................ 188,313 178,489 166,738
------------ ------------ ------------
Gross margin.............................................................. 187,281 162,420 145,922
------------ ------------ ------------
Operating expenses:
Marketing, selling and advertising.................................... 53,693 50,642 46,436
Distribution and warehousing.......................................... 24,019 22,509 22,049
General and administrative............................................ 16,776 15,031 13,328
Amortization of the excess of cost over acquired net tangible
assets............................................................... 2,706 2,706 2,706
------------ ------------ ------------
97,194 90,888 84,519
------------ ------------ ------------
Earnings from operations.................................................. 90,087 71,532 61,403
Other income, net......................................................... 5,274 3,566 2,635
------------ ------------ ------------
Earnings before income taxes.............................................. 95,361 75,098 64,038
Provision for income taxes................................................ 34,679 27,891 23,670
------------ ------------ ------------
Net earnings.............................................................. 60,682 47,207 40,368
Retained earnings at beginning of year.................................... 136,352 121,477 107,763
------------ ------------ ------------
197,034 168,684 148,131
------------ ------------ ------------
Deduct:
Cash dividends ($.32, $.27 and $.23 per share)........................ 7,472 6,372 5,383
Stock dividends....................................................... 30,438 25,960 21,271
------------ ------------ ------------
37,910 32,332 26,654
------------ ------------ ------------
Retained earnings at end of year.......................................... $159,124 $136,352 $121,477
------------ ------------ ------------
------------ ------------ ------------
Earnings per share........................................................ $ 2.58 $ 1.99 $ 1.70
------------ ------------ ------------
------------ ------------ ------------
Average common and class B common shares outstanding...................... 23,542 23,690 23,690
------------ ------------ ------------
------------ ------------ ------------
(The accompanying notes are an integral part of these statements.)
- --------------------------------------------------------------------------------------------------------------------
8
CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------
ASSETS December 31,
1997 1996
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 60,433 $ 45,659
Investments............................................................................. 81,847 98,498
Accounts receivable, less allowances of $2,085 and $1,885............................... 23,319 21,207
Inventories:
Finished goods and work-in-process.................................................. 22,938 20,359
Raw materials and supplies.......................................................... 13,721 9,950
Prepaid expenses........................................................................ 2,910 3,001
Deferred income taxes................................................................... 1,793 2,839
------------ ------------
Total current assets............................................................ 206,961 201,513
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land.................................................................................... 6,895 6,895
Buildings............................................................................... 22,100 29,304
Machinery and equipment................................................................. 122,430 117,130
------------ ------------
151,425 153,329
Less--Accumulated depreciation.......................................................... 73,061 71,642
------------ ------------
78,364 81,687
------------ ------------
OTHER ASSETS:
Excess of cost over acquired net tangible assets, net of accumulated
amortization of $18,085 and $15,378................................................... 90,549 93,256
Investments............................................................................. 39,738 --
Other assets............................................................................ 21,130 15,000
------------ ------------
151,417 108,256
------------ ------------
$436,742 $391,456
------------ ------------
------------ ------------
(The accompanying notes are an integral part of these statements.)
- ------------------------------------------------------------------------------------------------------------------------
9
(in thousands except per share data)
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY December 31,
1997 1996
------------ ------------
CURRENT LIABILITIES:
Accounts payable................................................................. $ 11,624 $ 8,560
Dividends payable................................................................ 1,930 1,668
Accrued liabilities.............................................................. 32,793 28,240
Income taxes payable............................................................. 7,259 9,716
------------ ------------
Total current liabilities................................................ 53,606 48,184
------------ ------------
NONCURRENT LIABILITIES:
Deferred income taxes............................................................ 8,650 9,268
Postretirement health care and life insurance benefits........................... 5,904 5,636
Industrial development bonds..................................................... 7,500 7,500
Other long term liabilities...................................................... 9,919 7,987
------------ ------------
Total noncurrent liabilities............................................. 31,973 30,391
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $.69-4/9 par value--
50,000 shares authorized--
15,851 and 15,617, respectively, issued........................................ 11,008 10,845
Class B common stock, $.69-4/9 par value--
20,000 shares authorized--
7,547 and 7,387, respectively, issued.......................................... 5,241 5,130
Capital in excess of par value................................................... 187,259 171,589
Retained earnings, per accompanying statement.................................... 159,124 136,352
Foreign currency translation adjustment account.................................. (11,052) (11,035)
Unrealized loss on marketable securities......................................... (417) --
------------ ------------
351,163 312,881
------------ ------------
$436,742 $391,456
------------ ------------
------------ ------------
- ------------------------------------------------------------------------------------------------------------------------
10
CONSOLIDATED STATEMENT OF
CASH FLOWS
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------
For the year ended December 31,
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.......................................................... $60,682 $47,207 $40,368
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization..................................... 12,819 12,068 10,794
Loss on retirement of fixed assets................................ 26 714 8
Changes in operating assets and liabilities:
Accounts receivable........................................... (2,327) 2,314 (3,740)
Inventories................................................... (6,463) 1,879 (3,829)
Prepaid expenses and other assets............................. (6,622) (4,253) (3,915)
Accounts payable and accrued liabilities...................... 9,624 9,362 4,389
Income taxes payable and deferred............................. (2,049) 3,718 5,122
Postretirement health care and life insurance benefits........ 269 250 393
Other long term liabilities................................... 1,932 3,460 1,375
Other......................................................... 285 (9) (114)
------------ ------------ ------------
Net cash provided by operating activities............................. 68,176 76,710 50,851
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................. (8,611) (9,791) (4,640)
Purchase of held to maturity securities............................... (68,982) (47,221) (45,313)
Maturity of held to maturity securities............................... 27,473 16,523 35,409
Purchase of available for sale securities............................. (304,910) (35,883) --
Sale and maturity of available for sale securities.................... 323,332 24,008 --
------------ ------------ ------------
Net cash used in investing activities................................. (31,698) (52,364) (14,544)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable........................................... -- (20,000) --
Shares repurchased and retired........................................ (14,401) -- --
Dividends paid in cash................................................ (7,303) (6,211) (5,292)
------------ ------------ ------------
Net cash used in financing activities................................. (21,704) (26,211) (5,292)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents.......................... 14,774 (1,865) 31,015
Cash and cash equivalents at beginning of year............................ 45,659 47,524 16,509
------------ ------------ ------------
Cash and cash equivalents at end of year.................................. $60,433 $45,659 $47,524
------------ ------------ ------------
------------ ------------ ------------
Supplemental cash flow information:
Income taxes paid..................................................... $36,716 $23,969 $18,573
------------ ------------ ------------
------------ ------------ ------------
Interest paid......................................................... $ 389 $ 1,015 $ 1,548
------------ ------------ ------------
------------ ------------ ------------
(The accompanying notes are an integral part of these statements.)
- ------------------------------------------------------------------------------------------------------------------------
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ IN THOUSANDS EXCEPT PER SHARE
DATA)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
Basis of consolidation:
The consolidated financial statements include the accounts of Tootsie Roll
Industries, Inc. and its wholly-owned subsidiaries (the company), which are
primarily engaged in the manufacture and sale of candy products. All significant
intercompany transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition:
Revenues are recognized when products are shipped. Accounts receivable are
unsecured.
Cash and cash equivalents:
The company considers temporary cash investments with an original maturity of
three months or less to be cash equivalents.
Investments:
Investments consist of various marketable securities with maturities of
generally less than one year. In accordance with the Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting For Certain Investments in Debt
and Equity Securities," the company's debt and equity securities are now
considered as either held to maturity or available for sale. Held to maturity
securities represent those securities that the company has both the positive
intent and ability to hold to maturity and are carried at amortized cost.
Available for sale securities represent those securities that do not meet the
classification of held to maturity, are not actively traded and are carried at
fair value. Unrealized gains and losses on these securities, where material, are
excluded from earnings and are reported as a separate component of stockholders'
equity, net of applicable taxes, until realized.
Inventories:
Inventories are stated at cost, not in excess of market. The cost of domestic
inventories ($30,530 and $24,305 at December 31, 1997 and 1996, respectively)
has been determined by the last-in, first-out (LIFO) method. The excess of
current cost over LIFO cost of inventories approximates $4,918 and $5,161 at
December 31, 1997 and 1996, respectively. The cost of foreign inventories
($6,129 and $6,004 at December 31, 1997 and 1996, respectively) has been
determined by the first-in, first-out (FIFO) method.
From time to time, the company enters into commodity futures and option
contracts in order to fix the price, on a short-term basis, of certain future
ingredient purchases which are integral to the company's manufacturing process
and which may be subject to price volatility (primarily sugar and corn syrup).
Gains or losses, if any, resulting from these contracts are considered as a
component of the cost of the ingredients being hedged. Open contracts at
December 31, 1997 and 1996 were not material.
Property, plant and equipment:
Depreciation is computed for financial reporting purposes by use of both the
straight-line and accelerated methods based on useful lives of 5 to 35 years for
both buildings and machinery and equipment. For income tax purposes the company
uses accelerated methods on all properties.
Carrying value of long-lived assets:
Effective January 1, 1996, the company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." In the event that facts and circumstances indicate that the company's
long-lived assets may be impaired, an evaluation of recoverability would be
performed. Such an evaluation entails comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write down to market value or discounted cash flow value is
required. The company considers that no circumstances exist that would require
such an evaluation.
Postretirement health care and life insurance benefits:
The company provides certain postretirement health care and life insurance
benefits. The cost of these postretirement benefits is accrued during employees'
working careers.
Income taxes:
The company uses the liability method of computing deferred income taxes.
Excess of cost over acquired net tangible assets:
The excess of cost over the acquired net tangible assets of operating
companies is amortized on a straight-line basis over a 40 year period. The
company assesses the recoverability of its intangible assets using undiscounted
future cash flows.
Foreign currency translation:
Prior to January 1, 1997, management designated the local currency as the
functional currency for the company's Mexican operations. Accordingly, the net
effect of translating the Mexican operations' financial statements was reported
in a separate component of shareholders' equity. During 1997, management
determined that the Mexican economy was hyper-inflationary. Accordingly, the US
dollar is now used as the functional currency, and translation gains and losses
are included in the determination of 1997 earnings.
Earnings per Share:
On December 31, 1997, the company adopted SFAS No. 128, "Earnings per Share."
A dual presentation of basic and diluted earnings per share is not required due
to the lack of potentially dilutive securities under the company's simple
capital structure. Therefore, all earnings per share amounts represent basic
earnings per share.
NOTE 2--ACCRUED LIABILITIES:
Accrued liabilities are comprised of the following:
December 31,
--------------------
1997 1996
--------- ---------
Compensation and employee benefits.................... $ 8,853 $ 7,892
Customer returns...................................... 4,684 4,158
Taxes, other than income.............................. 1,936 1,754
Advertising and promotions............................ 6,939 6,434
Other................................................. 10,381 8,002
--------- ---------
$ 32,793 $ 28,240
--------- ---------
--------- ---------
NOTE 3--INCOME TAXES:
The domestic and foreign components of pretax income are as follows:
1997 1996 1995
--------- --------- ---------
Domestic................................... $ 93,318 $ 71,660 $ 61,894
Foreign.................................... 2,043 3,438 2,144
--------- --------- ---------
$ 95,361 $ 75,098 $ 64,038
--------- --------- ---------
--------- --------- ---------
12
The provision for income taxes is comprised of the following:
1997 1996 1995
--------- --------- ---------
Current:
Federal.................................. $ 29,764 $ 23,907 $ 19,849
Foreign.................................. 626 375 844
State.................................... 3,836 3,167 2,425
--------- --------- ---------
34,226 27,449 23,118
--------- --------- ---------
Deferred:
Federal.................................. 738 (322) 517
Foreign.................................. (368) 802 (25)
State.................................... 83 (38) 60
--------- --------- ---------
453 442 552
--------- --------- ---------
$ 34,679 $ 27,891 $ 23,670
--------- --------- ---------
--------- --------- ---------
Deferred income taxes are comprised of the following:
December 31,
--------------------
1997 1996
--------- ---------
Workers' compensation................................... $ 428 $ 448
Reserve for returns..................................... 407 407
Reserve for uncollectible accounts...................... 537 445
Other accrued expenses.................................. 1,107 1,295
VEBA funding............................................ (387) (452)
Other, net.............................................. (299) 696
--------- ---------
Net current deferred income tax asset................... $ 1,793 $ 2,839
--------- ---------
--------- ---------
December 31,
--------------------
1997 1996
--------- ---------
Depreciation............................................ $ 8,930 $ 9,078
Post retirement benefits................................ (2,045) (1,935)
Deductible goodwill..................................... 4,390 3,617
Deferred compensation................................... (3,441) (2,478)
DISC commissions........................................ 1,553 1,148
Foreign subsidiary tax loss carryforward................ (1,470) (1,750)
Other, net.............................................. 733 1,588
--------- ---------
Net long-term deferred income tax liability............. $ 8,650 $ 9,268
--------- ---------
--------- ---------
At December 31, 1997, gross deferred tax assets and gross deferred tax
liabilities are $12,147 and $19,004, respectively.
The effective income tax rate differs from the statutory rate as follows:
1997 1996 1995
---------- ---------- ----------
U.S. statutory rate............................ 35.0% 35.0% 35.0%
State income taxes, net........................ 2.7 2.8 2.6
Amortization of excess of cost over acquired
net tangible assets........................... 0.5 0.6 0.7
Other, net..................................... (1.8) (1.3) (1.3)
--- --- ---
Effective income tax rate...................... 36.4% 37.1% 37.0%
--- --- ---
--- --- ---
The company has not provided for U.S. federal or foreign withholding taxes on
$4,073 of foreign subsidiaries' undistributed earnings as of December 31, 1997
because such earnings are considered to be permanently reinvested. When excess
cash has accumulated in the company's foreign subsidiaries and it is
advantageous for tax or foreign exchange reasons, subsidiary earnings may be
remitted, and income taxes will be provided on such amounts. It is not
practicable to determine the amount of income taxes that would be payable upon
remittance of the undistributed earnings.
NOTE 4--SHARE CAPITAL AND CAPITAL IN EXCESS OF PAR VALUE:
Class B
Common Stock Common Stock Capital in
-------------------- ------------------------ excess of
Shares Amount Shares Amount par value
--------- --------- ----------- ----------- -----------
(000's) (000's)
Balance at
January 1, 1995......... 7,306 $ 5,074 3,542 $ 2,459 $ 132,997
Issuance of 3%
stock dividend.......... 218 152 105 73 20,932
Issuance of 2-for-1
stock split............. 7,542 5,237 3,630 2,521 (7,758)
Conversion of Class B
common shares to
common shares........... 43 29 (43) (29) --
--------- --------- ----- ----------- -----------
Balance at
December 31, 1995....... 15,109 10,492 7,234 5,024 146,171
Issuance of 3% stock
dividend................ 449 312 212 147 25,418
Conversion of Class B
common shares to common
shares.................. 59 41 (59) (41) --
--------- --------- ----- ----------- -----------
Balance at
December 31, 1996....... 15,617 10,845 7,387 5,130 171,589
Issuance of 3% stock
dividend................ 465 323 221 153 29,868
Conversion of Class B
common shares to common
shares.................. 61 42 (61) (42) --
Purchase and retirement
of common shares........ (292) (202) -- -- (14,198)
--------- --------- ----- ----------- -----------
Balance at
December 31, 1997....... 15,851 $ 11,008 7,547 $ 5,241 $ 187,259
--------- --------- ----- ----------- -----------
--------- --------- ----- ----------- -----------
The Class B Common Stock has essentially the same rights as Common Stock,
except that each share of Class B Common Stock has ten votes per share (compared
to one vote per share of Common Stock), is not traded on any exchange, is
restricted as to transfer and is convertible on a share-for-share basis, at any
time and at no cost to the holders, into shares of Common Stock which are traded
on the New York Stock Exchange.
Average shares outstanding and all per share amounts included in the financial
statements and notes thereto have been adjusted retroactively to reflect annual
three percent stock dividends and the two-for-one stock split distributed in
1995.
NOTE 5--NOTES PAYABLE AND INDUSTRIAL DEVELOPMENT BONDS:
In 1993, the company entered into two 3-year term notes aggregating $20,000
the proceeds of which were used to purchase the company's Chicago manufacturing
facility and headquarters. These term notes bore interest payable monthly at
3.55% and matured in September, 1996.
During 1992, the company entered into an industrial development bond agreement
with the City of Covington, Tennessee. The bond proceeds of $7.5 million were
used to finance the expansion of the company's existing facilities. Interest is
payable at various times during the year based upon the interest calculation
option (fixed, variable or floating) selected by the company. As of December 31,
1997 and 1996, interest was calculated under the floating option (3.8% and 3.7%,
respectively) which requires monthly payments of interest. Principal on the
bonds is due in its entirety in the year 2027.
In connection with the issuance of the bonds, the company entered into a
letter of credit agreement with a bank for the amount of principal outstanding
plus 48 days' accrued interest. The letter of credit, which expires in March
2000, carries an annual fee of 32 1/2 basis points on the outstanding principal
amount of the bonds.
13
NOTE 6--EMPLOYEE BENEFIT PLANS:
Pension plans:
The company sponsors defined contribution pension plans covering certain
nonunion employees with over one year of credited service. The company's policy
is to fund pension costs accrued based on compensation levels. Total pension
expense for 1997, 1996 and 1995 approximated $2,153, $1,814 and $1,524,
respectively. The company also maintains certain profit sharing and
savings-investment plans. Company contributions in 1997, 1996 and 1995 to these
plans were $540, $485 and $441, respectively.
The company also contributes to multi-employer defined benefit pension plans
for its union employees. Such contributions aggregated $609, $436 and $416 in
1997, 1996 and 1995, respectively. The relative position of each employer
associated with the multi-employer plans with respect to the actuarial present
value of benefits and net plan assets is not determinable by the company.
Postretirement health care and life insurance benefit plans:
The company provides certain postretirement health care and life insurance
benefits for corporate office and management employees. Employees become
eligible for these benefits if they meet minimum age and service requirements
and if they agree to contribute a portion of the cost. The company has the right
to modify or terminate these benefits. The company does not fund postretirement
health care and life insurance benefits in advance of payments for benefit
claims.
The accrual for the accumulated postretirement benefit obligation at December
31, 1997 and 1996 consists of the following:
December 31,
--------------------
1997 1996
--------- ---------
Retirees............................................ $ 1,532 $ 1,325
Active employees--nonvested......................... 2,692 2,692
Unrecognized net gain............................... 1,680 1,619
--------- ---------
Accrued postretirement liability.................... $ 5,904 $ 5,636
--------- ---------
--------- ---------
Net periodic postretirement benefit cost for 1997, 1996 and 1995 included the
following components:
1997 1996 1995
--------- --------- ---------
Service cost--benefits attributed to
service during the period.............................. $ 251 $ 263 $ 273
Interest cost on the accumulated postretirement
benefit obligation..................................... 285 277 313
Amortization of unrecognized net gain.................... (101) (87) (63)
--------- --------- ---------
Net periodic postretirement benefit cost................. $ 435 $ 453 $ 523
--------- --------- ---------
--------- --------- ---------
For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1997; the rate was assumed
to decrease gradually to 5.5% for 2004 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
1 percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by approximately $582 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year then ended by approximately $92. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 6.75% and 7.25% at December 31, 1997 and
1996, respectively.
NOTE 7--OTHER INCOME, NET:
Other income (expense) is comprised of the following:
1997 1996 1995
--------- --------- ---------
Interest income................................ $ 5,764 $ 3,887 $ 3,161
Interest expense............................... (483) (1,498) (1,515)
Dividend income................................ 999 1,386 1,753
Foreign exchange losses........................ (447) (50) (654)
Royalty income................................. 312 92 214
Miscellaneous, net............................. (871) (251) (324)
--------- --------- ---------
$ 5,274 $ 3,566 $ 2,635
--------- --------- ---------
--------- --------- ---------
NOTE 8--COMMITMENTS:
During 1993 and 1994, the company entered into operating leases for certain
manufacturing equipment which provided the company with the option to terminate
the lease in 1996 and to purchase the equipment at its fair market value. The
company exercised this option and purchased the equipment for $5,401 on January
2, 1996.
Rental expense aggregated $477, $439 and $2,538 in 1997, 1996 and 1995,
respectively.
Future operating lease commitments are not significant.
NOTE 9--DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents and investments
The carrying amount approximates fair value of cash and cash equivalents
because of the short maturity of those instruments. The fair values of
investments are estimated based on quoted market prices.
Industrial development bonds
The fair value of the company's industrial development bonds approximates
their carrying value because they have a floating interest rate.
Fair value
The estimated fair values of the company's financial instruments are as
follows:
1997 1996
------------------------ ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
Cash and cash equivalents............. $ 60,433 $ 60,433 $ 45,659 $ 45,659
Investments held to maturity.......... 95,086 97,000 86,622 89,164
Investments available for sale........ 26,499 26,499 11,876 11,876
Industrial development bonds.......... 7,500 7,500 7,500 7,500
14
A summary of the aggregate fair value, gross unrealized gains, gross unrealized
losses and amortized cost basis of the company's investment portfolio by major
security type is as follows:
December 31, 1997
----------------------------------------------
Unrealized
Amortized Fair ----------------------
Held to Maturity: Cost Value Gains Losses
- ----------------------------------------- ----------- --------- --------- -----------
Unit investment trusts of preferred
stocks.................................. $ 4,724 $ 6,794 $ 2,070 $ --
Tax-free commercial paper................ 15,300 15,300 -- --
Municipal bonds.......................... 87,456 87,218 -- (238)
Unit investment trusts of municipal
bonds................................... 1,103 1,484 381 --
US gov't/gov't agency obligations........ 1,803 1,803 -- --
Other.................................... -- -- -- --
Private export funding securities........ -- -- -- --
----------- --------- --------- -----------
$ 110,386 $ 112,599 $ 2,451 $ (238)
----------- --------- --------- -----------
----------- --------- --------- -----------
Available for Sale:
- -----------------------------------------
Municipal Bonds.......................... $ 37,587 $ 37,484 $ -- $ (103)
Mutual funds............................. 7,796 7,482 -- (314)
----------- --------- --------- -----------
$ 45,383 $ 44,966 $ -- $ (417)
----------- --------- --------- -----------
----------- --------- --------- -----------
December 31, 1996
----------------------------------------------
Unrealized
Amortized Fair ----------------------
Held to Maturity: Cost Value Gains Losses
- ------------------------------------------ ----------- --------- --------- -----------
Unit investment trusts of preferred
stocks................................... $ 13,242 $ 14,853 $ 1,611 $ --
Tax-free commercial paper................. 2,900 2,900 -- --
Municipal bonds........................... 56,776 56,761 -- (15)
Unit investment trusts of municipal
bonds.................................... 1,200 1,762 562 --
US gov't/gov't agency obligations......... 10,199 10,197 -- (2)
Other..................................... 2,176 2,563 387 --
Private export funding securities......... 3,029 3,028 -- (1)
----------- --------- --------- -----------
$ 89,522 $ 92,064 $ 2,560 $ (18)
----------- --------- --------- -----------
----------- --------- --------- -----------
Available for Sale:
- ------------------------------------------
Municipal Bonds........................... $ 22,164 $ 22,164
----------- ---------
----------- ---------
Held to maturity securities of $15,300 and $2,900 and available for sale
securities of $18,467 and $10,288 were included in cash and cash equivalents at
December 31, 1997 and 1996, respectively.
Gross realized gains and losses on the sale of available for sale securities in
1997 and 1996 were not significant.
NOTE 10--GEOGRAPHIC AREA AND SALES INFORMATION:
Summary of sales, net earnings and assets by geographic area
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
Mexico Mexico Mexico
United and Consoli- United and Consoli- United and Consoli-
States Canada dated States Canada dated States Canada dated
--------- -------- --------- --------- -------- --------- --------- -------- ---------
Sales to unaffiliated customers... $346,487 $29,107 $375,594 $315,131 $25,778 $340,909 $290,590 $22,070 $312,660
--------- --------- ---------
--------- --------- ---------
Sales between geographic areas.... 1,694 3,314 1,888 3,152 1,747 2,055
--------- -------- --------- -------- --------- --------
$348,181 $32,421 $317,019 $28,930 $292,337 $24,125
--------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- --------
Net earnings...................... $ 58,898 $ 1,784 $ 60,682 $ 44,946 $ 2,261 $ 47,207 $ 39,044 $ 1,324 $ 40,368
Total assets...................... $414,629 $22,113 $436,742 $373,925 $17,531 $391,456 $339,718 $14,098 $353,816
Net assets........................ $332,410 $18,753 $351,163 $298,565 $14,316 $312,881 $260,273 $11,913 $272,186
Total assets are those assets associated with or used directly in the respective
geographic area, excluding intercompany advances and investments.
Major customer
Revenues from a major customer aggregated approximately 15.9%, 16.2% and 16.0%
of total net sales during the years ended December 31, 1997, 1996 and 1995,
respectively.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS [LOGO]
To the Board of Directors and Shareholders of Tootsie Roll Industries, Inc.
In our opinion, the accompanying consolidated statement of financial position
and the related consolidated statement of earnings and retained earnings and of
cash flows present fairly, in all material respects, the financial position of
Tootsie Roll Industries, Inc. and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
[SIGNATURE]
Chicago, Illinois
February 11, 1998
15
QUARTERLY FINANCIAL DATA
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
(Thousands of dollars except per share data)
1997 First Second Third Fourth Total
- -----------------------------------------------------------------------------------------------------------------------
Net sales....................................................... $66,258 $82,287 $140,645 $86,404 $375,594
Gross margin.................................................... 33,323 41,382 69,746 42,830 187,281
Net earnings.................................................... 9,751 12,507 24,695 13,729 60,682
Net earnings per share.......................................... .41 .53 1.05 .59 2.58
1996
- -----------------------------------------------------------------------------------------------------------------------
Net sales....................................................... $63,265 $72,511 $128,658 $76,475 $340,909
Gross margin.................................................... 30,687 35,292 60,415 36,026 162,420
Net earnings.................................................... 8,118 9,327 19,143 10,619 47,207
Net earnings per share.......................................... .34 .39 .81 .45 1.99
1995
- -----------------------------------------------------------------------------------------------------------------------
Net sales....................................................... $60,269 $68,774 $116,472 $67,145 $312,660
Gross margin.................................................... 29,566 33,056 52,517 30,783 145,922
Net earnings.................................................... 7,319 8,326 16,232 8,491 40,368
Net earnings per share.......................................... .31 .35 .68 .36 1.70
Net earnings per share is based upon average outstanding shares as adjusted for 3% stock dividends issued
during the second quarter of each year and the 2-for-1 stock split effective July 11, 1995.
- -----------------------------------------------------------------------------------------------------------------------
1997-1996 QUARTERLY SUMMARY OF TOOTSIE ROLL INDUSTRIES, INC. STOCK PRICE
AND DIVIDENDS PER SHARE
STOCK PRICES* DIVIDENDS**
1997 1996
- ------------------------------------------------------
Hi Lo Hi Lo 1997 1996
- ------------------------------------------------------ -------------------------------------------------
1st Qtr... 46-3/4 37-3/4 40-1/2 36-1/2 1st Qtr........ $ .0704 $ .0577
2nd Qtr... 49-7/8 44-1/2 36-3/4 34-1/2 2nd Qtr........ $ .0825 $ .0704
3rd Qtr... 50-7/8 45-3/4 35-7/8 34-1/8 3rd Qtr........ $ .0825 $ .0704
4th Qtr... 64-7/8 51 40-1/4 34-3/8 4th Qtr........ $ .0825 $ .0704
*NYSE -- Composite Quotations NOTE: In addition to the above cash dividends, a
3% stock dividend was issued on 4/22/97 and
Estimated Number of shareholders at 12/31/97 ... 9,500 4/23/96.
**Cash dividends are restated to reflect 3% stock
dividends.
16
FIVE YEAR SUMMARY OF EARNINGS AND FINANCIAL HIGHLIGHTS
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
(Thousands of dollars except per share,
percentage and ratio figures)
- ------------------------------------------------------------------------------------------------------------------------
(See Management's Comments starting on page 5) 1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Sales and Earnings Data
Net sales........................................ $ 375,594 $ 340,909 $ 312,660 $ 296,932 $ 259,593
Gross margin..................................... 187,281 162,420 145,922 141,367 125,615
Interest expense................................. 483 1,498 1,515 1,649 642
Provision for income taxes....................... 34,679 27,891 23,670 23,236 22,268
Net earnings..................................... 60,682 47,207 40,368 37,931 35,442
% of sales................................... 16.2% 13.8% 12.9% 12.8% 13.7%
% of shareholders' equity.................... 17.3% 15.1% 14.8% 15.8% 16.7%
Per Common Share Data (1)
Net sales........................................ $ 15.95 $ 14.39 $ 13.20 $ 12.53 $ 10.96
Net earnings..................................... 2.58 1.99 1.70 1.60 1.50
Shareholders' equity............................. 15.01 13.21 11.49 10.15 8.96
Cash dividends................................... .32 .27 .23 .19 .16
Stock dividends.................................. 3% 3% 3% 3% 3%
Additional Financial Data
Working capital.................................. $ 153,355 $ 153,329 $ 109,643 $ 92,626 $ 61,052
Current ratio.................................... 3.9 4.2 3.0 4.5 2.2
Net cash provided by operating activities........ 68,176 76,710 50,851 40,495 33,397
Property, plant & equipment additions (2)........ 8,611 9,791 4,640 8,179 52,492
Net property, plant & equipment.................. 78,364 81,687 81,999 85,648 86,699
Total assets..................................... 436,742 391,456 353,816 310,083 303,940
Long term debt................................... 7,500 7,500 7,500 27,500 27,500
Shareholders' equity............................. 351,163 312,881 272,186 240,461 212,343
Average shares outstanding (1)................... 23,542 23,690 23,690 23,690 23,690
<FN>
(1) Adjusted for annual 3% stock dividends and the 2-for-1 stock split
effective July 11, 1995.
(2) 1993 includes $44,500 relating to the Cambridge Brands acquisition and the
purchase of the Chicago office and plant facilities.
- -------------------------------------------------------------------------------------------------------------------------
17