ITEM 1. BUSINESS
Russ Berrie and Company, Inc. was incorporated in New Jersey in 1966. The term "Company" refers to Russ Berrie and Company, Inc. and its consolidated subsidiaries, unless the context requires otherwise. Its principal executive offices are located at 111 Bauer Drive, Oakland, New Jersey 07436, and its telephone number is (201) 337-9000.
The Company had operated two business segments; gift and toy through May of 1997. The gift business segment represents the Company's continuing line of operations which principally markets a line of products under the trade name RUSS(R). The toy business segment represented the Company's subsidiaries Cap Toys, Inc. and OddzOn Products, Inc.
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. Accordingly, the Toy business segment is reported as discontinued operations.
CONTINUING OPERATIONS
The Company designs, manufactures through third parties and markets a wide variety of gift products to retail stores throughout the United States and countries throughout the world.
The Company's products are designed to appeal to the emotions of consumers to reflect their feelings of friendship, fun, love and affection. The Company believes that its present position as one of the leaders in the gift industry is due primarily to its imaginative product design, broad and effective marketing of its products, efficient distribution, high product quality and commitment to customer service.
The Company maintains a direct salesforce and distribution network to serve its customers in the United States, Europe and Canada. Where the Company does not maintain a direct salesforce and distribution network, the Company's products are sold worldwide through distributors. See note 16 of the Notes to Consolidated Financial Statements for more information regarding geographic information.
PRODUCTS
The Company's product line of more than 6,000 items (including distinctive variations on basic product designs) are marketed under the trade name and trademark RUSS(R). This extensive line encompasses both seasonal and everyday products that focus on theme or concept groupings. Products include stuffed animals, picture frames, candles, figurines and home decor gifts based on current fashions and trends. The Company maintains product depth in categories such as Birthday, Anniversaries, Over-The-Hill, Fun 'N Games, Gifted Moments, Inspirational Gifts, Lifestyles, Home Styles, Gentlemen's Gifts, Collectibles and Baby Products. Extensive seasonal lines include products for all the major holidays. In addition, the Company's Bright of America, Inc. subsidiary principally markets placemats and candles as well as aromatic products such as potpourri and incense through Scentex(R), a new division of Bright of America, Inc., directly to mass merchandisers.
Most of the Company's products have suggested retail prices between $1 and $30. Product sales are highly diverse and as such, no single gift item represented more than 2% of sales within the gift segment in 1997.
DESIGN AND PRODUCTION
The Company has a continuing program of new product development. The Company designs most of its own products and then generally evaluates consumer response through test marketing in selected unaffiliated retail stores. Items are added to the product line only if they can be obtained and marketed on a basis that meets the Company's profitability standards.
The Company believes that the breadth of its product line and the continuous development of new products are key elements to its success and that it is capable of designing and producing large numbers of new products annually.
The Company has approximately 165 employees responsible for product development and design located in the United States and in the Far East. Generally, a new design is brought to market in less than nine months after a decision is made to produce the product. Sales of the Company's products are, in large part, dependent on the Company's ability to identify and react quickly to changing consumer preferences and to utilize its sales and distribution systems to bring new products to market.
The Company engages in market research and test marketing to evaluate consumer reactions to its gift products. Research into consumer buying trends often suggests new products. The Company assembles information from retail stores, the Company's salesforce and the Company's own Product Development department. The Company continually analyzes its products to determine whether they should be adapted into new or different products using elements of the initial design or whether they should be removed from the product line.
Substantially all of the Company's products are produced by independent manufacturers, generally in the Far East, under the supervision of Company personnel. During 1997, approximately 94% of the Company's products were produced in the Far East, and 6% in the United States. The dollar amount of purchases in the United States predominantly represent domestically produced displays and printed materials such as cards and calendars.
The Company utilizes approximately 140 manufacturers in the Far East, primarily in the People's Republic of China, Taiwan, Korea, Indonesia, Philippines and Thailand. During 1997, approximately 71% of the Company's dollar volume of purchases was attributable to manufacturing in the People's Republic of China. Legislation has been proposed from time to time that would revoke the most-favored nation status (which is a designation determined annually by the President of the United States, subject to possible override by Congress) of the People's Republic of China. Such a revocation would cause import duties to increase or become applicable to products imported by the Company from the People's Republic of China.
A significant portion of the Company's staff of approximately 300 employees in Hong Kong, Taiwan, Korea and the cities of Shenzhen and Qingdao in the People's Republic of China monitor the production process with responsibility for the quality, safety and prompt delivery of Company products. Members of the Company's Far East staff make frequent visits to the manufacturers for which they are responsible. Many of the Company's manufacturers are small operations, some selling exclusively to the Company. The Company believes that there are many alternate manufacturers for the Company's products and the loss of any one manufacturer would not significantly affect the operations of the Company. In 1997, the supplier accounting for the greatest dollar volume of the Company's purchases accounted for approximately 11% of such purchases and the five largest suppliers accounted for approximately 29% in the aggregate.
MARKETING
The Company's products are marketed primarily through its own direct salesforce of more than 530 full-time employees. Products are sold directly to retail stores in the United States and in certain foreign countries, including gift stores, pharmacies, card shops, home decor shops, apparel stores, craft stores, garden stores, book stores, stationery stores, hospitals, college and airport gift shops, resort and hotel shops, florists, chain stores and military post exchanges. During 1997, the Company sold gift products to more than 60,000 customers. No single gift customer accounted for more than 2% of gift dollar sales.
The Company reinforces the marketing efforts of its gift product salesforce through an active promotional program, including showrooms, participation in trade shows, trade and consumer advertising and a program of seasonal and theme based catalogs.
The Company believes that effective packaging and merchandising of its products are very important to its marketing success. Many products are shipped in colorful corrugated cartons which can be used as free-standing displays and can be discarded when all the products have been sold. The Company also offers semi-permanent free-standing lucite, metal and wooden displays, thereby providing an efficient promotional vehicle for selling the Company's products.
The Company believes that customer service is an important component of its marketing strategy and therefore has established a Customer Service Department at each distribution facility that responds to customer requests, investigates and resolves problems and generally assists customers.
The Company's general terms of sale are believed to be competitive in the gift industry. The Company provides extended payment terms to customers, which does not exceed five months, on sales of seasonal merchandise, e.g., Christmas, Halloween, Easter and other seasons. The Company has a general policy that all sales are final and does not sell on consignment.
During the year ended December 31, 1998, the Company will be creating a division called Russ Baby to market through a separate direct saleforce the Company's line of Baby gift products.
The Company maintains a direct salesforce and distribution network to serve its customers in Great Britain, Holland, Belgium, Ireland, Spain, Germany and Canada. The Company's products are sold worldwide, through distributors, where the Company does not maintain a direct salesforce and distribution network. The Company's foreign sales, including export sales from the United States, aggregated $73,366,000, $66,840,000 and $59,000,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
DISTRIBUTION
The Company has customers located in the United States and throughout the world. In order to serve them quickly and effectively, the Company maintains U.S. distribution centers in South Brunswick, New Jersey and Petaluma, California which receive products directly from suppliers and then distribute such products to the Company's customers. The Company also maintains a facility in the Toronto, Canada area for its Canadian customers and facilities in Southampton, England to serve its customers in Europe. The Company generally uses common carriers to distribute to its customers.
SEASONALITY
In addition to its everyday gift products, the Company produces specially designed products for holiday seasons which include: Christmas, Valentine's Day, Easter, Halloween, Mother's Day, Thanksgiving, Graduation, Father's Day, and St. Patrick's Day.
The pattern of the Company's gift sales is influenced by the shipment of seasonal merchandise. The Company generally ships the majority of gift orders each year for Christmas in the quarter ended September 30, for Valentine's Day in the quarter ended December 31 and for Easter in the quarter ended March 31.
During 1997, gift items specially designed for individual seasons accounted for approximately 46% of the Company's sales; no individual season accounted for more than 18% of the Company's sales.
The following table sets forth the Company's quarterly sales during 1997, 1996 and 1995.
QUARTERLY SALES (In Millions)
The Company has historically had higher profit margins in the quarter ended September 30 as a result of the economies of scale which accompany the higher sales volume. In 1996, due to the earlier consumer selling season, the Company shipped orders for Easter 1997 in the quarter ended December 31, 1996 as well as during the quarter ended March 31, 1997.
BACKLOG
It is characteristic of the Company's business that orders for seasonal merchandise are taken in advance of shipment. The Company's backlog at December 31, 1997 and December 31, 1996 was $29,097,000 and $21,616,000, respectively.
COMPETITION
The gift industry is highly competitive. The Company believes that the principal competitive factors in the gift business are marketing ability, reliable delivery, product design, quality, customer service and price. The Company's principal competitors are Gund, Inc., Midwest Imports, Department 56, Inc., Boyds Collections LTD. (Inc.), Ganz Bros., Ty, Inc., Enesco and numerous small suppliers. Certain of the Company's existing or potential competitors may have financial resources that are greater than those of the Company.
COPYRIGHTS, TRADEMARKS, PATENTS AND LICENSES
The Company prints notices of claim of copyright on substantially all of its products and has registered hundreds of its designs with the United States Copyright Office. The Company has registered, in the United States and certain foreign countries, the trademark RUSS(R) with a distinctive design, which is utilized on most of its gift products. The Company believes its copyrights, trademarks and patents are valid, and has pursued a policy of aggressively protecting them from infringement. However, it does not consider its business materially dependent on copyright, trademark or patent protection.
The Company enters into various license agreements relating to trademarks, copyrights, designs and products which enable the Company to market items compatible with its product line. The Company's licenses are generally exclusive for specific products in specified territories. Royalties are paid on licensed items and, in many cases, advance royalties and minimum guarantees are required by these license agreements.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 1,550 persons. The Company considers its employee relations to be good; substantially all of the Company's employees are not covered by a collective bargaining agreement. The Company's policy is to require that its management, sales and product development and design personnel enter into confidentiality agreements and, in the case of management and sales personnel, non-competition agreements (subject to certain territorial limitations in the case of salespersons) which restrict their ability to compete with the Company for a period of six months after termination of their employment.
GOVERNMENT REGULATION
Certain of the Company's products are subject to the provisions of, among other laws, the Federal Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws empower the Consumer Product Safety Commission to protect children from certain hazardous articles by regulating their use or excluding them from the market and requiring a manufacturer to repurchase articles which become banned. The Commission's determination is subject to judicial review. Similar laws exist in some states and cities in the United States and in certain foreign jurisdictions. The Company maintains a quality control program in order to comply with applicable laws.
DISCONTINUED OPERATIONS
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.
The sale transaction resulted in a gain on the sale of discontinued operations in the year ended December 31, 1997 of $75,300,000 before tax or $46,700,000 ($2.12 per share) after tax.
Net sales of the Company's discontinued operations for the years ended December 31, 1997, 1996 and 1995 amounted to $38,614,000, $151,380,000 and $134,556,000, respectively.
ITEM 2.
ITEM 2. PROPERTIES
The Company's continuing operations principal facilities consist of its corporate offices in Oakland, New Jersey, and distribution centers in South Brunswick, New Jersey; and Petaluma, California. In May of 1997, the Company closed its Reynoldsburg, Ohio distribution center and moved the operations to its South Brunswick, New Jersey facility. The Company believes greater efficiencies can be achieved while maintaining a high level of service to its customers. Additionally, office and distribution facilities are located in Southampton, England and in the Toronto, Canada area. The Company owns the facility used by Bright of America, Inc. in Summersville, West Virginia, one of its facilities in Southampton, England and most of the office space it uses in Hong Kong. The Company leases its other facilities. The facilities of the Company are maintained in good operating condition, are adequate for the Company's purposes and are generally fully utilized, other than those that were closed as part of a restructuring of the Company's distribution system.
The Company's subsidiary, Amram's Distributing, Ltd. has purchased land, located in Brampton, Ontario, Canada, for the purpose of building a new office and distribution facility. Construction of the new facility is expected to be completed in the fourth quarter of 1998.
THE COMPANY'S CURRENT PRINCIPAL FACILITIES ARE AS FOLLOWS:
(1) Not including renewal options.
(2) Properties owned directly or indirectly by Russell Berrie or members of his immediate family. See ITEM 13 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
(3) Regional distribution center.
(4) Corporate headquarters.
(5) Subsidiary (or division) headquarters.
(6) Subsidiary (or division) distribution center.
The Company's Lakeland, Florida facility was closed as part of restructuring of the Company's distribution system that took place prior to the year ended December 31, 1994. This facility has been partially subleased and the lease term expires on February 28, 1998.
The Company operates showroom facilities in Oakland, New Jersey; Los Angeles and San Francisco, California; Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; Seattle, Washington; Montreal, Vancouver and Toronto, Canada; Brussels, Belgium; Utrecht, Holland; and Kowloon, Hong Kong. Certain showrooms are located within the facilities listed above, others are leased with remaining lease terms at these facilities ranging between one and six years.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is party to various copyright, patent and trademark infringement, unfair competition, breach of contract, customs, employment and other legal actions, as plaintiff or defendant.
The Company believes that the outcome of the proceedings to which it is currently a party will not have a material adverse effect on its business or financial condition.
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Factors That May Affect Future Results and Financial Condition
This Annual Report on Form 10-K contains forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission ("SEC") filings and otherwise. The 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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information with respect to the executive officers of the Company. All officers are elected by the Board of Directors and may be removed with or without cause by the Board.
NAME AGE POSITION WITH THE COMPANY - ------------------------- --- ---------------------------------------------- Russell Berrie .......... 65 Chairman of the Board, Chief Executive Officer and Director
Arnold S. Bloom ......... 55 Vice President, Secretary and General Counsel
Paul Cargotch ........... 53 Executive Vice President, Chief Financial Officer, Assistant Secretary and Director*
Ricky Chan .............. 45 Senior Vice President - Product Development and Executive Vice President-Far East Operations
Chris Collins ........... 35 Vice President-Sales
Maureen A. Flotard ...... 38 Vice President - Business Development
Daniel J. Kochenash ..... 39 Vice President - Corporate Operations
Y.B. Lee ................ 52 Senior Vice President - Far East and President of Far East Operations
Eric R. Lohwasser ....... 42 Vice President - Finance**
Guy M. Lombardo ......... 53 Vice President and General Manager/East Operations
Ron Miller .............. 38 Vice President - National Accounts
James O'Reardon ......... 54 Vice President - Administration
Lloyd Winkler ........... 49 Vice President of Marketing - Russ Baby
Dror Zoreff ............. 52 Vice President - International Operations
* Mr. Paul Cargotch, Executive Vice President and Chief Financial Officer of the Company, and a Director, has resigned effective April 17, 1998. He will not stand for re-election to the Board of Directors of the Company.
** Mr. Eric R. Lohwasser has also been elected Chief Financial Officer of the Company effective April 17, 1998.
Russell Berrie, the founder of the Company, has been Chairman of the Board and Chief Executive Officer of the Company since its incorporation in 1966.
Arnold S. Bloom has been employed by the Company as Vice President, Secretary and General Counsel for more than the past five years.
Paul Cargotch has been employed by the Company as Executive Vice President, Chief Financial Officer and Assistant Secretary since July 1996. Prior to that, Mr. Cargotch was Vice President-Finance and Chief Financial Officer for more than the past five years. Mr. Cargotch has served as a Director of the Company since July 1996.
Ricky Chan has been employed by the Company as Senior Vice President - Product Development since July 1995. Prior to that, Mr. Chan was Vice President - Creative Division since January 1991.
Chris Collins has been employed as Vice President of Sales since January 1997. Prior thereto, Mr. Collins held various managerial positions within the Company's salesforce for more than the past five years.
Maureen A. Flotard has been employed as Vice President of Business Development since January 1998. Ms. Flotard was Corporate Controller since July 1996 and prior thereto was Director of Financial Planning for more than the past five years.
Daniel J. Kochenash has been employed by the Company as Vice President of Corporate Operations since January 1998. Prior to that, Mr. Kochenash was Director of Operations since June 1994. Prior to joining the Company, Mr. Kochenash was Director of Distribution at Simon & Schuster, Inc. since 1990.
Y.B. Lee has been employed by the Company as President of Far East Operations since October 1996. Prior to that, Mr. Lee was Senior Vice President-Far East since August 1996 and Senior Vice President - Far East Plush Division for more than the past five years.
Eric R. Lohwasser has been employed by the Company as Vice President - Finance since July 1996. Mr. Lohwasser was Vice President - Controller since December 1995 and prior thereto was Corporate Controller for more than the past five years.
Guy M. Lombardo has been employed by the Company as Vice President and General Manager/East Operations since November 1997. Prior to that, Mr. Lombardo was Vice President - Management Information Systems for more than the past five years.
Ron Miller has been employed as Vice President of National Accounts since March 1998. Prior thereto, Mr. Miller held various managerial positions within the Company's salesforce for more than the past five years.
Jim O'Reardon has been employed by the Company as Vice President of Administration since September 1997. Prior to that, Mr. O'Reardon was Director of Administration/ Internal Audit for more than the past five years.
Lloyd Winkler has been employed as Vice President of the Russ Baby Division since March 1998. Prior to joining the Company, Mr. Winkler was President of the Halsey Collection, which was a ladies apparel import company, since 1992.
Dror Zoreff has been employed as Vice President of International Operations since March 1998. Prior to joining the Company, Mr. Zoreff was the Executive Vice President at the College of Judea & Samaria since 1989.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 1997, the Company's Common Stock was held by approximately 549 shareholders of record. The Company's Common Stock has been traded on the New York Stock Exchange since its initial public offering on March 29, 1984. The following table sets forth the high and low sale prices on the New York Stock Exchange Composite Tape for the calendar periods indicated, as furnished by the New York Stock Exchange:
The Board of Directors declared its first dividend to holders of the Company's Common Stock in November, 1986. Since then, a cash dividend has been paid quarterly. The current quarterly rate is $.19 per share, effective February 1998. Prior to that the quarterly rate was $.17 per share since February 1997 and $.15 per share since February 1993. The Board of Directors will review its dividend policy from time to time and declaration of dividends will remain within its sole discretion.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
* 1996 includes the gain on sale of Papel/Freelance, Inc. of approximately $4,800,000 before tax or $3,000,000 ($0.14 per share) after tax and a reversal of a litigation provision of $4,450,000 before tax or $2,800,000 ($0.13 per share) after tax.
1993 includes a restructuring charge of $5.0 million.
** 1997 includes the gain on sale of Cap Toys, Inc. and OddzOn Products, Inc. of $75,300,000 before tax or $46,700,000 ($2.12 per share) after tax.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF CONTINUING OPERATIONS - YEARS ENDED DECEMBER 31, 1997 AND 1996
For the year ended December 31, 1997 the Company's net sales of $271,336,000 compares to net sales for the year ended December 31, 1996 of $226,243,000. This represents an increase of 19.9%. This increase in net sales reflects the positive customer response to the Company's redesign of its gift product line focusing on coordinated themes of product offerings.
Cost of sales were 44.1% of net sales in 1997 compared to 46.4% of net sales in 1996. The decrease primarily reflects higher gross profit margins on sales of certain of the Company's product line concepts during the year ended December 31, 1997.
Selling, general and administrative expense was $104,152,000 or 38.4% of net sales for the year ended December 31, 1997 compared to $89,827,000 or 39.7% of net sales in 1996, an increase of $14,325,000 or 15.9%. As a percent of net sales, the decrease in selling, general and administrative expense can be attributed to fixed costs which were absorbed by the increase in net sales. Included in the selling, general and administrative expense for the year ended December 31, 1997 is a provision of $1,500,000 for costs associated with closing all of the Company's remaining retail operations. The year ended December 31, 1996 includes a provision of $900,000 related to costs associated with closing certain of the Company's retail stores. Excluding these provisions, selling, general and administrative expense increased $13,725,000 or 15.4% when compared to the prior year. This increase can be primarily attributed to the increase in expenses required to support the higher sales levels, in particular compensation and travel costs associated with the salesforce.
Investment and other income of $6,249,000 for the year ended December 31, 1997 compares to $6,707,000 in 1996. Included in the results for the year ended December 31, 1996 is a gain of approximately $4,800,000 before tax related to the sale of the Company's Papel/Freelance, Inc. subsidiary. Excluding the gain, investment and other income increased $4,342,000 which can be primarily attributed to increased investment income relative to the Company's investment portfolio resulting from higher investment balances as a result of the proceeds from the sale of the Toy business segment.
The provision for income taxes as a percent of income before taxes for the year ended December 31, 1997 was 30.6% compared to 37.3% in the prior year. This decrease can be primarily attributed to decreases in tax liability on certain foreign subsidiary income during the year ended December 31, 1997 and an advance corporation tax refund relative to the Company's United Kingdom subsidiary.
Net income from continuing operations for the year ended December 31, 1997 of $37,265,000 compares to net income from continuing operations of $26,699,000 in 1996. Included in the results for the year ended December 31, 1996 is the gain on the sale of the Company's subsidiary Papel/Freelance, Inc., of $3,000,000 after tax and the reversal of a litigation provision of $2,800,000 after tax. Excluding the gain and the litigation reversal, net income from continuing operations increased $16,366,000 or 78.3%. This increase in net income can be attributed to the increase in net sales, improved gross profit margins, increased investment income and lower effective tax rate partially offset by the increase in selling, general and administrative expense.
The Company maintains a direct salesforce and distribution network to serve its customers in Europe and Canada. Product, sales and marketing strategies in these foreign operations are similar to those in the Company's domestic operations. Where the Company does not maintain a direct salesforce and distribution network, the Company's products are sold worldwide through distributors. See Note 16 of the Notes to Consolidated Financial Statements for more information regarding geographic information.
RESULTS OF CONTINUING OPERATIONS - YEARS ENDED DECEMBER 31, 1996 AND 1995
For the year ended December 31, 1996 the Company's net sales of $226,243,000 compares to net sales for the year ended December 31, 1995 of $213,918,000. This represents an increase of 5.8%. The Company's gift products subsidiary Papel/Freelance, Inc. was sold on January 17, 1996. Net sales excluding Papel/Freelance, Inc. for the year ended December 31, 1996 was $225,328,000 compared to $183,253,000 for the year ended December 31, 1995, an increase of $42,075,000 or 23.0%. This increase in net sales reflects the strong acceptance of the Company's current gift product line. In December 1996 the Company, due to the earlier consumer selling season for Easter 1997, sold approximately $4,900,000, which represents a portion of its Easter seasonal merchandise sales. Historically, sales of this product would not occur until January of the following year.
Cost of sales were 46.4% of net sales in 1996 compared to 47.2% of net sales in 1995. This decrease can be attributed to the components of cost of sales that are fixed costs which were absorbed by the higher sales volume in the year ended December 31, 1996.
Selling, general and administrative expense was $89,827,000 or 39.7% of net sales for the year ended December 31, 1996 compared to $103,184,000 or 48.2% of net sales in 1995, a decrease of $13,357,000 or 12.9%. The decrease in selling, general and administrative expense can be primarily attributable to the elimination of the selling, general and administrative expense of the Company's Papel/Freelance, Inc. subsidiary, which was sold in January, 1996. The decrease in selling, general and administrative expense as a percent of net sales can be attributed to fixed costs as they relate to the increase in net sales.
During the year ended December 31, 1996 the Company reversed a litigation provision of $4,450,000 before tax or $2,800,000 after tax. This reversal was due to a settlement of certain litigation for less than what was provided for in the year ended December 31, 1992.
Investment and other income of $6,707,000 for the year ended December 31, 1996 compares to $1,732,000 in 1995. Included in the results for the year ended December 31, 1996 is a gain of approximately $4,800,000 before tax related to the sale of the Company's Papel/Freelance, Inc. subsidiary.
The provision for income taxes as a percent of income before taxes for the year ended December 31, 1996 was 37.3% compared to 34.5% in the prior year. This increase can be attributed to increases in tax liability on certain foreign subsidiary income during the year ended December 31, 1996.
Net income from continuing operations for the year ended December 31, 1996 of $26,699,000 compares to net income from continuing operations of $7,474,000 in 1995. This increase in net income can be attributed to the increase in net sales, the decrease in selling, general and administrative expense, the gain on the sale of the Company's subsidiary Papel/Freelance, Inc., of $3,000,000 after tax and the reversal of a litigation provision of $2,800,000 after tax, partially offset by the increase in the effective tax rate.
DISCONTINUED OPERATIONS
On May 2, 1997, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products, Inc., to a wholly-owned subsidiary of Hasbro, Inc. These two subsidiaries represented the Company's Toy business segment. The operating results of the Toy business segment have been classified as discontinued operations and the financial statements have been restated to reflect this presentation.
The sale transaction resulted in a gain on the sale of discontinued operations in the year ended December 31, 1997 of $75,300,000 before tax or $46,700,000 ($2.12 per share) after tax.
Net sales of the Company's discontinued operations amounted to $38,614,000 for the year ended December 31, 1997 compared to $151,380,000 for the year ended December 31, 1996. Net loss from discontinued operations for the year ended December 31, 1997 of $1,324,000 compares to net income of $4,978,000 in 1996.
YEAR 2000 COMPLIANCE
The Company has undertaken a project to implement a new packaged software system for the global organization. This new enterprise-wide system will replace the current custom software that the Company utilizes to operate its business. The new enterprise software system is Year 2000 compliant.
The total cost of the project including hardware, packaged software and project implementation is expected to be in excess of $10,000,000. Hardware, software and certain project costs will be capitalized and amortized over their useful lives. The remainder of the costs will be expensed as incurred.
The implementation is expected to be completed by the first quarter of 1999 for the Company's domestic operations. The implementation for the remainder of the Company's worldwide operation is expected to be completed by the fourth quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents and marketable securities of $202,001,000 compared to $52,257,000 at December 31, 1996.
On May 2, 1997, the Company sold substantially all of the assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products, Inc. The sale resulted in proceeds of $134,484,000, which represents the purchase price less escrow balances and costs associated with the transaction. 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.
As of December 31, 1997, the Company had marketable securities of $108,558,000. 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. See Note 3 of the Notes to Consolidated Financial Statements for more information regarding financial instruments.
The Company's portfolio of preferred securities investments are subject to market fluctuations based largely, but not exclusively, on the securities' sensitivity to changes in interest rates. By maintaining an economic hedge consisting of government futures contracts and options, the Company seeks to reduce interest rate related risk. The portfolio of preferred securities and futures contracts and options position are intended to produce offsetting capital gains and losses as interest rates change.
The Company has available $84,771,000 in bank lines of credit that provide for direct borrowings and letters of credit used for the purchase of inventory. At December 31, 1997, letters of credit of $14,521,000 were outstanding. There were no direct borrowings under the bank lines of credit. Working capital requirements during 1997 were met entirely through internally generated funds. The Company remains in a highly liquid position and believes that the resources available from investments, operations and bank lines of credit are sufficient to meet the foreseeable requirements of its business.
The Company enters into forward exchange contracts and currency options, principally to serve as economic hedges of the currency risk associated with the purchase of inventory by its European and Canadian operations. Gains and losses, related to contracts accounted for as hedges, are reported as a component of the related transactions. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts.
During the year ended December 31, 1997, the Board of Directors authorized the Company to repurchase an additional 1,000,000 shares of common stock for a total authorization of 4,000,000 shares. As of December 31, 1997, 2,847,600 shares have been repurchased since the beginning of the Company's stock repurchase program in March, 1990.
Starting in 1997, the Company, as part of its repurchase program, utilizes put and call option instruments to establish a strategy to purchase the Company's stock with no upfront cash investment while fixing the price required to be paid for the shares. These instruments took the form of a costless equity collar and were constructed as a series of purchased calls and sold puts, with the cost of the purchased calls exactly offset by the premium earned on the sold puts.
ITEM 7A.
ITEM 7A. QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required for this item is incorporated on pages 15 and 16 of the Management's Discussion and Analysis of Results of Operations and Financial Condition of the Company's 1997 Annual Report.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Russ Berrie and Company, Inc.:
We have audited the accompanying consolidated balance sheet of Russ Berrie and Company, Inc. (a New Jersey Corporation) and subsidiaries as of December 31, 1997 and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Russ Berrie and Company, Inc. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Roseland, New Jersey January 30, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Russ Berrie and Company, Inc.:
We have audited the consolidated balance sheet of Russ Berrie and Company, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995 and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Russ Berrie and Company, Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Parsippany, New Jersey January 31, 1997
Quarterly Financial Information (Unaudited)
The following selected financial data for the eight quarters ended December 31, 1997 are derived from unaudited financial statements and include, in the opinion of management, all adjustments of a normal recurring nature necessary for fair presentation of the results for the interim periods presented. The quarter ended June 30, 1997 includes the gain on sale of discontinued operations of $75,300,000 before tax or $46,700,000 ($2.12 per share) after tax. The quarter ended March 31, 1996 includes the gain on the sale of Papel/Freelance, Inc. of approximately $4,800,000 before tax or $3,000,000 ($0.14 per share) after tax. The quarter ended September 30, 1996 includes the reversal of a litigation provision of $4,450,000 before tax or $2,800,000 ($0.13 per share) after tax.
For Quarters Ended (Dollars in Thousands, Except Per Share Data)
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31
(Dollars in Thousands, Except Per Share Data)
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEET AT DECEMBER 31 (Dollars in Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (Dollars in Thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business
Russ Berrie and Company, Inc. and its subsidiaries design, manufacture through third parties and market a wide variety of gift products to retail stores throughout the United States and countries throughout the world.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Russ Berrie and Company, Inc. and its wholly-owned subsidiaries (collectively, the "Company") after elimination of intercompany accounts and transactions.
Discontinued Operations
The Notes to these consolidated financial statements reflect the continuing operations of the Company unless otherwise stated or indicated.
Revenue Recognition
The Company recognizes revenue from product sales, net of provisions for sales discounts, returns and allowances, upon shipment of product to the customer.
Advertising Costs
Production costs for advertising are charged to operations in the year the related advertising campaign begins. All other advertising costs are charged to operations during the year in which they are incurred. Advertising costs for the years ended December 31, 1997, 1996 and 1995 amounted to $2,112,000, $1,327,000 and $2,072,000, respectively.
Cash and Cash Equivalents
Cash equivalents consist of investments in interest bearing accounts and highly liquid securities having a maturity of three months or less and approximate fair market value.
Inventories
Inventories, which mainly consist of finished goods, are stated at the lower of cost (first-in, first-out) or market value.
Property
Property, plant and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives which range from three to eighteen years. Leasehold improvements are amortized using the straight-line method over the term of the respective lease or asset life, whichever is shorter. Major improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Gain or loss on retirement or disposal of individual assets is recorded as income or expense in the period incurred.
Goodwill and Other Intangible Assets
Included in other assets is goodwill, which represents the excess of purchase price of acquired assets over the fair market value of net assets acquired. Goodwill is being amortized using the straight-line method over fifteen years or less. The Company evaluates the recoverability of goodwill based upon estimated future income and cash flows of operating entities. Impairments would be recognized in operating results to the extent that carrying value exceeds fair value. Other intangible assets acquired are being amortized over the period for which benefit is derived, which ranges from three to five years. Goodwill and other intangible assets, net of accumulated amortization, was $620,000 and $774,000 at December 31, 1997 and 1996, respectively. Accumulated amortization amounted to $2,227,000 and $3,025,000 at December 31, 1997 and 1996, respectively.
Foreign Currency Translation
Aggregate foreign exchange gains or losses resulting from the translation of foreign subsidiaries' financial statements, for which the local currency is the functional currency, are recorded as a separate component of shareholders' equity. Gains and losses from foreign currency transactions are included in investment and other income - net (See Note 8).
Accounting for Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Earnings Per Share
The Notes to these consolidated financial statements reflect basic earnings per share unless otherwise stated or indicated. See Note 10 for more information regarding earnings per share.
Use of Estimates
The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
Note 3 - Financial Instruments
Marketable Securities
In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company's marketable securities are considered available-for-sale investments. Accordingly, these investments are carried in the accompanying balance sheet at market value, with the difference between cost and market value recorded as a component of shareholders' equity, net of tax. Marketable securities are composed primarily of government fixed income securities. Additionally, included in marketable securities is a diversified portfolio of investment grade preferred securities.
Interest Rate Futures Contracts and Options
The Company's portfolio of preferred securities investments are subject to market fluctuations based largely, but not exclusively, on the securities' sensitivity to changes in interest rates. By maintaining an economic hedge consisting of government futures contracts and options, the Company seeks to reduce interest rate related risk. The portfolio's position of preferred securities and futures contracts and options are intended to produce offsetting capital gains and losses as interest rates change. The market value of these instruments is reported in marketable securities with unrealized gains and losses recorded as part of shareholders' equity.
As of December 31, 1997, marketable securities consist of the following:
Unrealized gains and losses with respect to available-for-sale investments are recorded, net of tax, in shareholders' equity. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statement of income.
Foreign Currency Contracts
The Company enters into forward exchange contracts, principally to serve as economic hedges of the currency risk associated with the purchase of inventory by its United Kingdom and Canadian subsidiaries. Gains and losses related to contracts accounted for as hedges are reported as a component of the related transactions. The Company does not trade in foreign currency contracts to achieve short-term gains. At December 31, 1997 and 1996, the aggregate notional amount of foreign exchange contracts was $5,800,000 and $12,000,000, respectively. At December 31, 1997 and 1996, there were no carrying amounts related to foreign currency contracts in the consolidated balance sheet.
At December 31, 1997, the Company's forward exchange contracts have expiration dates which range from one to seven months. The estimated fair value of the notional amount of the Company's forward exchange contracts based on quoted rates as of December 31, 1997 and 1996 were $5,705,000 and $11,327,000, respectively. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts.
Concentrations of Credit Risk
As part of its ongoing control procedures, the Company monitors concentrations of credit risk associated with financial institutions with which it conducts business. The Company avoids concentration with any single financial institution. As of December 31, 1997, marketable securities of the Company were actively managed by four investment managers. These investment managers operate under guidelines which restrict the investment grade and type of investment and furthermore limit the dollar amount that can be invested in any one instrument.
The Company also monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. Concentrations of credit risk associated with these trade receivables are considered minimal due to the Company's diverse customer base. The Company does not normally require collateral or other security to support credit sales.
Note 4 - Inventory Reserves
As of December 31, 1997 and 1996, the Company has recorded reserves to reflect inventories at their estimated net realizable value. Management believes that such inventories are fairly stated. The reserve balance as of December 31, 1997 and 1996 was $15,292,000 and $17,132,000, respectively.
Note 5 - Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31,
Note 6 - Lines of Credit
Under its existing domestic bank lines of credit, which are renewed annually, the Company has available $70,000,000 for direct borrowings and letters of credit at any one time.
The maximum amount available to the Company's foreign operations at December 31, 1997, under local lines of credit, is $14,771,000. These lines provide for direct borrowings, letters of credit and overdraft facilities.
In connection with the purchase of imported merchandise, the Company, at December 31, 1997, had letters of credit outstanding under all lines of $14,521,000.
Note 7 - Accrued Expenses
Accrued expenses consist of the following:
December 31,
Note 8 - Investment and Other Income - Net
The significant components of investment and other income - net consist of the following:
Years Ended December 31,
On January 17, 1996, the Company completed the sale of its subsidiary Papel/Freelance, Inc. The sale resulted in a gain of approximately $4,800,000 before tax, or $3,000,000 ($0.14 per share) after tax, which was recognized in the first quarter of 1996. An additional $2,000,000 before tax, relating to a transitional agreement, will be received and recognized as income contingent upon satisfaction of the terms of the agreement.
Note 9 - Income Taxes
The Company and its domestic subsidiaries file a consolidated Federal income tax return.
Income from continuing operations before income taxes was:
The provision for income taxes consists of the following:
A reconciliation of the provision for income taxes with amounts computed at the statutory Federal rate is shown below:
The Company had a valuation allowance at December 31, 1997 and 1996 of $1,219,000 and $1,984,000, respectively (primarily relating to deferred state income taxes) to reflect the estimated amount of deferred tax assets which may not be realized.
The components of the net deferred tax asset, net of the valuation allowance, resulting from temporary differences between accounting for financial and tax reporting purposes were as follows:
Provisions are made for estimated United States and foreign income taxes, less available tax credits and deductions, which may be incurred on the remittance of foreign subsidiaries' undistributed earnings less those earnings deemed to be permanently reinvested. The amount of such earnings deemed permanently reinvested was approximately $49,659,000 as of December 31, 1997. Determination of the net amount of unrecognized deferred tax liability with respect to these earnings is not practicable.
Note 10 - Earnings Per Share
In the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," which requires presentation in the Consolidated Statement of Income of both basic and diluted earnings per share. Earnings per common share (basic) as calculated in accordance with this Statement does not differ from earnings per share reported in prior periods.
A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution follows:
(1) Issuable under stock option plans.
Stock options outstanding at December 31, 1996 and 1995 to purchase 78,500 and 860,500 shares, respectively, of common stock were not included in the computation of earnings per common share assuming dilution because the options' exercise prices were greater than the average market price of the common shares during the respective years.
Note 11 - Related Party Transactions
Certain buildings, referred to in Note 12, are leased from Russell Berrie, the Company's majority shareholder, or entities owned or controlled by him. Rentals under these leases for the years ended December 31, 1997, 1996 and 1995 were $4,122,000, $4,042,000 and $4,042,000, respectively. The Company is also a guarantor under two mortgages for property so leased with a principal amount aggregating approximately $8,068,000 as of December 31, 1997, $2,000,000 of which is collateralized by assets of the Company.
The Company also leased a facility from a partnership in which a director of the Company is a general partner. Annual rentals under this lease agreement for the years ended December 31, 1997, 1996 and 1995 were $830,000, $996,000 and $996,000, respectively. As of December 31, 1996 the lease obligation was included in accrued future lease obligations (See Note 7).
The Company paid to an investment banking firm, of which a Director of the Company is a Vice Chairman, fees with regard to the sale of the Toy business segment (See Note 18). The total amount of transaction fees paid during the year ended December 31, 1997 amounted to $1,632,000.
Note 12 - Leases
At December 31, 1997, the Company and its subsidiaries are obligated under operating lease agreements (principally for buildings and other leased facilities) for remaining lease terms ranging from one to seventeen years.
Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted to $6,415,000, $6,834,000 and $7,479,000, respectively.
The approximate aggregate minimum future rental payments as of December 31, 1997 under operating leases are as follows:
Note 13 - Stock Repurchase Program
During the year ended December 31, 1997, the Board of Directors authorized the Company to repurchase an additional 1,000,000 shares of common stock for a total authorization of 4,000,000 shares. As of December 31, 1997, 2,847,600 shares have been repurchased since the beginning of the Company's stock repurchase program in March, 1990.
Starting in 1997, the Company, as part of its repurchase program, utilizes put and call option instruments to establish a strategy to purchase the Company's stock with no upfront cash investment while fixing the price required to be paid for the shares. These instruments took the form of a costless equity collar and were constructed as a series of purchased calls and sold puts, with the cost of the purchased calls exactly offset by the premium earned on the sold puts. As of December 31, 1997, the Company has call options to purchase 67,500 shares at an average price of $22.01. The Company has sold put options covering 135,000 shares at an average price of $21.02. The term of these options expire over a period of one year. The net fair value of these instruments as of December 31, 1997 is $289,000. The put and call options did not have a dilutive effect on earnings per share.
Unrealized gains or losses during the term of these options have no impact on the consolidated financial position of the Company. Upon exercise or expiration of the options, the transaction will be recorded within shareholders' equity.
Note 14 - Stock Option and Employee Stock Purchase Plans
The Company has three Stock Option Plans and an Employee Stock Purchase Plan. As of December 31, 1997, there were 2,769,794 shares of common stock reserved for issuance under all stock plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock plans. Had compensation cost for the Company's three Stock Option Plans and Employee Stock Purchase Plan been determined based on the fair value at the grant date for the awards in 1997, 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for all grants:
The option price for all stock option plans is equal to the closing price of the Company's common stock as of the date the option is granted. All stock options vest one year from the grant date. Options expire 10 years from the date of grant. Information regarding these option plans for 1997, 1996 and 1995 is as follows:
The weighted-average fair value of options granted, on a per share basis, during the years 1997, 1996 and 1995 was $4.70, $3.19 and $3.22, respectively.
The following table summarizes information about fixed-price stock options outstanding at December 31, 1997:
Under the Employee Stock Purchase Plan, the purchase price is 90% of the closing market price of the stock on the first business day of the Plan year. Information regarding the Employee Stock Purchase Plan for 1997, 1996 and 1995 is as follows:
As of December 31, 1997, the Employee Stock Purchase Plan has 91,771 shares reserved for future issuance.
Note 15 - 401(k) Plan
The Company maintains a 401(k) Plan to which employees may, up to certain prescribed limits, contribute a portion of their compensation to the 401(k) Plan and a portion of these contributions is matched by the Company. The provision for contributions charged to operations for the years ended December 31, 1997, 1996 and 1995 was $737,000, $583,000 and $523,000, respectively.
Note 16 - Geographic Information
The Company's continuing operations comprise one business segment. Financial data by geographic area are presented below:
Export sales to customers from the United States are not material.
Note 17 - Litigation
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the results of operations, the financial position or the cash flows of the Company.
Included in income for the year ended December 31, 1996 is a reversal of a litigation provision of $4,450,000 before tax. This reversal was due to a settlement of certain litigation.
Note 18 - Discontinued Operations
On May 2, 1997, the Company completed the sale of substantially all of the assets of its wholly-owned subsidiaries, Cap Toys, Inc. and OddzOn Products, Inc., to a wholly-owned subsidiary of Hasbro, Inc. These two subsidiaries represented the Company's Toy business segment. The Toy business segment is reported as discontinued operations for the years ended December 31, 1997, 1996 and 1995. The sale transaction resulted in a gain on the sale of discontinued operations in the year ended December 31, 1997 of $75,300,000 before tax or $46,700,000 ($2.12 per share) after tax. The Company believes it has adequately provided for any accruals related to discontinued operations.
Amounts included in net (loss) income from discontinued operations for the Toy business segment for the years ended December 31 were as follows:
Advertising costs for discontinued operations for the years ended December 31, 1997, 1996 and 1995 amounted to $4,336,000, $27,683,000 and $15,219,000, respectively.
Amortization costs related to intangible assets for the years ended December 31, 1997, 1996 and 1995 amounted to $851,000, $2,512,000 and $2,497,000, respectively.
Assets and liabilities of the Toy business segment, reported as net assets of discontinued operations at December 31, 1996 were as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Changes in Registrant's Certifying Accountant
The registrant has dismissed the accounting firm of Coopers & Lybrand L.L.P. of Parsippany, New Jersey and has engaged the accounting firm of Arthur Andersen LLP of Roseland, New Jersey as their principal independent accounting firm, effective August 21, 1997. In accordance with applicable Securities and Exchange Commission regulations, such dismissal was reported in the Company's filing on Form 8-K on August 21, 1997.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to this item appears under the caption "ELECTION OF DIRECTORS" on pages 1 and 2 and "SECTION 16 COMPLIANCE" on pages 15 and 16 of the 1998 Proxy Statement, which is incorporated herein by reference and under the caption "EXECUTIVE OFFICERS OF THE REGISTRANT" on pages 9 and 10 of this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to this item appears under the caption "THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD" on page 3, "DIRECTOR COMPENSATION" on pages 3 and 4, "EXECUTIVE COMPENSATION" on pages 11 through 13 and "COMPENSATION COMMITTEE REPORT" on pages 5 and 6 in the 1998 Proxy Statement, which are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to this item appears under the captions "SECURITY OWNERSHIP OF MANAGEMENT" on pages 8 and 9 and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" on pages 9 and 10 of the 1998 Proxy Statement, which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to this item appears under the captions "EXECUTIVE COMPENSATION" on pages 11 through 13, "CERTAIN TRANSACTIONS" on pages 14 and 15 and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" on page 6 of the 1998 Proxy Statement, which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report.
1. Financial Statements:
Page Number in this Report
Report of Independent Public Accountants - 1997....... 17
Report of Independent Accountants - 1996.............. 18
Consolidated Statement of Income for the years ended December 31, 1997, 1996 and 1995............ 20
Consolidated Statement of Changes in Shareholders' Equity for the years ended 1997, 1996 and 1995..................................... 21
Consolidated Balance Sheet at December 31, 1997 and 1996............................................ 22
Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995............ 23
Notes to Consolidated Financial Statements.............. 24-35
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......... S-2
Other schedules are omitted because they are either not applicable or not required or the information is presented in the Consolidated Financial Statements or Notes thereto.
3. Exhibits:
Exhibit No.
3.1 (a) Restated Certificate of Incorporation of the Registrant and amendment thereto. (9)
(b) Certificate of Amendment to Restated Certificate of Incorporation of the Company filed April 30, 1987. (23)
3.2 (a) By-Laws of the Registrant. (9)
(b) Amendment to Revised By-Laws of the Company adopted April 30, 1987. (23)
(c) Amendment to Revised By-Laws of the Company adopted February 18, 1988. (23)
4.1 Form of Common Stock Certificate. (1)
10.1(a) Russ Berrie and Company, Inc. Stock Option and Restricted Stock Plan. (2)
(b) Amendment to the Russ Berrie and Company, Inc. Stock Option and Restricted Stock Plan. (11)
10.2(a) Russ Berrie and Company, Inc. Stock Option Plan for Outside Directors. (3)
(b) Amendment to the Russ Berrie and Company, Inc. Stock Option Plan for Outside Directors. (11)
10.3 Russ Berrie and Company, Inc. Profit Sharing Plan. (3)
10.4 Agreement dated January 26, 1982 between the Registrant and A. Curts Cooke and amendment thereto dated March 10, 1984. (3)
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(1) Incorporated by reference to Amendment No. 2 to Registration Statement No. 2-88797 on Form S-1, as filed on March 29, 1984.
(2) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1984.
(3) Incorporated by reference to Amendment No. 1 to Registration Statement No. 2-8797 on Form S-1, as filed on March 13, 1984.
(9) Incorporated by reference to Amendment No. 1 to Registration Statement No. 33-10077 on Form S-1, as filed on December 16, 1986.
(11) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1987.
(23) Incorporated by reference to Registration No. 33-51823 on Form S-8, as filed on January 6, 1994.
Exhibit No.
10.26 Lease Agreement, dated April 1, 1981, between Tri-State Realty and Investment Company and Russ Berrie and Company, Inc. (4)
10.27 Guaranty, dated March 20, 1981, from Russ Berrie and Company, Inc. and Russell Berrie to the New Jersey Economic Development Authority and Midlantic National Bank as Trustee. (4)
10.28 Mortgage, dated April 6, 1981, between Tri-State Realty and Investment Company and the New Jersey Economic Development Authority. (4)
10.29 Credit and Security Agreement, dated as of March 1, 1981, between the New Jersey Economic Development Authority and Tri-State Realty and Investment Company. (4)
10.30 Assignment of Leases, Rents & Profits, dated April 6, 1981, by Tri-State Realty and Investment Company to the New Jersey Economic Development Authority. (4)
10.31 Note, dated April 6, 1981, made by Tri-State Realty and Investment Company to the order of the New Jersey Economic Development Authority in the principal amount of $2,000,000. (4)
10.32 Specimen of State of New Jersey Economic Development Authority $2,000,000 Economic Development Bond (Tri-State Realty and Investment Company -- 1980 Project), dated April 6, 1981. (4)
10.33 Lease, dated December 28, 1983, between Russell Berrie and Russ Berrie and Company, Inc. (4)
10.35 Guarantee dated as of December 1, 1983, from Russ Berrie and Company, Inc. to the New Jersey Economic Development Authority, Bankers Trust Company as Trustee and each Holder of a Bond. (4)
10.36 Letter of Credit and Reimbursement Agreement, dated as of December 1, 1983, between Russ Berrie and Company, Inc. and Citibank, N.A.(4)
10.37 Loan Agreement, dated as of December 1, 1983, between the New Jersey Economic Development Authority and Russell Berrie. (4)
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(4) Incorporated by reference to Registration Statement No. 2-88797 on Form S-1 as filed on February 2, 1984.
Exhibit No.
10.38 Mortgage, dated December 28, 1983, between Russell Berrie and Citibank, N.A. (4)
10.39 Form of New Jersey Economic Development Authority Variable/Fixed Rate Economic Development Bond (Russell Berrie -- 1983 Project). (4)
10.51 Grant Deed, dated June 28, 1982, from Russ Berrie and Company, Inc. to Russell Berrie. (1)
10.52 Russ Berrie and Company, Inc. 1989 Employee Stock Purchase Plan.(13)
10.53 (a) Russ Berrie and Company, Inc. Stock Option Plan. (6)
(b) Amendments to the Russ Berrie and Company, Inc. Stock Option Plan. (11)
10.68 (a) Lease Agreement, dated as of May 1, 1977, between Fred T. Reisman and Associates Limited, Amram's Distributing, LTD, and Alfa Romeo (Canada) Limited (8)
(b) Lease Agreement, dated April 8, 1986, between Pensionfund Realty Limited and Amram's Distributing LTD. (9)
10.70 Amendment, dated October 29, 1985 to the restated Russ Berrie and Company, Inc. Profit Sharing Plan. (8)
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(1) Incorporated by reference to Amendment No. 2 to Registration Statement No. 2-88797 on Form S-1, as filed on March 29, 1984.
(4) Incorporated by reference to Registration Statement No. 2-88797 on Form S-1, as filed on February 2, 1984.
(6) Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement No. 2-96238 on Form S-8, as filed on November 6, 1985.
(8) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1985.
(9) Incorporated by reference to Amendment No. 1 to Registration Statement No. 33-10077 of Form S-1, as filed on December 16, 1986.
(11) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1987.
(13) Incorporated by reference to Form S-8 Registration Statement No. 33-26161, as filed on December 16, 1988.
Exhibit No.
10.73 Russ Berrie and Company, Inc. Deferred Compensation Plan. (9)
10.76 (a) Lease agreement, dated September 17, 1987, between Forsgate Industrial Complex and Russ Berrie and Company, Inc. (11)
(b) Amendment, dated March 18, 1988, between Forsgate Industrial Complex and Russ Berrie and Company, Inc. (11)
10.77 Lease agreement, dated July 1, 1987, between Hunter Street, Inc. and Russ Berrie and Co. (West), Inc. (11)
10.78 Lease agreement, dated October 1, 1987, between David Benjamin and Nicole Berrie Lakeland Trust and Russ Berrie and Company, Inc. (11)
10.80 Russ Berrie and Company, Inc. 1989 Stock Option Plan. (14)
10.81 Russ Berrie and Company, Inc. 1989 Stock Option Plan for Outside Directors. (15)
10.82 Russ Berrie and Company, Inc. 1989 Stock Option and Restricted Stock Plan. (16)
10.83 Lease Agreement dated November 7, 1988 between A. Mantella & Sons Limited and Amram's Distributing, Ltd. (17) - ---------- (9) Incorporated by reference to Amendment No. 1 to Registration Statement No. 33-10077 of Form S-1, as filed on December 16, 1986.
(11) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1987.
(14) Incorporated by reference to Form S-8 Registration Statement No. 33-27406, as filed on March 16, 1989.
(15) Incorporated by reference to Form S-8 Registration Statement No. 33-27897, as filed on April 5, 1989.
(16) Incorporated by reference to Form S-8 Registration Statement No. 33-27898, as filed on April 5, 1989.
(17) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988.
Exhibit No.
10.84 Lease Agreement dated November 7, 1988 between Russell Berrie and Russ Berrie and Company, Inc. (17)
10.86 Lease Agreement dated June 8, 1989 between Americana Development, Inc. and Russ Berrie and Company, Inc. (18)
10.87 Lease dated December 25, 1989 between Kestrel Properties, Ltd. and Russ Berrie (U.K.) Ltd. (18)
10.89 Amendment dated January 9, 1989 to Letter of Credit and Reimbursement Agreement dated as of December 1, 1983 between Russ Berrie and Company, Inc. and Citibank, N.A. (18)
10.91 (a) Assignment of Underlease of Unit 10 Nursling Industrial Estate, Marks and Spencer plc to Russ Berrie (U.K.) Limited. (19)
(b) Underlease of Unit 10 Nursling Estate County of Hants. (19)
10.92 Agreement for sale and purchase of parts or shares of Sea View Estate between Sino Rank Company Limited and Tri Russ International (Hong Kong) Limited dated March 10, 1990. (19)
10.95 (a) Asset Purchase Agreement dated September 18, 1990 by and among Bright, Inc., Bright of America, Inc., Bright Crest, LTD. and William T. Bright. (19)
(b) Non-Compete Agreement dated September 18, 1990 by and between William T. Bright and Bright, Inc. (19)
(c) Deed of Trust dated September 18, 1990 by and among Bright, Inc. F.T. Graff Jr. and Louis S. Southworth, III Trustees, and Bright of America, Inc. (19)
(d) Guaranty Agreement dated September 18, 1990 executed by Russ Berrie and Company, Inc. delivered to Bright of America, Inc. and Bright Crest, LTD. (19)
(e) Guaranty Agreement dated September 18, 1990 executed by Russ Berrie and Company, Inc. delivered to William T. Bright. (19)
10.97 Russ Berrie and Company, Inc. Retirement Plan Amended and Restated Effective January 1, 1989. (19)
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(17) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988.
(18) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1989.
(19) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1990.
Exhibit No.
10.101 (a) Sale and Purchase Agreement dated October 16, 1991 by and among Weaver Corp. and Papel/Freelance, Inc. (20)
(b) Non-competition Agreement made October 16, 1991 by and among Weaver Corp., an Indiana corporation, Steven Weaver and Papel/Freelance, Inc. a Pennsylvania corporation. (20)
10.102 Transfer of Freehold land between British Telecommunications plc and BT Property Limited and Russ Berrie (UK) Ltd. (21)
10.103 Executive Employment Agreement dated December, 1992 between Russ Berrie and Company, Inc. and Bernard Tenenbaum. (21)
10.104 Russ Berrie and Company, Inc. 1994 Stock Option Plan. (21)
10.105 Russ Berrie and Company, Inc. 1994 Stock Option Plan for Outside Directors. (21)
10.106 Russ Berrie and Company, Inc. 1994 Stock Option and Restricted Stock Plan. (21)
10.107 Russ Berrie and Company, Inc. 1994 Employee Stock Purchase Plan. (21)
10.108 Asset Purchase Agreement dated October 1, 1993 by and between RBTACQ, Inc. and Cap Toys, Inc. (22)
10.109 Asset Purchase Agreement I.C. September 30, 1994 by and among RBCACQ, Inc. and OddzOn Products, Inc., Scott Stillinger and Mark Button. (23)
10.110 Asset Purchase Agreement By and Among PF ACQUISITION CORP., ZEBRA CAPITAL CORPORATION, PAPEL/FREELANCE, INC. and RUSS BERRIE AND COMPANY, INC. dated December 15, 1995. (24)
10.111 Agreement dated December 17, 1996, by and between Russ Berrie and Company, Inc. and A. Curts Cooke. (25)
10.112 Agreement dated March 24, 1997, by and between Russ Berrie and Company, Inc. and Ricky Chan. (25)
10.113 Asset Purchase Agreement dated as of May 2, 1997 among Russ Berrie and Company, Inc., OddzOn Products, Inc., Cap Toys, Inc., OddzOn/Cap Toys, Inc. and Hasbro, Inc., together with exhibits thereto. (26)
10.114 First Amendment of Agreement dated June 5, 1997, by and between Russ Berrie and Company, Inc. and A. Curts Cooke. (27)
10.115 Agreement of Purchase and Sale between Amram's Distributing Ltd. and Metrus Properties Ltd. dated November 25, 1997. (27)
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(20) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1991.
(21) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1992.
(22) Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(23) Incorporated by Reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(24) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1995.
(25) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1996.
(26) Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
(27) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1997.
Exhibit No.
21.1 List of Subsidiaries
23.1 Report of Independent Public Accountants - 1997
23.2 Report of Independent Accountants - 1996
23.3 Consent of Independent Public Accountants - 1997
27.1 Financial Data Schedule - 1997
27.2 Restated Financial Data Schedule - 1997*
27.3 Restated Financial Data Schedule - 1997*
27.4 Restated Financial Data Schedule - 1996*
* Per share data restated to meet reporting requirements under SFAS No. 128.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1997.
Undertaking
In order to comply with amendments to the rules governing the use of Form S-8 under the Securities Act of 1933, as amended, as set forth in Securities Act Release No. 33-6867, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statements on Forms S-8 (File Nos. 2-96238, 2- 96239, 2-96240, 33-10779, 33-27406, 33-27897 and 33-27898):
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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)
3/26/98 By /s/ Paul Cargotch - ------------------- ---------------------------- Date Paul Cargotch Executive Vice President, Chief Financial Officer, Assistant Secretary and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES DATE ---------- ----
/s/ Russell Berrie 3/26/98 - -------------------------------------------- --------- Russell Berrie, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)
/s/ Paul Cargotch 3/26/98 - -------------------------------------------- --------- Paul Cargotch, Executive Vice President, Chief Financial Officer, Assistant Secretary and Director (Principal Financial and Accounting Officer)
SIGNATURES DATE ---------- ----
/s/ Raphael Benaroya 3/24/98 - ------------------------------ -------- Raphael Benaroya, Director
/s/ Angelica Berrie 3/20/98 - ------------------------------ -------- Angelica Berrie, Director
/s/ A. Curts Cooke 3/20/98 - ------------------------------ -------- A. Curts Cooke, Director
/s/ Ilan Kaufthal 3/27/98 - ------------------------------ -------- Ilan Kaufthal, Director
/s/ Charles Klatskin 3/20/98 - ------------------------------ -------- Charles Klatskin, Director
/s/ Joseph Kling 3/20/98 - ------------------------------ -------- Joseph Kling, Director
/s/ William A. Landman 3/20/98 - ------------------------------ -------- William A. Landman, Director
/s/ Sidney Slauson 3/20/98 - ------------------------------ -------- Sidney Slauson, Director
S-2
RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (Dollars in Thousands)
*Principally account write-offs, allowances and disposal of merchandise, respectively.
Exhibit Index -------------
Exhibit Numbers - ---------------
10.114 First Amendment of Agreement dated June 5, 1997, by and between Russ Berrie and Company, Inc. and A. Curts Cooke
10.115 Agreement of Purchase and Sale between Amram's Distributing Ltd. and Metrus Properties Ltd. dated November 25, 1997
21.1 List of Subsidiaries
23.1 Report of Independent Public Accountants - 1997
23.2 Report of Independent Accountants - 1996
23.3 Consent of Independent Public Accountants - 1997
27.1 Financial Data Schedule - 1997
27.2 Restated Financial Data Schedule - 1997*
27.3 Restated Financial Data Schedule - 1997*
27.4 Restated Financial Data Schedule - 1996*
*Per share data restated to meet reporting requirements under SFAS No. 128.