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 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 happiness, 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, Canada and Australia. In countries where the Company does not maintain a direct salesforce and distribution network, the Company's products are sold through distributors. See Note 16 of the Notes to Consolidated Financial Statements for information regarding segment and geographic information.
PRODUCTS
The Company's product line of approximately 6,000 items (including distinctive variations on basic product designs) is 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 such as collectible heirloom bears, stuffed animals, wedding, anniversary and baby gifts, tabletop accessories and home decor, including candles and accessories, collectible glass, porcelain and ceramic gifts and contemporary lifestyle gifts and accessories. Extensive seasonal lines include products for all major holidays. In addition, one of the Company's wholly-owned subsidiaries, Bright of America, Inc., principally markets placemats and candles as well as aromatic products such as potpourri and incense, through its division, Scentex(R), directly to mass merchandisers.
Most of the Company's products have suggested retail prices between $3 and $35. Product sales are highly diverse and, as such, no single item represented more than 2% of the Company's sales in 2000.
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 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 160 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 effectively 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 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 2000, approximately 94% of the Company's products were produced in the Far East, and approximately 6% in the United States. Purchases in the United States predominantly represent domestically produced displays, candles, placemats and printed materials such as cards.
The Company utilizes approximately 100 manufacturers in the Far East, with facilities primarily in the People's Republic of China ("PRC"). During 2000, approximately 93% of the Company's dollar volume of purchases was attributable to manufacturing in the PRC. The PRC currently enjoys "normal trade relations" ("NTR") status under US tariff laws, which provides a favorable category of US import duties. Due to various factors, there has been, and may be in the future, opposition to the annual extension of NTR status for the PRC. Subject to the accession of the PRC to the World Trade Organization, the NTR status may be made permanent if certain determinations are made by the President of the United States under Public Law 106-286. There can be no assurance that either the accession or the permanent designation of the NTR status will occur. The loss of such NTR status would result in a substantial increase in the import duty for products manufactured for the Company in the PRC and imported into the United States and would result in increased costs for the Company.
A significant portion of the Company's staff of approximately 290 employees in Hong Kong, Taiwan, Korea, Philippines and the cities of Shenzhen and Qingdao in the PRC monitor the production process with responsibility for the quality, safety and prompt delivery of Company products as well as design and product development as described earlier. Members of the Company's Far East staff make frequent visits to the manufacturers for which they are responsible. Certain of the Company's manufacturers sell exclusively to the Company. The Company believes that there are many alternate manufacturers for the Company's products and sources of raw materials. In 2000, the supplier accounting for the greatest dollar volume of the Company's purchases accounted for approximately 9% of such purchases and the five largest suppliers accounted for approximately 34% in the aggregate.
MARKETING
The Company's products are marketed primarily through its own direct salesforce of approximately 450 full-time employees as of December 31, 2000. The Company maintains a telemarketing department which is responsible for servicing the Company's smaller customers. Products are sold directly to retail customers in the United States and in certain foreign countries, including but not limited to 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, military post exchanges and internet companies. During 2000, the Company sold gift products to more than 50,000 customers worldwide. No single customer accounted for more than 3% of sales.
The Company reinforces the marketing efforts of its 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 maintains a marketing plan which recognizes its most valued customers as "Preferred Partners", based upon attainment of certain sales levels, and offers them special benefits and privileges including, but not limited to, access to exclusive product offerings and dedicated customer service representatives.
The Company believes that effective packaging and merchandising of its products are also very important to its marketing success. Many products are shipped in colorful, corrugated cartons which can be used as freestanding displays and then recycled or discarded when all the products have been sold. The Company also offers to its customers semi-permanent freestanding lucite, metal and wooden displays, thereby providing an efficient promotional vehicle for selling the Company's products at retail locations.
The Company believes that customer service is another essential component of its marketing strategy and therefore has established a Customer Service Department that responds to customer requests, investigates and resolves problems and generally assists customers.
The Company believes its general terms of sale are competitive in the gift industry. The Company provides extended payment terms to customers, which do 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.
The Company also maintains a direct salesforce and distribution network to serve its customers in England, Holland, Belgium, Ireland, Spain, Germany, Austria, Canada, France and Australia. 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 $104,085,000, $91,913,000 and $78,516,000 for the years ended December 31, 2000, 1999 and 1998, respectively. See Note 16 of the Notes to Consolidated Financial Statements for additional geographic information.
DISTRIBUTION
The Company has customers located in the United States and throughout the world. In order to serve them effectively, the Company maintains U.S. distribution centers in South Brunswick, New Jersey and Petaluma, California, each of which receives products directly from suppliers and then distributes such products to the Company's customers. The Company also maintains distribution facilities in the Toronto, Canada area, in Southampton, England and the Sydney, Australia area to serve its customers in Canada, Europe and Australia, respectively. The Company is presently contemplating a transaction in which one of its wholly-owned subsidiaries, Russ Berrie (U.K.) Limited, will lease a new distribution center in England from a corporation owned, directly or indirectly, by Mr. Berrie. The new facility is intended to replace the two current facilities maintained by the Company in Southampton, England. Lease terms with respect to the new facility have not yet been finalized. However, construction of the building is expected to commence in April 2001 and be completed in June or July 2002, at which time it is anticipated that Russ Berrie (U.K.) Limited will occupy the building. The Company generally uses common carriers to distribute its products to its customers.
SEASONALITY
In addition to its everyday products, the Company produces specially designed products for holiday seasons which include: Christmas/Chanukah, Easter, Valentine's Day, Father's Day, Halloween/Thanksgiving, Mother's Day, St. Patrick's Day and Graduation/Secretary's Day.
The pattern of the Company's sales is influenced by the shipment of seasonal merchandise. The Company generally ships the majority of 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 2000, 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 2000, 1999 and 1998.
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.
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, 2000 and December 31, 1999 was $22,271,261 and $29,775,000, respectively. It is expected that significantly all of the Company's backlog at December 31, 2000 will be shipped during 2001.
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. 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, 2000, the Company employed approximately 1,500 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 sales management and sales personnel, non-competition agreements (subject to certain territorial limitations) 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 ("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.
ITEM 2.
ITEM 2. PROPERTIES
The principal facilities of the Company's operations consist of its corporate offices in Oakland, New Jersey, and distribution centers in South Brunswick, New Jersey, and Petaluma, California, all of which the Company leases. Additionally, office and distribution facilities are located in Southampton, England, in the Toronto, Canada area and in the Sydney, Australia area. The Company owns the facility used by one of its wholly-owned subsidiaries, 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. One of the Company's subsidiaries, Amram's Distributing, Limited, owns a facility in Toronto, Canada that serves as its office and distribution facility. The facilities of the Company are maintained in good operating condition and are, in the aggregate, adequate for the Company's purposes and are generally fully utilized. Due to the purchase of a new office and distribution facility in Toronto, Canada, the Company vacated the facility being leased and is currently subleasing such facility to a third party.
THE COMPANY'S CURRENT PRINCIPAL FACILITIES ARE AS FOLLOWS:
(1) Not including renewal options, if any.
(2) Properties owned directly or indirectly by Russell Berrie, Chairman and Chief Executive Officer, or members of his immediate family. See ITEM 13 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
(3) Regional distribution center.
(4) Corporate headquarters.
(5) Subsidiary offices.
(6) Subsidiary distribution center.
The Company also operates showroom facilities in Oakland, New Jersey; Los Angeles and San Francisco, California; Denver, Colorado; Atlanta, Georgia; Chicago, Illinois; High Point, North Carolina; Dallas, Texas; Seattle, Washington; Miami, Florida; Sydney, Australia; Montreal, Vancouver and Toronto, Canada; Southampton, England; Utrecht, Holland; and Kowloon, Hong Kong. Certain showrooms are located within the facilities listed above, others are leased with remaining lease terms ranging between one and five 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 incidental to its business, 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.
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.
Russell Berrie, the founder of the Company, has been Chairman and Chief Executive Officer of the Company since its incorporation in 1966.
Arnold S. Bloom has been employed by the Company as Vice President, General Counsel and Secretary for more than the past five years.
Ricky Chan has been employed by the Company as Senior Vice President - Product Development for more than the past five years.
Teresa Chan was elected as an officer of the Company in October 1999 and has been employed by the Company as Vice President - International Sales since February 1997. Ms. Chan was Managing Director of International Operations for more than five years prior thereto.
Dona Fisher has been employed by the Company as Vice President and Chief Operating Officer since September 2000. Prior to joining the Company, Ms. Fisher was employed with Helen of Troy as Senior Vice President and Chief Financial Officer since March 1999, with Sun Apparel Company as Senior Executive Vice President since September 1996 and with The Franklin Mint as Senior Vice President for more than five years prior thereto.
Eva J. Goldenberg, was elected an officer of the Company in January 2001 and has been employed by the Company as Vice President - Human Resouces since April 2000. Ms. Goldenberg was Director of Human Resources since September 1999, Associate General Counsel since January 1999 and Assistant General Counsel since August 1994.
Thomas K. Higgerson has been employed by the Company as Vice President - Global Logistics since January 2000. Prior to joining the Company, Mr. Higgerson was employed with Hygrade Integrated Logistics Systems, Inc. as Executive Vice President since March 1997 and as Senior Vice President for more than five years prior thereto.
J. Michael Hope has been employed by the Company as Vice President - National Accounts since February 2000. Prior to that, Mr. Hope was Vice President - Sales Administration since November 1998 and was Vice President and General Manager of the Company's Petaluma Distribution Center for more than five years prior thereto.
Y.B. Lee has been employed by the Company as President of Far East Operations since October 1996. Mr. Lee has been Senior Vice President-Far East since August 1996 and was Senior Vice President - Far East Plush Division for more than five years prior thereto.
James J. O'Reardon, Jr. has been employed by the Company as Vice President - Corporate Audits since April 2000 and was Vice President - Administration since September 1997. Mr. O'Reardon was Director of Administration/Internal Audit for more than five years prior thereto.
Michael M. Saunders has been employed with the Company as Vice President - Chief Information Officer since March 2001. Prior to joining the Company, Mr. Saunders was employed with Danskin, Inc. as Chief Information Officer since April 2000, the Jenna Lane Group as Vice President & Chief Information Officer since December 1998 and Kurt Salmon Associates as Senior Manager - IT Group since June 1995.
Benjamin J. Sottile was elected to the Board of Directors in July 2000 and has been employed with the Company as Vice Chairman since June 2000. Prior to joining the Company, Mr. Sottile was a consultant to the Company since July 1999 and prior thereto was a consultant to various consumer product companies, unaffiliated with the Company, and non-profit organizations since February 1996. Mr. Sottile was employed with Gibson Greetings, Inc. as Chairman, President and Chief Executive Officer for more than five years prior thereto.
Susan Strunck was elected as an officer of the Company in January 2001 and has been employed by the Company as Vice President - Corporate Affairs since April 2000. Ms. Strunck was Director of Corporate Affairs since January 1998 and was assistant to the Chairman for more than five years thereto.
John T. Toolan has been employed with the Company as Executive Vice President - Marketing and Sales since February 2001. Prior to joining the Company, Mr. Toolan was employed with Westpoint Stevens Inc. as Executive Vice President and President of Sales and Marketing since November 1999, as Executive Vice President and President of the Domestic Marketing Division since January 1999, as Senior Vice President of the Company since January 1997 and as President of the Fashion Brands Division since January 1998. Prior to that, Mr. Toolan was Senior Vice President / Home Fashions Division since January 1996.
John D. Wille has been employed with the Company as Vice President and Chief Financial Officer since February 2001. Prior to joining the Company, Mr. Wille was employed with the Betesh Group as Vice President Finance and Chief Financial Officer since November 2000. Prior to that, Mr. Wille was employed with Time Life Inc. as Vice President and Corporate Controller since May 1997 and with The Franklin Mint as Vice President, Strategic Buying, Inventory and Logistics since November 1995.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 2000, the Company's Common Stock was held by 546 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 dividend rate was increased from $0.20 in 1999 to $0.22 in 2000 and to $0.24 per common share, effective February 2001, which represents the fifth consecutive year of increased dividends.
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
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
* Net sales and cost of sales for the years ended December 31, 1999, December 31, 1998, December 31, 1997 and December 31, 1996 have been restated to conform to the presentation for the year ended December 31, 2000, representing the Company's application of the Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling Fees and Costs".
** The year ended December 31, 2000 includes income of $2,544,000 before tax or $1,603,000 ($0.08 per diluted share) after tax for the reversal of certain contingency reserves related to the Company's sale of its toy business segment in May 1997. The year ended December 31, 1999 includes an information system write-off of capitalized costs of $10,392,000 before tax or $6,557,000 ($0.31 per diluted share) after tax. The year ended December 31, 1998 includes income of $1,828,000 before tax or $1,152,000 ($0.05 per diluted share) after tax for the completion of a transitional agreement related to the sale of Papel/Freelance, Inc. The year ended December 31, 1996 includes the gain on sale of Papel/Freelance, Inc. of approximately $4,800,000 before tax or $3,000,000 ($0.14 per diluted share) after tax and a reversal of a litigation provision of $4,450,000 before tax or $2,800,000 ($0.13 per diluted share) after tax.
*** Represents the gain on sale of Cap Toys, Inc. and OddzOn Products, Inc. in 1997 of $75,300,000 before tax or $46,700,000 ($2.08 per diluted share) after tax.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2000 AND 1999
The Company's net sales for the year ended December 31, 2000 were $300,801,000 compared to $287,011,000 for the year ended December 31, 1999 reflecting the impact of a new accounting standard for shipping and handling fees and costs, as well as the resultant restatement of the previous year. This represents a net sales increase of $13,790,000 or 4.8% due primarily to the increase in net sales of the Company's international operations, including the Company's new subsidiary in Australia, established in January 2000. Net sales for the year ended December 31, 1999 were negatively impacted by operational issues resulting from the June 1999 conversion to a new computer system for the Company's domestic operations and ultimately resulted in the Company successfully reverting back to its legacy systems. The Company's product line, focusing on coordinated themes of product offerings, continues to receive a positive response from customers worldwide. In September 2000, the Company launched a new division, Russ Trading, along with a dedicated Hong Kong showroom. Orders and shipments from this initiative are expected to commence in 2001. The Company believes that the new division will give the Company the ability to market new and different lines and private label merchandise to non-traditional customers of the Company, such as mass merchandisers.
Cost of sales were 44.2% of net sales in 2000 compared to 42.9% of net sales in 1999 reflecting the impact of a new accounting standard for shipping and handling fees and costs, as well as the resultant restatement of the previous year. The cost of sales percentage increase primarily reflects lower gross profit margins on sales of certain of the Company's product line concepts and greater utilization of other than normal distribution channels during the year ended December 31, 2000.
Selling, general and administrative expense was $106,991,000 or 35.6% of net sales for the year ended December 31, 2000 compared to $108,023,000 or 37.6% of net sales in 1999, a decrease of $1,032,000 or 1.0% and a decrease of 2.0%, as a percent of net sales. This decrease is due primarily to lower distribution and administrative costs resulting from nonrecurring costs incurred in 1999 due to operational difficulties and the depreciation and other costs of the new computer systems. This decrease was partially offset by increased selling costs as a result of increased sales. Selling, general and administrative expense for the year ended December 31, 1999 was restated to conform to the presentation for the year ended December 31, 2000, reflecting the Company's application of a new accounting standard for shipping and handling fees and costs which had been historically recorded net in selling, general and administrative expense.
During the year ended December 31, 1999, the Company recognized a charge to income of $10,392,000, before tax, for the write-off of the net book value of certain capitalized costs relating to terminating the use of the new computer system.
Investment and other income of $10,202,000 for the year ended December 31, 2000 compares to $8,587,000 in 1999. Included in investment and other income for the year ended December 31, 2000 was income of $2,544,000 before tax for the reversal of certain contingency reserves related to the Company's sale of its toy business segment in May of 1997. Excluding the income from this reversal, investment and other income decreased $929,000. This decrease is primarily related to decreased investment income from the Company's fixed income portfolio attributable to lower total returns on the Company's investment portfolio.
The provision for income taxes as a percent of income before taxes for the year ended December 31, 2000 remained relatively unchanged at 32.6% compared to 32.5% for the year ended December 31, 1999.
Net income for the year ended December 31, 2000 increased 31.6% to $47,941,000 compared to net income of $36,436,000 for the year ended December 31, 1999 and earnings per diluted share increased 37.8% to $2.37 from $1.72 in 1999. Included in the results for the year ended December 31, 2000 was income of $1,603,000, after tax, or $0.08 per diluted share, for the reversal of certain contingency reserves related to the Company's sale of its toy business segment in May of 1997. Included in the results for the year ended December 31, 1999 was a write-off of $6,557,000, after tax, or $0.31 per diluted share, for the Company's new packaged software system. Excluding the reversal for the year ended December 31, 2000 and the information system write-off in 1999, net income for the year ended December 31, 2000 would have increased 7.8% to $46,338,000 compared to $42,993,000 in 1999 and earnings per diluted share would have increased 12.8% to $2.29 from $2.03 in 1999. This increase is primarily attributed to increased net sales and gross profit, along with decreases in selling, general and administrative expense as discussed above.
The Company maintains a direct salesforce and distribution network to serve its customers in Europe, Canada and Australia. 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 OPERATIONS - YEARS ENDED DECEMBER 31, 1999 AND 1998
The Company's net sales for the year ended December 31, 1999 were $287,011,000 compared to $279,002,000 for the year ended December 31, 1998. Net sales for the years ended December 31, 1999 and December 31, 1998 have been restated to conform with the presentation of the year ended December 31, 2000 reflecting the impact of the new accounting standard for shipping and handling fees and costs. This represents a net sales increase of $8,009,000 or 2.9% due primarily to the increase in net sales of the Company's international operations. The Company's product line, focusing on coordinated themes of product offerings, continues to receive a positive response from customers worldwide. During the year ended December 31, 1999, the Company experienced operational issues, which were caused by the domestic implementation of a new computer system. These operational issues had negatively impacted net sales since implementation in June 1999 and ultimately resulted in the termination of the Company's use of this new system and reverting back to its legacy systems.
Cost of sales were 42.9% of net sales in 1999 compared to 44.4% of net sales in 1998 reflecting the impact of a new accounting standard for shipping and handling fees and costs, as well as the resultant restatement of both years. The cost of sales percentage decrease reflects the higher gross profit margins on sales of certain of the Company's product line concepts during the year ended December 31, 1999. The decrease also reflects the Company's successful efforts to manage inventory levels, resulting in a reduced need to distribute product through other than normal channels.
Selling, general and administrative expense was $108,023,000 or 37.6% of net sales for the year ended December 31, 1999 compared to $105,854,000 or 37.9% of net sales in 1998, an increase of $2,169,000 or 2.0%. This increase is due primarily to higher distribution costs attributed to operational difficulties and depreciation of computer systems offset by lower costs of a reduced salesforce and realization of costs savings from the closing of its Petaluma, California administrative operations in 1998.
Selling, general and administrative expense for the years ended December 31, 1999 and December 31, 1998 were restated to conform to the presentation for the year ended December 31, 2000, reflecting the Company's application of a new accounting standard for shipping and handling fees and costs which had been historically recorded net in selling, general and administrative expense.
During the quarter ended December 31, 1999, the Company recognized a charge to income of $10,392,000, before tax, for the write-off of the net book value of certain capitalized costs relating to terminating the use of the new computer system.
Investment and other income of $8,587,000 for the year ended December 31, 1999 compares to $10,196,000 in 1998. Included in investment and other income for the year ended December 31, 1998 was income of $1,828,000 for the completion of a transitional agreement related to the sale of the Company's subsidiary, Papel/Freelance, Inc.
The provision for income taxes as a percent of income before taxes for the year ended December 31, 1999 was 32.5% compared to 31.9% in the prior year.
Net income for the year ended December 31, 1999 was $36,436,000 compared to net income of $40,596,000 for the year ended December 31, 1998. Included in the results for the year ended December 31, 1999 is a charge of $6,557,000, after tax, for the write-off of the Company's new computer system.
Included in the results for the year ended December 31, 1998 is income of $1,152,000, after tax, for the completion of a transitional agreement related to the sale of the Company's subsidiary, Papel/Freelance, Inc. Excluding the information system write-off in 1999 and the income from this transitional agreement in 1998, net income increased $3,549,000 or 9.0%. This increase can be primarily attributed to increased net sales and gross profit offset by the increase in selling, general and administrative expense.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had cash and cash equivalents and marketable securities of $218,826,000 compared to $202,051,000 at December 31, 1999.
As of December 31, 2000 and 1999, the Company had marketable securities of $141,032,000 and $137,143,000 respectively, included in the amounts above. 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 are intended to produce offsetting capital gains and losses, realized and unrealized, as interest rates change.
The Company has available $80,423,000 in bank lines of credit that provide for direct borrowings and letters of credit used for the purchase of inventory. At December 31, 2000, letters of credit of $14,182,000 were outstanding. There were no direct borrowings under the bank lines of credit. Working capital requirements during 2000 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 manage the economic currency risks associated with the purchase of inventory and the payment of interest on intercompany loans by its European and Canadian operations. Gains and losses, related to such contracts, were not material to its results of operations. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts.
As of December 31, 2000, the Board of Directors had authorized the Company to repurchase 7,000,000 shares of common stock of which 5,561,400 shares have been repurchased since the beginning of the Company's stock repurchase program in March 1990. During 2000, the Company repurchased 815,100 shares, which amounted to $15,619,000.
Consistent with its past practices and as a normal course of business, the Company regularly reviews acquisition opportunities of varying sizes. There can be no assurance, however, that any discussions arising in connection therewith will result in definitive purchase agreements and, if they do, what the terms or timing of any such agreements would be.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain Derivatives and Certain Hedging Activities, an amendment of SFAS No. 133", establishing the accounting and reporting for derivatives and hedging activities. The Company has determined that the impact of adopting SFAS No. 133, as amended by SFAS No. 138, on the consolidated financial statements will not be significant. See Note 2, "Accounting for Derivatives and Hedging" of the Notes to Consolidated Financial Statements for additional information.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission (SEC) filings and otherwise. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements. These statements may be identified by the use of forward-looking words or phrases including, but not limited to, "anticipate", "believe", "expect", "intend", "may", "planned", "potential", "should", "will" or "would". The Company cautions readers that results predicted by forward-looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Specific risks and uncertainties include, but are not limited to, the Company's ability to continue to manufacture its products in the Far East, the seasonality of revenues, the actions of competitors, ability to increase production capacity, price competition, the effects of government regulation, possible delays in the introduction of new products, customer acceptance of products, issues related to the start up of the Company's recently announced Russ Trading division, changes in foreign currency exchange rates, issues related to the Company's computer systems and other factors.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2000 and December 31, 1999, a sensitivity analysis to measure potential changes in market value of the Company's investments from a change in interest rates indicates that a one percentage point increase in interest rates would decrease the net aggregate market value of these investments by approximately $1,715,000 and $2,197,000, respectively, and a one percentage point decrease in interest rates would increase the net aggregate market value of these investments by approximately $1,711,000 and $2,380,000, respectively. At December 31, 2000 and December 31, 1999, a sensitivity analysis to changes in the value of the U.S. dollar on foreign currency denominated derivatives and monetary assets and liabilities indicates that if the U.S. dollar uniformly weakened by 10% against all currency exposures of the Company, income from operations would decrease by approximately $1,110,000 and $780,000, respectively.
Additional information required for this item is incorporated in the section above entitled, "Liquidity and Capital Resources" of Management's Discussion and Analysis of Results of Operations and Financial Condition and Note 3 of the Notes to Consolidated Financial Statements.
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, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements and the schedule referred to below 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 in accordance with auditing standards generally accepted in the United States. 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, appearing on pages 16 to 30 of this Form 10-K, present fairly, in all material respects, the financial position of Russ Berrie and Company, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule appearing on page 42 of this Form 10-K is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Roseland, New Jersey February 15, 2001
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)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
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.
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. In addition, during 2000, the Company applied the provisions of the Emerging Issues Task Force Issue 00-10, "Shipping and Handling Fees and Costs", (EITF 00-10), which required that all amounts billed to customers for shipping and handling, be classified as revenue and the costs incurred for such shipping and handling, be classified as costs of goods sold, as well as the restatement of previous years. Prior to the application of EITF 00-10 the Company recorded these amounts net in selling, general and administrative expense.
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, 2000, 1999 and 1998 amounted to $2,286,000, $2,014,000 and $2,109,000, 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, at the date of purchase, 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, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which primarily range from three to twenty-five 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.
In accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1), costs of internal use software and other related costs under certain circumstances are capitalized. External direct costs of materials and services and payroll costs of employees working solely on the application development stage of the project are also capitalized in accordance with SOP 98-1. Such capitalized costs are amortized over a period of one to five years commencing with when the system is placed in service. Training and travel costs related to systems implementations are expensed as 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 amortized using the straight-line method over fifteen years or less. The Company evaluates the recoverability of all long-lived assets, including 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 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, were $269,000 and $383,000 at December 31, 2000 and 1999, respectively. Accumulated amortization amounted to $1,508,000 and $1,394,000 at December 31, 2000 and 1999, 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 accumulated other comprehensive income (loss) within 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 (SFAS) No. 109, "Accounting for Income Taxes" as disclosed in Note 9.
EARNINGS PER SHARE
The Company presents both basic and diluted earnings per share in the Consolidated Statement of Income in accordance with SFAS No. 128, "Earnings per Share".
The Notes to the consolidated financial statements reflect basic earnings per share unless otherwise stated or indicated (See Note 10).
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally accepted accounting principles in the United States requires management to make certain estimates and assumptions that affect the reported amounts of 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.
COMPREHENSIVE INCOME
The Company elects to include all information required by SFAS No. 130, "Reporting Comprehensive Income", in the Consolidated Statement of Changes in Shareholders' Equity.
ACCOUNTING FOR DERIVATIVES AND HEDGING
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS No. 133" (SFAS No. 137), which deferred the effective date of SFAS No. 133 for an additional year. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133," establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133, as amended by SFAS No. 138, requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement or other comprehensive income and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.
Under the deferral permitted by SFAS No. 137, SFAS No. 133 as amended by SFAS No. 138, was adopted by the Company effective January 1, 2001. The Company has determined that the impact of adopting SFAS No. 133, as amended by SFAS No. 138, on the consolidated financial statements will not be significant; however, the adoption could increase volatility in earnings and other comprehensive income.
ACCOUNTING FOR STOCK OPTIONS
Effective July 1, 2000 the Company adopted the provisions of Financial Accounting Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", (FIN No. 44), requiring, among other things, a charge to the Consolidated Statement of Income for changes in the Company's stock price for options repriced subsequent to being granted. Due to the transitional provisions of FIN No. 44 the charge to the Consolidated Statement of Income for changes in the Company's stock price was only effective commencing July 1, 2000 for the repricing of options effective February 29, 2000 (See Note 14).
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2000 presentation.
NOTE 3 - FINANCIAL INSTRUMENTS
MARKETABLE SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company's marketable securities are considered available-for-sale investments. Accordingly, these investments are carried in the accompanying 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 comprised primarily of U.S. and municipal 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, both realized and unrealized, as interest rates change. The market value of these instruments is reported in marketable securities.
As of December 31, 2000, marketable securities consist of the following:
As of December 31, 1999, 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 manage the economic currency risks associated with the purchase of inventory and payment of interest on intercompany loans by its United Kingdom and Canadian subsidiaries. These contracts enable the Company to buy and sell foreign currencies in the future at fixed exchange rates. 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, 2000 and 1999, the aggregate notional amount of foreign exchange contracts was $9,250,000 and $18,000,000, respectively. At December 31, 2000 and 1999, there were no carrying amounts related to foreign currency contracts in the Consolidated Balance Sheet.
At December 31, 2000, the Company's forward exchange contracts have expiration dates which range from two to nine months. The estimated fair value of the notional amount of the Company's forward exchange contracts based on quoted rates as of December 31, 2000 and 1999 were $9,034,000 and $18,012,000, 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, 2000, marketable securities of the Company were actively managed by five 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, 2000 and 1999, the Company has recorded reserves to reflect inventories at their estimated net realizable value. The reserve balance as of December 31, 2000 and 1999 was $14,043,000 and $14,182,000, respectively.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
During the quarter ended December 31, 1999, the Company recognized a charge to income of $10,392,000, before tax, for the write-off of the net book value of certain property, plant and equipment relating to terminating the use of the new computer system.
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, 2000, under local lines of credit, is $10,423,000. 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, 2000, had letters of credit outstanding under all lines of $14,182,000.
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following:
NOTE 8 - INVESTMENT AND OTHER INCOME - NET
The significant components of investment and other income - net consist of the following:
The year ended December 31, 2000 includes income of $2,544,000 before tax or $1,603,000 ($0.08 per diluted share) after tax for the reversal of certain contingency reserves related to the Company's sale of its toy business segment in May 1997. The year ended December 31, 1998, includes $1,828,000 before tax or $1,152,000 ($0.05 per diluted share) after tax, for a transitional agreement related to the sale of Papel/Freelance, Inc.
NOTE 9 - INCOME TAXES
The Company and its domestic subsidiaries file a consolidated Federal income tax return.
Income 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, 2000 and 1999 of $910,000 and $855,000, 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 deferred tax asset and 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 $90,077,000 as of December 31, 2000. Determination of the net amount of unrecognized deferred tax liability with respect to these earnings is not practicable.
NOTE 10 - EARNINGS PER SHARE
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, 2000, 1999 and 1998 to purchase 341,600 shares, 189,400 shares and 213,550 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, 2000, 1999 and 1998 were $3,841,000, $3,867,000 and $3,931,000, respectively. The Company is also a guarantor under two mortgages for property so leased with a principal amount aggregating approximately $7,651,000 as of December 31, 2000, $2,000,000 of which is collateralized by assets of the Company.
NOTE 12 - LEASES
At December 31, 2000, 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 five years.
Rent expense for the years ended December 31, 2000, 1999 and 1998 amounted to $6,158,000, $5,809,000 and $6,052,000, respectively.
The approximate aggregate minimum future rental payments as of December 31, 2000 under operating leases are as follows:
NOTE 13 - STOCK REPURCHASE PROGRAM
As of December 31, 2000, the Board of Directors had authorized the Company to purchase 7,000,000 shares of common stock of which 5,561,400 shares have been repurchased since the beginning of the Company's stock repurchase program in March 1990. During 2000, the Company repurchased 815,100 shares.
NOTE 14 - STOCK PLANS
The Company has a Stock Option and Restricted Stock Plan, two Stock Option Plans and an Employee Stock Purchase Plan (collectively, the "Stock Plans"). As of December 31, 2000, there were 2,240,123 shares of common stock reserved for issuance under all stock plans. Under the Stock Option and Restricted Stock Plan, stock awards of 6,176 shares, 2,917 shares and 2,626 shares were issued for the years ended December 31, 2000, 1999 and 1998, respectively. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the options granted for these Stock Plans except for the adoption of FIN No. 44 which resulted in a charge to the Consolidated Statement of Income of $444,000 during the year ended December 31, 2000 relating only to the options granted during 2000 as those options were repriced as of February 29, 2000 upon approval of the Board of Directors and Shareholders. Had compensation cost for the Company's Stock Plans been determined based on the fair value at the grant date in 2000, 1999 and 1998, 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 under the Stock Option Plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for all grants:
The fair value of each option granted under the Employee Stock Purchase Plan 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 except for the 2000 grant of options which were repriced to the closing price of the Company's stock effective February 29, 2000. 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 2000, 1999 and 1998 is as follows:
The weighted-average fair value of options granted, on a per share basis, during the years 2000, 1999 and 1998 was $4.45, $5.05 and $7.31, respectively.
The following table summarizes information about fixed-price stock options outstanding at December 31, 2000:
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 except for the 2000 grant which was repriced to 90% of the closing market price of the stock as of February 29, 2000. Information regarding the Employee Stock Purchase Plan for 2000, 1999 and 1998 is as follows:
As of December 31, 2000, the Employee Stock Purchase Plan has 114,778 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 and a portion of these contributions is matched by the Company. The provision for contributions charged to operations for the years ended December 31, 2000, 1999 and 1998 was $703,000, $796,000 and $733,000, respectively.
NOTE 16 - SEGMENT, GEOGRAPHIC AND RELATED INFORMATION
The Company's operations comprise one operating segment, offering an extensive line of products including stuffed animals, picture frames, candles, figurines and home decor gifts based on current fashions and trends. The following table represents financial data of the Company, under the basis by which the Company has chosen to organize itself, by geographic area (See Note 2 "Revenue Recognition").
There were no material sales or transfers among geographic areas and no material amount of export sales to customers from the United States. Outside of the United States, no single country is deemed material for separate disclosure. The Company has no single customer representing greater than 10% of consolidated revenues.
NOTE 17 - LITIGATION
The Company is subject to legal proceedings and claims arising 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, financial position or cash flows of the Company.
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected financial data for the four quarters ended December 31, 2000 and 1999 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 September 30, 2000 includes income of $1,607,000 before tax, or $1,012,000 ($0.05 per diluted share) after tax, and the quarter ended December 31, 2000 includes income of $937,000 before tax or $591,000 ($0.03 per diluted share) after tax for the reversal of certain contingency reserves related to the Company's sale of its toy business segment in May 1997. The quarter ended December 31, 1999 includes a charge of $10,392,000 before tax or $6,557,000 after tax ($0.32 per diluted share) for the information system write-off (See Note 2 "Revenue Recognition").
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to this item appears under the captions "ELECTION OF DIRECTORS" and "SECTION 16a BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" of the 2001 Proxy Statement, which is incorporated herein by reference and under the caption "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I of this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to this item appears under the captions "THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD", "DIRECTOR COMPENSATION", "EXECUTIVE COMPENSATION", "COMPENSATION COMMITTEE REPORT", "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" and "RUSS BERRIE AND COMPANY, INC. Comparison of Five Year Cumulative Total Return Among Russ Berrie and Company, Inc., the S&P 500 Index and Peer Group Companies," of the 2001 Proxy Statement, which is 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" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" of the 2001 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 "CERTAIN TRANSACTIONS", "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" of the 2001 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:
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.
EXHIBITS: (Listed by numbers corresponding to item 601 of Regulation S-K)
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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.
(3) Incorporated by reference to Amendment No. 1 to Registration Statement No. 2-88797 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.
(23) Incorporated by reference to Registration No. 33-51823 on Form S-8, as filed on January 6, 1994.
(28) Incorporated by reference to Form S-8 Registration Statement No. 33 - 37008 as filed on January 4, 1999.
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(4) Incorporated by reference to Registration Statement No. 2-88797 on Form S-1 as filed on February 2, 1984.
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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.
(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.
(13) Incorporated by reference to Form S-8 Registration Statement No. 33-26161, as filed on December 16, 1988.
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(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.
(18) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1989.
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(19) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1990.
(20) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1991.
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(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.
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(28) Incorporated by reference to Form S-8 Registration Statement No. 333-70081 as filed on January 4, 1999.
(29) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1998.
(30) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1999.
(31) Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
21.1 List of Subsidiaries
23.1 Consent of Independent Public Accountants
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended December 31, 2000.
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, 33-26161, 33-27406, 33-27897, 33-27898, 33-51823 and 333-70081):
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)
3/30/01 By /s/ John D. Wille - ----------- ------------------------------- Date
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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.
/s/ Russell Berrie 3/30/01 - ------------------------------------- ---------------- Russell Berrie, Chairman, DATE Chief Executive Officer and Director (Principal Executive Officer)
/s/ Raphael Benaroya 3/30/01 - ------------------------------------- ---------------- Raphael Benaroya, Director DATE
/s/ Angelica Berrie 3/30/01 - ------------------------------------- ---------------- Angelica Berrie, Director DATE
/s/ Carl Epstein 3/29/01 - ------------------------------------- ---------------- Carl Epstein, Director DATE
/s/ Ilan Kaufthal 3/28/01 - ------------------------------------- ---------------- Ilan Kaufthal, Director DATE
/s/ Charles Klatskin 3/30/01 - ------------------------------------- ---------------- Charles Klatskin, Director DATE
/s/ Joseph Kling 3/30/01 - ------------------------------------- ---------------- Joseph Kling, Director DATE
/s/ William A. Landman 3/28/01 - ------------------------------------- ---------------- William A. Landman, Director DATE
/s/ Sidney Slauson 3/29/01 - ------------------------------------- ---------------- Sidney Slauson, Director DATE
/s/ Benjamin J. Sottile 3/30/01 - ------------------------------------- ---------------- Benjamin J. Sottile, Vice Chairman and Director DATE
/s/ Josh Weston 3/28/01 - ------------------------------------- ---------------- Josh Weston, Director DATE
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