SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2001 Commission File Number 1 - 1361 TOOTSIE ROLL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) VIRGINIA 22 - 1318955 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7401 South Cicero Avenue Chicago, Illinois 60629 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (773) 838 - 3400 No Changes Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practible date. Class Outstanding Common Stock, $.69 4/9 par value 34,004,303 Class B Common Stock, $.69 4/9 par value 16,504,019 TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES APRIL 1, 2001 I N D E X Part I - Financial Information Page No Financial Statements: Consolidated Statements of Financial Position 2 Consolidated Statements of Earnings, Comprehensive Earnings and Retained Earnings 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Part II - Other Information Other Information 7 Signatures 7 <TABLE> PART I - FINANCIAL INFORMATION TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) ASSETS March 31, April 1, Dec. 31, CURRENT ASSETS 2001 2000 2000 <S> <C> <C> <C> Cash & Cash Equiv. $ 37,469,696 $ 67,000,271 $ 60,882,142 Investments 71,449,570 90,552,973 71,605,091 Trade Accounts Receivable, Less Allowances of $2,135,000, $2,115,000 & $2,147,000 25,367,807 19,745,812 23,567,411 Other Receivables 3,916,467 4,583,469 1,229,701 Inventories, at Cost (Last-in,First-out): Finished Goods & Work in Process 34,903,998 29,758,001 24,984,361 Raw Material & Supplies 20,358,753 16,517,252 16,906,199 Prepaid Expenses 11,198,880 5,683,560 2,684,738 Deferred Income Taxes 1,351,000 2,069,000 1,351,000 Total Current Assets 206,016,171 235,910,338 203,210,643 PROPERTY, PLANT & EQUIPMENT, (at cost) Land 8,327,400 7,981,419 8,327,400 Buildings 36,936,658 29,210,324 36,936,658 Machinery & Equipment 188,425,071 152,353,231 183,858,538 233,689,129 189,544,974 229,122,596 Less-Accumulated Depreciation 100,032,987 90,425,212 98,004,162 133,656,142 99,119,762 131,118,434 OTHER ASSETS Intangible Assets, net of Accumulated Amortization of $27,861,000, $24,229,000 & $26,917,000 120,318,148 89,385,448 121,262,726 Investments 69,789,315 70,656,634 62,548,257 Cash Surrender Value of Life Insurance and Other Assets 45,687,338 38,174,893 44,301,529 235,794,801 198,216,975 228,112,512 Total Assets $575,467,114 $533,247,075 $562,441,589 (The accompaning notes are an integral part of these statements) </TABLE> <TABLE> <CAPTION> (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY March 31, April 1, Dec. 31, CURRENT LIABILITIES 2001 2000 2000 <S> <C> <C> <C> Accounts Payable $ 12,556,387 $ 13,299,139 $ 10,296,197 Dividends Payable 3,678,711 3,150,603 3,436,103 Accrued Liabilities 29,486,740 30,611,016 33,336,341 Income Taxes Payable 16,800,203 14,925,203 10,377,643 Total Current Liabilities 62,522,041 61,985,961 57,446,284 NON-CURRENT LIABILITIES Ind.Dev.Bonds 7,500,000 7,500,000 7,500,000 Post Retirement Benefits 7,086,620 6,638,699 6,956,094 Deferred Compensation and Other Liabilities 18,169,139 19,994,501 19,421,338 Deferred Income Taxes 12,412,066 9,790,160 12,422,248 Total Non-Current Liabilities 45,167,825 43,923,360 46,299,680 SHAREHOLDERS' EQUITY Common Stk., $.69-4/9 par value- 120,000,000 shares author. 34,004,303, 33,374,436 & 32,985,805 respectively, issued 23,613,898 23,176,489 22,906,603 Class B Common Stk., $.69-4/9 par value- 40,000,000 shares author. 16,504,019, 16,157,754 & 16,056,384 respectively, issued 11,461,027 11,220,564 11,150,174 Capital in Excess of Par Value 325,878,304 275,362,077 256,698,004 Retained Earnings 118,634,349 127,793,886 180,123,036 Accumulated Other Comprehensive Earnings (9,818,927) (8,223,859) (10,190,789) Treasury Stock (at cost)- 53,045, 53,045 & 53,045, shares respectively (1,991,403) (1,991,403) (1,991,403) Total Shareholders' Equity 467,777,248 427,337,754 458,695,625 Total Liabilities and Shareholders' Equity $575,467,114 $533,247,075 $562,441,589 </TABLE> <TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS (NOTE 1) (UNAUDITED) 13 Weeks Ended March 31, 2001 & April 1, 2000 <S> <C> <C> Net Sales (Note 2) $ 82,621,201 $ 78,014,809 Cost of Goods Sold 39,663,550 36,948,005 Gross Margin 42,957,651 41,066,804 Selling, Marketing and Administrative Expense 24,202,324 22,209,419 Amortization of Intangible Assets 944,579 732,084 Earnings from Operations 17,810,748 18,125,301 Other Income, Net 1,267,118 2,252,818 Earnings before Income Taxes 19,077,866 20,378,119 Provision for Income Taxes 6,693,000 7,315,000 Net Earnings (Note 5) $ 12,384,866 $ 13,063,119 Net Earnings $ 12,384,866 $ 13,063,119 Other Comprehensive Earnings, Net of Tax 371,862 716,408 Comprehensive Earnings $ 12,756,728 $ 13,779,527 Retained Earnings at Beginning of Period $180,123,036 $158,619,140 Net Earnings 12,384,866 13,063,119 Cash Dividends (3,429,348) (3,005,218) Stock Dividends - 3% (70,444,205) (40,883,155) Retained Earnings at End of Period $118,634,349 $127,793,886 Net Earnings Per Share (Note 3) $.25 $ .26 Dividends Per Share * $.07 $ .0625 Average Number of Shares Outstanding (Notes 3 & 4) 50,455,277 51,195,502 *Does not include 3% Stock Dividend to Shareholders of Record on 3/06/01 and 3/07/00. (The accompanying notes are an integral part of the statements) </TABLE> <TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 13 Weeks Ended <S> March 31, 2001 & April 1, 2000 CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C> Net Earnings $12,384,866 $13,063,119 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,973,400 2,854,396 (Increase) decrease in assets: Accounts receivable (1,730,044) (664,005) Other receivables (2,686,766) 1,132,681 Inventories (13,255,891) (11,090,575) Prepaid expenses and other assets (9,915,537) (4,557,455) Increase (decrease) in liabilities: Accounts payable and accrued liabilities (1,624,799) (902,429) Income taxes payable and deferred 6,438,842 6,936,522 Postretirement health care and life insurance benefits 130,526 81,839 Deferred compensation and other liabilities (1,252,199) 909,996 Other 209,723 159,817 Net cash provided by (used in) operating activities (8,327,879) 7,923,906 CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisition, net of cash and cash equivalents acquired -- (6,475,419) Capital expenditures (4,566,533) (3,950,117) Purchase of held to maturity securities (33,882,348) (40,756,173) Maturity of held to maturity securities 26,664,149 39,569,558 Purchase of available for sale securities (23,129,571) (12,771,357) Sale and maturity of available for sale securities 23,262,233 11,928,842 Net cash used in investing activities (11,652,070) (12,454,666) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid in cash (3,432,497) (3,032,371) Shares repurchased and retired -- (13,940,329) Net cash used in financing activities (3,432,497) (16,972,700) Decrease in cash and cash equivalents (23,412,446) (21,503,460) Cash and cash equivalents-beginning of year 60,882,142 88,503,731 Cash and cash equivalents end of quarter $37,469,696 $67,000,271 Supplemental cash flow information: Income taxes paid $ 241,000 $ 475,000 Interest paid $ 209,000 $ 172,000 (The accompanying notes are an integral part of the statements) </TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) Note 1 - Foregoing data has been prepared from the unaudited financial records of the Company and in the opinion of Management all adjustments necessary for a fair statement of the results for the interim period have been reflected. All adjustments were of a normal and recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company's 2000 Annual Report on Form 10-K. Note 2 - The Company's unshipped orders at March 31, 2001 amounted to $17,200,000. Note 3 - Based on Average Shares outstanding adjusted for Stock Dividends. Note 4 - Includes 3% stock dividends distributed on April 18, 2001 and April 19, 2000. Note 5 - Results of operations for the period ended March 31, 2001 are not necessarily indicative of results to be expected for the year to end December 31, 2001 because of the seasonal nature of the Company's operations. Historically, the Third Quarter has been the Company's largest sales quarter due to Halloween sales. Note 6 - On May 12, 2000, the Company acquired the assets of Andes Candies, Inc. from Brach & Brock Confections, Inc. In February 2000, the Company acquired the assets of a small confectionery company. The cost of these acquisitions was $74.3 million. The acquisitions were accounted for by the purchase method. Accordingly, the operating results of the acquired businesses have been included in the consolidated financial statements since the date of acquisition. Note 7 - Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" and its related amendment, Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These standards require that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. Changes in the fair value of derivatives will be recorded each period in earnings or accumulated other comprehensive earnings, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive earnings will be reclassified as earnings in the periods in which earnings are affected by the hedged item. The adoption of these new standards did not affect net earnings and increased comprehen- sive earnings by $229,000, net of income taxes, as of January 1, 2001. The Company utilizes commodity futures contracts to manage variability in cash flows associated with certain commodities (primarily sugar). Commodity futures contracts are entered into for varying periods and are intended and effective as hedges of market price risks associated with the anticipated purchase of raw materials. To qualify as a hedge, the Company evaluates the the nature and relationships between the hedging instrument and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. In addition, the significant characteristics and expected terms of the anticip- ated transaction must be specifically identified and it must be probable that the anticipated transaction will occur. If the anticipated transaction were not to occur, the gian or loss would be recognized in earnings currently. Financial instru- ments qualifying for hedge accounting must maintain a high correlation between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company does not engage in trading or other speculative use of derivative instruments. In entering into these contracts, the Company has assumed the risk that might arise from the possible inability of counterparties to meet the terms of their con- tracts. The Company does not expect any losses as a result of counterparty defaults. During the quarter ended March 31, 2001, accumulated other comprehensive earnings decreased by $118,000 due to hedging transactions and decreased by $333,000, which represented the net amount reclassified to the consolidated statement of earnings, comprehensive earnings and retained earnings. As of March 31, 2001, $363,000 of deferred net gains on derivative instruments accumulated in other comprehensive earnings are expected to be reclassified to earnings during the next twelve months. NOTE 8 - In April 2001, a consensus was reached by the Emerging Issues Task Force (EITF) on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." The Company's cooperative advertising programs are covered by this issue. In May 2000, a consensus was reached by the EITF on Issue 00-14, "Accounting for Certain Sales Incentives." These issues require that cooperative advertising and certain sales incentives costs currently being reported as selling, marketing and administrative expense to be recorded as a reduction of net sales beginning with the quarter ended March 31, 2002. The total potential impact of such reclassifications has not yet been determined. The reclassifi- cations will not affect the Company's financial position or net income. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is Management's discussion of the Company's operating results and analysis of factors which have affected the accompanying Statement of Earnings. This discussion, the information contained in the preceding notes to the finan- cial statements and the information contained in "Quantitative and Qualitative Disclosures About Market Risk," contain certain forward-looking statements that are based largely on the Company's current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. Such risks, trends and uncertainties, which in some instances are beyond the Company's control, include changes in demand and consumer preferences; raw material prices; competition; the effect of acquisitions on the Company's results of operations and financial condition; the Company's reliance on third-party vendors for various services; and changes in the confectionary environment including action taken by major retailers and customer accounts. The words "believe," "expect," "anticipate," "estimate," "intend" and similar expressions generally identify forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking state- ments, which are as of the date of this filing. NET SALES: First Quarter, 2001 First Quarter vs. 2001 2000 First Quarter, 2000 $82,621,201 $78,014,809 +5.9% First Quarter 2001 net sales of $82,621,000, were up 5.9% from First Quarter 2000 net sales of $78,015,000. Sales rose as a result of additional sales from brands acquired in 2000 and from volume increases in some core brands. However, the Company experienced both increased competitive pressures and the effects of the overall slowing economy. First Quarter 2001 net sales of $82,621,000 were down from Fourth Quarter 2000 net sales of $92,789,000. This is not considered unusual as the First Quarter of the year is historically the company's lowest sales quarter. COST OF SALES: Cost of Sales as a First Quarter Percentage of Net Sales 2001 2000 1st Qtr. 2001 1st Qtr. 2000 $39,663,550 $36,948,005 48.0% 47.4% Cost of sales as a percentage of net sales increased slightly from 47.4% for First Quarter 2000 to 48.0% for First Quarter 2001. This increase reflects some changes in the sales mix as well as the lower profit margins of the acquired brands. NET EARNINGS: First Quarter, 2001 First Quarter vs. 2001 2000 First Quarter, 2000 $12,384,866 $13,063,119 -5.2% First quarter earnings from operations were $17,811,000 and $18,125,000 in 2001 and 2000, respectively. The decline in operating income of $314,000 or 2% is the result of product mix changes and the resulting lower profit margins from the acquired brands, higher energy and transporation costs, and higher promo- tional costs and customer deductions. First Quarter 2001 net earnings were $12,385,000 compared to First Quarter 2000 net earnings of $13,063,000. First Quarter 2001 earnings per share were $0.25 a decrease of $.01 or 3.8% from First Quarter 2000 earnings per share of $.26. Net income was further adversely affected by decreased investment income and foreign exchange losses. The consolidated effective income tax rate favorably decreased from 35.9% in the First Quarter of 2000 to 35.1% in the First Quarter of 2001. This improvement generally reflects a reduction in state income taxes. First Quarter 2001 net earnings were $12,385,000 compared to Fourth Quarter 2000 net earnings of $15,508,000, which reflects the lower level of sales in the First Quarter 2001 compared to the Fourth Quarter 2000. This is consis- tent with historical trends. LIQUIDITY AND CAPITAL RESOURCES: The Company's current ratio (current assets divided by current liabilities) is 3.3 to 1 as of the end of the First Quarter 2001 as compared to 3.8 to 1 as of the First Quarter 2000 and 3.5 to 1 as of the Fourth Quarter 2000. Net working capital was $143,131,000 as of the end of the First Quarter 2001 as compared to $173,924,000 as of the First Quarter 2000. The decrease in net working capital principally reflects the use of cash and cash equivilents and short-term investments for a business acquisition made in the Second Quarter of 2000. Net working capital was $145,764,000 at the end of the Fourth Quarter 2000. Net cash used in operating activities was $8,328,000 for the quarter ended March 31, 2001 compared to net cash provided by operating activities of $7,924,000 for the quarter ended April 1, 2000. The change primarily reflects increased inventory and accounts receivable levels at March 31, 2001 and a change in the timing of the funding of certain medical benefit costs. Capital expenditures for 2001 are anticipated to be generally in line with historical spending and are to be funded from the Company's cash flow from operations and internal sources. Debt securities that matured during the quarters ended March 31, 2001 and April 1, 2000 were replaced with debt securities of similar maturities. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK: The Company is exposed to various market risks, including fluctuations in sugar, corn syrup, edible oils, cocoa and packaging costs. The Company also invests in securities with maturities of up to three years, the majority of which are held to maturity, which limits the Company's exposure to interest rate fluctua- tions. There has been no material change in the Company's market risks that would significantly affect the disclosures made in the Form 10-K for the year ended December 31, 2000. PART II - OTHER INFORMATION TOOTSIE ROLL INDUSTRIES, INC AND SUBSIDIARIES Form 8-K was not required to be filed during the First Quarter of 2001. Sales of unregistered Securities - None. SIGNATURES Pursuant to the requirements 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. TOOTSIE ROLL INDUSTRIES, INC. Date: May 14, 2001 BY: Melvin J. Gordon Chairman of the Board BY: G. Howard Ember Vice President - Finance