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 June 30, 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 34,030,578 Class B Common Stock, $.69 4/9 par value 16,477,744 TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES JUNE 30, 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 June 30, July 1, Dec. 31, CURRENT ASSETS 2001 2000 2000 <S> <C> <C> <C> Cash & Cash Equiv. $ 68,075,809 $ 20,593,808 $ 60,882,142 Investments 43,472,423 69,497,283 71,605,091 Trade Accounts Receivable, Less Allowances of $2,146,000, $2,360,000 & $2,147,000 22,544,058 23,688,324 23,567,411 Other Receivables 3,313,435 2,956,497 1,229,701 Inventories, at Cost (Last-in,First-out): Finished Goods & Work in Process 48,044,184 50,200,214 24,984,361 Raw Material & Supplies 18,996,928 19,919,144 16,906,199 Prepaid Expenses 11,403,277 5,443,076 2,684,738 Deferred Income Taxes 1,351,000 2,069,000 1,351,000 Total Current Assets 217,201,114 194,367,346 203,210,643 PROPERTY, PLANT & EQUIPMENT, (at cost) Land 8,359,186 8,320,053 8,327,400 Buildings 37,217,313 32,558,297 36,936,658 Machinery & Equipment 192,407,462 180,225,620 183,858,538 237,983,961 221,103,970 229,122,596 Less-Accumulated Depreciation 104,143,644 93,007,575 98,004,162 133,840,317 128,096,395 131,118,434 OTHER ASSETS Intangible Assets, net of Accumulated Amortization of $28,806,000, $25,106,000 & $26,917,000 119,388,569 123,102,626 121,262,726 Investments 77,537,631 72,283,495 62,548,257 Cash Surrender Value of Life Insurance and Other Assets 47,652,273 40,153,550 44,301,529 244,578,473 235,539,671 228,112,512 Total Assets $595,619,904 $558,003,412 $562,441,589 (The accompanying notes are an integral part of these statements) </TABLE> <TABLE> <CAPTION> (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY June 30, July 1, Dec. 31, CURRENT LIABILITIES 2001 2000 2000 <S> <C> <C> <C> Notes Payable to Banks $ -- $ 16,075,000 $ -- Accounts Payable 11,226,230 13,824,753 10,296,197 Dividends Payable 3,535,583 3,467,253 3,436,103 Accrued Liabilities 32,034,335 32,521,967 33,336,341 Income Taxes Payable 23,388,941 10,610,010 10,377,643 Total Current Liabilities 70,185,089 76,498,983 57,446,284 NON-CURRENT LIABILITIES Industrial Development Bonds 7,500,000 7,500,000 7,500,000 Post Retirement Benefits 7,226,054 6,726,792 6,956,094 Deferred Compensation and Other Liabilities 19,328,032 19,986,590 19,421,338 Deferred Income Taxes 12,433,628 9,415,150 12,422,248 Total Non-Current Liabilities 46,487,714 43,628,532 46,299,680 SHAREHOLDERS' EQUITY Common Stock, $.69-4/9 par value- 120,000,000 shares authorized 34,030,578, 33,432,980 & 32,985,805 respectively, issued 23,632,145 23,217,144 22,906,603 Class B Common Stock, $.69-4/9 par value- 40,000,000 shares authorized 16,477,744, 16,099,209 & 16,056,384 respectively, issued 11,442,780 11,179,908 11,150,174 Capital in Excess of Par Value 325,878,304 275,362,049 256,698,004 Retained Earnings 129,004,320 139,981,837 180,123,036 Accumulated Other Comprehensive Earnings (9,019,045) (9,873,638) (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 478,947,101 437,875,897 458,695,625 Total Liabilities and Shareholders' Equity $595,619,904 $558,003,412 $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 26 Weeks Ended June 30, 2001 & July 1, 2000 June 30, 2001 & July 1, 2000 <S> <C> <C> <C> <C> NET SALES (Note 2) $ 86,882,146 $ 90,376,428 $169,503,347 $168,391,237 Cost of Goods Sold 43,364,838 42,167,153 83,028,388 79,115,158 Gross Margin 43,517,308 48,209,275 86,474,959 89,276,079 Selling, Marketing & Administrative Expense 24,379,747 24,707,493 48,582,071 46,916,912 Amortization of Intangible Assets 944,579 876,537 1,889,158 1,608,621 Earnings from Operations 18,192,982 22,625,245 36,003,730 40,750,546 Other Income, Net 3,107,859 1,797,354 4,374,977 4,050,172 Earnings before Income Taxes 21,300,841 24,422,599 40,378,707 44,800,718 Provision for Income Taxes 7,399,000 8,771,000 14,092,000 16,086,000 Net Earnings (Note 5) $ 13,901,841 $ 15,651,599 $ 26,286,707 $ 28,714,718 Net Earnings $ 13,901,841 $ 15,651,599 $ 26,286,707 $ 28,714,718 Other Comprehensive Earnings, Net of Tax 799,882 (1,649,779) 1,171,744 (933,371) Comprehensive Earnings $ 14,701,723 $ 14,001,820 $ 27,458,451 $ 27,781,347 Retained Earnings at Beginning of Period $118,634,349 $127,793,886 $180,123,036 $158,619,140 Net Earnings 13,901,841 15,651,599 26,286,707 28,714,718 Cash Dividends (3,531,870) (3,463,648) (6,961,218) (6,468,866) Stock Dividends - 3% -- -- (70,444,205) (40,883,155) Retained Earnings at End of Period $129,004,320 $139,981,837 $129,004,320 $139,981,837 Net Earnings per Share (Note 3) $ .28 $ .31 $ .52 $ .56 Dividends per Share * $ .07 $ .07 $ .14 $ .1325 Average Number of Shares Outstanding (Notes 3 & 4) 50,455,277 50,945,277 50,455,277 51,088,263 *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) 26 Weeks Ended <S> June 30, 2001 & July 1, 2000 CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C> Net earnings $26,286,707 $28,714,718 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 8,028,639 6,313,296 (Increase) decrease in assets: Accounts receivable 1,221,848 (4,758,065) Other receivables (2,007,547) 2,759,653 Inventories (24,865,587) (29,222,095) Prepaid expenses and other assets (12,139,575) (6,952,058) Increase (decrease) in liabilities: Accounts payable and accrued liabilities (450,382) 999,229 Income taxes payable and deferred 13,093,514 2,182,023 Postretirement health care and life insurance benefits 269,960 169,932 Deferred compensation and other liabilities (93,306) 902,085 Other 50,731 (278,870) Net cash provided by operating activities 9,395,002 829,848 CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions acquired, net of cash and cash equivalents -- (74,293,419) Capital expenditures (8,237,134) (7,609,113) Purchase of held to maturity securities (65,927,977) (97,991,933) Maturity of held to maturity securities 69,119,391 109,931,588 Purchase of available for sale securities (37,839,581) (46,837,375) Sale and maturity of available for sale securities 47,791,461 52,105,208 Net cash provided by (used in) investing activities 4,906,160 (64,695,044) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of notes payable -- 38,775,000 Repayment of notes payable -- (22,700,000) Shares repurchased and retired -- (13,940,329) Dividends paid in cash (7,107,495) (6,179,398) Net cash used in financing activities (7,107,495) (4,044,727) Increase (decrease) in cash & cash equivalents 7,193,667 (67,909,923) Cash and cash equivalents-beginning of year 60,882,142 88,503,731 Cash and cash equivalents-end of quarter $68,075,809 $20,593,808 Supplemental cash flow information: Income taxes paid $ 1,293,000 $13,806,000 Interest paid $ 470,000 $ 429,000 (The accompanying notes are an integral part of the statements) </TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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 June 30, 2001 amounted to $62,560,000. 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 June 30, 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 gain 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 June 30, 2001, accumulated other comprehensive earnings decreased by $139,000 due to hedging transactions, and decreased by $104,000 as a result of the net amount reclassified to the consolidated statement of earnings, comprehensive earnings and retained earnings. As of June 30, 2001, $120,000 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. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. This statement requires that amortization be ceased on all indefinite-lived intangible assets and goodwill, with impairment tests being performed on an annual basis. The provisions of SFAS 142 are effective for fiscal years beginning after December 15, 2001, thus, the Company will adopt SFAS 142 on January 1, 2002. Management is currently assessing the impact of the adoption of this statement. 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: Second Quarter, 2001 Second Quarter vs. 2001 2000 Second Quarter, 2000 $86,882,146 $90,376,428 -3.9% First Half, 2001 First Half vs. 2001 2000 First Half, 2000 $169,503,347 $168,391,237 +0.7% Second Quarter 2001 net sales of $86,882,000, were down 3.9% from Second Quarter 2000 net sales of $90,376,000. First Half 2001 net sales of $169,503,000 were up 0.7% from First Half 2000 net sales of $168,391,000. Although second quarter sales were off slightly from the prior year quarterly period, first half 2001 sales set a new record compared to the first half 2000 previous record. The slowing economy and increased competitive pressures affected both the first quarter and half 2001 sales results. The sales increase in the first half was attained principally from brands aquired in 2000. Second Quarter 2001 net sales of $86,882,000 were up 5.2% from First Quarter 2001 net sales of $82,621,000. 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 Second Quarter Percentage of Net Sales 2001 2000 2nd Qtr. 2001 2nd Qtr. 2000 $43,364,838 $42,167,153 49.9% 46.7% Cost of Sales as a First Half Percentage of Net Sales 2001 2000 1st Half 2001 1st Half 2000 $83,028,388 $79,115,158 49.0% 47.0% Cost of sales as a percentage of net sales increased from 46.7% in the Second Quarter 2000 to 49.9% in the Second Quarter 2001. First Half cost of sales also increased from 47.0% to 49.0% in 2001. These increases are the result of changes in the sales and product mix, lower profit margins of the acquired brands, and higher plant overhead costs including increased energy costs. NET EARNINGS: Second Quarter, 2001 Second Quarter vs. 2001 2000 Second Quarter, 2000 $13,901,841 $15,651,599 -11.2% First Half, 2001 First Half vs 2001 2000 First Half, 2000 $26,286,707 $28,714,718 -8.5% Second quarter net earnings were $13,902,000, compared to $15,652,000 in the Second Quarter 2000. Second Quarter 2001 earnings per share were $.28, a decrease of $.03 or 9.7% from Second Quarter 2000 earnings per share of $.31. First Half 2001 net earnings were $26,287,000 compared to the prior year's First Half 2000 net earnings of $28,715,000. First Half 2001 earnings per share of $.52 decreased $.04 or 7.1% from First Half 2000 earnings per share of $.56. Second Quarter earnings from operations were $18,193,000 and $22,625,000 in 2001 and 2000 respectively, a decline of $4,432,000 or 19.6% . This decrease reflects the effects of lower sales and gross margins as explained above, coupled with higher distribution and delivery expenses relating to higher fuel costs, and higher trade promotion spending and customer dedutions. These factors also had an adverse impact on the First Half 2001 operating earnings. Other Income, Net, was $3,108,000 and $1,798,000 in the Second Quarter 2001 and 2000, respectively, an increase of $1,310,000. This increase reflects $1,003,000 of increased investment capital gains. Second Quarter 2001 net earnings of $13,902,000 increased $1,517,000 or 12.2% from First Quarter 2001 net earnings of $12,385,000. This increase principally reflects increased investment income and investment capital gains. The consolidated effective income tax rate favorably decreased from 35.9% in the First Half of 2000 to 34.9% in the First Half of 2001. This improvement generally reflects increased tax-free investment income as well as some reduction in state income taxes. LIQUIDITY AND CAPITAL RESOURCES: The Company's current ratio (current assets divided by current liabilities) is 3.1 to 1 as of the end of the Second Quarter 2001 as compared to 2.5 to 1 as of the Second Quarter 2000 and 3.5 to 1 as of the Fourth Quarter 2000. Net Working Capital was $147,016,000 as of the end of the Second Quarter 2001 as compared to $117,868,000 as of the Second Quarter 2000 and $145,764,000 at the end of the Fourth Quarter 2000. Net cash provided by operating activities was $9,395,000 for the Quarter ended June 30, 2001 compare to $829,848 for the Quarter ended July 1, 2000. The change primarily reflects lower inventory and accounts receivable levels and a change in the timing of the funding of certain medical benefit costs and tax liabilities. 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 June 30, 2001 and July 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, 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 fluctuations. 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 Item 4. Submission of Matters to a Vote of Security-Holders At the Annual Meeting of Shareholders of the Company, held on May 7, 2001, the following number of votes were cast for the matters indicated: 1. For the election of five Directors of the Company by the holders of Common Shares and Class B Common Shares voting together: Broker Nominee For Withheld Abstain Non-vote Melvin J. Gordon 185,039,312 1,289,088 -0- -0- Ellen R. Gordon 185,022,095 1,306,305 -0- -0- Lana Jane Lewis-Brent 186,181,945 146,455 -0- -0- Charles W. Siebert 186,157,148 171,252 -0- -0- Richard P. Bergeman 186,205,550 122,850 -0- -0- 2. Proposal to approve the Tootsie Roll Industries, Inc. 2001 Bonus Incentive Plan: For Withheld Abstain Non-vote Common Shares and Class B Common Shares voting together 183,630,220 2,393,234 -0- -0- 3. Proposal to ratify the appointment of PricewaterhouseCoopers LLP as auditors for the fiscal year 2001: Broker For Withheld Abstain Non-vote Common Shares and Class B Common Shares voting together 183,960,706 2,299,918 67,716 -0- No other matters were submitted to a vote by ballot at the 2001 Annual Meeting. Item 6. Form 8-K was not required to be filed during the Second 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: July 23, 2001 BY: Melvin J. Gordon Chairman of the Board BY: G. Howard Ember Vice President - Finance