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 30, 2002 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 34,877,581 Class B Common Stock, $.69 4/9 par value 16,792,744 TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES MARCH 30, 2002 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 30, March 31, Dec. 31, CURRENT ASSETS 2002 2001 2001 <S> <C> <C> <C> Cash & Cash Equiv. $ 75,319,441 $ 37,469,696 $106,531,923 Investments 65,417,563 71,449,570 68,629,416 Trade Accounts Receivable, Less Allowances of $1,981,000, $2,135,000 & $2,037,000 24,814,487 25,367,807 20,402,588 Other Receivables 2,906,535 3,916,467 3,329,423 Inventories, at Cost (Last-in,First-out): Finished Goods & Work in Process 32,164,446 34,903,998 24,769,785 Raw Material & Supplies 20,529,617 20,358,753 16,391,683 Prepaid Expenses 12,041,006 11,198,880 4,268,974 Deferred Income Taxes 1,772,000 1,351,000 1,772,000 Total Current Assets 234,965,095 206,016,171 246,095,792 PROPERTY, PLANT & EQUIPMENT, (at cost) Land 8,353,604 8,327,400 8,353,823 Buildings 43,606,560 36,936,658 43,612,983 Machinery & Equipment 191,392,752 188,425,071 189,528,268 243,352,916 233,689,129 241,495,074 Less-Accumulated Depreciation 111,966,760 100,032,987 108,920,165 131,386,156 133,656,142 132,574,909 OTHER ASSETS Goodwill, Net of Accumulated Amortization of $17,799,000, $16,695,000 & $17,799,000 38,151,303 39,255,923 38,151,303 Trademarks, Net Of Accumulated Amortization of $12,896,000, $11,166,000 & $12,896,000 79,348,109 81,062,225 79,348,109 Investments 85,976,810 69,789,315 71,130,695 Cash Surrender Value of Life Insurance and Other Assets 53,065,363 45,687,338 51,375,232 256,541,585 235,794,801 240,005,339 Total Assets $622,892,836 $575,467,114 $618,676,040 (The accompanying notes are an integral part of these statements) </TABLE> <TABLE> <CAPTION> (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY March 30, March 31, Dec. 31, CURRENT LIABILITIES 2002 2001 2001 <S> <C> <C> <C> Accounts Payable $ 12,227,396 $ 12,556,387 $ 9,223,256 Dividends Payable 3,865,639 3,678,711 3,535,583 Accrued Liabilities 31,742,461 29,486,740 34,294,920 Income Taxes Payable 16,501,249 16,800,203 10,792,138 Total Current Liabilities 64,336,745 62,522,041 57,845,897 NON-CURRENT LIABILITIES Ind.Dev.Bonds 7,500,000 7,500,000 7,500,000 Post Retirement Benefits 7,616,432 7,086,620 7,450,336 Deferred Compensation and Other Liabilities 21,100,371 18,169,139 20,627,044 Deferred Income Taxes 16,463,356 12,412,066 16,791,542 Total Non-Current Liabilities 52,680,159 45,167,825 52,368,922 SHAREHOLDERS' EQUITY Common Stk., $.69-4/9 par value- 120,000,000 shares author. 34,877,581, 34,004,303 & 34,139,604 respectively, issued 24,220,342 23,613,898 23,707,856 Class B Common Stk., $.69-4/9 par value- 40,000,000 shares author. 16,792,744, 16,504,019 & 16,318,718 respectively, issued 11,661,531 11,461,027 11,332,347 Capital in Excess of Par Value 376,282,788 325,878,304 323,980,941 Retained Earnings 105,884,770 118,634,349 161,344,847 Accumulated Other Comprehensive Earnings (10,182,096) (9,818,927) (9,913,367) Treasury Stock (at cost)- 54,636, 54,636 & 54,636, shares respectively (1,991,403) (1,991,403) (1,991,403) Total Shareholders' Equity 505,875,932 467,777,248 508,461,221 Total Liabilities and Shareholders' Equity $622,892,836 $575,467,114 $618,676,040 </TABLE> <TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS (NOTE 1) (UNAUDITED) 13 Weeks Ended March 30, 2002 & March 31, 2001 <S> <C> <C> <C> <C> Net Sales (Note 2) $ 78,990,799 $ 75,857,504 Cost of Goods Sold 43,159,892 39,663,550 Gross Margin 35,830,907 36,193,954 Selling, Marketing and Administrative Expense 17,496,296 17,438,627 Amortization of Intangible Assets -- 944,579 Earnings from Operations 18,334,611 17,810,748 Other Income, Net 1,163,302 1,267,118 Earnings before Income Taxes 19,497,913 19,077,866 Provision for Income Taxes 6,726,000 6,693,000 Net Earnings (Note 5) 12,771,913 12,384,866 Other Comprehensive Income, before Tax: Foreign Currency Translation Adjustments 291,582 387,451 Unrealized Gains on Securities: Unrealized holding gains (losses) arising during period $ (133,000) $(407,000) Less: Reclassification adjustment for gains Realized in earnings 48,689 (84,311) 17,411 (389,589) Unrealized Gains on Derivatives: Unrealized holding gains (losses) arising during period (1,010,000) 31,000 Less: Reclassification adjustment for gains Realized in earnings 205,000 (805,000) 333,000 364,000 Other comprehensive income (loss), before tax (597,729) 361,862 Income tax benefit related to items of other Comprehensive Income 329,000 10,000 Other comprehensive income (loss), net of tax (268,729) 371,862 Comprehensive Earnings $ 12,503,184 $ 12,756,728 Retained Earnings at Beginning of Period $161,344,847 $180,123,036 Net Earnings 12,771,913 12,384,866 Cash Dividends (3,508,420) (3,429,348) Stock Dividends - 3% (64,723,570) (70,444,205) Retained Earnings at End of Period $105,884,770 $118,634,349 Net Earnings Per Share (Note 3) $.25 $ .24 Dividends Per Share * $.07 $ .07 Average Number of Shares Outstanding (Notes 3 & 4) 51,758,189 51,950,689 *Does not include 3% Stock Dividend to Shareholders of Record on 3/05/02 and 3/06/01. (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 30, 2002 & March 31, 2001 CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C> Net Earnings $12,771,913 $12,384,866 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,046,595 3,973,400 (Increase) decrease in assets: Accounts receivable (4,356,534) (1,730,044) Other receivables (83,848) (2,686,766) Inventories (11,450,511) (13,255,891) Prepaid expenses and other assets (9,515,738) (9,915,537) Increase (decrease) in liabilities: Accounts payable and accrued liabilities 423,977 (1,624,799) Income taxes payable and deferred 5,397,786 6,438,842 Postretirement health care and life insurance benefits 166,096 130,526 Deferred compensation and other liabilities 473,327 (1,252,199) Other 15,252 209,723 Net cash used in operating activities (3,111,685) (7,327,879) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,708,118) (5,566,533) Purchase of held to maturity securities (80,841,815) (33,882,348) Maturity of held to maturity securities 69,839,453 26,664,149 Purchase of available for sale securities (9,775,739) (23,129,571) Sale and maturity of available for sale securities 9,143,839 23,262,233 Net cash used in investing activities (13,342,380) (12,652,070) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid in cash (3,530,805) (3,432,497) Shares repurchased and retired (11,227,612) -- Net cash used in financing activities (14,758,417) (3,432,497) Decrease in cash and cash equivalents (31,212,482) (23,412,446) Cash and cash equivalents-beginning of year 106,531,923 60,882,142 Cash and cash equivalents end of quarter $ 75,319,441 $37,469,696 Supplemental cash flow information: Income taxes paid $ 964,000 $ 241,000 Interest paid $ 135,000 $ 209,000 (The accompanying notes are an integral part of the statements) </TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 30, 2002 (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 2001 Annual Report on Form 10-K. Note 2 - The Company's unshipped orders amounted to $15,700,000 and $17,200,000 at March 30, 2002 and March 31, 2001, respectively. Note 3 - Average shares outstanding for the period ended March 30, 2002 reflects stock repurchases of 285,000 shares for $11,227,612 and a 3% stock dividend distributed on April 17, 2002. Average shares outstanding for the period ended March 31, 2001 reflects a 3% stock dividend distributed on April 18, 2001. Note 4 - Results of operations for the period ended March 30, 2002 are not necessarily indicative of results to be expected for the year to end December 31, 2002 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 5 - Effective January 1, 2002, the Company adopted EITF 00-14, "Accounting for Certain Sales Incentives" and EITF 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." These state- ments required that the Company reclassify its cooperative advertising and certain sales incentives from selling, marketing and and administrative expense to a reduction of net sales. This reclassification has been made for all periods presented. The effect of the adoption of these issues was to reduce both net sales and operating expenses in the First Quarter of 2002 and 2001 by $6,258,000 and $6,764,000, respectively. The adoption of such requirements did not effect the comparative quarterly earnings. NOTE 6 - The Company adopted SFAS 142, "Goodwill and Other Intangible Assets," on January 1, 2002. As a result of its adoption, the Company has reclassified approximately $79.3 million from intangible assets to trademarks. The remaining amounts relate to goodwill. All trademarks have been assessed by management to have indefinite lives because they are expected to generate cash flows indefinitely. Thus, the Company has ceased amorti- zation expense on all trademarks and goodwill as of January 1, 2002, resulting in increased reported net income after tax by approximately $715,000 for the quarter ending March 30, 2002. The amortization expense and net income (including any tax effects) of the Company for the 13 weeks ended March 30, 2002 and March 31, 2001, respectively, are as follows: 13 Weeks Ended March 30, 2002 & March 31,2001 Reported net income $12,772 $12,385 Add back: goodwill amortization 0 369 Add back: trademark amortization 0 576 Less: Tax effect 0 230 Adjusted net income $12,772 $13,100 Reported basic earnings per share $ .25 $.24 Goodwill amortization - .00 Trademark amortization - .01 Adjusted basic earnings per share $ .25 $.25 The Company has identified its reporting units related to good- will and completed step one of the goodwill impairment test during the first quarter which required that management compare the fair value of the reporting unit with its carrying value. The reporting units were not considered to be impaired. The Company also completed its impairment test of the indefinite lived trademarks which required management to compare the fair value of the trademarks to the carrying value. The trademarks were not considered to be impaired. The impairment tests performed require that the Company deter- mine the fair market value of its trademarks and the fair market value of its reporting units for comparison to the carrying value of such net assets to assess whether an impairment exists. The methodologies used to estimate fair market value involve the use of estimates and assumptions, including projected cash flows, royalty rates and discount rates. 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 goods and 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 statements, which are as of the date of this filing. NET SALES: First Quarter, 2002 First Quarter vs. 2002 2001 First Quarter, 2001 $78,990,799 $75,857,504 +4.1% First Quarter 2002 net sales of $78,991,000, were up 4.1% from First Quarter 2001 net sales of $75,858,000. Effective January 1, 2002, the Company adopted the reporting requirements of the Emerging Issues Task Force of the Financial Accounting Standards Board (FASB) which requires that certain consumer and trade promotion expenses, including off invoice allowances and marketing performance fund payments, be recorded as a reduction of net sales and not as a component of selling, marketing and administrative expenses. The effect of the above was to reduce net sales and operating expenses in the First Quarter 2002 and 2001 by $6,258,000 and $6,764,000, respectively. The adoption of such requirements did not effect the Company's comparative quarterly earnings or financial position. Sales for the First Quarter 2002 rose as a result of effective marketing and promotional programs, as well as product line extenstions and new products. First Quarter 2002 net sales of $78,991,000 were down from Fourth Quarter 2001 net sales of $87,454,000. 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 2002 2001 1st Qtr. 2002 1st Qtr. 2001 $43,159,892 $39,663,550 54.6% 52.3% Cost of sales as a percentage of net sales increased from 52.3% for First Quarter 2001 to 54.6% for First Quarter 2002. This increase reflects higher ingredient costs and the effects of changes in the product mix and related cost of goods sold of such products. NET EARNINGS: First Quarter, 2002 First Quarter vs. 2002 2001 First Quarter, 2001 $12,771,913 $12,384,866 3.1% Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangibles", which changed the financial accounting and reporting for acquired goodwill and intangibles. SFAS 142 specifies that goodwill and indefinite-lived intangibles will not be amortized but rather will be tested for impairment. The Company has completed its impairment tests under the provisions of SFAS No. 142 for its indefinite-lived trademarks and goodwill and has concluded that neither is impaired. The adoption of SFAS No. 142 had the effect of eliminating $945,000 of amortization expense relating to the Company's acquired goodwill and indefinite-lived trademarks during the First Quarter of 2002. First Quarter earnings from operations were $18,335,000 and $17,811,000 in 2002 and 2001, respectively. However, after adjusting the prior year's first quarter's operating earnings for the effects of SFAS 142, First Quarter 2002 and 2001 operating earnings were $18,335,000 and $18,756,000, respectively. The decrease in adjusted operating earnings pricipally results from higher ingred- ient costs and the effects of sales mix, as discussed above, and increased customer deductions. First Quarter 2002 net earnings were $12,772,000 compared to First Quarter 2001 net earnings of $12,385,000. First Quarter 2002 earnings per share were $0.25, an increase of $.01 or 4.2% from First Quarter 2001 earnings per share of $.24. As discussed above, the adoption of SFAS 142 had the effect of increasing re- ported net earnings by approximately $715,000 or $.01 per share in the First Quarter 2002. First Quarter 2002 net earnings were adversely affected by lower investment income. The consolidated effective income tax rate favorably decreased from 35.1% in the First Quarter of 2001 to 34.5% in the First Quarter of 2002. This improvement generally reflects a reduction in state income taxes. First Quarter 2002 net earnings were $12,772,000 compared to Fourth Quarter 2001 net earnings of $12,390,000. Fourth Quarter 2001 earnings included a charge of $.02 per share relating to the closing and consolidation of a small manufacturing plant. LIQUIDITY AND CAPITAL RESOURCES: The Company's current ratio (current assets divided by current liabilities) is 3.7 to 1 as of the end of the First Quarter 2002 as compared to 3.3 to 1 as of the First Quarter 2001 and 4.3 to 1 as of the Fourth Quarter 2001. Net working capital was $170,628,000 as of the end of the First Quarter 2002 as compared to $143,494,000 as of the First Quarter 2001. Net working capital was $188,250,000 at the end of the Fourth Quarter 2001. Net cash used in operating activities was $3,112,000 for the quarter ended March 30, 2002 and $8,328,000 for the quarter ended March 31, 2001. The change primarily reflects increased accounts receivable levels at March 30, 2002, changes in other receivables, inventories, accounts payable and accrued liablities, and a change in the timing of the funding of certain medical benefit costs. Capital expenditures for 2002 are anticipated to be generally in line with historical annualized spending and are to be funded from the Company's cash flow from operations and internal sources. First Quarter 2001 capital expenditures relate to a new distribution center and additional production capacity. Debt securities that matured during the quarters ended March 30, 2002 and March 31, 2001 were generally 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, 2001. PART II - OTHER INFORMATION TOOTSIE ROLL INDUSTRIES, INC AND SUBSIDIARIES Form 8-K was not required to be filed during the First Quarter of 2002. 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 10, 2002 BY: Melvin J. Gordon Chairman of the Board BY: G. Howard Ember Vice President - Finance