1 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 27, 1998 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 None 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 practicable date. Class Outstanding Common Stock, $.69 4/9 par value 32,610,182 Class B Common Stock, $.69 4/9 par value 15,496,638 <PAGE 2> <TABLE> PART I - FINANCIAL INFORMATION TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION <CAPTION> (UNAUDITED) ASSETS June 27, June 28, Dec. 31, CURRENT ASSETS 1998 1997 1997 <S> <C> <C> <C> Cash & Cash Equiv. $ 42,422,848 $ 41,979,248 $ 60,432,573 Marketable Securities 83,068,342 38,954,587 81,847,537 Accounts Receivable Less Allowances of $2,242,000,$2,146,000 & $2,085,000 24,104,647 19,759,642 23,319,189 Inventories at Cost (Last-in,First-out): Finished Goods & Work in Process 44,760,913 40,224,993 22,937,821 Raw Material & Supplies 18,844,947 13,785,906 13,721,292 Prepaid Expenses 5,891,727 4,450,370 2,910,043 Deferred Income Taxes 1,793,000 2,839,000 1,793,000 Total Current Assets 220,886,424 161,993,746 206,961,455 PROPERTY, PLANT & EQUIPMENT, (at cost) Land 6,895,294 6,894,139 6,895,124 Building 22,144,888 28,393,242 22,099,681 Machinery & Equipment 129,510,930 121,778,739 122,429,737 158,551,112 157,066,120 151,424,542 Less-Accumulated Depreciation and Amortization 77,607,078 75,839,385 73,060,644 80,944,034 81,226,735 78,363,898 OTHER ASSETS Intangibles 89,196,153 91,902,453 90,549,303 Investments 46,556,761 53,661,021 39,737,566 Other Assets 24,491,287 16,826,535 21,129,874 160,244,201 162,390,009 151,416,743 Total Assets $462,074,659 $405,610,490 $436,742,096 </TABLE> <PAGE 3> <TABLE> <CAPTION> (UNAUDITED) LIABILITIES AND SHAREHOLDERS( EQUITY June 27, June 28, Dec. 31, CURRENT LIABILITIES 1998 1997 1997 <S> <C> <C> <C. Notes Payable to Banks $ 7,000,000 $ -- $ -- Accounts Payable 10,049,803 10,393,202 11,623,404 Dividends Payable 2,525,616 1,940,654 1,930,339 Accrued Liabilities 31,338,177 28,666,646 32,793,347 Fed. & State Income Taxes 6,932,280 9,462,415 7,259,040 Total Current Liabilities 57,845,876 50,462,917 53,606,130 NON-CURRENT LIABILITIES Ind.Dev.Bonds 7,500,000 7,500,000 7,500,000 Post Retirement Benefits 6,068,347 5,789,881 5,904,593 Deferred Compensation 13,089 880 8,777,168 9,918,664 Deferred Income Taxes 8,274,497 9,078,530 8,650,156 Total Non-Current Liabilities 34,932,724 31,145,579 31,973,413 SHAREHOLDERS( EQUITY Common Stk., $.69-4/9 par value- 50,000,000 shares author. 32,610,182, 15,948,909 & 15,851,296 respectively, issued 22,645,749 11,075,492 11,007,706 Class B Common Stk $.69-4/9 par value- 20,000,000 shares author. 15,496,638, 7,573,892 & 7,546,505 respectively, issued 10,761,454 5,259,581 5,240,563 Capital in Excess of Par Value 219,169,952 194,189,254 187,259,058 Retained Earnings 127,281,538 124,568,911 159,123,991 Accumulated other comprehensive income (10,562,364) (11,091,244) (11,468,765) Total Shareholders( Equity 369,296,059 324,001,994 351,162,553 Total Liabilities and Shareholders( Equity $462,074,659 $405,610,490 $436,742,096 </TABLE> <PAGE 4> <TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (NOTE 1) (UNAUDITED) 13 Weeks Ended 26 Weeks Ended June 27, 1998 & June 28, 1997 June 27, 1998 & June 28,1997 <S> <C> 1998 <C> 1997 <C> 1998 <C> 1997 NET SALES (Note 2) $ 85,930,837 $ 82,287,560 $155,631,680 $148,545,160 Cost of goods sold 40,798,091 40,905,105 73,532,953 73,840,042 Gross Margin 45,132,746 41,382,455 82,098,727 74,705,118 Operating Expenses: Marketing, Selling and Advertising 13,662,796 12,404,317 24,519,689 22,298,508 Distribution and Warehousing 6,018,968 5,877,557 10,890,383 11,037,790 General and Administrative 4,272,077 4,221,345 8,325,420 8,087,250 Goodwill amortization 676,575 676,575 1,353,150 1,353,150 24,630,416 23,179,794 45,088,642 42,776,698 Earnings from Operations 20,502,330 18,202,661 37,010,085 31,928,420 Other Income (Expense) Net 1,285,104 1,431,698 2,447,866 3,089,736 Earnings before Income Taxes 21,787,434 19,634,359 39,457,951 35,018,156 Provision for Income Taxes 7,877,000 7,127,000 14,331,000 12,760,000 Net Earnings (Note 5) 13,910,434 12,507,359 25,126,951 22,258,156 Retained Earnings at beginning of period 115,896,720 114,002,206 159,123,991 136,352,123 129,807,154 126,509,565 184,250,942 158,610,279 Deduct: Cash Dividends 2,525,616 1,940,654 4,455,955 3,603,034 Stock Dividends - 3% -- -- 52,513,449 30,438,334 2,525,616 1,940,654 56,969,404 34,041,368 Retained Earnings at end of period $127,281,538 $124,568,911 $127,281,538 $124,568,911 Net Earnings per Share (Note 3) $ .29 $ .26 $ .52 $ .46 Dividends Per Share * $ .0525 $ .04125 $ .09375 $ .0775 Average Number of Shares Outstanding (Notes 3 & 4) 48,120,120 48,343,820 48,132,849 48,364,391 *Does not include 3% Stock Dividend to Shareholders of Record on 3/10/98 and 3/11/97, but has been restated for the 2-for-1 Stock Split to Shareholders of Record 6/22/98. </TABLE> <PAGE 5> <TABLE> TOOTSIE ROLL INDUSTRIES, INC.AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 26 Weeks Ended June 27, 1998 & June 28, 1997 <S> <C> 1998 <C> 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings $25,126,951 $22,258,156 Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Depreciation and amortization 5,899,590 5,701,084 (Increase) decrease in assets: Accounts receivable (787,182) 1,436,930 Inventories (26,951,052) (23,734,113) Prepaid expenses and other assets (6,660,362) (6,125,462) Increase (decrease) in liabilities: Accounts payable and accrued liabilities (1,066,339) 2,265,280 Income taxes payable and deferred (703,406) (445,112) Other long term liabilities 3,171,216 944,182 Other 160,821 (17,008) Net cash (used in) provided by operating activities (1,809,763) 2,283,937 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (9,088,412) (3,759,225) Purchase of held to maturity securities (73,647,614) (19,192,819) Maturity of held to maturity securities 66,944,226 27,362,195 Purchase of available for sale securities (74,978,240) (6,000,000) Sale and maturity of available for sale securities 74,874,377 6,434,354 Net cash (used in) provided by investing activities (15,895,663) 4,844,505 CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of notes payable 7,000,000 -- Shares repurchased and retired (3,194,858) (7,383,811) Dividends paid in cash (4,109,441) (3,424,182) Net cash used in financing activities (304,299) (10,807,993) Decrease in cash and cash equivalents (18,009,725) (3,679,551) Cash and cash equivalents-beginning of year 60,432,573 45,658,799 Cash and cash equivalents-end of quarter $42,422,848 $41,979,248 Supplemental cash flow information: Income taxes paid $15,253,000 $13,117,000 Interest paid $ 272,000 $ 284,000 </TABLE> <PAGE 6> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following is Management's discussion of the Company's operating results and analysis of factors which have affected the accompanying Statement of Earnings: NET SALES: Second Quarter, 1998 Second Quarter vs. 1998 1997 Second Quarter, 1997 $85,930,837 $82,287,560 +4.4 First Half, 1998 First Half vs. 1998 1997 First Half, 1997 $155,631,680 $148,545,160 +4.8% Second Quarter 1998 net sales of $85,931,000, a record, were up 4.4% from the Second Quarter 1997 net sales of $82,288,000. First Half 1998 net sales of $155,632,000 were up 4.8% from First Half 1997 net sales of $148,545,000. Second Quarter 1998 net sales of $85,931,000 were up 23.3% from First Quarter 1998 net sales of $69,701,000. This is not considered unusual as the First quarter of the year is historically the Company(s lowest sales quarter. Record sales for the Second Quarter and First Half of 1998 are the result of successful marketing and promotional programs as well as new products and product line extensions. These record sales principally reflect sales gains of the Company(s core brands and are primarily the result of increased sales volume. COST OF SALES: Cost of Sales as a Second Quarter Percentage of Net Sales 1998 1997 2nd Qtr. 1998 2nd Qtr. 1997 $40,798,091 $40,905,105 47.5% 49.7% Cost of Sales as a First Half Percentage of Net Sales 1998 1997 1st Half 1998 1st Half 1997 $73,532,953 $73,840,042 47.2% 49.7% Cost of sales as a percentage of net sales favorably decreased from 49.7% for the Second Quarter of 1997 to 47.5% for the Second Quarter of 1998. First Half cost of sales also favorably decreased from 49.7% in 1997 to 47.2% for the same period in 1998. This improvement reflects lower costs of certain ingredients and packaging materials as well as various manufacturing productivity improvements. NET EARNINGS: Second Quarter, 1998 Second Quarter vs. 1998 1997 Second Quarter, 1997 $13,910,434 $12,507,359 +11.2% First Half, 1998 First Half vs. 1998 1997 First Half, 1997 $25,126,951 $22,258,156 +12.9% Second Quarter 1998 net earnings were $13,910,000 compared to $12,507,000 in the Second Quarter 1997. Second Quarter 1998 earnings per share of $.29 were up 12% over Second Quarter 1997 earnings per share of $.26. First Half 1998 net earnings were $25,127,000 compared to prior year's First Half 1997 net earnings of $22,258,000. First Half 1998 earnings per share of $.52 were up 13% over First Half 1997 earnings per share of $.46. Second Quarter 1998 net earnings of $13,910,000 increased $2,693,000 or 24.0% from First Quarter 1998 net earnings of $11,217,000. The increase in net earnings for the Second Quarter and First Half of 1998 reflects higher sales, improved gross profit margins and effective ongoing cost control programs which resulted in higher income from operations. Second Quarter 1998 income from operations was $20,502,000, an increase of 13% from Second Quarter 1997 income from operations of $18,203,000. Income from operations for the First Half 1998 increased 16% to $37,010,000 from $31,928,000 in the First Half of 1997. Other income in the Second Quarter and First Half was adversely affected by $382,000 and $1,215,000, respectively, of foreign exchange and translation losses in Mexico; based on the accounting rules that classify Mexico as hyper-inflationary, these translation losses were charged to expense in the current period. Increased investment income in 1998 partially mitigated these losses. The consolidated effective income tax rate decreased from 36.4% in the First Half of 1997 to 36.3% in the First Half of 1998. This favorable decrease reflects increased tax-free investment income. NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for all fiscal quarters beginning after June 15, 1999. Under existing practice, there exist a variety of bases on which derivatives are reported on the balance sheet. SFAS 133 establishes a new model which supercedes and amends a number of existing standards. This Statement requires that all derivatives be recorded in the balance sheet as either assets of liabilities and be measured at fair value. The accounting changes in fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company's use of derivatives relate principally to hedging activities in order to fix the future price of certain ingredients. Management is in the process of evaluating this standard and has not yet determined the future impact on the consolidated financial statements upon adoption. <PAGE 7> 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 4, 1998, 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 86,391,507 873,453 -0- -0- Ellen R. Gordon 86,396,638 868,322 -0- -0- Lana Jane Lewis-Brent 86,380,531 884,429 -0- -0- Charles W. Siebert 86,376,063 888,897 -0- -0- William Touretz 86,376,952 888,008 -0- -0- 2. Proposal to ratify the appointment of Price Waterhouse LLP (subsquently renamed PricewaterhouseCoopers LLP) as auditors for the fiscal year 1998: Broker For Withheld Abstain Non-vote Common Shares and Class B Common Shares voting together 86,206,861 1,022,618 35,481 -0- No other matters were submitted to a vote by ballot at the 1998 Annual Meeting. 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: August 4, 1998 BY: Melvin J. Gordon Chairman of the Board BY: G. Howard Ember Vice President - Finance