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 October 2, 1999 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 33,005,122 Class B Common Stock, $.69 4/9 par value 15,729,526 <PAGE 2> <TABLE> PART I - FINANCIAL INFORMATION TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) ASSETS Oct. 2, Sept 26, Dec. 31, CURRENT ASSETS 1999 1998 1998 <S> <C> <C> <C> Cash & Cash Equiv. $ 61,001,611 $ 44,165,781 $ 80,743,591 Investments 48,625,057 63,864,726 83,176,169 Trade Accounts Receivable, Less Allowances of $3,230,000,$3,204,000 & $2,184,000 66,604,454 64,003,438 19,110,304 Other Receivables 5,834,852 3,736,777 3,324,145 Inventories, at Cost (Last-in,First-out): Finished Goods & Work in Process 23,278,453 24,521,839 21,394,685 Raw Material & Supplies 14,418,155 15,393,247 15,125,269 Prepaid Expenses 5,304,182 5,594,447 3,081,281 Deferred Income Taxes 2,584,000 1,793,000 2,584,000 Total Current Assets 227,650,764 223,073,255 228,539,444 PROPERTY, PLANT & EQUIPMENT, (at cost) Land 7,785,843 6,895,294 7,773,504 Buildings 28,401,308 22,144,888 22,226,017 Machinery & Equipment 142,680,394 131,855,285 133,601,378 178,867,545 160,895,467 163,600,899 Less-Accumulated Depreciation 86,805,965 79,839,907 80,577,319 92,061,580 81,055,560 83,023,580 OTHER ASSETS Intangible Assets, Net of Accumulated Amortization of $22,821,000, $20,114,000, & $20,791,000 85,813,279 88,519,578 87,843,004 Investments 96,158,769 69,767,649 59,252,305 Cash Surrender Value of Life Insurance and Other Assets 36,169,042 28,253,530 28,764,817 218,141,090 186,540,757 175,860,126 Total Assets $537,853,434 $490,669,572 $487,423,150 </TABLE> <PAGE 3> <TABLE> <CAPTION> (UNAUDITED) LIABILITIES AND SHAREHOLDERS( EQUITY Oct 2, Sept 26, Dec. 31, CURRENT LIABILITIES 1999 1998 1998 <S> <C> <C> <C> Accounts Payable $ 14,966,655 $ 13,173,546 $ 12,449,800 Dividends Payable 3,045,932 2,517,301 2,513,774 Accrued Liabilities 38,029,931 37,016,405 31,297,560 Income Taxes Payable 19,136,425 15,111,846 7,123,316 Total Current Liabilities 75,178,943 67,819,098 53,384,450 NON-CURRENT LIABILITIES Ind.Dev.Bonds 7,500,000 7,500,000 7,500,000 Post Retirement Benefits 6,381,938 6,148,636 6,144,943 Deferred Compensation and Other Liabilities 16,941,859 13,185,654 14,922,897 Deferred Income Taxes 8,473,105 8,195,314 9,014,031 Total Non-Current Liabilities 39,296,902 35,029,604 37,581,871 SHAREHOLDERS( EQUITY Common Stk., $.69-4/9 par value- 50,000,000 shares author. 33,005,122, 32,507,845 & 32,438,988, respectively, issued and outstanding 22,920,017 22,574,682 22,526,866 Class B Common Stk $.69-4/9 par value- 20,000,000 shares author. 15,729,526, 15,465,575 & 15,422,232, respectively, issued 10,923,183 10,739,883 10,709,784 Capital in Excess of Par Value 254,455,479 214,328,970 210,063,413 Retained Earnings 146,699,796 151,981,777 164,652,120 Accumulated Other Comprehensive Earnings (9,629,483) (10,831,854) (10,522,766) Treasury Stock (at cost)- 50,000, 25,000 & 25,000, shares respectively (1,991,403) (972,588) (972,588) Total Shareholders( Equity 423,377,589 387,820,870 396,456,829 Total Liabilities and Shareholders( Equity $537,853,434 $490,669,572 $487,423,150 </TABLE> <PAGE 4> <TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS (NOTE 1) (UNAUDITED) 13 Weeks Ended 39 Weeks Ended Oct 2, 1999 & Sept 26, 1998 Oct 2, 1999 & Sept 26,1998 <S> <C> 1999 <C> 1998 <C> 1999 <C> 1998 NET SALES (Note 2) $152,667,380 $144,230,201 $315,131,948 $299,861,881 Cost of Goods Sold 75,016,227 70,979,589 152,763,953 144,512,542 Gross Margin 77,651,153 73,250,612 162,367,995 155,349,339 Selling, Marketing and Administrative Expense 32,321,005 30,989,231 76,830,026 74,724,723 Amortization of Intangible Assets 676,575 676,575 2,029,725 2,029,725 Earnings from Operations 44,653,573 41,584,806 83,508,244 78,594,891 Other Income, Net 1,183,473 1,129,684 4,834,364 3,577,550 Earnings before Income Taxes 45,837,046 42,714,490 88,342,608 82,172,441 Provision for Income Taxes 16,554,000 15,498,000 31,984,000 29,829,000 Net Earnings (Note 5) $ 29,283,046 $ 27,216,490 $ 56,358,608 $ 52,343,441 Net Earnings $ 29,283,046 $ 27,216,490 $ 56,358,608 $ 52,343,441 Other Comprehensive Earnings, Net of Tax (134,091) (269,220) 893,283 636,911 Comprehensive Earnings $ 29,148,955 $ 26,947,270 $ 57,251,891 $ 52,980,352 Retained Earnings at Beginning of Period $120,459,556 $127,281,538 $164,652,120 $159,123,991 Net Earnings 29,283,046 27,216,490 56,358,608 52,343,441 Cash Dividends (3,042,806) (2,516,251) (8,621,400) (6,972,206) Stock Dividends - 3% -- -- (65,689,532) (52,513,449) Retained Earnings at End of Period $146,699,796 $151,981,777 $146,699,796 $151,981,777 Net Earnings per Share (Note 3) $ .60 $ .55 $1.15 $1.06 Dividends per Share * $ .0625 $ .0525 $ .1775 $ .14625 Average Number of Shares Outstanding (Notes 3 & 4) 48,830,898 49,487,223 49,081,848 49,535,878 *Does not include 3% Stock Dividend to Shareholders of Record on 3/09/99 and 3/10/98, but has been restated for the 2-for-1 Stock Split to Shareholders of Record on 6/22/98. </TABLE> <PAGE 5> TOOTSIE ROLL INDUSTRIES, INC. <TABLE> AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 39 Weeks Ended October 2, 1999 & September 26, 1998 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $56,358,608 $52,343,441 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 8,088,517 8,823,102 (Increase) decrease in assets: Accounts receivable (47,270,080) (45,372,456) Other receivables (2,510,707) 945,837 Inventories (850,546) (3,264,804) Prepaid expenses and other assets ( 9,355,764) (26,944,117) Increase in liabilities: Accounts payable and accrued liabilities 9,163,579 7,736,449 Income taxes payable and deferred 11,537,679 7,396,319 Postretirement health care and life insurance benefits 236,995 244,043 Deferred compensation and other liabilities 2,018,962 3,022,947 Other 261,167 238,292 Net cash provided by operating activities 27,678,410 5,169,053 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (15,276,792) (11,432,761) Purchase of held to maturity securities (169,907,134) (162,095,418) Maturity of held to maturity securities 169,524,189 168,437,355 Purchase of available for sale securities (105,675,624) (163,024,238) Sale and maturity of available for sale securities 103,713,944 162,414,290 Net cash used in investing activities (17,621,417) (5,700,772) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of notes payable -- 7,000,000 Repayment of notes payable -- (7,000,000) Purchase of treasury stock (1,018,815) (972,588) Shares repurchased and retired (20,509,802) (8,128,477) Dividends paid in cash (8,270,356) (6,634,008) Net cash used in financing activities (29,798,973) (15,735,073) (Decrease) in cash and cash equivalents (19,741,980) (16,266,792) Cash and cash equivalents-beginning of year 80,743,591 60,432,573 Cash and cash equivalents end of quarter $61,001,611 $44,165,781 Supplemental cash flow information: Income taxes paid $20,316,000 $22,672,000 Interest paid $ 448,000 $ 348,000 </TABLE> <PAGE 6> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 (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. Note 2 - The Company's unshipped orders at October 2, 1999 amounted to $23,700,000. Note 3 - Based on Average Shares outstanding adjusted for Stock Dividends. Note 4 - Includes 3% stock dividends distributed on April 21, 1999 and April 22, 1998 and the 2-for-1 stock split distributed on July 13, 1998. Note 5 - Results of operations for the period ended October 2, 1999 are not necessarily indicative of results to be expected for the year to end December 31, 1999 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 Comprehensive Income - The Company(s total comprehensive income was as follows: (in thousands) 13 Weeks Ended Oct. 2, 1999 Sept 26, 1998 Net earnings $29,283 $27,216 Other comprehensive (loss) (134) (269) Total comprehensive earnings $29,149 $26,947 (in thousands) 39 Weeks Ended Oct. 2, 1999 Sept 26, 1998 Net earnings $56,359 $52,343 Other comprehensive gain 893 637 Total comprehensive earnings $57,252 $52,980 <PAGE 7> MANAGEMENT'S DISCUSSION AND ANALYSIS 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: NET SALES: Third Quarter, 1999 Third Quarter vs. 1999 1998 Third Quarter, 1998 $152,667,380 $144,230,201 +5.8% Nine Months, 1999 Nine Months vs. 1999 1998 Nine Months, 1998 $315,131,948 $299,861,881 +5.1% Third Quarter 1999 net sales of $152,667,000, were up 5.8% from Third Quarter 1998 net sales of $144,230,000. Nine Months 1999 net sales of $315,132,000 were up 5.1% from Nine Months 1998 net sales of $299,862,000. Third Quarter 1999 net sales of $152,667,000 were up 73.0% from Second Quarter 1999 net sales of $88,265,000. Historically, the Third Quarter includes pre-Halloween sales and is the company's largest quarterly sales period of the year. Record sales for the Third Quarter and Nine Months 1999 are the result of successful marketing and promotional programs, including pre-Halloween sales programs, as well as new products, product line extensions and the benefits of earlier 1999 shipments compared to 1998. Although the timing of such earlier shipments had a favorable impact on 1999 reported sales, they will have a corresponding unfavorable effect when comparing the Fourth Quarter of 1999 to 1998. COST OF SALES: Cost of Sales as a Third Quarter Percentage of Net Sales 1999 1998 3rd Qtr. 1999 3rd Qtr. 1998 $75,016,227 $70,979,589 49.1% 49.2% Cost of Sales as a Nine Months Percentage of Net Sales 1999 1998 9 Months 1999 9 Months 1998 $152,763,953 $144,512,542 48.5% 48.2% Third Quarter 1999 cost of sales as a percentage of net sales was 49.1%, which was generally unchanged from the Third Quarter 1998 percentage of 49.2%. Nine months cost of sales increased slightly from 48.2% in 1998 to 48.5% in 1999. This increase principally reflects higher ingredient costs offset partially by the benefits of higher volumes against generally fixed plant overhead costs. (6) MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) NET EARNINGS: Third Quarter, 1999 Third Quarter vs. 1999 1998 Third Quarter, 1998 $29,283,046 $27,216,490 +7.6% Nine Months, 1999 Nine Months vs. 1999 1998 Nine Months, 1998 $56,358,608 $52,343,441 +7.7% Third Quarter 1999 net earnings were $29,283,000 compared to $27,216,000 in the Third Quarter of 1998. Third Quarter earnings per share of $.60 were up $.05 or 9.1% over Third Quarter 1998 earnings per share of $.55. Nine Months 1999 net earnings were $56,359,000 compared to the prior year's Nine Months net earnings of $52,343,000. Nine Months 1999 earnings per share of $1.15 were up $.09 or 8.5% over Nine Months 1998 earnings per share of $1.06. Third Quarter 1999 net earnings of $29,283,000 increased $14,532,000 or 98.5% from Second Quarter of 1999 net earnings of $14,751,000. The increase in net earnings for the Third Quarter and Nine Months of 1999 reflects higher sales and effective ongoing cost control programs which resulted in higher income from operations. Third Quarter 1999 income from operations was $44,654,000 an increase of 7% from Third Quarter 1998 income from operations of $41,585,000. Income from operations for the Nine Months 1999 increased 6% to $83,508,000 from $78,595,000 in the Nine Months of 1998. Other income in the Third Quarter and Nine Months benefited from decreased foreign exchange translation losses relating to the Company's Mexican operations. Also as discussed above, the timing of period to date sales contributed to the Third Quarter and Nine Months 1999 results. The consolidated effective income tax rate decreased from 36.3% in the Nine Months of 1998 to 36.2% in the Nine Months of 1999. This favorable decrease principally reflects modification for changes in local and state taxes. LIQUIDITY AND CAPITAL RESOURCES: The Company's current ratio (current assets divided by current liabilities) is 3 to 1 as of the end of the Third Quarter 1999. Capital expenditures for 1999 are anticipated to be generally in line with historical spending and are to funded from the Company's cash flow from operations and internal sources. NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which, as amended by Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective Date of FASB Statement No. 133", is effective for all fiscal years beginning after June 15, 2000. Under existing practice, there exist a variety of basses 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 or liabilities and be measured at fair value. (6 A) The accounting for 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 relates 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 of adoption on the consolidated financial statements. YEAR 2000 COMPUTER ISSUE The Company has completed its year 2000 assessment of all of its computer systems which includes business software applications, operating systems and data bases, electronic data interchange (EDI), system networks, manufacturing controllers and facility management systems. The Company has also completed its assessment of its key customers, suppliers and outside organizations, such as banks and sales brokers, in order to evaluate their Year 2000 readiness. All of the Company's Year 2000 compliance efforts are now complete, and management has not ascertained any exception that in its opinion could have material adverse consequences to the Company. The Company's mission critical business applications are year 2000 compliant Oracle-based software applications that operate within the Oracle data base. These systems utilize modern technologies where year 2000 dates are not problematic. The Company has completed upgrading these systems to the version or release that has been year 2000 "certified" by the software vender. The Company has further completed its year 2000 remediation project at its Mexican operations including system testing. <PAGE 8> PART II - OTHER INFORMATION TOOTSIE ROLL INDUSTRIES, INC AND SUBSIDIARIES Item 2. Sales of unregistered Securities - None. Item 4. Submission of matters to a vote of security holders - None. Item 6. Form 8-K was not required to be filed during the Third Quarter of 1999. 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: November 8, 1999 BY: Melvin J. Gordon Chairman of the Board BY: G. Howard Ember Vice President - Finance