**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **ý**                                                                                                                                                                                                                   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                         |
| **For the  quarterly period ended June 30, 2003**                                                                                                                                                                       |
|                                                                                                                                                                                                                         |
| **OR**                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                         |
| **o**                                                                                                                                                                                                                        | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                                                                                                                                                         |
| **For the  transition period  from                 to               ** |

 

**Commission file number  1-8681**

 
| **RUSS BERRIE AND COMPANY, INC.**                                                   |
|-------------------------------------------------------------------------------------|
| (Exact name of registrant  as specified in its charter)                             |
|                                                                                |   |   |
| **New  Jersey**                                                                     |   | **22-1815337** |
| (State or other  jurisdiction of incorporation or  organization)                    |   | (IRS Employer  Identification No.) |
|                                                                                |   |   |
| **111 Bauer  Drive, Oakland, New Jersey**                                           |   | **07436** |
| (Address of principal  executive offices)                                           |   | (Zip Code) |
|                                                                                |   |   |
| **(201) 337-9000**                                                                  |
| (Registrant’s telephone  number, including area code)                          |
|                                                                                |
|                                                                                |
| (Former name, former  address and former fiscal year, if changed since last report) |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  ý   No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes  ý   No  o

 

Thenumber of shares outstanding of each of the registrant’s classes of commonstock, as of August 1, 2003 was as follows:

 
| **CLASS**                            |       | **OUTSTANDING  AT****August 1, 2003** |
|--------------------------------------|------------|--------------------------------------------|
| **Common Stock, $0.10 stated value** | ** ** | **20,632,051**                             |

 

 

----

 

**RUSSBERRIE AND COMPANY, INC.**

 

**INDEX**

 
| **PART I – FINANCIAL  INFORMATION** |
|------------------------------------------|
|                                     |   |
| Item 1.                                  | Financial Statements |
|                                     |   |
| a)                                       | Consolidated Balance Sheet  as of June 30, 2003 and December 31, 2002 |
|                                     |   |
| b)                                       | Consolidated Statement  of Income for the three and six months ended June 30, 2003 and 2002 |
|                                     |   |
| c)                                       | Consolidated  Statement of Cash Flows for the six months ended June 30, 2003 and 2002 |
|                                     |   |
| d)                                       | Notes to  Consolidated Financial Statements |
|                                     |   |
| Item 2.                                  | Management’s  Discussion and Analysis of Results of Operations and Financial Condition |
|                                     |   |
| Item  3.                                 | Quantitative  and Qualitative Disclosures About Market Risk |
|                                     |   |
| Item 4.                                  | Controls and  Procedures |
|                                     |   |
| **PART II – OTHER INFORMATION**     |
|                                     |   |
| Item 1.                                  | Legal Proceedings |
|                                     |   |
| Item  2.                                 | Changes  in Securities and Use of Proceeds |
|                                     |   |
| Item  4.                                 | Submission  of Matters to a Vote of Security Holders |
|                                     |   |
| Item 6.                                  | Exhibits  and Reports on Form 8-K |
|                                     |   |
| Signatures                               |
|                                          |  |  |

 

2

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**PART 1 - FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**RUSSBERRIE AND COMPANY, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEET**

 

**(Dollars inThousands)**

**(UNAUDITED)**

 
|                                                                                                                               |   | **June 30,  2003** |       | **December 31,  2002** |       |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|------------|
| ***ASSETS***                                                                                                                       |   |                    | ** ** |                        | ** ** |
| Current  assets                                                                                                                    |   |                    |       |                        |       |
| Cash  and cash equivalents                                                                                                         |   | $                       | 96,065     |                        | $          | 93,513 |   |
| Marketable  securities                                                                                                             |   | 120,431                 |       | 109,350                     |       |
| Other  investments                                                                                                                 |   | 21,400                  |       | 22,888                      |       |
| Accounts  receivable, trade, less allowances of $3,608 in 2003 and $3,395 in 2002                                                  |   | 61,212                  |       | 73,938                      |       |
| Inventories  — net                                                                                                            |   | 48,263                  |       | 44,749                      |       |
| Prepaid  expenses and other current assets                                                                                         |   | 3,617                   |       | 4,896                       |       |
| Deferred  income taxes                                                                                                             |   | 6,404                   |       | 6,548                       |       |
| **Total current assets**                                                                                                           |   | 357,392                 |       | 355,882                     |       |
|                                                                                                                               |   |                    |       |                        |       |
| Property,  plant and equipment — net                                                                                          |   | 43,817                  |       | 42,096                      |       |
| Goodwill                                                                                                                           |   | 10,388                  |       | 10,388                      |       |
| Other  assets                                                                                                                      |   | 23,065                  |       | 22,086                      |       |
| **Total assets**                                                                                                                   |   | $                       | 434,662    |                        | $          | 430,452 |   |
|                                                                                                                               |   |                    |       |                        |       |
| ***LIABILITIES AND SHAREHOLDERS’  EQUITY***                                                                                   |   |                    |       |                        |       |
| Current  liabilities                                                                                                               |   |                    |       |                        |       |
| Accounts  payable                                                                                                                  |   | $                       | 9,756      |                        | $          | 10,752 |   |
| Accrued  expenses                                                                                                                  |   | 23,348                  |       | 26,346                      |       |
| Accrued  income taxes                                                                                                              |   | 3,164                   |       | 4,463                       |       |
| **Total current liabilities**                                                                                                      |   | 36,268                  |       | 41,561                      |       |
| Commitments  and contingencies                                                                                                     |   |                    |       |                        |       |
| Shareholders’  equity                                                                                                         |   |                    |       |                        |       |
| Common  stock: $.10 stated value per share; authorized 50,000,000 shares; issued  2003, 26,244,459 shares; 2002, 26,163,986 shares |   | 2,625                   |       | 2,618                       |       |
| Additional  paid in capital                                                                                                        |   | 83,511                  |       | 81,403                      |       |
| Retained  earnings                                                                                                                 |   | 419,692                 |       | 417,047                     |       |
| Accumulated  other comprehensive income (loss)                                                                                     |   | 2,776                   |       | (1,967                      | )          |
| Treasury  stock, at cost (5,639,314 shares at June 30, 2003 and at  December 31, 2002)                                   |   | (110,210                | )          | (110,210                    | )          |
|                                                                                                                               |   |                    |       |                        |       |
| **Total shareholders’ equity**                                                                                                |   | 398,394                 |       | 388,891                     |       |
|                                                                                                                               |   |                    |       |                        |       |
| **Total liabilities and shareholders’ equity**                                                                                |   | $                       | 434,662    |                        | $          | 430,452 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

3

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**RUSS BERRIE AND COMPANY, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENT OF INCOME**

 

**(Dollars in Thousands, Except Per Share Data)**

 

**(UNAUDITED)**

 
|                                         |   | **THREE  MONTHS ENDED  JUNE 30,** |       | **SIX MONTHS  ENDED  JUNE 30,** |       |
|----------------------------------------------|--------|----------------------------------------|------------|--------------------------------------|------------|
|                                         |   | **2003**                               |       | **2002**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                         |   |                                   |       |                                 |       |   |   |   |   |
| Net sales                                    |   | $                                      | 67,167     |                                 | $          | 66,042 |   | $ | 154,718 |   | $ | 143,644 |   |
|                                         |   |                                   |       |                                 |       |   |   |   |   |
| Cost of Sales                                |   | 31,498                                 |       | 31,042                               |       | 71,390 |   | 64,758 |   |
|                                         |   |                                   |       |                                 |       |   |   |   |   |
| **Gross profit**                             |   | 35,669                                 | ** ** | 35,000                               |       | 83,328 |   | 78,886 | ** ** |
|                                         |   |                                   |       |                                 |       |   |   |   |   |
| Selling, general and administrative expense  |   | 30,996                                 |       | 28,773                               |       | 65,815 |   | 59,594 |   |
|                                         |   |                                   |       |                                 |       |   |   |   |   |
| Investment and other income-net              |   | 1,173                                  |       | 2,251                                |       | 3,272 |   | 4,559 |   |
|                                         |   |                                   |       |                                 |       |   |   |   |   |
| **Income before provision for income taxes** |   | 5,846                                  | ** ** | 8,478                                |       | 20,785 |   | 23,851 | ** ** |
|                                         |   |                                   |       |                                 |       |   |   |   |   |
| Provision for income taxes                   |   | 1,668                                  |       | 1,705                                |       | 6,628 |   | 7,142 |   |
|                                         |   |                                   |       |                                 |       |   |   |   |   |
| **Net****income**                            |   | $                                      | 4,178      | ** **                           | $          | 6,773 |   | $ | 14,157 |   | $ | 16,709 | ** ** |
|                                         |   |                                   |       |                                 |       |   |   |   |   |
| **Net income per share:**                    |   |                                   |       |                                 |       |   |   |   |   |
| Basic                                        |   | $                                      | 0.20       |                                 | $          | 0.33 |   | $ | 0.69 |   | $ | 0.82 |   |
| Diluted                                      |   | $                                      | 0.20       |                                 | $          | 0.33 |   | $ | 0.69 |   | $ | 0.81 |   |

 

*The accompanying notes are an integral part of the consolidatedfinancial statements.*

 

4

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**RUSS BERRIEAND COMPANY, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

 

**(Dollars inThousands)**

**(UNAUDITED)**

 
|                                                                               |   | **SIX MONTHS  ENDED  JUNE 30,** |    |
|------------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                               |   | **2003**                             |    | **2002** | ** ** |
| **Cash flows from operating activities:**                                          |   |                                 |    |   |   |
| Net income                                                                         |   | $                                    | 14,157  |   | $ | 16,709 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                                 |    |   |   |
| Depreciation and amortization                                                      |   | 3,177                                |    | 2,171 |   |
| Provision for accounts receivable reserves                                         |   | 798                                  |    | 1,005 |   |
| Other                                                                              |   | 1,526                                |    | (28 | ) |
| Changes in assets and liabilities:                                                 |   |                                 |    |   |   |
| Accounts receivable                                                                |   | 11,928                               |    | 8,673 |   |
| Inventories — net                                                             |   | (3,514                               | )       | 3,839 |   |
| Prepaid expenses and other current assets                                          |   | 1,279                                |    | 289 |   |
| Other assets                                                                       |   | (987                                 | )       | (51 | ) |
| Accounts payable                                                                   |   | (996                                 | )  | 438 |   |
| Accrued expenses                                                                   |   | (2,996                               | )       | 1,071 |   |
| Accrued income taxes                                                               |   | (1,299                               | )       | (1,378 | ) |
| Total adjustments                                                                  |   | 8,916                                |    | 16,029 |   |
| Net cash provided by operating activities                                          |   | 23,073                               |    | 32,738 |   |
|                                                                               |   |                                 |    |   |   |
| **Cash flows from investing activities:**                                          |   |                                 |    |   |   |
| Purchase of marketable securities                                                  |   | (208,138                             | )       | (108,935 | ) |
| Proceeds from sale of marketable securities                                        |   | 196,135                              |    | 42,744 |   |
| Proceeds from sale of property, plant and equipment                                |   | 35                                   |    | — |   |
| Capital expenditures                                                               |   | (4,046                               | )       | (9,768 | ) |
| Net cash  (used in) investing activities                                           |   | (16,014                              | )       | (75,959 | ) |
|                                                                               |   |                                 |    |   |   |
| **Cash flows from financing activities:**                                          |   |                                 |    |   |   |
| Proceeds from issuance of common stock                                             |   | 2,115                                |    | 4,698 |   |
| Dividends paid to shareholders                                                     |   | (11,512                              | )       | (10,603 | ) |
| Purchase of treasury stock                                                         |   | —                               |    | (214 | ) |
| Net cash (used in) financing activities                                            |   | (9,397                               | )       | (6,119 | ) |
|                                                                               |   |                                 |    |   |   |
| Effect of exchange rate changes on cash and cash equivalents                       |   | 4,890                                |    | 3,367 |   |
| Net increase (decrease) in cash and cash equivalents                               |   | 2,552                                |    | (45,973 | ) |
| Cash and cash equivalents at beginning of period                                   |   | 93,513                               |    | 148,872 |   |
| Cash and cash equivalents at end of period                                         |   | $                                    | 96,065  |   | $ | 102,899 |   |
|                                                                               |   |                                 |    |   |   |
| **Cash paid during the period for:**                                               |   |                                 |    |   |   |
| Interest                                                                           |   | $                                    | 13      |   | $ | 47 |   |
| Income taxes                                                                       |   | $                                    | 7,927   |   | $ | 8,520 |   |

 

*The accompanying notes are an integral part of theconsolidated financial statements.*

 

5

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

(Unaudited)

 

**NOTE 1 - INTERIM CONSOLIDATEDFINANCIAL STATEMENTS**

 

Theaccompanying unaudited interim consolidated financial statements have beenprepared by Russ Berrie and Company, Inc. and its subsidiaries (the “Company”)in accordance with accounting principles generally accepted in the UnitedStates of America for interim financial reporting and the instructions to theQuarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included infinancial statements prepared under generally accepted accounting principleshave been condensed or omitted pursuant to such principles andregulations.  The information furnished reflects all adjustments, which are,in the opinion of management, of a normal recurring nature and necessary for afair presentation of the Company’s consolidated financial position, results ofoperations and cash flows for the interim periods presented.  Results forinterim periods are not necessarily an indication of results to be expected forthe year.

 

TheCompany operates in two segments which consist of the Company’s core giftbusiness and the Company’s non-core business, which includes the Company’sJuly 26, 2002 acquisition of Sassy, Inc. The Company’s core business designs, manufactures through third partiesand markets a wide variety of gift and home dècor products to retail storesthroughout the United States and throughout the world via the Company’sinternational wholly-owned subsidiaries and distributors.  The Company’s non-core businesses design andmarket functional consumer products sold at comparable price points withcomparable gross margins to each other and consists of Sassy, Inc. since itsacquisition on July 26, 2002 and the Company’s wholly-owned subsidiaryBright of America, Inc.  These productsare sold to consumers, primarily in the United States, through mass marketers.

 

Certainprior year amounts have been reclassified to conform to the 2003presentation.  (See Note 8).

 

ThisQuarterly Report on Form 10-Q for the three and six months ended June 30,2003 should be read in conjunction with the Company’s Quarterly Report on Form10-Q for the three months ended March 31, 2003 and the Company’s AnnualReport on Form 10-K for the year ended December 31, 2002.

 

**NOTE 2 – FINANCIAL INSTRUMENTS**

 

**MARKETABLE SECURITIES AND OTHERINVESTMENTS**

 

In accordance with SFASNo. 115, “Accounting for Certain Investments in Debt and EquitySecurities,” the Company’s marketable securities are consideredavailable-for-sale investments. Accordingly, these investments are carried in the accompanyingconsolidated balance sheet at fair value, with the difference between cost andfair value (unrealized gain and losses) recorded as a component of shareholders’equity, net of tax in Accumulated Other Comprehensive Income/Loss.  These investments consist of U.S. governmentobligations, municipal obligations, preferred stock and mutual funds.  The Company also has an equity investment ina limited partnership which manages a portfolio of mortgage-backed securitiesto achieve returns through yield income and price appreciation.  Thisinvestment, included in Other Investments in the consolidated balance sheet, isaccounted for using the equity method and accordingly the Company’sproportionate share of the limited partnership’s income or loss amounting to anon-cash loss of $1,695,000 and non-cash income of $138,000 for the threemonths ended June 30, 2003 and June 30, 2002, respectively, and a non-cashloss of  $1,488,000 and non-cash income of $705,000 for the six monthsended June 30, 2003 and June 30, 2002, respectively, is included ininvestment and other income-net in the Consolidated Statement of Income.  The Company liquidated this investment inJuly 2003.  Additionally, realizedgains on sales of available-for-sale marketable securities of $2,031,000 and$32,000 for the three months ended June 30, 2003 and 2002, respectively,and realized gains on sales of available-for sale marketable securities of $2,480,000and $191,000 for the six months ended June 30, 2003 and 2002,respectively, as determined on a specific identification basis, are included inthe Consolidated Statement of Income.

 

6

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Marketablesecurities consist of the following:

 
|                         |   | **As of June 30, 2003**         |        |
|------------------------------|--------|--------------------------------------|-------------|
|                         |   | **Cost**                             |        | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  (Loss)** |   | **Fair Value****** | ** ** |
| U.S. Government obligations  |   | $                                    | 22,307,000  |   | $ | 44,000 |   | $ | (60,000 | ) | $ | 22,291,000 |   |
| Municipal obligations        |   | 82,151,000                           |        | 162,000 |   | (29,000 | ) | 82,284,000 |   |
| Preferred stock & other  |   | 8,594,000                            |        | — |   | (277,000 | ) | 8,317,000 |   |
| Equity securities            |   | 5,192,000                            |        | 22,000 |   | (136,000 | ) | 5,078,000 |   |
| Asset Backed Securities      |   | 2,453,000                            |        | 10,000 |   | (2,000 | ) | 2,461,000 |   |
|                         |   |                                 |        |   |   |   |   |   |   |
| Total marketable securities  |   | $                                    | 120,697,000 |   | $ | 238,000 |   | $ | (504,000 | ) | $ | 120,431,000 |   |
|                         |   |                                 |        |   |   |   |   |   |   |
|                         |   | **As of December 31. 2002****** |        |
|                         |   |                                 |        |   |   |   |   |   |   |
| U.S. Government  obligations |   | $                                    | 38,918,000  |   | $ | 155,000 |   | ($  5,000 | ) | $ | 39,068,000 |   |
| Municipal obligations        |   | 52,200,000                           |        | 848,000 |   | (42,000 | ) | 53,006,000 |   |
| Preferred stock & other  |   | 12,950,000                           |        | 41,000 |   | (892,000 | ) | 12,099,000 |   |
| Equity securities            |   | 5,148,000                            |        | 100,000 |   | (71,000 | ) | 5,177,000 |   |
|                         |   |                                 |        |   |   |   |   |   |   |
| Total marketable securities  |   | $                                    | 109,216,000 |   | $ | 1,144,000 |   | $ | (1,010,000 | ) | $ | 109,350,000 |   |

 

**NOTE 3 - EARNINGS PER SHARE**

 

Areconciliation of weighted average common shares outstanding to weightedaverage common shares outstanding assuming dilution is as follows:

 
|                                                               |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |       |
|--------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|------------|
|                                                               |   | **2003**                               |   | **2002**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                               |   |                                   |   |                                 |       |   |   |   |   |
| Weighted  average common shares outstanding                        |   | 20,567,000                             |   | 20,417,000                           |       | 20,558,000 |   | 20,375,000 |   |
|                                                               |   |                                   |   |                                 |       |   |   |   |   |
| Dilutive effect of common shares issuable under stock option plans |   | 110,000                                |   | 140,000                              |       | 98,000 |   | 133,000 |   |
| Weighted  average common shares outstanding assuming dilution      |   | 20,677,000                             |   | 20,557,000                           |       | 20,656,000 |   | 20,508,000 |   |

 

Stock options outstanding at June 30, 2003 to purchase 197,969 sharesof common stock were not included in the computation of earnings per commonshare assuming dilution because the options' exercise prices were greater thanthe average market price of the common shares. There were no such stock options outstanding at June 30, 2002.

 

**NOTE 4 - DIVIDENDS**

 

Cashdividends of $5,758,000 ($0.28 per share) were paid on June 6, 2003to shareholders of record of the Company’s Common Stock on May 23,2003.  Cash dividends of $11,512,000($0.28 per share per quarter) were paid in the six months ended June 30,2003.

 

7

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Cashdividends of $5,309,000 ($0.26 per share) were paid on June 7, 2002 toshareholders of record of the Company’s Common Stock on May 24, 2002.  Cash dividends of $10,603,000 ($0.26 pershare per quarter) were paid in the six months ended June 30, 2002.

 

**NOTE5 - COMPREHENSIVE INCOME**

 

ComprehensiveIncome, representing all changes in Shareholders’ equity during the periodother than changes resulting from the issuance or repurchase of the Company’scommon stock and payment of dividends, is reconciled to net income for thethree and six months ended June 30, 2003 and 2002 as follows:

 
|                                                                                  |   | **Three  Months Ended  June 30,** |      | **Six Months  Ended  June 30,** |       |
|---------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|------------|
|                                                                                  |   | **2003**                               |      | **2002**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net  income                                                                           |   | $                                      | 4,178,000 |                                 | $          | 6,773,000 |   | $ | 14,157,000 |   | $ | 16,709,000 |   |
| Other  comprehensive income (loss), net of tax:                                       |   |                                   |      |                                 |       |   |   |   |   |
| Foreign  currency translation adjustments                                             |   | 4,236,000                              |      | 4,744,000                            |       | 4,961,000 |   | 3,973,000 |   |
|                                                                                  |   |                                   |      |                                 |       |   |   |   |   |
| Net  unrealized gain (loss) on securities available-for-sale                          |   | 57,000                                 |      | 999,000                              |       | (278,000 | ) | 80,000 |   |
| Net  unrealized gain (loss) on foreign currency forward exchange contracts and  other |   | (287,000                               | )         | 626,000                              |       | 60,000 |   | 696,000 |   |
| Other  comprehensive income                                                           |   | 4,006,000                              |      | 6,369,000                            |       | 4,743,000 |   | 4,749,000 |   |
|                                                                                  |   |                                   |      |                                 |       |   |   |   |   |
| Comprehensive  income                                                                 |   | $                                      | 8,184,000 |                                 | $          | 13,142,000 |   | $ | 18,900,000 |   | $ | 21,458,000 |   |

 

**NOTE 6 – LITIGATION**

 

Inthe ordinary course of its business, the Company is party to various copyright,patent and trademark infringement, unfair competition, breach of contract,customs, employment and other legal actions incidental to its business, asplaintiff or defendant.  In the opinionof management, the amount of ultimate liability with respect to these actionswill not materially adversely affect the consolidated results of operations,financial condition or cash flows of the Company, except for the matterdescribed below.

 

Aspreviously reported in the Company's Quarterly Report on Form 10-Q for theperiod ended March 31, 2003, an action was commenced against the Company onAugust 22, 2001, in the United States District Court, District of NewJersey, by Dam Things from Denmark (a/k/a Troll Company ApS.), alleging, amongother things, copyright infringement by the Company of the plaintiff’sreinstated United States copyrights for its troll designs, unfair competitionunder common law and violation of Danish and U.S. copyrights constitutingcopyright infringement under the laws of the Peoples Republic of China.  The plaintiff is seeking, among otherthings, injunctive relief prohibiting the Company from continuing to offer forsale its troll products, cancellation of the Company’s U.S. copyrightregistrations with respect to its various troll products, as well asunspecified damages and attorney’s fees and expenses.  On December 3, 2001, a preliminary injunction was issued bythe District Court which, as subsequently modified, prohibited the Company frommanufacturing and importing its troll products into the United States andselling such products in the United States after a date specified by the court.  The issuance of the preliminary injunctionwas appealed by the Company to the Third Circuit Court of Appeals.  On May 14, 2002, the appeals courtvacated the preliminary injunction, and the matter was remanded to the DistrictCourt.  The plaintiff, on June 13, 2003,renewed its motion for preliminary injunctive relief seeking to reinstate therelief which was previously vacated by the Third Circuit Court of Appeals.  The District Court has set September 8,2003, for a hearing on this motion.  TheCompany believes it has substantial defenses to the allegations.  In the quarter ended June 30, 2003, thesale of troll products represented less than one-half of one percent of theCompany’s net sales.  As ofDecember 31, 2001 in response to the issuance of the preliminaryinjunction, the Company had segregated the amount of its troll productsinventory and recorded such inventory as a long-term asset in the Company’sConsolidated Balance Sheet.  As a resultof the vacation of the preliminary injunction, such inventory is no longersegregated or classified as a long-term asset. The Company does not believe that the ultimate resolution of this actionwill have a material adverse impact on the consolidated financial condition of theCompany; however, the outcome of any litigation is uncertain.  The plaintiff has advised the Company of itsintention to amend the claims under the litigation to include allegedinfringements of the plaintiff’s copyrights under the laws of unspecified foreigncountries and to seek unspecified damages for sales of the Company’s trollproducts sold throughout the world. Since the new assertions have not, to date, been included in thelitigation, the Company cannot evaluate them or their potential impact on theCompany.

 

8

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**NOTE 7 - ACQUISITION**

 

OnJuly 26, 2002, pursuant to the terms of an asset purchase agreement, awholly-owned subsidiary of the Company acquired the business and substantiallyall of the assets of Sassy, Inc. (“Sassy”), a designer, manufacturer anddistributor of baby and juvenile products based in Grand Rapids, Michigan,including, but not limited to, real property, tangible personal property,inventory, most accounts receivable, designated contracts, intellectualproperty rights, governmental authorizations and intangible rights. The assetsacquired will continue to be used by the Company in Sassy’s business. Inaddition to the Sassy brand, the Company also gained distribution rights tocertain baby soothing and comforting products from MAM Babyartikel GmbH, ofVienna, Austria.  The Company purchasedprivately held Sassy, Inc. for approximately $46,204,000 (includingacquisition costs and the working capital adjustment) using the Company’s owninternal funds, based on Sassy’s current and projected earnings beforeinterest, taxes, depreciation and amortization, and working capital.  Additional payments, not expected to exceed$3,800,000, may become payable based on future performance and othermeasurements and will be expensed as incurred in the Company’s ConsolidatedStatement of Income.  The results ofoperations of Sassy, Inc. are included in the Company’s ConsolidatedStatement of Income since July 26, 2002.

 

TheCompany believes that the identifiable intangible assets purchased in theacquisition valued based upon a third party valuation have an indefinitelife.  Goodwill was assigned to theCompany’s non-core segment.  Theaggregate amount of goodwill expected to be deductible for tax purposes isestimated to be $10,176,000.

 

Thefollowing unaudited pro forma consolidated results of operations for the threemonths and six months ended June 30, 2002 assumes the acquisition ofSassy, Inc. occurred as of January 1, 2002.

 
| **(000’s)**       |   | **Three months ended  June 30, 2002** |   | **Six months ended  June 30, 2002** |   |
|------------------------|--------|--------------------------------------------|--------|------------------------------------------|--------|
| Net  sales             |   | $                                          | 77,887 |                                     | $      | 167,263 |   |
| Net  income            |   | 7,795                                      |   | 18,745                                   |   |
| Net  income per share: |   |                                       |   |                                     |   |
| Basic                  |   | $                                          | 0.38   |                                     | $      | 0.92 |   |
| Diluted                |   | $                                          | 0.38   |                                     | $      | 0.91 |   |

 

Theabove amounts are based upon certain assumptions and estimates, and do notreflect any benefits from combined operations. The pro forma results have not been audited and do not necessarilyrepresent results which would have occurred if the acquisition had taken placeon the basis assumed above, and may not be indicative of the results of futurecombined operations.

 

Therehave been no changes in the carrying amount of goodwill during the three andsix months ended June 30, 2003.

 
| **(000’s)**                      |   | **Core  Segment** |   | **Non-core  Segment** |   | **Total** |   |
|---------------------------------------|--------|-------------------|--------|-----------------------|--------|-----------|--------|
|                                  |   |              |   |                  |   |      |   |
| Balance  as of December 31, 2002 |   | —            |   | $                     | 10,388 |      | $      | 10,388 |   |
|                                  |   |              |   |                  |   |      |   |
| Goodwill  acquired during the quarter |   | —            |   | $                     | — |      | $      | — |   |
|                                  |   |              |   |                  |   |      |   |
| Balance  as of June 30, 2003     |   | —            |   | $                     | 10,388 |      | $      | 10,388 |   |

 

**NOTE 8 – SEGMENTS OF THE COMPANY AND RELATEDINFORMATION**

 

TheCompany operates in two segments which consist of the Company’s core giftbusiness and the Company’s non-core business, which includes the Company’sJuly 26, 2002 acquisition of Sassy, Inc. This segmentation of the Company’s operations reflects how the Company’sChief Executive Officer currently views the results of operations.  There are no intersegment revenues toeliminate.  Prior to the acquisition ofSassy, Inc., the Company had only one reportable segment, as such, the Companyhas reclassified the prior year’s single segment information to be consistentwith the current period’s presentation.

 

9

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TheCompany’s core business designs, manufactures through third parties and marketsa wide variety of gift and home décor products to retail stores throughout theUnited States and throughout the world via the Company’s internationalwholly-owned subsidiaries and distributors.  The Company’s non-corebusiness designs and markets functional consumer products sold at comparableprice points with comparable gross margins to each other and consists of theCompany’s wholly-owned subsidiaries, Sassy, Inc. and Bright of America,Inc.  The products are sold toconsumers, primarily in the United States, through mass marketers.

 

**(Inthousands)**

 
|                        |   | **Three  Months Ended  June 30,** |   | **Six  months Ended  June 30,** |       |
|-----------------------------|--------|----------------------------------------|--------|--------------------------------------|------------|
|                        |   | **2003**                               |   | **2002**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Core:                       |   |                                   |   |                                 |       |   |   |   |   |
| Net  sales                  |   | $                                      | 52,493 |                                 | $          | 63,829 |   | $ | 125,604 |   | $ | 139,316 |   |
| Income  before income taxes |   | 4,047                                  |   | 8,074                                |       | 17,237 |   | 23,207 |   |
|                        |   |                                   |   |                                 |       |   |   |   |   |
| Non-core:                   |   |                                   |   |                                 |       |   |   |   |   |
| Net  Sales                  |   | 14,674                                 |   | 2,213                                |       | 29,114 |   | 4,328 |   |
| Income  before income taxes |   | 1,799                                  |   | 404                                  |       | 3,548 |   | 644 |   |
|                        |   |                                   |   |                                 |       |   |   |   |   |
| Consolidated:               |   |                                   |   |                                 |       |   |   |   |   |
| Net  Sales                  |   | 67,167                                 |   | 66,042                               |       | 154,718 |   | 143,644 |   |
| Income  before income taxes |   | 5,846                                  |   | 8,478                                |       | 20,785 |   | 23,851 |   |
|                             |        |                                        |        |                                      |            |  |  |  |  |  |  |  |  |

 

Additionally, total assets of each segment were asfollows:

 
|     |   | **June 30,  2003** |   | **December 31,  2002** |    |
|----------|--------|-------------------------|--------|-----------------------------|---------|
|     |   |                    |   |                        |    |
| Core     | $      | 365,603                 |   | $                           | 363,820 |   |
| Non-core |   | 69,059                  |   | 66,632                      |    |
|     |   |                    |   |                        |    |
| Total    | $      | 434,662                 |   | $                           | 430,452 |   |

** **

**NOTE 9—INVESTMENT AND OTHER INCOME – NET**

 

Thesignificant components of investment and other income—net consist of thefollowing: 

 
|                                |   | **Three  Months Ended  June 30,** |      | **Six Months  Ended  June 30,** |       |
|-------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|------------|
|                                |   | **2003**                               |      | **2002**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Investment  income                  |   | $                                      | 1,446,000 |                                 | $          | 1,796,000 |   | $ | 3,275,000 |   | $ | 4,082,000 |   |
| Interest  expense                   |   | (12,000                                | )         | (35,000                              | )          | (13,000 | ) | (47,000 | ) |
| Foreign  currency transactions, net |   | (290,000                               | )         | 454,000                              |       | (56,000 | ) | 449,000 |   |
| Other                               |   | 29,000                                 |      | 36,000                               |       | 66,000 |   | 75,000 |   |
| Total                               |   | $                                      | 1,173,000 |                                 | $          | 2,251,000 |   | $ | 3,272,000 |   | $ | 4,559,000 |   |

 

10

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**NOTE 10 - ACCOUNTING FOR STOCK OPTIONS**

 

Duringthe fourth quarter of 2002, the Company adopted the disclosure provisions ofSFAS No. 148.  The Company had previously adopted the disclosure-onlyprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and,therefore, accounts for its stock option plans in accordance with theprovisions of Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees”, and related interpretations usingthe intrinsic value method of accounting. Accordingly, no compensation cost has been recognized for the optionsgranted under these Stock Plans except for the application of FinancialAccounting Interpretation No. 44, “Accounting for Certain TransactionsInvolving Stock Compensation”, which resulted in non cash charges of $137,000and $164,000 during the three months ended June 30, 2003 and June 30,2002, respectively, and non cash charges of $82,000 and $284,000 during the sixmonths ended June 30, 2003 and June 30, 2002, respectively, andincluded in the Consolidated Statement of Income.  The charges relate only to the options granted during 2000 thatwere repriced as of February 29, 2000 upon approval of the Board of Directorsand Shareholders.  Had compensation costfor the Company’s Stock Plans been determined based on the fair valuerecognition provisions of SFAS No. 123 at the grant date, in the three andsix months ended June 30, 2003 and 2002, the Company’s net income and earningsper share would have been reduced to the pro forma amounts indicated below:

 
|                                                                                                     |   | **Three  Months Ended  June 30,** |      | **Six Months  Ended  June 30,** |       |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|------------|
|                                                                                                     |   | **2003**                               |      | **2002**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net  income-as reported                                                                                  |   | $                                      | 4,178,000 |                                 | $          | 6,773,000 |   | $ | 14,157,000 |   | $ | 16,709,000 |   |
| Deduction  for stock-based compensation expense determined under fair value method net  of tax-pro forma |   | 313,100                                |      | 330,762                              |       | 548,389 |   | 376,860 |   |
|                                                                                                     |   |                                   |      |                                 |       |   |   |   |   |
| Net  income-pro forma                                                                                    |   | 3,864,900                              |      | 6,442,238                            |       | 13,608,611 |   | 16,332,140 |   |
| Earnings  per share (basic) - as reported                                                                |   | .20                                    |      | .33                                  |       | .69 |   | .82 |   |
| Earnings  per share (basic) – pro forma                                                             |   | .19                                    |      | .32                                  |       | .66 |   | .80 |   |
| Earnings  per share (diluted) – as reported                                                         |   | .20                                    |      | .33                                  |       | .69 |   | .81 |   |
| Earnings  per share (diluted) – pro forma                                                           |   | .19                                    |      | .31                                  |       | .66 |   | .80 |   |
|                                                                                                          |        |                                        |           |                                      |            |  |  |  |  |  |  |  |  |

 

Thefair value of each option granted under the Stock Option Plans is estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing assumptions used for all grants:

 
|                                                            |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |       |
|-----------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|------------|
|                                                            |   | **2003**                               |   | **2002**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Dividend  yield                                                 |   | 3.22                                   | %      | 3.36                                 | %          | 3.22 | % | 3.36 | % |
| Risk-free  interest rate                                        |   | 2.09                                   | %      | 3.69                                 | %          | 2.09 | % | 3.69 | % |
| Volatility                                                      |   | 25.68                                  | %      | 50.05                                | %          | 22.73 | % | 27.52 | % |
| Expected  life (years)                                          |   | 2.9                                    |   | 3.3                                  |       | 2.9 |   | 3.3 |   |
| Weighted  average fair value of options granted during the year |   | $                                      | 5.07   |                                 | $          | 9.83 |   | $ | 4.44 |   | $ | 5.60 |   |
|                                                                 |        |                                        |        |                                      |            |  |  |  |  |  |  |  |  |

 

**NOTE 11 - FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS**

 

Certainof the Company’s foreign subsidiaries periodically enter into foreign currencyforward exchange contracts (“Forward Contracts”) to hedge inventory purchases,both anticipated and firm commitments, denominated in the United Statesdollar.  These contracts reduce foreign currency risk caused by changes inexchange rates and are used to hedge these inventory purchases, generally forperiods up to 13 months.  AtJune 30, 2003, the Company’s Forward Contracts have expiration dates whichrange from one to nine months.

 

Sincethere is a direct relationship between the Forward Contracts and the currencydenomination of the underlying transaction, such Forward Contracts are highly effectivein hedging the cash flows of certain of the Company’s foreign subsidiariesrelated to transactions denominated in the United States dollar.  TheseForward Contracts meet the criteria for cash flow hedge accounting treatmentand accordingly, gains or losses are included in other comprehensive income(loss) and are recognized in cost of sales based on the turnover of inventory.

 

11

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**NOTE 12 - RECENTLY ISSUED ACCOUNTING STANDARDS**

 

InJune 2001, FASB issued SFAS No. 143, Accounting for Asset RetirementObligations. SFAS No. 143 will require the Company to record the fair value ofan asset retirement obligation as a liability in the period in which it incursa legal obligation associated with the retirement of tangible long-lived assetsthat result from the acquisition, construction, development, and/or normal useof the assets. The Company also will record a corresponding asset that isdepreciated over the life of the asset. Subsequent to the initial measurementof the asset retirement obligation, the obligation will be adjusted at the endof each period to reflect the passage of time and changes in the estimatedfuture cash flows underlying the obligation. The Company adopted SFAS No. 143on January 1, 2003 and such adoption did not have a material effect on theCompany’s consolidated financial statements.

 

InApril 2002, the FASB issued Statement of Financial Accounting Standard No.145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections” (“SFAS No. 145”).  SFAS No. 145 requires companies to apply the criteria in APBOpinion No. 30, Reporting the Results of Operations - Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions (Opinion No. 30), in determiningthe classification of gains and losses resulting from the extinguishment ofdebt.  Additionally, SFAS No. 145 amendsSFAS No. 13 to require that certain lease modifications that have economiceffects similar to sale-leaseback transactions be accounted for in the samemanner as sale-leaseback transactions. SFAS No.145 is effective for fiscal years beginning after May 15,2002, or 2003 for the Company, and did not have a material impact on itsconsolidated financial statements.

 

InJune 2002, the FASB issued SFAS No. 146, Accounting for Costs Associatedwith Exit or Disposal Activities. SFAS No. 146 addresses financial accountingand reporting for costs associated with exit or disposal activities andnullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity.The provisions of this Statement are effective for exit or disposal activitiesthat are initiated after December 31, 2002. The adoption of SFAS No. 146would effect the Company’s consolidated financial statements if it were toengage in the aforementioned activities, however, did not have a materialimpact on the Company’s consolidated financial statements.

 

InNovember 2002, the FASB issued Interpretation No. 45, Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness to Others. This Interpretation elaborates on the disclosures to be made by aguarantor in its interim and annual financial statements about its obligationsunder guarantees issued.  TheInterpretation also clarifies that a guarantor is required to recognize, atinception of a guarantee, a liability for the fair value of the obligationundertaken.  The initial recognition andmeasurement provisions of the Interpretation are applicable to guaranteesissued or modified after December 31, 2002 and did not have a materialeffect on the Company’s consolidated financial statements.

 

InJanuary 2003, the FASB issued Interpretation No. 46, Consolidation ofVariable Interest Entities, an interpretation of ARB No. 51.  This Interpretation addresses theconsolidation by business enterprises of variable interest entities as definedin the Interpretation.  TheInterpretation applies immediately to variable interests in variable interestentities created after January 31, 2003, and to variable interests invariable interest entities obtained after January 31, 2003.  The application of this Interpretation didnot have a material effect on the Company’s consolidated financial statements.

 

InApril 2003, the FASB issued No. 149, “Amendment of Statement 133 onDerivatives Instruments and Hedging Activities”. SFAS No. 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under SFASNo. 133 “Accounting for Derivative Instruments and Hedging Activities.” Thechanges are for decisions made as part of the derivatives implementation groupprocess that effectively required amendments to Statement 133, in connectionwith other board projects dealing with financial instruments, and in connectionwith implementation issues raised in relation to the application of thedefinition of a derivative, in particular, the meaning of an initial netinvestment that is smaller than would be required for other types of contractsthat would be expected to have a similar response to changes in market factors,the meaning of underlying, and the characteristics of a derivative thatcontains financing components. SFAS No. 149 will be effective for contractsentered into or modified after June 30, 2003 except for implementationissues that have been effective for fiscal quarters that began prior toJune 15, 2003, should continue to be applied in accordance with theirrespective dates, and for hedging relationships designated after June 30,2003 and all provisions of this Statement should be applied prospectively.  The Company does not believe the adoption ofthis statement will have a material impact on its consolidated financialstatements.

 

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InMay 2003, the FASB issued Statement of Financial Accounting Standard No.150, Accounting for Certain Financials Instruments with Characteristics of bothLiabilities and Equity.  SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity andrequires that an issuer classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances). Previously, many ofthese instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise is effective at the beginningof the first interim period beginning after June 15, 2003, except for mandatorilyredeemable financial instruments of non public entities.  It is to be implemented by reporting thecumulative effect of a change in an accounting principle for financialinstruments created before the issuance date of the Statement and still existingat the beginning of the interim period of adoption.  Restatement is not permitted. The Company does not believe the adoption of this statement will have amaterial impact on its consolidated financial statements.

 

**ITEM 2. MANAGEMENT’S DISCUSSION****AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIALCONDITION**

 

Thefinancial and business analysis below provides information which the Companybelieves is relevant to an assessment and understanding of the Company’sconsolidated financial condition, changes in financial condition and results ofoperations.  This financial and businessanalysis should be read in conjunction with the Notes to the ConsolidatedFinancial Statements in Item 1 of this Quarterly Report on Form 10-Q and theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

**SEGMENTS**

 

TheCompany operates in two segments which consist of the Company’s core giftbusiness and the Company’s non-core business, which includes the Company’sJuly 26, 2002 acquisition of Sassy, Inc. The Company’s core business designs, manufactures through third partiesand markets a wide variety of gift and home dècor products to retail storesthroughout the United States and throughout the world via the Company’sinternational wholly-owned subsidiaries and distributors.  The Company’s non-core businesses design andmarket functional consumer products sold at comparable price points withcomparable gross margins to each other and consists of Sassy, Inc. since its acquisitionon July 26, 2002 and the Company’s wholly-owned subsidiary Bright ofAmerica, Inc.  These products are soldto consumers, primarily in the United States, through mass marketers.

 

**RESULTS OFOPERATIONS—SIX MONTHS ENDED JUNE 30, 2003 AND 2002**

 

TheCompany’s consolidated net sales for the six months ended June 30, 2003increased 7.7% to $154,718,000 compared to consolidated net sales of$143,644,000 for the six months ended June 30, 2002.  The net sales increase was primarilyattributable to the Company’s non-core segment, specifically, from salesgenerated by Sassy, Inc., whose results of operations are included since itsacquisition on July 26, 2002, offset in part, by the decline in net salesin the Company’s core segment in its United States and certain internationalmarkets.

 

TheCompany’s core segment’s net sales for the six months ended June 30, 2003decreased 9.8% to $125,604,000 compared to core net sales of $139,316,000 forthe six months ended June 30, 2002 primarily as a result of the difficultretail environment in its domestic and certain international markets.  Net sales in the Company’s core segmentbenefited from foreign exchange rates by approximately $4,700,000 for the sixmonths ended June 30, 2003.  TheCompany’s non-core segment’s net sales for the six months ended June 30,2003 increased to $29,114,000 compared to non-core net sales of $4,328,000 forthe six months ended June 30, 2002 as a result of the acquisition ofSassy, Inc.

 

Consolidatedcost of sales were 46.1% of consolidated net sales for the six monthsended  June 30, 2003 as compared to45.1% of consolidated net sales for the six months ended June 30,2002.  The erosion in the consolidatedgross profit percentage is primarily due to the addition of Sassy, Inc. to theCompany’s non-core segment at lower gross profit margins, offset, in part, byhigher gross profit margins on sales of certain of the Company’s core productline concepts, lower charitable donation of inventory in the six months endedJune 30, 2003 as compared to the six months ended June 30, 2002 andlower inventory reserve requirements in the Company’s core segment.  Cost of sales for the Company’s core segmentwere 41.7% of net sales for such segment for the six months ended June 30,2003 as compared to 44.6% of net sales for the six months ended June 30,2002.  Cost of sales for the Company’snon-core segment were 65.2% of net sales for such segment for the six monthsended June 30, 2003 as compared to 59.1% of net sales for the six monthsended June 30, 2002.

 

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Consolidatedselling, general and administrative expense was $65,815,000 or 42.5% ofconsolidated net sales for the six months ended June 30, 2003 compared to$59,594,000 or 41.5% of consolidated net sales for the six months endedJune 30, 2002.  This increase inconsolidated selling, general and administrative expense is due primarily tothe addition of Sassy, Inc. to its non-core segment and increased sellingexpenses and systems development costs in its core segment.

 

Consolidatedinvestment and other income of $3,272,000 for the six months endedJune 30, 2003 compares to $4,559,000 for the six months endedJune 30, 2002, a decrease of $1,287,000, or 28.2%.  This decrease was primarily the result oflower investment income and foreign exchange losses for the six months endedJune 30, 2003 as compared to foreign exchange gains in the six monthsended June 30, 2002 in the Company’s core segment (See Notes 2 and 9 tothe Notes to the Consolidated Financial Statements).

 

Theconsolidated provision for income taxes as a percent of income before taxes forthe six months ended June 30, 2003 was 31.9% compared to 29.9% for the sixmonths ended June 30, 2002 primarily as a result of the difficult retailenvironment in its domestic and certain international markets.  The increase in the effective income taxrate is due primarily to a lower income tax benefit on the Company’s charitabledonations as compared to the six months ended June 30, 2002.

 

Consolidatednet income for the six months ended June 30, 2003 was $14,157,000 comparedto consolidated net income of $16,709,000 for the six months endedJune 30, 2002, representing a decrease of $2,552,000 or 15.3% and adecrease of $0.12, or 14.8%, per diluted share (See Note 3 to the Notes tothe Consolidated Financial Statements). The decrease in consolidated net income was primarily the result ofincreased consolidated selling, general and administrative expense and lowerinvestment and other income, offset, in part, by increased sales, in theCompany’s non-core segment, as described above.

 

**RESULTS OFOPERATIONS—THREE MONTHS ENDED JUNE 30, 2003 AND 2002**

 

TheCompany’s consolidated net sales for the quarter ended June 30, 2003increased 1.7% to $67,167,000 compared to consolidated net sales of $66,042,000for the quarter ended June 30, 2002. The net sales increase was primarily attributable to the Company’snon-core segment, specifically, from sales generated by Sassy, Inc., whoseresults of operations are included since its acquisition on July 26, 2002,offset in part, by the decline in net sales in the Company’s core segment inits United States and certain international markets.

 

TheCompany’s core segment’s net sales for the quarter ended June 30, 2003decreased 17.8% to $52,493,000 compared to core net sales of $63,829,000 forthe quarter ended June 30, 2002 primarily as a result of the difficultretail environment in its domestic and certain international markets.  Net sales in the Company’s core segment benefitedfrom foreign exchange rates by approximately $2,100,000 in the quarter.  The Company’s non-core segment’s net salesfor the quarter ended June 30, 2003 increased to $14,674,000 compared tonon-core net sales of $2,213,000 for the quarter ended June 30, 2002 as aresult of the acquisition of Sassy, Inc.

 

Consolidatedcost of sales were 46.9% of consolidated net sales for the quarter endedJune 30, 2003, relatively flat as compared to 47.0% of consolidated netsales for the quarter ended June 30, 2002.  Cost of sales for the Company’s core segment were 41.8% of netsales for such segment for the quarter ended June 30, 2003 as compared to46.6% of net sales for the quarter ended June 30, 2002, due primarily tohigher gross profit margins on sales of certain of the Company's core productline concepts, a lower charitable donation in the quarter ended June 30, 2003than in the quarter ended June 30, 2002 and lower inventory reservesrequirements.  Cost of sales for theCompany’s non-core segment were 65.0% of net sales for such segment for thequarter ended June 30, 2003 as compared to 57.5% of net sales for thequarter ended June 30, 2002, due primarily to the addition of Sassy, Inc.

 

Consolidatedselling, general and administrative expense was $30,996,000 or 46.1% ofconsolidated net sales for the quarter ended June 30, 2003 compared to$28,773,000 or 43.6% of consolidated net sales for the quarter endedJune 30, 2002.  This increase inconsolidated selling, general and administrative expense is due primarily tothe addition of Sassy, Inc. to its non-core segment and systems developmentcosts in its core segment.

 

Consolidatedinvestment and other income of $1,173,000 for the quarter ended June 30,2003 compares to $2,251,000 for the quarter ended June 30, 2002, adecrease of $1,078,000, or 47.9%.  Thisdecrease was primarily the result of lower investment income and foreignexchange losses for the quarter ended June 30, 2003 as compared to foreignexchange gains in the quarter ended June 30, 2002 in the Company’s coresegment (See Notes 2 and 9 to the Notes to the Consolidated FinancialStatements).

 

14

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Theconsolidated provision for income taxes as a percent of income before taxes forthe quarter ended June 30, 2003 was 28.5% compared to 20.1% for the quarterended June 30, 2002.  The increasein the effective income tax rate is due primarily to a lower income tax benefiton the Company’s charitable donations as compared to the three months endedJune 30, 2002, offset, in part by lower effective tax rates of certain ofthe Company’s foreign operations.

 

Consolidatednet income for the quarter ended June 30, 2003 was $4,178,000 compared toconsolidated net income of $6,773,000 for the quarter ended June 30, 2002,representing a decrease of $2,595,000 or 38.3% and a decrease of $0.13 or 39.4%per diluted share (See Note 3 to the Notes to the Consolidated FinancialStatements).  The decrease inconsolidated net income was primarily the result of increased consolidatedselling, general and administrative expense and lower investment and otherincome, offset, in part, by increased sales in the Company’s non-core segment,as described above.

 

TheCompany is dependent upon information technology systems in many aspects of itsbusiness.  During 2002, the Company begana project to implement a new Enterprise Resource Planning (“ERP”) system forthe Company’s core businesses and successfully completed the replacement of itswarehouse management system in its South Brunswick, New Jersey and Petaluma,California, Canadian and European distribution facilities in addition to theimplementation of the purchasing module of its new ERP system worldwide.  The Company’s prior custom software that hadbeen utilized to operate and manage its business and other third party softwaresystems are being replaced using a strategic and phased approach.  The Company’s worldwide headquarters in theUnited States previously had completed the implementation of the finance moduleof the new ERP system and has transitioned to the order management andinventory modules during the second quarter of 2003.  The Company’s international subsidiaries have begun to phase-incertain aspects of the Company’s new ERP system and the transition to ordermanagement, inventory and finance modules is now anticipated by the end of thesecond quarter of 2004.  This delay ismeant to enable the Company to enhance its proficiency in utilizing the newsystem and to help ensure the efficiency of the international implementations.  The Company has experienced certain startupissues but has not experienced any significant business disruptions related tothe replacement of these systems.

 

**Liquidity and Capital Resources**

 

Asof June 30, 2003, the Company had cash, cash equivalents, marketablesecurities and other investments of $237,896,000 as compared to $225,751,000 atDecember 31, 2002.

 

Asof June 30, 2003 and December 31, 2002, the Company had marketablesecurities and other investments of $141,831,000 and $132,238,000 respectively,included in the amounts above.  Thisincrease is primarily a result of the Company’s investment of additional cashand cash equivalents in marketable securities. As of June 30, 2003 these investments consist of U.S. governmentobligations, municipal obligations, preferred stock, mutual funds and an equityinvestment in a limited partnership which primarily invests in mortgage-backedsecurities.  The objective of theinvestment portfolio is to maximize after-tax returns while minimizing risk.  The Company’s marketable securities aresubject to market fluctuations based largely, but not exclusively, on thesecurities’ sensitivity to changes in interest rates.  For more information regarding marketable securities and otherinvestments, see Note 2 of the Notes to Consolidated Financial Statements.

 

Workingcapital requirements during the quarter ended June 30, 2003 were metentirely through internally generated funds. The Company anticipates capital expenditure requirements for 2003 to beapproximately $8,000,000, primarily for systems development costs.  Capital expenditures for the quarter endedJune 30, 2003 of $1,400,000 and $4,046,000 for the six months endedJune 30, 2003 were primarily for systems development.  The Company remains in a highly liquidposition and believes that the resources available from cash and cashequivalents, marketable securities and other investments, operations and banklines of credit are sufficient to meet the foreseeable requirements of itsbusiness.

 

Certainbuildings, including the newly constructed facility in the United Kingdom, areleased from entities or parties owned or controlled by, or related to the lateRussell Berrie, one of the Company’s former directors, who was also Chairmanand Chief Executive Officer of the Company and a significant shareholder, untilhis death on December 25, 2002. Ms. Angelica Berrie, Chief Executive Officer, Director of the Companyand the widow of Mr. Berrie, is the beneficial owner of the landlord of the UKfacility as distributee under a trust established by the late Mr. Berrie,subject to administration by the executors of the Estate of Russell Berrie andby the trustees of said trust.  Thelease, which commenced in April 2002, is for a term of twenty years andincludes a tenant’s option to terminate the lease at the end of the tenthyear.  The Company occupied the facilityJune 2002.  Annual base rental isapproximately $1,600,000 with rent reviews at the end of every fifth year ofthe lease, adjusted to an open market rental value.  A discussion of other related party information is included inItem 13, “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS”, of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002.

 

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TheCompany enters into forward exchange contracts, principally to manage theeconomic currency risks associated with the purchase of inventory by itsEuropean and Canadian subsidiaries. Gains and losses related to such contracts were not material to itsresults of operations or cash flows.  TheCompany does not anticipate any material adverse impact on its results ofoperations or financial position from these contracts.

 

Asof June 30, 2003, the Board of Directors had previously authorized theCompany to repurchase 7,000,000 shares of common stock of which 5,643,200shares have been repurchased since the beginning of the Company’s stockrepurchase program in March 1990. During the quarter ended June 30, 2003, no shares were repurchasedby the Company.

 

Cashdividends of $5,758,000 ($0.28 per share) and $5,309,000 ($0.26 per share) werepaid in the quarters ended June 30, 2003 and June 30, 2002,respectively.  Cash dividends of$11,512,000 ($0.28 per share per quarter) and $10,603,000 ($0.26 per share perquarter) were paid in the six months ended June 30, 2003 and June 30,2002, respectively.

 

TheCompany is subject to legal proceedings and claims arising in the ordinarycourse of its business that could possibly have a material adverse impact onthe Company’s results of operations and cash flows.  See Note 6 of the Notes to Consolidated Financial Statements forinformation regarding specific litigation.

 

Inconnection with the Company’s continuing expansion of its operations in thePeople’s Republic of China (“PRC”), the Company completed a voluntary review ofthe activities of its offices in the PRC to assess their compliance withapplicable laws and regulations.  As aresult of this review, management became aware of some potential operationaland tax compliance issues under applicable PRC laws and regulations and istaking appropriate corrective actions. As a result, although the relevant PRC authorities have broad discretionwith respect to the imposition of sanctions on noncompliant companies, the Companydoes not expect the consequences, if any, of these matters to have a materialimpact on its results of operations, financial condition or cash flows.

 

Consistentwith its past practices and in the normal course of its business, the Companyregularly reviews acquisition opportunities of varying sizes.  There can be no assurance, however, that anydiscussions arising in connection therewith will result in definitive purchaseagreements and, if they do, what the terms or timing of any such agreements wouldbe.

 

**CRITICAL ACCOUNTING POLICIES**

 

FinancialReporting Release No. 60, “Cautionary Advice Regarding Disclosure aboutCritical Accounting Policies”, issued by the Securities and Exchange Commission(“SEC”), advises companies to include a discussion of critical accountingpolicies or methods used in the preparation of financial statements.Note 2 of the Notes to Consolidated Financial Statements on the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002, includes a summary of the significant accounting policies and methods used inthe preparation of the Company’s Consolidated Financial Statements. Thefollowing is a brief discussion of those accounting policies and methods usedby the Company which require subjective judgments and are considered criticalto the understanding of the Company’s consolidated financial condition, resultsof operations and cash flows.

 

**Marketable Securities and Other Investments**

 

TheCompany has a significant amount of marketable securities, all of which areconsidered as available-for-sale investments, in accordance with SFASNo. 115, “Accounting for Certain Investments in Debt and EquitySecurities”. Accordingly, these investments, except for the investment in thelimited partnership, are carried in the accompanying consolidated balance sheetat fair value, with the difference between cost and fair value recorded as acomponent of shareholders’ equity, net of tax, in Accumulated OtherComprehensive Income/Loss. The investment in the limited partnership isaccounted for using the equity method and accordingly the Company’sproportionate share of the limited partnership’s income or loss amounting to anon-cash loss of $1,695,000 for the quarter ended June 30, 2003, which isincluded in investment and other income-net in the Consolidated Statement of Income.  The Company liquidated this investment inJuly 2003.  Realized gains andlosses on sales of investments, as determined on a specific identificationbasis, are included in the Consolidated Statement of Income.  As of June 30, 2003, marketable securitieswere comprised primarily of U.S. government obligations, municipal obligations,preferred stock and mutual funds.  TheCompany’s marketable securities are subject to market fluctuations basedlargely, but not exclusively, on the securities’ sensitivity to changes ininterest rates.

 

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**Accounts Receivable, Trade and Revenue Recognition**

 

Inthe normal course of business, the Company extends credit to customers whichsatisfy established credit criteria. The Company believes that it does not havea significant concentration of credit risk due to the significant diversity ofits customer base. Accounts Receivable, Trade, as shown on the ConsolidatedBalance Sheet, is net of allowances, discounts and estimated bad debts. Anallowance for doubtful accounts is determined through analysis of the aging ofaccounts receivable at the date of the financial statements, assessments ofcollectibility based on historical trends and an evaluation of the impact ofcurrent and projected economic conditions.

 

TheCompany recognizes revenue in accordance with SEC Staff Accounting BulletinNo. 101, Revenue Recognition in Financial Statements (SAB 101), asamended.  SAB 101 requires that fourbasic criteria must be met before revenue can be recognized:(1) persuasive evidence of a sales arrangement exists; (2) deliveryhas occurred or services rendered; (3) the amount of revenue is fixed anddeterminable; and (4) collectibility is reasonably assured.

 

Determinationof criteria (3) and (4) are based on management’s judgments regarding the fixednature of the amounts billed to the Company’s customers for products deliveredand services rendered and the collectibility of those revenues.

 

**Inventory**

 

TheCompany values inventory at the lower of the actual cost or its currentestimated market value. The Company regularly reviews inventory quantities onhand, by item, and records a provision for excess inventory based primarily onthe Company’s historical experience and estimated forecast of product demandusing historical and recent ordering data relative to the quantity on hand foreach item. A significant decrease in demand for the Company’s products couldresult in an increase in the amount of excess inventory quantities on hand, however,the Company manages inventory and monitors product purchasing to minimize thisrisk.

 

**Impairment of Long-Lived Assets**

 

Inaccordance with SFAS No. 144, long-lived assets, such as property, plant,and equipment, and purchased intangibles subject to amortization, are reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto estimated undiscounted future cash flows expected to be generated by theasset. If the carrying amount of an asset exceeds its estimated future cashflows, an impairment charge is recognized by the amount by which the carryingamount of the asset exceeds the fair value of the asset, which is generallybased on discounted cash flows.

 

Goodwilland intangible assets not subject to amortization are tested annually forimpairment, and are tested for impairment more frequently if events andcircumstances indicate that the asset might be impaired. An impairment loss isrecognized to the extent that the carrying amount exceeds the asset’s fairvalue.

 

**Accrued Liabilities**

 

Thepreparation of the Company’s consolidated financial statements in conformitywith generally accepted accounting principles in the United States requiresmanagement to make certain estimates and assumptions that affect the reportedamounts of liabilities and disclosure of contingent liabilities at the date ofthe financial statements. Such liabilities include, but are not limited to,accruals for various legal matters, tax accruals and valuation allowances, selffunded medical claims for its domestic business, product liability claims,sales commissions and bonuses and management incentive compensation plans. Thesettlement of the actual liabilities could differ from the estimates includedin the Company’s consolidated financial statements.

 

**RECENTLYISSUED ACCOUNTING STANDARDS**

 

Theinformation set forth in Part I, Financial Information, Item 1, Notes toConsolidated Financial Statements, Note 12 - “Recently Issued AccountingStandards”, of this Quarterly Report on Form 10-Q is incorporated herein byreference thereto.

 

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**FORWARD-LOOKINGSTATEMENTS**

 

ThisQuarterly Report on Form 10-Q contains certain forward-looking statements.Additional written and oral forward-looking statements may be made by theCompany from time to time in Securities and Exchange Commission (SEC) filingsand otherwise. The Private Securities Litigation Reform Act of 1995 provides asafe-harbor for forward-looking statements. These statements may be identifiedby the use of forward-looking words or phrases including, but not limited to,“anticipate”, “believe”, “expect”, “intend”, “may”, “planned”, “potential”,“should”, “will” or “would”. The Company cautions readers that resultspredicted by forward-looking statements, including, without limitation, thoserelating to the Company’s future business prospects, revenues, working capital,liquidity, capital needs, interest costs and income are subject to certainrisks and uncertainties that could cause actual results to differ materiallyfrom those indicated in the forward-looking statements. Specific risks anduncertainties include, but are not limited to, the Company’s ability tointegrate its acquisition of Sassy, to continue to manufacture its products inthe Far East, the seasonality of revenues, the actions of competitors, abilityto increase production capacity, price competition, the effects of governmentregulation, results of any enforcement action by the People Republic of China(“PRC”) authorities with respect to the Company’s PRC operations, theresolution of various legal matters, possible delays in the introduction of newproducts, customer acceptance of products, issues related to the Company’s newbusiness ventures, changes in foreign currency exchange rates, issues relatedto the Company’s computer systems, the current and future outlook of the globalretail market, and other factors.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES****ABOUT MARKET RISK**

 

Asof June 30, 2003, there have been no material changes in the Company’smarket risks as described in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2002.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

Based on the evaluationrequired by paragraph (b) of Rule 13a-15 or 15d-15 promulgated under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’sChief Executive Officer and Chief Financial Officer have concluded that, as ofthe end of the period covered by this report, the Company’s disclosure controlsand procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the ExchangeAct), are effective.

 

There has been no change inthe Company’s internal control over financial reporting that occurred duringthe fiscal quarter to which this report relates that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

**PART II -OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

Theinformation set forth in Part I, Financial Information, Item 1, “Notes toConsolidated Financial Statements, Note 6 — Litigation,” of this QuarterlyReport on Form 10-Q is incorporated herein by reference thereto.

 

**ITEM2.  CHANGES IN SECURITIES AND USE OFPROCEEDS**

** **

OnApril 4, 2003, the Company granted to Jeffrey A. Bialosky 1,534 shares of theCommon Stock of the Company, subject to the terms of a Restricted StockAgreement dated as of April 4, 2003, in partial consideration for Mr.Bialosky's employment with the Company. The shares were issued without registration under the Securities Act of1933, as amended, in reliance on the exemption provided by Section 4(2)thereof.

 

OnMay 8, 2003, the Company granted to Christopher John Robinson 1,496 shares ofthe Common Stock of the Company, subject to the terms of a Restricted StockAgreement dated as of May 8, 2003, in partial consideration for Mr. Robinson'semployment with the Company.  The shareswere issued without registration under the Securities Act of 1933, as amended,in reliance on the exemption provided by Section 4(2) thereof.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

On May 7, 2003, the registrant held its annual meeting ofshareholders.  Each of the ten nominateddirectors was elected without contest. The votes for and the votes withheld for each of the nominees fordirector were as follows:

 
| **Nominee**         |   | **For**    |   | **%** |   | **Withhold** |   | **%** |   |
|---------------------|--------|------------|--------|-------|--------|--------------|--------|-------|--------|
| Raphael Benaroya    |   | 18,579,920 |   | 95.9  |   | 788,335      |   | 4.1   |   |
| Angelica Berrie     |   | 18,936,317 |   | 97.8  |   | 431,938      |   | 2.2   |   |
| Carl Epstein        |   | 18,958,394 |   | 97.9  |   | 409,861      |   | 2.1   |   |
| Ilan Kaufthal       |   | 18,937,379 |   | 97.8  |   | 430,876      |   | 2.2   |   |
| Charles Klatskin    |   | 17,785,569 |   | 91.8  |   | 1,582,686    |   | 8.2   |   |
| Joseph Kling        |   | 18,957,598 |   | 97.9  |   | 410,657      |   | 2.1   |   |
| William A. Landman  |   | 18,580,870 |   | 95.9  |   | 787,385      |   | 4.1   |   |
| Sidney Slauson      |   | 17,701,806 |   | 91.4  |   | 1,666,449    |   | 8.6   |   |
| Benjamin J. Sottile |   | 18,555,797 |   | 95.8  |   | 812,458      |   | 4.2   |   |
| Josh S. Weston      |   | 18,958,898 |   | 97.9  |   | 409,357      |   | 2.1   |   |

 

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A brief description of each matter voted upon at themeeting other than the election of directors follows:

 

Approval of the Russ Berrie and Company, Inc. 2004Stock Option, Restricted and Non-Restricted Stock Plan:

 

| **FOR**    |   | **%** |   | **AGAINST** |   | **%** |   | **ABSTAIN** |   | **%** |   | **BROKER  NON-  VOTES** |   | **%** |   |
|------------|--------|-------|--------|-------------|--------|-------|--------|-------------|--------|-------|--------|-------------------------|--------|-------|--------|
| 11,620,148 |   | 60.0  |   | 6,139,465   |   | 31.7  |   | 498,215     |   | 2.6   |   | 1,110,427               |   | 5.7   |   |

 

Approvalof the Russ Berrie and Company, Inc. 2004 Employee Stock Purchase Plan.

 

| **FOR**    |   | **%** |   | **AGAINST** |   | **%** |   | **ABSTAIN** |   | **%** |   | **BROKER  NON-  VOTES** |   | **%** |   |
|------------|--------|-------|--------|-------------|--------|-------|--------|-------------|--------|-------|--------|-------------------------|--------|-------|--------|
| 17,432,975 |   | 90.0  |   | 322,829     |   | 1.7   |   | 495,369     |   | 2.6   |   | 1,117,082               |   | 5.8   |   |

 

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

a)                                            Exhibits to this Quarterly Report on Form10-Q.

 

31.1               Certification of CEO required by Section 302of the Sarbanes Oxley Act of 2002.

 

31.2               Certification of CFO required by Section 302of the Sarbanes Oxley Act of 2002.

 

32.1               Certification of CEO required by Section 906of the Sarbanes Oxley Act of 2002.

 

32.2               Certification of CFO required by Section 906of the Sarbanes Oxley Act of 2002.

 

b)                                           During the quarter ended June 30, 2003,the Company filed a current report on Form 8-K on May 8, 2003 under Item7.  Financial Statements, Pro Forma Financial Information and Exhibits andItem 9.  Regulation FD Disclosure (Item12, Results of Operations and Financial Condition), with respect to theissuance of a press release covering results of operations and financialcondition for the first quarter of 2003.

 

**Items 3 and 5 are not applicable and have beenomitted.**

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                              | RUSS BERRIE AND COMPANY, INC. |                                         |
|-----------------------------------|-------------------------------|----------------------------------------------|
|                              | (Registrant)                  |
|                              |                          |
|                              | By                            | /s/  John D. Wille                           |   |
| Date:   August 14, 2003 |                          |                                         | John  D. Wille |
|                              |                          | Vice  President and  Chief Financial Officer |
|                                   |                               |                                              |  |  |  |

 

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