**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-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 March 31, 2004**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom             to            **

 

**Commissionfile number  1-8681**

 

**RUSSBERRIE 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) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 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

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). Yes  ý   No  o

 

The number of sharesoutstanding of each of the registrant’s classes of common stock, as ofApril 30, 2004 was as follows:

 
| **CLASS**                         |   | **OUTSTANDING  AT April 30, 2004** |
|-----------------------------------|--------|-----------------------------------------|
| Common  Stock, $0.10 stated value |   | 20,724,745                              |

 

 

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**RUSS BERRIE AND COMPANY, INC.**

 

**INDEX**

 
| **PART I – FINANCIAL  INFORMATION** |   |
|------------------------------------------|--------|
|                                     |   |
| Item 1.                                  |   | Financial Statements |   |
|                                     |   |   |   |
| a)                                  |   | Consolidated Balance Sheet  as of March 31, 2004 and December 31, 2003 |   |
|                                     |   |   |   |
| b)                                  |   | Consolidated  Statement of Income for the three months ended March 31, 2004 and 2003 |   |
|                                     |   |   |   |
| c)                                  |   | Consolidated  Statement of Cash Flows for the three months ended March 31, 2004 and  2003 |   |
|                                     |   |   |   |
| d)                                  |   | Notes to  Consolidated Financial Statements |   |
|                                     |   |   |   |
| Item  2.                                 |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                     |   |   |   |
| Item  3.                                 |   | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                     |   |   |   |
| Item 4.                                  |   | Controls and Procedures |   |
|                                     |   |
| **PART II – OTHER INFORMATION**     |   |
|                                     |   |
| Item 1.                                  |   | Legal Proceedings |   |
|                                     |   |   |   |
| Item 6.                                  |   | Exhibits and Reports on Form 8-K |   |
|                                     |   |
| Signatures                               |   |

 

2

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**PART 1 -FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

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

 

**CONSOLIDATEDBALANCE SHEET**

 

**(Dollars in Thousands)(UNAUDITED)**

 
|                                                                                                                              |   | **March 31,  2004** |    | **December 31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
| ***ASSETS***                                                                                                                      |   |                     |    |                        |   |
| Current assets                                                                                                                    |   |                     |    |                        |   |
| Cash and cash equivalents                                                                                                         |   | $                        | 185,558 |                        | $      | 81,535 |   |
| Marketable securities                                                                                                             |   | 53,866                   |    | 150,515                     |   |
| Accounts receivable, trade, less allowances of $3,997 in 2004 and  $3,841 in 2003                                                 |   | 63,476                   |    | 82,795                      |   |
| Inventories — net                                                                                                            |   | 48,077                   |    | 51,921                      |   |
| Prepaid expenses and other current assets                                                                                         |   | 4,863                    |    | 4,517                       |   |
| Deferred income taxes                                                                                                             |   | 9,882                    |    | 9,671                       |   |
| **Total current assets**                                                                                                          |   | 365,722                  |    | 380,954                     |   |
|                                                                                                                              |   |                     |    |                        |   |
| Property, plant and equipment — net                                                                                          |   | 45,340                   |    | 46,108                      |   |
| Goodwill                                                                                                                          |   | 10,353                   |    | 10,353                      |   |
| Other assets                                                                                                                      |   | 23,220                   |    | 25,333                      |   |
| **Total assets**                                                                                                                  |   | $                        | 444,635 |                        | $      | 462,748 |   |
|                                                                                                                              |   |                     |    |                        |   |
| ***LIABILITIES AND SHAREHOLDERS’  EQUITY***                                                                                  |   |                     |    |                        |   |
| Current liabilities                                                                                                               |   |                     |    |                        |   |
| Accounts payable                                                                                                                  |   | $                        | 7,153   |                        | $      | 10,318 |   |
| Accrued expenses                                                                                                                  |   | 18,521                   |    | 28,684                      |   |
| Accrued income taxes                                                                                                              |   | 5,952                    |    | 8,000                       |   |
| **Total current liabilities**                                                                                                     |   | 31,626                   |    | 47,002                      |   |
| Deferred  income taxes                                                                                                       |   | 328                      |    | 328                         |   |
| **Total liabilities**                                                                                                             |   | $                        | 31,954  |                        | $      | 47,330 |   |
| Commitments and contingencies                                                                                                     |   |                     |    |                        |   |
| Shareholders’ equity                                                                                                         |   |                     |    |                        |   |
| Common stock: $.10 stated value per share; authorized 50,000,000  shares; issued 2004, 26,359,616 shares; 2003, 26,296,995 shares |   | 2,637                    |    | 2,631                       |   |
| Additional paid in capital                                                                                                        |   | 86,838                   |    | 85,197                      |   |
| Retained earnings                                                                                                                 |   | 422,925                  |    | 428,704                     |   |
| Accumulated other comprehensive income                                                                                            |   | 10,431                   |    | 9,036                       |   |
| Treasury stock, at cost (5,639,314 shares at March 31, 2004 and  at December 31, 2003)                                  |   | (110,150                 | )       | (110,150                    | )      |
|                                                                                                                              |   |                     |    |                        |   |
| **Total shareholders’ equity**                                                                                               |   | 412,681                  |    | 415,418                     |   |
| **Total liabilities and shareholders’ equity**                                                                               |   | $                        | 444,635 |                        | $      | 462,748 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

3

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

 

**CONSOLIDATED STATEMENT OF INCOME**

 

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

 

**(UNAUDITED)**

 
|                                         |   | **THREE MONTHS ENDED  MARCH 31,** |   |
|----------------------------------------------|--------|----------------------------------------|--------|
|                                         |   | **2004**                               |   | **2003** |   |
|                                         |   |                                   |   |   |   |
| Net sales                                    |   | $                                      | 65,713 |   | $ | 87,551 |   |
|                                         |   |                                   |   |   |   |
| Cost of Sales                                |   | 32,610                                 |   | 39,892 |   |
|                                         |   |                                   |   |   |   |
| **Gross profit**                             |   | 33,103                                 |   | 47,659 |   |
|                                         |   |                                   |   |   |   |
| Selling, general and administrative expense  |   | 34,441                                 |   | 34,819 |   |
|                                         |   |                                   |   |   |   |
| Investment and other income-net              |   | 1,963                                  |   | 2,099 |   |
|                                         |   |                                   |   |   |   |
| **Income before provision for income taxes** |   | 625                                    |   | 14,939 |   |
|                                         |   |                                   |   |   |   |
| Provision for income taxes                   |   | 189                                    |   | 4,960 |   |
|                                         |   |                                   |   |   |   |
| **Net****income**                            |   | $                                      | 436    |   | $ | 9,979 |   |
|                                         |   |                                   |   |   |   |
| **Net income per share:**                    |   |                                   |   |   |   |
| Basic                                        |   | $                                      | 0.02   |   | $ | 0.49 |   |
| Diluted                                      |   | $                                      | 0.02   |   | $ | 0.48 |   |
|                                         |   |                                   |   |   |   |
| **Weighted average shares:**                 |   |                                   |   |   |   |
| Basic                                        |   | 20,684,000                             |   | 20,548,000 |   |
| Diluted                                      |   | 20,762,000                             |   | 20,633,000 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

4

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

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 

**(Dollars in Thousands)(UNAUDITED)**

 
|                                                                               |   | **THREE  MONTHS ENDED  MARCH 31,** |    |
|------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                               |   | **2004**                                |    | **2003** |   |
| **Cash flows from operating activities:**                                          |   |                                    |    |   |   |
| Net income                                                                         |   | $                                       | 436     |   | $ | 9,979 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                                    |    |   |   |
| Depreciation and amortization                                                      |   | 1,673                                   |    | 1,560 |   |
| Provision for accounts receivable reserves                                         |   | 620                                     |    | 467 |   |
| Other                                                                              |   | 751                                     |    | 415 |   |
| Changes in assets and liabilities :                                                |   |                                    |    |   |   |
| Accounts receivable                                                                |   | 18,699                                  |    | (1,317 | ) |
| Inventories—net                                                               |   | 3,844                                   |    | 4,125 |   |
| Prepaid expenses and other current assets                                          |   | (346                                    | )       | 809 |   |
| Deferred income taxes-net                                                          |   | (211                                    | )       | (191 | ) |
| Other assets                                                                       |   | 2,113                                   |    | (112 | ) |
| Accounts payable                                                                   |   | (3,165                                  | )       | (2,861 | ) |
| Accrued expenses                                                                   |   | (10,163                                 | )       | (5,415 | ) |
| Accrued income taxes                                                               |   | (2,048                                  | )       | 3,348 |   |
| Total adjustments                                                                  |   | 11,767                                  |    | 828 |   |
| Net cash provided by operating activities                                          |   | 12,203                                  |    | 10,807 |   |
| **Cash flows from investing activities:**                                          |   |                                    |    |   |   |
| Purchase of marketable securities and other investments                            |   | (138,334                                | )       | (65,950 | ) |
| Proceeds from sale of marketable securities and other investments                  |   | 234,263                                 |    | 60,326 |   |
| Proceeds from sale of property, plant and equipment                                |   | 45                                      |    | 25 |   |
| Capital expenditures                                                               |   | (723                                    | )       | (2,634 | ) |
| Net cash provided by (used in) investing activities                                |   | 95,251                                  |    | (8,233 | ) |
| **Cash flows from financing activities:**                                          |   |                                    |    |   |   |
| Proceeds from issuance of common stock                                             |   | 1,647                                   |    | 589 |   |
| Dividends paid to shareholders                                                     |   | (6,215                                  | )       | (5,754 | ) |
| Net cash (used in) financing activities                                            |   | (4,568                                  | )       | (5,165 | ) |
| Effect of exchange rate changes on cash and cash equivalents                       |   | 1,137                                   |    | 657 |   |
| Net increase (decrease) in cash and cash equivalents                               |   | 104,023                                 |    | (1,934 | ) |
| Cash and cash equivalents at beginning of period                                   |   | 81,535                                  |    | 93,513 |   |
| Cash and cash equivalents at end of period                                         |   | $                                       | 185,558 |   | $ | 91,579 |   |
| **Cash paid during the year for:**                                                 |   |                                    |    |   |   |
| Interest expense                                                                   |   | $                                       | 15      |   | $ | 1 |   |
| Income taxes                                                                       |   | $                                       | 2,237   |   | $ | 1,612 |   |

 

5

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

(Unaudited)

 

**NOTE 1 -INTERIM CONSOLIDATED FINANCIAL STATEMENTS**

 

The accompanying unauditedinterim consolidated financial statements have been prepared by Russ Berrie andCompany, Inc. and its subsidiaries (the “Company”) in accordance withaccounting principles generally accepted in the United States of America forinterim financial reporting and the instructions to the Quarterly Report onForm 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, certaininformation and footnote disclosures normally included in financial statementsprepared under generally accepted accounting principles have been condensed oromitted pursuant to such principles and regulations.  The informationfurnished reflects all adjustments, which are, in the opinion of management, ofa normal recurring nature and necessary for a fair presentation of theCompany’s consolidated financial position, results of operations and cash flowsfor the interim periods presented.  Results for interim periods are notnecessarily an indication of results to be expected for the year.

 

The Company operates in twosegments which consist of the Company’s core gift business and the Company’snon-core business.  The Company’s core business designs, manufacturesthrough third parties and markets a wide variety of gift and home décorproducts to retail stores throughout the United States and throughout the worldvia the Company’s international wholly-owned subsidiaries anddistributors.  The Company’s non-core businesses design and marketfunctional consumer products sold at comparable price points with comparablegross margins to each other and consists of the Company’s wholly-ownedsubsidiaries Sassy, Inc. and Bright of America, Inc.  These products aresold to consumers, primarily in the United States, through mass marketers.

 

Certain prior year amountshave been reclassified to conform to the 2004 presentation.

 

This Quarterly Report onForm 10-Q for the three months ended March 31, 2004 should be read inconjunction with the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

**NOTE 2 –FINANCIAL INSTRUMENTS**

 

**MARKETABLESECURITIES AND OTHER INVESTMENTS**

 

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 arecarried in the accompanying consolidated balance sheet at fair value, with thedifference between cost and fair value (unrealized gain and losses) recorded asa component of shareholders’ equity, net of tax, in Accumulated OtherComprehensive Income/Loss.  These investments consist of U.S. governmentobligations, municipal obligations, preferred stock, mutual funds and equitysecurities.  The Company liquidated, in July 2003, its equityinvestment in a limited partnership which managed a portfolio ofmortgage-backed securities to achieve returns through yield income and priceappreciation.  This investment, which had been included in OtherInvestments in the consolidated balance sheet until its liquidation, wasaccounted for using the equity method. Accordingly the Company’s proportionateshare of the limited partnership’s income amounting to non-cash income of$207,000 for the three months ended March 31, 2003 is included ininvestment and other income-net in the Consolidated Statement ofIncome. Additionally, realized gains on sales of a significant portion ofthe Company’s available-for-sale marketable securities of $1,189,000 for thethree months ended March 31, 2004 and realized gains on sales ofavailable-for-sale marketable securities of $449,000 for the three months endedMarch 31, 2003, as determined on a specific identification basis, areincluded in investment and other income, net in the Consolidated Statement ofIncome.

 

6

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Marketable securitiesconsist of the following:

 
|                        |   | **As of March 31, 2004**    |        |
|-----------------------------|--------|----------------------------------|-------------|
|                        |   | **Cost**                         |        | **Gross  Unrealized  Gain** |   | **Gross  Unrealized  (Loss)** |   | **Fair  Value** |   |
| U.S. Government obligations |   | $                                | 35,007,000  |   | $ | — |   | $ | (3,000 | ) | $ | 35,004,000 |   |
| Municipal obligations       |   | 16,629,000                       |        | 32,000 |   | (86,000 | ) | 16,575,000 |   |
| Preferred stock & other |   | 954,000                          |        | — |   | (69,000 | ) | 885,000 |   |
| Equity securities           |   | 616,000                          |        | — |   | (11,000 | ) | 605,000 |   |
| Asset Backed Securities     |   | 796,000                          |        | 1,000 |   | — |   | 797,000 |   |
|                        |   |                             |        |   |   |   |   |   |   |
| Total marketable securities |   | $                                | 54,002,000  |   | $ | 33,000 |   | $ | (169,000 | ) | $ | 53,866,000 |   |
|                        |   |                             |        |   |   |   |   |   |   |
|                        |   | **As of December 31, 2003** | ** **  |
| U.S. Government obligations |   | $                                | 23,874,000  |   | $ | 23,000 |   | $ | (148,000 | ) | $ | 23,749,000 |   |
| Municipal obligations       |   | 98,440,000                       |        | 131,000 |   | (140,000 | ) | 98,431,000 |   |
| Preferred stock & other |   | 7,946,000                        |        | 225,000 |   | (68,000 | ) | 8,103,000 |   |
| Equity securities           |   | 12,955,000                       |        | 332,000 |   | (140,000 | ) | 13,147,000 |   |
| Asset Backed Securities     |   | 7,082,000                        |        | 12,000 |   | (9,000 | ) | 7,085,000 |   |
|                        |   |                             |        |   |   |   |   |   |   |
| Total marketable securities |   | $                                | 150,297,000 |   | $ | 723,000 |   | $ | (505,000 | ) | $ | 150,515,000 |   |

 

**NOTE 3 -EARNINGS PER SHARE**

 

A reconciliation of weightedaverage common shares outstanding to weighted average common shares outstandingassuming dilution is as follows:

 
|                                                                       |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                       |   | **2004**                                |   | **2003** |   |
|                                                                       |   |                                    |   |   |   |
| Weighted average common shares outstanding                                 |   | 20,684,000                              |   | 20,548,000 |   |
|                                                                       |   |                                    |   |   |   |
| Dilutive effect of common shares issuable under outstanding stock  options |   | 78,000                                  |   | 85,000 |   |
| Weighted average common shares outstanding assuming dilution               |   | 20,762,000                              |   | 20,633,000 |   |

 

Stock options outstanding atMarch 31, 2004 and March 31, 2003 to purchase 186,000 and 193,000 ofcommon stock, respectively, were not included in the computation of earningsper common share assuming dilution for such period because the options’exercise prices were greater than the average market price of the common shares.

 

7

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**NOTE 4 -DIVIDENDS**

 

Cash dividends of$6,215,000 ($0.30 per share) were paid on March 26, 2004 toshareholders of record of the Company’s Common Stock on March 12,2004. Cash dividends of $5,754,000 ($0.28 per share) were paid onMarch 28, 2003 to shareholders of record of the Company’s Common Stock onMarch 14, 2003. See Note 13 with respect to the declaration of aspecial $ 7.00 per common share dividend.

 

**NOTE 5 -COMPREHENSIVE INCOME**

 

Comprehensive Income,representing all changes in Shareholders’ equity during the period other thanchanges resulting from the issuance or repurchase of the Company’s common stockand payment of dividends, is reconciled to net income for the three monthsended March  31, 2004 and 2003 as follows:

 
|                                                                          |   | **Three  Months Ended  March 31,** |      |
|-------------------------------------------------------------------------------|--------|-----------------------------------------|-----------|
|                                                                          |   | **2004**                                |      | **2003** |   |
| Net income                                                                    |   | $                                       | 436,000   |   | $ | 9,979,000 |   |
| Other comprehensive income (loss), net of tax:                                |   |                                    |      |   |   |
| Foreign currency translation adjustments                                      |   | 1,541,000                               |      | 724,000 |   |
|                                                                          |   |                                    |      |   |   |
| Net unrealized (loss) on securities available-for-sale                        |   | (255,000                                | )         | (335,000 | ) |
| Net unrealized gain on foreign currency forward exchange contracts  and other |   | 109,000                                 |      | 347,000 |   |
| Other comprehensive income                                                    |   | 1,395,000                               |      | 736,000 |   |
|                                                                          |   |                                    |      |   |   |
| Comprehensive income                                                          |   | $                                       | 1,831,000 |   | $ | 10,715,000 |   |

 

**NOTE 6 –LITIGATION AND COMMITMENTS**

 

In the ordinary course ofits business, the Company is party to various copyright, patent and trademarkinfringement, unfair competition, breach of contract, customs, employment andother legal actions incidental to its business, as plaintiff or defendant. Inthe opinion of management, the amount of ultimate liability with respect tothese actions will not materially adversely affect the consolidated results ofoperations, financial condition or cash flows of the Company.

 

An action was commencedagainst the Company on August 22, 2001, in the United States DistrictCourt, District of New Jersey, by Dam Things from Denmark (a/k/a Troll CompanyApS.), alleging, among other things, copyright infringement by the Company ofthe plaintiff’s reinstated United States copyrights for its troll designs,unfair competition under common law and violation of Danish and U.S. copyrightsconstituting copyright infringement under the laws of the People’s Republic ofChina. The plaintiff was seeking, among other things, injunctive reliefprohibiting the Company from continuing to offer for sale its troll products,cancellation of the Company’s U.S. copyright registrations with respect to itsvarious troll products, as well as unspecified damages and attorney’s fees andexpenses. On February 28, 2004,the parties to this litigation executed a worldwide settlementagreement, pursuant to which, among other things, (i) the parties haveexecuted and filed with the appropriate court a stipulation and order ofdismissal of the lawsuit with prejudice, (ii) the Company paid $3,000,000to the plaintiff, which amount was accrued as of December 31, 2003,(iii) the Company assigned to plaintiff any rights it has in the trademark“Good Luck Troll”, as well as any other trademarks relating to the Company’stroll products (exclusive of trademarks or designations in the word “Russ”) aswell as relevant copyright registrations owned by the Company to its trollproducts, (iv) transferred its remaining inventory of troll products tothe plaintiff, and (v) the Company agreed to refrain from making, using,or selling any work that is substantially similar to the Company’s trollproducts. The Company does not believe that the

 

8

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terms of the settlementagreement or the resolution of this action will have a material adverse impacton the consolidated financial condition of the Company.

 

The Company entered intoletter agreements, dated January 5, 2004, which superceded previous letteragreements dated July, 2, 2003, with each of eleven employees of the Company,with respect to the payment of a special cash bonus to such employee in theevent that a change in control (as defined under the Company’s Change inControl Severance Plan) occurred on or before April 30, 2004. Such bonusesare payable only in the event that the relevant officer remained employed bythe Company through the consummation of such transaction. The aggregatepotential amount of the bonuses that could be payable by the Company under allsuch letter agreements equals $1,450,000. See Note 13 for information regardingthe termination of contingent payment obligations under these letteragreements.

 

**NOTE 7 –SEGMENTS OF THE COMPANY AND RELATED INFORMATION**

 

The Company operates in twosegments which consist of the Company’s core gift business and the Company’snon-core business. This segmentation of the Company’s operations reflects howthe Company’s Chief Executive Officer currently views the results ofoperations.  There are no intersegment revenues to eliminate.

 

The Company’s core businessdesigns, manufactures through third parties and markets a wide variety of giftand home décor products to retail stores throughout the United States andthroughout the world via the Company’s international wholly-owned subsidiariesand distributors.  The Company’s non-core business designs and marketsfunctional consumer products sold at comparable price points with comparablegross margins to each other and consists of the Company’s wholly-ownedsubsidiaries, Sassy, Inc. and Bright of America, Inc.  The products aresold to consumers, primarily in the United States, through mass marketers.

 
|                       |   | **Three  Months Ended  March 31,** |       |
|----------------------------|--------|-----------------------------------------|------------|
|                       |   | **2004**                                |       | **2003** |   |
| Core:                      |   |                                    |       |   |   |
| Net sales                  |   | $                                       | 51,356,000 |   | $ | 73,111,000 |   |
| Income before income taxes |   | (961,000                                | )          | 13,190,000 |   |
|                       |   |                                    |       |   |   |
| Non-core:                  |   |                                    |       |   |   |
| Net Sales                  |   | 14,357,000                              |       | 14,440,000 |   |
| Income before income taxes |   | 1,586,000                               |       | 1,749,000 |   |
|                       |   |                                    |       |   |   |
| Consolidated:              |   |                                    |       |   |   |
| Net Sales                  |   | 65,713,000                              |       | 87,551,000 |   |
| Income before income taxes |   | 625,000                                 |       | 14,939,000 |   |
|                            |        |                                         |            |  |  |  |  |

 

Additionally, total assetsof each segment were as follows:

 
|     |   | **March 31,  2004** |        | **December 31,  2003** |   |
|----------|--------|--------------------------|-------------|-----------------------------|--------|
|     |   |                     |        |                        |   |
| Core     |   | $                        | 372,653,000 |                        | $      | 388,207,000 |   |
| Non-core |   | 71,982,000               |        | 74,541,000                  |   |
|     |   |                     |        |                        |   |
| Total    |   | $                        | 444,635,000 |                        | $      | 462,748,000 |   |

 

9

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**NOTE 8—INVESTMENTAND OTHER INCOME – NET**

 

The significant componentsof investment and other income—net consist of the following:

 
|                               |   | **Three  Months Ended  March 31,** |      |
|------------------------------------|--------|-----------------------------------------|-----------|
|                               |   | **2004**                                |      | **2003** |   |
| Investment income                  |   | $                                       | 2,299,000 |   | $ | 1,829,000 |   |
| Interest (expense)                 |   | (15,000                                 | )         | (1,000 | ) |
| Foreign currency transactions, net |   | (415,000                                | )         | 234,000 |   |
| Other                              |   | 94,000                                  |      | 37,000 |   |
| Total                              |   | $                                       | 1,963,000 |   | $ | 2,099,000 |   |

 

**NOTE 9 -ACCOUNTING FOR STOCK OPTIONS**

 

The Company follows thedisclosure provisions of SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure, an amendment of FASB Statement No. 123”and, therefore, accounts for its stock option grants 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 compensationcost has been recognized for the options granted by the Company except for theapplication of Financial Accounting Interpretation No. 44, “Accounting forCertain Transactions Involving Stock Compensation”, which resulted in non-cashexpense of $30,000 and non-cash income of $55,000 during the three months endedMarch 31, 2004 and March 31, 2003, respectively, which is included inselling, general and administrative expenses in the Consolidated Statement ofIncome.  These charges relate only to the options granted during 2000 thatwere repriced as of February 29, 2000 upon approval of the Board ofDirectors and Shareholders.  Had compensation cost for the Company’s stockgrants been determined based on the fair value recognition provisions of SFASNo. 123 at the grant date, in the three months ended March 31, 2004and 2003, the Company’s net income and earnings per share would have beenreduced to the pro forma amounts indicated below:

 
|                                                                                                    |   | **Three  Months Ended  March 31,** |    |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                                                    |   | **2004**                                |    | **2003** |   |
| Net income-as reported                                                                                  |   | $                                       | 436,000 |   | $ | 9,979,000 |   |
| Deduction for stock-based compensation expense determined under fair  value method net of tax-pro forma |   | 187,000                                 |    | 253,000 |   |
|                                                                                                    |   |                                    |    |   |   |
| Net income-pro forma                                                                                    |   | 249,000                                 |    | 9,726,000 |   |
| Earnings per share (basic) - as reported                                                                |   | 0.02                                    |    | 0.49 |   |
| Earnings per share (basic) – pro forma                                                             |   | 0.01                                    |    | 0.47 |   |
| Earnings per share (diluted) – as reported                                                         |   | 0.02                                    |    | 0.48 |   |
| Earnings per share (diluted) – pro forma                                                           |   | 0.01                                    |    | 0.47 |   |
|                                                                                                         |        |                                         |         |  |  |  |  |

 

The fair value of eachoption granted by Company is estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions used for allgrants:

 

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|                                                           |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                           |   | **2004**                                |   | **2003** |   |
| Dividend yield                                                 |   | 3.52                                    | %      | 3.22 | % |
| Risk-free interest rate                                        |   | 2.40                                    | %      | 2.09 | % |
| Volatility                                                     |   | 23.56                                   | %      | 34.48 | % |
| Expected life (years)                                          |   | 3.9                                     |   | 3.4 |   |
| Weighted average fair value of options granted during the year |   | $                                       | 5.06   |   | $ | 7.34 |   |
|                                                                |        |                                         |        |  |  |  |  |

 

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**NOTE 10 -FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS**

 

Certain of the Company’sforeign subsidiaries periodically enter into foreign currency forward exchangecontracts (“Forward Contracts”) to hedge inventory purchases, both anticipatedand firm commitments, denominated in the United States dollar. One of theCompany’s domestic subsidiaries periodically enters into Forward Contracts tohedge inventory purchases, both anticipated and firm commitments, denominatedin the Euro. 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.  At March 31, 2004, the Company’s ForwardContracts have expiration dates which range from one to nine months.

 

Since there is a directrelationship between the Forward Contracts and the currency denomination of theunderlying transaction, such Forward Contracts are highly effective in hedgingthe cash flows of certain of the Company’s foreign subsidiaries related totransactions denominated in the United States dollar and certain of theCompany’s domestic subsidiaries related to transaction denominated in theEuro.  These Forward Contracts meet the criteria for cash flow hedgeaccounting treatment and accordingly, gains or losses are included in othercomprehensive income (loss) and are recognized in cost of sales based on theturnover of inventory.

 

**NOTE 11 -RECENTLY ISSUED ACCOUNTING STANDARDS**

 

***Recently Issued Accounting Standards***

 

On March 31, 2004, theFinancial Accounting Standards Board (FASB) issued a proposed Statement, Share-BasedPayment that addresses the accounting for share-based awards to employees,including employee-stock-purchase-plans (ESPPs). The FASB formally proposed torequire companies to recognize the fair value of stock options and otherstock-based compensation to employees. The proposed Statement would eliminatethe ability to account for share-based compensation transactions using theintrinsic value method under APB Opinion No. 25, Accounting for Stock Issued toEmployees, and generally would require instead that such transactions beaccounted for using a fair-value-based method. The proposed requirements in theexposure draft would be effective for public companies as of the beginning ofthe first fiscal year beginning after December 15, 2004. The Company currentlyaccounts for its stock-based compensation plans in accordance with APB OpinionNo. 25. Therefore, if the FASB adopts this proposed statement, as currentlydrafted, the Company will have to recognize fair value of the stock basedcompensation in the consolidated statement of income rather than disclosing thepro forma impact of the stock based compensation as the Company currently doesin the footnote 9.

 

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**NOTE 12—BARTER TRANSACTION**

 

During 2003, the Companyentered into a barter transaction, exchanging inventory with a net book valueof $1,192,000 for future barter credits to be utilized on future advertising,freight and other goods and services. Such credits are redeemable for apercentage of various goods and services purchased from certain vendors. TheCompany evaluates the recoverability of such assets on a quarterly basis andexpects to utilize all credits recorded during 2003 prior to their expirationin February 2009.

 

The credits recorded, whichtotaled $1,683,000 at March 31, 2004, were recorded at the fair value ofthe inventory exchanged, in accordance with APB 29, “Accounting forNon-Monetary Transactions” and EITF 93-11 “Accounting for Barter Transactions”and are included in other assets in the Company’s Consolidated Balance Sheet.

 

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**NOTE 13 – SUBSEQUENT EVENTS**

 

On April 12, 2004, theCompany declared a special cash dividend in the amount of $7.00 per commonshare payable on May 28, 2004 to shareholders of record on May 14, 2004.

 

In addition, onApril 12, 2004, the Company announced the termination of itspreviously-announced exploration of strategic alternatives.

 

As no change of control (asdefined under the Company’s Change in Control Severance Plan) occurred byApril 30, 2004, the letter agreements referred to in Note 6 are of nofurther force and effect, and no amounts are payable by the Company thereunder.

 

On May 7,2004, the Company announced that the Board of Directors has authorized a cashtender offer to holders of its options, as is more fully described in theStatement on Schedule TO filed by the Company with the Securities and ExchangeCommission on such date. The tender offer has not yet commenced, but iscurrently expected to be completed in June, 2004. Assuming that all eligibleoptionholders tender all of their options in the tender offer, the cost to theCompany is not expected to exceed approximately $1,000,000, which will betreated as a compensation expense.

 

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

 

The financial and businessanalysis below provides information which the Company believes is relevant toan assessment and understanding of the Company’s consolidated financialcondition, changes in financial condition and results of operations. Thisfinancial and business analysis should be read in conjunction with theCompany’s consolidated financial statements and accompanying notes to theconsolidated financial statements set forth in Part I, Financial Information,Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q andthe Company’s Annual Report on Form 10-K for the year ended December 31,2003.

 

**OVERVIEW**

 

The Company’s revenues areprimarily derived from sales of its products, a significant portion of which isattributable to sales of products in its core segment.  The Company’s core segment has been, andcontinues to be, negatively impacted by several factors, including, but notlimited to, the continued challenging retail environment for the gift industryin the United States and certain foreign markets.  Specifically, the Company believes that the trend of decreasingsales in its core segment is due primarily to: (i) retailer consolidation,which has had a negative impact on consumer traffic and sales of the Company’sindependent retail customers in the core segment, (ii) the actions ofcompetitors in the gift industry with respect to reduced pricing and moresuccessful product development for independent retail customers, (iii) a shiftof consumer buying habits from the independent to mass market retailers and(iv) weak customer response to the Company’s new product introductions duringthe first quarter of 2004.    TheCompany is responding to these developments by (i) hiring a new, veryexperienced chief executive officer, who will commence employment byJune 1, 2004, (ii) focusing on categorizing and improving the efficiencyof its product line to better meet the changing demands of its customers andimprove its competitive position in the industry, (iii) segmenting its sellingefforts with an increased focus on national accounts and (iv) continuing tofocus on growth opportunities in its international markets and its non-corebusiness segment.

 

**SEGMENTS**

 

The Company operates in twosegments which consist of the Company’s core gift business and the Company’snon-core business. The Company’s core business designs, manufactures throughthird parties and markets a wide variety of gift and home dècor products toretail stores throughout the United States and throughout the world via theCompany’s international wholly-owned subsidiaries and distributors. TheCompany’s non-core businesses design and market functional consumer productssold at comparable price points with comparable gross margins to each other andconsists of the Company’s wholly-owned subsidiaries Sassy, Inc. and Brightof America, Inc. These products are sold to consumers, primarily in theUnited States, through mass marketers. See also Item 1, “Business” of theCompany’s Annual Report on Form 10-K for the year ended December 31, 2003for further discussion of the Company’s products and business.

 

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**RESULTS OF OPERATIONS—THREE MONTHS ENDEDMARCH 31, 2004 AND 2003**

 

The Company’s consolidatednet sales for the three months ended March 31, 2004 decreased 24.9% to$65,713,000 compared to consolidated net sales of $87,551,000 for the threemonths ended March 31, 2003. The net sales decline for the three monthsended March 31, 2004 was primarily attributable to the Company’s coresegment, as described below. The Company’s non-core segment remained relativelyflat for the three months ended March 31, 2004 as compared to the threemonths ended March 31, 2003. See “Overview” above and the followingparagraph for a discussion of factors the Company believes contributed to thedecline in net sales.

 

The Company’s core segment’snet sales for the three months ended March 31, 2004 decreased 29.8% to$51,356,000 compared to core net sales of $73,111,000 for the three monthsended March 31, 2003, due primarily to reduced customer bookings, whichwere down approximately 15% compared to the prior year and a lower open orderbacklog entering 2004 compared to the backlog entering 2003. The Companyattributes the customer bookings decline to weak customer acceptance of its newJanuary 2004 product releases along with a continued softness in theindependent retail sales channel, as described more fully in the “Overview”above. The Company’s core segment’s international sales benefited byapproximately $3,000,000 from favorable foreign exchange rates in the firstthree months of 2004. The Company’s non-core segment’s net sales for the threemonths ended March 31, 2004 remained relatively flat at $14,357,000compared to non-core net sales of $14,440,000 for the three months endedMarch 31, 2003.

 

Consolidated cost of saleswere 49.6% of consolidated net sales for the three months ended March 31,2004 as compared to 45.6% for the three months ended March 31,2003. Cost of sales for the Company’s core segment were 44.7% of net salesfor such segment for the three months ended March 31, 2004 as compared to41.7% of net sales for the three months ended March 31, 2003, primarilydue to lower margins on sales of certain of the Company’s core product lineconcepts. Cost of sales for the Company’s non-core segment were 67.3% of netsales for such segment for the three months ended March 31, 2004 ascompared to 65.3% of net sales for the three months ended March 31, 2003,primarily due to a change in the mix of products sold.

 

Consolidated selling,general and administrative expense was $34,441,000 or 52.4% of consolidated netsales for the three months ended March 31, 2004 compared to $34,819,000 or39.8% of consolidated net sales for the three months ended March 31, 2003,a decrease of $378,000 or 1.1%. This decrease was primarily due to decreases inselling related expenses and litigation costs, offset, in part by increases dueto the impact of changes in foreign currency exchange rates in the amount of$1,523,000.  The decrease in selling,general and administrative expense was not as significant as the decrease inconsolidated net sales because certain of the Company's costs are fixed in theshort term.  The increase in expenses asa percentage of net sales is due primarily to the decrease in net sales for thefirst three months of 2004 as compared to the first three months of 2003.

 

Consolidated investment andother income of $1,963,000 for the three months ended March 31, 2004compares to $2,099,000 for the three months ended March 31, 2003. Thisdecrease was primarily the result of foreign exchange losses of $415,000 in thethree months ended March 31, 2004 as compared to foreign exchange gains of$234,000 in the three months ended March 31, 2003, offset, in part, byincreased realized gains on sales of a significant portion of the Company’savailable-for-sale marketable securities. (See Note 2 of the Notes to theConsolidated Financial Statements).

 

The consolidated provisionfor income taxes as a percent of consolidated income before taxes for the threemonths ended March 31, 2004 was 30.2% compared to 33.2% for the threemonths ended March 31, 2003. The decrease in the effective income tax rateis due primarily to a reduction in the Company’s valuation allowance fordeferred tax assets, offset, in part, by increased state tax provisionsrelative to income before income taxes.

 

Consolidated net income forthe three months ended March 31, 2004 was $436,000 compared toconsolidated net income of $9,979,000 for the three months ended March 31,2003, representing a decrease of 95.6% or 95.8% per diluted share. The decreasein consolidated net income was primarily the result of lower sales andresultant decreased gross profit in the Company’s core segment and lowerinvestment and other income-net, offset, in part, by lower selling, general andadministrative expense and a lower provision for income taxes, all as describedabove.

 

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**Liquidity and Capital Resources**

 

As of March 31, 2004,the Company had cash, cash equivalents and marketable securities of$239,424,000 compared to cash, cash equivalents, marketable securities andother investments of $232,050,000 at December 31, 2003. As ofMarch 31, 2004 and December 31, 2003, working capital was$334,096,000 and $333,952,000, respectively.

 

As of March 31, 2004and December 31, 2003, the Company had marketable securities $53,866,000and $150,515,000 respectively, included in the amounts above. This decrease isprimarily a result of the Company’s sale of a significant portion of theCompany’s available-for-sale marketable securities during the three monthsended March 31, 2004. As of March 31, 2004, marketable securitiesinvestments consisted of U.S. government obligations, municipal obligations,preferred stock, mutual funds and equity securities. For more informationregarding financial instruments, see Note 2 of the Notes to Consolidated FinancialStatements.

 

Cash and cash equivalentsincreased $104,023,000 during the three months ended March 31, 2004 ascompared to a decrease in cash and cash equivalents of $1,934,000 for the threemonths ended March 31, 2003. Net cash provided by operating activities wasapproximately $12,203,000 during the three months ended March 31, 2004 ascompared to approximately $10,807,000 during the three months endedMarch 31, 2003. This increase of $1,396,000 was due primarily to theincrease of cash provided by the collection of accounts receivable offset inpart by the decrease in net income and the increase in the amounts paid foraccrued expenses and accrued income taxes. Net cash provided by investing activities was approximately $95,251,000for the three months ended March 31, 2004 as compared to net cash used ininvesting activities of approximately $8,233,000 for the three months endedMarch 31, 2003. This increase of approximately $103,484,000 was dueprimarily to the receipt of proceeds from sales of marketable securities in thethree months ended March 31, 2004 as compared to the purchase ofmarketable securities in the three months ended March 31, 2003. Net cashused in financing activities of $4,568,000 and $5,165,000 for the three monthsended March 31, 2004 and 2003, respectively, consisted of dividends paidto shareholders, described below, offset, in part, by the proceeds from theissuance of the Company’s common stock due to the exercise of stock options.

 

During the three monthsended March 31, 2004, the Company paid approximately $2,237,000 for incometaxes. The Company currently expects that its cash flows will exceed any incometax payments during 2004 by a significant amount.

 

Working capital requirementsduring the three months ended March 31, 2004 were met entirely throughinternally generated funds. The Company anticipates capital expenditurerequirements for 2004 to be approximately $5,000,000, primarily for continuedsystem implementation and development costs. The Company remains in a liquidposition and believes that the resources available from cash and cashequivalents, marketable securities, operations and bank lines of credit aresufficient to meet the foreseeable requirements of its business.

 

Cash dividends of$6,215,000 ($0.30 per share) were paid on March 26, 2004 toshareholders of record of the Company’s Common Stock on March 12,2004. Cash dividends of $5,754,000 ($0.28 per share) were paid onMarch 28, 2003 to shareholders of record of the Company’s Common Stock onMarch 14, 2003. Effective February 2004, the quarterly dividendrate was increased from $0.28 per common share to $0.30 per common share. TheBoard of Directors will review its dividend policy from time to time anddeclaration of dividends will remain within its sole discretion.

 

On April 12, 2004, theCompany declared a special dividend in the amount of $7.00 per common share,payable on May 28, 2004 to shareholders of record on May 14, 2004 for anaggregate payment of approximately $145,000,000, based on the number of sharesoutstanding as of April 30, 2004. The Company intends to pay the special dividend out of its liquidassets. The Company believes that it will remain in a liquid position after thepayment of this special dividend, such that its resources available from cashand cash equivalents, marketable securities, operations and bank lines ofcredit will continue to allow it to meet the foreseeable requirements of itsbusiness.

 

See Note 13 ofNotes to Consolidated Financial Statements for a description of the Board ofDirector's authorization of a cash tender offer to holders of Company options.Management believes that the tender offer will not have a material impact onthe liquidity of the Company.

 

The Company enters intoforward exchange contracts, principally to manage the economic currency risksassociated with the purchase of inventory by its European, Canadian andAustralian subsidiaries in the core segment and one of the subsidiaries in thenon-core segment. Gains and losses related to such contracts were not materialto its results of operations or cash flows. The Company does not anticipate anymaterial adverse impact on its results of operations or financial position fromthese contracts.

 

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The Board of Directors hadpreviously authorized the Company to repurchase 7,000,000 shares of commonstock. As of March 31, 2004, 5,643,200 shares have been repurchased sincethe beginning of the Company’s stock repurchase program in March 1990. Duringthe three months ended March 31, 2004, the Company did not repurchase anyshares.

 

 The Company hasentered into certain transactions with related parties which are disclosed inNote 13 of the Notes to Consolidated Financial Statements and  ITEM 13 “CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS” of the Company’s Annual Report on Form 10-K for the yearended December 31, 2003.

 

The Company is dependentupon information technology systems in many aspects of its business. TheCompany is continuing implementation of an Enterprise Resource Planning (“ERP”)system for the Company’s core businesses, which began in 2002. In 2002 and2003, the Company successfully completed the replacement of its warehousemanagement system in its South Brunswick, New Jersey and Petaluma, California,Canadian and European distribution facilities in addition to the implementationof the purchasing module of its new ERP system worldwide. The Company’s priorcustom software that had been utilized to operate and manage its business andother third party software systems are being replaced using a strategic andphased approach. The Company’s worldwide headquarters in the United Statescompleted the implementation of the finance module of the new ERP system in thefirst quarter of 2003 and transitioned to the order management and inventorymodules during the second quarter of 2003. During 2003 and continuing in 2004,the Company’s international subsidiaries began and continue to phase-in certainaspects of the Company’s new ERP system and the transition to order management,inventory and finance modules is now anticipated by the end of the secondquarter of 2005. This extended timetable is meant to continue to enable theCompany to enhance its proficiency in utilizing the new system, to help ensurethe efficiency of the international implementations and allow the Company tomeet its obligations regarding internal controls as required bySection 404 of the Sarbanes-Oxley Act of 2002. The Company has experiencedcertain startup issues but has not experienced any significant businessdisruptions related to the replacement of these systems.

 

The Company is subject tolegal proceedings and claims arising in the ordinary course of its businessthat the Company believes will not have a material adverse impact on theCompany’s results of operations and cash flows. See Note 6 of the Notes toConsolidated Financial Statements for information regarding the settlement ofspecific litigation.

 

In connection with theCompany’s continuing expansion of its operations in the People’s Republic ofChina (“PRC”), the Company completed a voluntary review in 2003 of theactivities of its offices in the PRC to assess their compliance with applicablelaws and regulations. As a result of this review, management became aware of somepotential operational and tax compliance issues under applicable PRC laws andregulations and continues to take appropriate corrective actions including theestablishment of a new subsidiary in the PRC effective January 2004. As aresult, although the relevant PRC authorities have broad discretion withrespect 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.

 

Consistent with its pastpractices and in the normal course of its business, the Company regularlyreviews acquisition opportunities of varying sizes. There can be no assurance,however, that any discussions arising in connection therewith will result indefinitive purchase agreements and, if they do, what the terms or timing of anysuch agreements would be.

 

The Board of Directors hasdiscontinued the exploration of various strategic alternatives that hadpreviously been reported in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2003. See Note 13 of the Notes to ConsolidatedFinancial Statements.

 

As no change of control (asdefined under the Company’s Change in Control Severance Plan) occurred byApril 30, 2004, the letter agreements referred to in Note 6 of the Note toConsolidated Financial Statements are of no further force and effect, and noamounts are payable by the Company thereunder.

 

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**Contractual Obligations**

 

As of March 31, 2004,there have been no material changes outside the ordinary course of business inthe Company’s contractual obligations as described under the caption“Contractual Obligations” of Item 7 of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2003.

 

**Off Balance Sheet Arrangements**

 

As of March 31, 2004,there have been no material changes in the information provided under thecaption “Off Balance Sheet Arrangements” of Item 7 of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2003.

 

**CRITICAL ACCOUNTING POLICIES**

 

The SEC has issueddisclosure advice regarding “critical accounting policies”, defined asaccounting policies that management believes are both most important to theportrayal of the Company’s financial condition and results and requireapplication of management’s most difficult, subjective or complex judgments,often as a result of the need to make estimates about the effects of mattersthat are inherently uncertain.

 

Management is required tomake certain estimates and assumptions during the preparation of itsconsolidated financial statements that effect the reported amounts of assets,liabilities, revenue and expenses, and related disclosure of contingent assetsand liabilities. Estimates and assumptions are reviewed periodically, andrevisions made as determined to be necessary by management. There have been nomaterial changes to the Company’s significant accounting estimates andassumptions or the judgments affecting the application of such estimates andassumptions during the period covered by this report. The Company’s significantaccounting estimates described below have historically been and are expected toremain reasonably accurate, but actual results could differ from thoseestimates under different assumptions or conditions.

 

Note 2 of the Notes toConsolidated Financial Statements of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2003 contains a summary of the significantaccounting policies used in the preparation of the Company’s consolidatedfinancial statements. The following, however, is a discussion of thoseaccounting policies which management considers to be “critical” within the SECdefinition discussed above.

 

**Marketable Securities and Other Investments**

 

The Company has asignificant amount of marketable securities, all of which are considered asavailable-for-sale investments, in accordance with SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities”. Accordingly,these investments, except for the investment in the limited partnership, whichwas liquidated in July 2003, are carried in the accompanying consolidatedbalance sheet at fair value, with the difference between cost and fair valuerecorded as a component of shareholders’ equity, net of tax, in AccumulatedOther Comprehensive Income/Loss. This investment, which had been included inOther Investments in the consolidated balance sheet until its liquidation, wasaccounted for using the equity method. Accordingly the Company’s proportionateshare of the limited partnership’s income amounting to non-cash income of$207,000 for the three months ended March 31, 2003 is included ininvestment and other income-net in the Consolidated Statement of Income. Realizedgains and losses on sales of investments, as determined on a specificidentification basis, are included in the Consolidated Statement of Income. Asof March 31, 2004, marketable securities were comprised primarily of U.S.government obligations, municipal obligations, preferred stock, mutual fundsand other equity securities. The Company’s marketable securities are subject tomarket fluctuations based largely, but not exclusively, on the securities’sensitivity to changes in interest rates.

 

**Accounts Receivable, Trade and Revenue Recognition**

 

In the normal course ofbusiness, the Company extends credit to customers which satisfy establishedcredit criteria. The Company believes that it does not have a significantconcentration of credit risk due to the significant diversity of its customerbase. Accounts receivable, trade, as shown on the Consolidated Balance Sheet,is net of allowances, discounts and estimated bad debts. An allowance fordoubtful accounts is determined through analysis of the aging of accountsreceivable at the date of the

 

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financial statements,assessments of collectibility based on historical trends and an evaluation ofthe impact of current and projected economic conditions. If such historicaltrends or economic conditions deteriorate the results could differ from theCompany’s estimates.

 

The Company recognizesrevenue in accordance with SEC Staff Accounting Bulletin No. 101, RevenueRecognition in Financial Statements (SAB 101), as amended. SAB 101 requiresthat four basic 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, net of provisions for estimates of sales discounts, returns andallowances; and (4) collectibility is reasonably assured.

 

Determination of criteria(4) is based on management’s judgments regarding the collectibility ofthose revenues.

 

**Inventory**

 

The Company values inventoryat the lower of cost (weighted average) or market value. The Company regularlyreviews inventory quantities on hand, by item, and records a provision forexcess inventory based primarily on the Company’s historical experience andestimated forecast of product demand using historical and recent ordering datarelative to the quantity on hand for each item. A significant decrease indemand for the Company’s products could result in an increase in the amount ofexcess inventory quantities on hand, however, the Company manages inventory andmonitors product purchasing to minimize this risk.

 

**Impairment of Long-Lived Assets**

 

In accordance with SFASNo. 144, long-lived assets, such as property, plant, and equipment, andpurchased intangibles subject to amortization, are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets to be held andused is measured by a comparison of the carrying amount of an asset toestimated undiscounted future cash flows expected to be generated by the asset.If the carrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount of theasset exceeds the fair value of the asset, which is generally based ondiscounted cash flows. If such actual future cash flows are less than theestimated future cash flows, certain of the Company’s long-lived assets couldbe impaired.

 

Goodwill and intangibleassets not subject to amortization are tested annually for impairment, and aretested for impairment more frequently if events and circumstances indicate thatthe asset might be impaired. An impairment loss is recognized to the extentthat the carrying amount exceeds the asset’s fair value. Based on the Company’sannual test performed in 2003 there was no impairment, however, if actualfuture cash flows are less than the estimated future cash flows, the Company’sgoodwill and intangible assets could be impaired.

 

**Accrued Liabilities**

 

The preparation of theCompany’s consolidated financial statements in conformity with generallyaccepted accounting principles in the United States requires management to makecertain estimates and assumptions that affect the reported amounts ofliabilities and disclosure of contingent liabilities at the date of thefinancial statements. Such liabilities include, but are not limited to,accruals for various legal matters, tax accruals and valuation allowances fordeferred tax assets. The settlement of the actual liabilities could differ fromthe estimates included in the Company’s consolidated financial statements.

 

**Recently Issued Accounting Standards**

 

See Note 11 of the Notes toConsolidated Financial Statements for a description of recently issuedaccounting standards including the respective dates of adoption and effects onresults of operations and financial condition.

 

**Forward-Looking Statements**

 

This Quarterly Report onForm 10-Q contains certain forward-looking statements. Additional writtenand oral forward-looking statements may be made by the Company from time totime in Securities and

 

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Exchange Commission (SEC)filings and otherwise. The Private Securities Litigation Reform Act of 1995provides a safe-harbor for forward-looking statements. These statements may beidentified by the use of forward-looking words or phrases including, but notlimited to, “anticipate”, “believe”, “expect”, “intend”, “may”, “planned”,“potential”, “should”, “will” or “would”. The Company cautions readers thatresults predicted by forward-looking statements, including, without limitation,those relating to the Company’s future business prospects, revenues, workingcapital, liquidity, capital needs, interest costs and income are subject tocertain risks and uncertainties that could cause actual results to differmaterially from those indicated in the forward-looking statements. Specificrisks and uncertainties include, but are not limited to, the Company’s abilityto continue to manufacture its products in the Far East, the seasonality ofrevenues, the actions of competitors, ability to increase production capacity,price competition, the effects of government regulation, results of any enforcementaction by the People’s Republic of China (“PRC”) authorities with respect tothe Company’s PRC operations, the resolution of various legal matters, possibledelays in the introduction of new products, customer acceptance of products,issues related to the Company’s new business ventures, changes in foreigncurrency exchange rates, issues related to the Company’s computer systems, thecurrent and future outlook of the global retail market, and other factors.

 

**ITEM 3.  QUANTITATIVE****AND QUALITATIVE DISCLOSURES****ABOUTMARKET RISK**

 

As of March 31, 2004,there have been no material changes in the Company’s market risks as describedin the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

**ITEM 4.  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 ended March 31, 2004 that has materially affected, oris reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**PART II -OTHER INFORMATION**

 

**ITEM 1.  LEGAL****PROCEEDINGS**

 

A description of thesettlement of litigation commenced against the Company by Dam Things fromDenmark (a/k/a/ troll Company ApS) with respect to the Company’s troll productsis set forth in Part I, Financial Information, Item 1, “Notes to ConsolidatedFinancial Statements, Note 6 — Litigation and Commitments,” of thisQuarterly Report on Form 10-Q, which is incorporated herein by referencethereto.

 

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

 
| a)     |   | Exhibits to this Quarterly  Report on Form 10-Q.                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                  |
|   |   | 3.2(l)  Amendment  to revised By-Laws of the Company adopted April 7, 2004.                            |
|   |   |                                                                                                                  |
|   |   | 10.86  Agreement  dated as of April 9, 2004 between Russ Berrie and Company Inc. and  Andrew R. Gatto. |
|   |   |                                                                                                                  |
|   |   | 31.1    Certification of CEO required by Section 302 of the Sarbanes Oxley Act  of 2002.               |

 

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|   |   | 31.2    Certification of CFO required by Section 302 of the Sarbanes Oxley Act  of 2002.                                                                                                                                                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                            |
|   |   | 32.1    Certification of CEO required by Section 906 of the Sarbanes Oxley Act  of 2002.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                            |
|   |   | 32.2    Certification of CFO required by Section 906 of the Sarbanes Oxley Act  of 2002.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                            |
| b)     |   | During the quarter ended  March 31, 2004, the Company filed a current report on Form 8-K on  February 12, 2004 with respect to the issuance of a press release covering  results of operations and financial condition for the fourth quarter and year  ended December 31, 2003. |
|        |        |                                                                                                                                                                                                                                                                                                 |  |

 

**Items 2, 3,4 and 5 are not applicable and have been omitted.**

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   | RUSS BERRIE AND COMPANY,  INC. |                                        |
|--------|--------------------------------|---------------------------------------------|
|   | (Registrant)                   |                                        |
|   |                           |
|   |                           |                                        |
|   | By                             | /s/ John D. Wille                           |   |
| Date:  | May 7, 2004               |                                        |   | John D. Wille |
|   |                           |                                        |
|   |                           |                                        |
|   |                           | Vice President and  Chief Financial Officer |
|        |                                |                                             |  |  |  |  |

 

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