**RUSS****Ò**

**Russ Berrie and Company, Inc.**

**111 Bauer Drive, Oakland, NJ 07436**

**(201) 337-9000 (800) 631-8465**

 

 

 

August 7, 2002

 

 

 

Jonathan G.Katz

Secretary

Securities andExchange Commission

450 FifthStreet, N.W.

Washington,D.C.  20549

 

Re:  Russ Berrie and Company, Inc. 3⁄4Certification of Chief Executive Officer and Chief Financial Officer requiredby the Sarbanes-Oxley Act of 2002.

 

Dear SecretaryKatz:

 

Enclosed onbehalf of the Chief Executive Officer and Chief Financial Officer of RussBerrie and Company, Inc., please find one (1) original and one (1) copy of eachof the following documents:

 

1.  Certification of Chief Executive OfficerRequired by the Sarbanes-Oxley Act of 2002; and

 

2.  Certification of Chief Financial OfficerRequired by the Sarbanes-Oxley Act of 2002.

 

Please filestamp the enclosed copy of this letter and the enclosed copy of eachCertification and return them to my attention.

 

 
| Very truly yours,       |
|-------------------------|
|                    |
|                    |
| /s/  John D. Wille |
| John D. Wille           |
| Vice President and      |
| Chief Financial Officer |

 

 

----

 

 

**RUSS****Ò**

**Russ Berrie and Company, Inc.**

**111 Bauer Drive, Oakland, NJ 07436**

**(201) 337-9000 (800) 631-8465**

 

 

 

 

**CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

**REQUIRED BY THE SARBANES-OXLEY ACT OF 2002**

 

 

In connectionwith the quarterly report of Russ Berrie and Company, Inc. (the"Company") on Form 10-Q for the period ending June 30, 2002, as filedwith the Securities and Exchange Commission on the date hereof (the"Report"), I, Russell Berrie, Chief Executive Officer of the Company,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002, that:

 

1.  The Report fully complies with therequirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;and

 

2.  The information contained in the Report fairlypresents, in all material respects, the financial condition and results ofoperations of the Company.

 

August 7, 2002
| /s/  Russell Berrie |
|--------------------------|
| Russell Berrie           |
| Chief Executive Officer  |
|                     |

 

 

----

 

**CERTIFICATION OF CHIEF FINANCIAL OFFICER**

**REQUIRED BY THE SARBANES-OXLEY ACT OF 2002**

** **

In connectionwith the quarterly report of Russ Berrie and Company, Inc. (the"Company") on Form 10-Q for the period ending June 30, 2002, as filedwith the Securities and Exchange Commission on the date hereof (the"Report"), I, John Wille, Chief Financial Officer of the Company,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002, that:

 

1.  The Report fully complies with therequirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;and

 

2.  The information contained in the Reportfairly presents, in all material respects, the financial condition and resultsof operations of the Company.

 
| August 7, 2002          |
|-------------------------|
|                    |
|                    |
| /s/  John D. Wille |
| John D. Wille           |
| Vice President and      |
| Chief Financial Officer |

 

 

 

 

 

**UNITED STATESSECURITIES 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 June 30, 2002**                                                                                                                                                                              |
|                                                                                                                                                                                                                          |
| **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 filenumber                                                                  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 sincelast 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

 

The number of sharesoutstanding of each of the registrant’s classes of common stock, as of August1, 2002 was as follows:

 
|                                  | **CLASS** |           |   |   | **OUTSTANDING  AT  AUGUST 1, 2002** |   |
|---------------------------------------|-----------|----------------|--------|--------|-------------------------------------|--------|
| **Common  Stock, $0.10 stated value** |      | **20,436,873** |

 

 

----

 

**RUSS BERRIE AND COMPANY, INC.**

 

**INDEX**

 
| **PART I – FINANCIAL  INFORMATION** |
|------------------------------------------|
|                                     |
| Item 1.                                  | Financial Statements |
|                                     |   |
| a)                                       | Consolidated Balance Sheet  as of June 30, 2002 and December 31, 2001 |
|                                     |   |
| b)                                       | Consolidated Statement  of Income for the three months and   the six months ended June 30, 2002 and 2001 |
|                                     |   |
| c)                                       | Consolidated Statement  of Cash Flows for the six months ended June 30, 2002 and 2001 |
|                                     |   |
| 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 |
|                                     |   |
| **PART II – OTHER INFORMATION**     |
|                                     |   |
| Item 1.                                  | Legal Proceedings |
|                                     |   |
| Item  4.                                 | Submission  of Matters to a Vote of Security Holders |
|                                     |   |
| Item 5.                                  | Other Information |
|                                     |   |
| Item 6.                                  | Exhibits  and Reports on Form 8-K |
|                                     |   |
| Signatures                               |

 

1

----

 

**PART 1 -FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

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

 

**CONSOLIDATED BALANCE SHEET**

 

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

**(UNAUDITED)**

 
| ** **                                                                                                                               | ** ** | **June  30,  2002** | ** ** | **December  31,  2001** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| ***ASSETS***                                                                                                                             |       |                |       |                    |       |
| Current assets                                                                                                                           |       |                |       |                    |       |
| Cash and cash equivalents                                                                                                                |       | $                   | 102,899    |                    | $          | 148,872 |   |
| Marketable securities and  other investments                                                                                             |       | 160,575             |       | 94,181                  |       |
| Accounts receivable,  trade, less allowances of $3,968 in 2002 and $3,454 in 2001                                                        |       | 53,803              |       | 63,481                  |       |
| Inventories — net                                                                                                                   |       | 35,819              |       | 37,374                  |       |
| Prepaid expenses and other  current assets                                                                                               |       | 4,261               |       | 4,550                   |       |
| Deferred income taxes                                                                                                                    |       | 6,727               |       | 6,705                   |       |
| **Total current assets**                                                                                                                 |       | 364,084             |       | 355,163                 | ** ** |
|                                                                                                                                     |       |                |       |                    |       |
| Property, plant and  equipment — net                                                                                                |       | 32,824              |       | 24,623                  |       |
| Inventories — long term,  net                                                                                                       |       | —              |       | 2,284                   |       |
| Other assets                                                                                                                             |       | 5,280               |       | 4,574                   |       |
| **Total assets**                                                                                                                         |       | $                   | 402,188    |                    | $          | 386,644 | ** ** |
|                                                                                                                                     |       |                |       |                    |       |
| ***LIABILITIES AND SHAREHOLDERS’ EQUITY***                                                                                          |       |                |       |                    |       |
| Current liabilities                                                                                                                      |       |                |       |                    |       |
| Accounts payable                                                                                                                         |       | $                   | 5,814      |                    | $          | 5,376 |   |
| Accrued expenses                                                                                                                         |       | 21,074              |       | 20,003                  |       |
| Accrued income taxes                                                                                                                     |       | 5,470               |       | 6,848                   |       |
| **Total current liabilities**                                                                                                            |       | 32,358              |       | 32,227                  | ** ** |
| Commitments and  contingencies                                                                                                           |       |                |       |                    |       |
| Shareholders’ equity                                                                                                                |       |                |       |                    |       |
| Common stock:  $.10  stated value per share; authorized 50,000,000 shares; issued 2002, 26,071,821  shares; 2001, 25,862,364 shares |       | 2,607               |       | 2,587                   |       |
| Additional paid in capital                                                                                                               |       | 78,471              |       | 73,794                  |       |
| Retained earnings                                                                                                                        |       | 398,378             |       | 392,272                 |       |
| Accumulated other  comprehensive income (loss)                                                                                           |       | 584                 |       | (4,165                  | )          |
| Unearned compensation                                                                                                                    |       | —              |       | (75                     | )          |
| Treasury stock, at cost  (5,639,314 shares at June 30, 2002 and 5,632,014 shares at December 31, 2001)                                   |       | (110,210            | )          | (109,996                | )          |
|                                                                                                                                     |       |                |       |                    |       |
| **Total shareholders’ equity**                                                                                                      |       | 369,830             |       | 354,417                 | ** ** |
|                                                                                                                                     |       |                |       |                    |       |
| **Total liabilities and shareholders’ equity**                                                                                      |       | $                   | 402,188    |                    | $          | 386,644 | ** ** |

 

The accompanying notes arean integral part of the consolidated financial statements.

 

2

----

 

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

 

**CONSOLIDATED STATEMENT OF INCOME**

 

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

 

**(UNAUDITED)**

 

 
|                                        |   | **THREE  MONTHS ENDED  JUNE 30,** |       | **SIX MONTHS  ENDED  JUNE 30,** |       |
|---------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|
|                                        |   | **2002**                          | ** ** | **2001**                        | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                        |   |                              |       |                            |       |   |   |   |   |
| Net sales                                   |   | $                                 | 66,042     |                            | $          | 61,278 |   | $ | 143,644 |   | $ | 137,207 |   |
|                                        |   |                              |       |                            |       |   |   |   |   |
| Cost of Sales                               |   | 31,042                            |       | 28,214                          |       | 64,758 |   | 61,928 |   |
|                                        |   |                              |       |                            |       |   |   |   |   |
| **Gross profit**                            |   | **35,000**                        | ** ** | **33,064**                      | ** ** | **78,886** | ** ** | **75,279** | ** ** |
|                                        |   |                              |       |                            |       |   |   |   |   |
| Selling, general and administrative expense |   | 28,773                            |       | 27,087                          |       | 59,594 |   | 57,977 |   |
|                                        |   |                              |       |                            |       |   |   |   |   |
| Investment and other income-net             |   | 2,251                             |       | 2,716                           |       | 4,559 |   | 4,494 |   |
|                                        |   |                              |       |                            |       |   |   |   |   |
| **Income before taxes**                     |   | **8,478**                         | ** ** | **8,693**                       | ** ** | **23,851** | ** ** | **21,796** | ** ** |
|                                        |   |                              |       |                            |       |   |   |   |   |
| Provision for income taxes                  |   | 1,705                             |       | 2,831                           |       | 7,142 |   | 7,211 |   |
|                                        |   |                              |       |                            |       |   |   |   |   |
| **Net****i****ncome**                       |   | **$**                             | **6,773**  | ** **                      | **$**      | **5,862** | ** ** | **$** | **16,709** | ** ** | **$** | **14,585** | ** ** |
|                                        |   |                              |       |                            |       |   |   |   |   |
| **Net income per share:**                   |   |                              |       |                            |       |   |   |   |   |
| Basic                                       |   | $                                 | 0.33       |                            | $          | 0.29 |   | $ | 0.82 |   | $ | 0.73 |   |
| Diluted                                     |   | $                                 | 0.33       |                            | $          | 0.29 |   | $ | 0.81 |   | $ | 0.72 |   |

 

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

 

4

----

 

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

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 

**(Dollars in Thousands)**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **SIX  MONTHS ENDED  JUNE 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **2002**                        | ** ** | **2001** | ** ** |
| **Cash flows from operating activities:**                                          |       |                            |       |   |   |
| Net income                                                                         |       | $                               | 16,709     |   | $ | 14,585 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                            |       |   |   |
| Depreciation and  amortization                                                     |       | 2,171                           |       | 1,995 |   |
| Provision for accounts  receivable reserves                                        |       | 1,005                           |       | 950 |   |
| Other                                                                              |       | (28                             | )          | 861 |   |
| Changes in assets and  liabilities:                                                |       |                            |       |   |   |
| Accounts receivable                                                                |       | 8,673                           |       | 9,629 |   |
| Inventories — net                                                             |       | 3,839                           |       | 630 |   |
| Prepaid expenses and other  current assets                                         |       | 289                             |       | 1,705 |   |
| Other assets                                                                       |       | (51)                            |       | (16 | ) |
| Accounts payable                                                                   |       | 438                             |       | (1,292 | ) |
| Accrued expenses                                                                   |       | 1,071                           |       | (2,028 | ) |
| Accrued income taxes                                                               |       | (1,378                          | )          | (343 | ) |
| Total adjustments                                                                  |       | 16,029                          |       | 12,091 |   |
| Net cash provided by  operating activities                                         |       | 32,738                          |       | 26,676 |   |
|                                                                               |       |                            |       |   |   |
| **Cash flows from investing activities:**                                          |       |                            |       |   |   |
| Purchase of marketable  securities                                                 |       | (108,935                        | )          | (43,305 | ) |
| Proceeds from sale of  marketable securities                                       |       | 42,744                          |       | 64,646 |   |
| Proceeds from sale of  property, plant and equipment                               |       | —                          |       | 48 |   |
| Capital expenditures                                                               |       | (9,768                          | )          | (1,646 | ) |
| Net cash (used in)  provided by investing activities                               |       | (75,959                         | )          | 19,743 |   |
|                                                                               |       |                            |       |   |   |
| **Cash flows from financing activities:**                                          |       |                            |       |   |   |
| Proceeds from issuance of  common stock                                            |       | 4,698                           |       | 6,614 |   |
| Dividends paid to  shareholders                                                    |       | (10,603                         | )          | (9,610 | ) |
| Purchase of treasury stock                                                         |       | (214                            | )          | — |   |
| Net cash (used in)  financing activities                                           |       | (6,119                          | )          | (2,996 | ) |
|                                                                               |       |                            |       |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                      |       | 3,367                           |       | (1,455 | ) |
| Net (decrease) increase in  cash and cash equivalents                              |       | (45,973                         | )          | 41,968 |   |
| Cash and cash equivalents  at beginning of period                                  |       | 148,872                         |       | 77,794 |   |
| Cash and cash equivalents  at end of period                                        |       | $                               | 102,899    |   | $ | 119,762 |   |
|                                                                               |       |                            |       |   |   |
| **Cash paid during the period for:**                                               |       |                            |       |   |   |
| Interest                                                                           |       | $                               | 47         |   | $ | 66 |   |
| Income taxes                                                                       |       | $                               | 8,520      |   | $ | 7,555 |   |

 

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

 

5

----

 

**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 Form 10-Q and Rule 10-01 ofRegulation S-X.  Accordingly, certain information and footnote disclosuresnormally included in financial statements prepared under generally acceptedaccounting principles have been condensed or omitted pursuant to suchprinciples and regulations.  The information furnished reflects alladjustments, which are, in the opinion of management, of a normal recurringnature and necessary for a fair presentation of the Company’s financial position,results of operations and cash flows for the interim periods presented. Results for interim periods are not necessarily an indication of results to beexpected for the year.

 

Net income in theConsolidated Statement of Income and the Consolidated Statement of Cash Flowsincluded non-cash charges of $164,000 and $476,000 relating to the impact ofthe 2000 stock option repricing for the three months ended June 30, 2002 and2001, respectively, and $284,000 and $1,384,000 relating to the impact of the 2000stock option repricing for the six months ended June 30, 2002 and 2001,respectively.

 

This report on Form 10-Q forthe three and six months ended June 30, 2002 should be read in conjunction withthe Company’s Quarterly Report on Form 10-Q for the three months ended March31, 2002 and its Annual Report on Form 10-K for the year ended December 31,2001.

 

### **NOTE 2 - MARKETABLESECURITIES AND OTHER INVESTMENTS**

 

Asof June 30, 2002, the Company has an investment in a limited partnership whichmanages a portfolio of mortgage-backed securities to achieve returns throughyield income and price appreciation.  This investment is accounted forusing the equity method and accordingly the Company’s proportionate share ofthe limited partnership’s income or loss is included in investment and otherincome-net in the Consolidated Statement of Income.  As of June 30, 2002,the Company’s investment in this limited partnership amounted to $23,708,000and is included in marketable securities and other investments in the ConsolidatedBalance Sheet.

 

### **NOTE 3 - EARNINGS PERSHARE**

 

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

 
|                                                                |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|---------------------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|
|                                                                |   | **2002**                          | ** ** | **2001**                        | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                |   |                              |       |                            |       |   |   |   |   |
| Average  common shares outstanding                                  |   | 20,417,000                        |       | 20,078,000                      |       | 20,375,000 |   | 20,009,000 |   |
|                                                                |   |                              |       |                            |       |   |   |   |   |
| Dilutive  effect of common shares issuable under stock option plans |   | 140,000                           |       | 192,000                         |       | 133,000 |   | 162,000 |   |
| Average  common shares outstanding assuming dilution                |   | 20,557,000                        |       | 20,270,000                      |       | 20,508,000 |   | 20,171,000 |   |

 

There were no stock optionsoutstanding at June 30, 2002 or June 30, 2001, which were not included in thecomputation of earnings per common share assuming dilution because none of theoptions’ exercise prices were greater than the average market price of thecommon shares.

 

6

----

 

**NOTE4 - DIVIDENDS**

 

Cash dividends of$5,309,000 ($0.26 per share) were paid on June 7, 2002 to shareholders ofrecord of the Company’s Common Stock on May 24, 2002.  Cash dividends of$10,603,000 ($0.26 per share per quarter) were paid in the six months endedJune 30, 2002.

 

Cashdividends of $4,817,000 ($0.24 per share) were paid on June 8, 2001 toshareholders of record of the Company’s Common Stock on May 25, 2001.  Cash dividends of $9,610,000 ($0.24 pershare per quarter) were paid in the six months ended June 30, 2001.

 

### **NOTE 5 - COMPREHENSIVEINCOME**

 

Comprehensive Income, representingall changes in Shareholders’ equity during the period other than changesresulting from the issuance or repurchase of the Company’s common stock,  payment of dividends and unearnedcompensation, is reconciled to net income for the three months and the sixmonths ended June 30, 2002 and 2001 as follows:

 
|                                                                          |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended   June 30,** |   |
|-------------------------------------------------------------------------------|--------|-----------------------------------|------------|----------------------------------|--------|
|                                                                          |   | **2002**                          |       | **2001**                         |   | **2002** |   | **2001** |   |
| Net income                                                                    |   | $                                 | 6,773,000  |                             | $      | 5,862,000 |   | $ | 16,709,000 |   | $ | 14,585,000 |   |
| Other comprehensive income  (loss), net of taxes)                             |   |                              |       |                             |   |   |   |   |   |
| Foreign currency  translation adjustments:                                    |   | 4,744,000                         |       | 879,000                          |   | 3,973,000 |   | (1,926,000 | ) |
|                                                                          |   |                              |       |                             |   |   |   |   |   |
| Net unrealized gain (loss)  on securities available-for-sale                  |   | 999,000                           |       | (46,000                          | )      | 80,000 |   | 845,000 |   |
| Net unrealized gain on  foreign currency forward exchange contracts and other |   | 626,000                           |       | 130,000                          |   | 696,000 |   | 603,000 |   |
| Other comprehensive income  (loss)                                            |   | 6,369,000                         |       | 963,000                          |   | 4,749,000 |   | (478,000 | ) |
|                                                                          |   |                              |       |                             |   |   |   |   |   |
| Comprehensive income                                                          |   | $                                 | 13,142,000 |                             | $      | 6,825,000 |   | $ | 21,458,000 |   | $ | 14,107,000 |   |

 

**NOTE 6 - LITIGATION**

 

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 affect the results of operations, financialcondition or cash flows of the Company, except for the matter described below.

 

As previously reported inthe Company’s Report on Form 10-Q for the quarter ended March 31, 2002, anaction was commenced against the Company on August 22, 2001, in the UnitedStates District Court, District of New Jersey, by Dam Things from Denmark(a/k/a Troll Company ApS.), alleging, among other things, copyrightinfringement by the Company of the plaintiff’s reinstated United Statescopyrights for its troll designs and unfair competition under common law. The plaintiff is seeking, among other things, injunctive relief prohibiting theCompany from continuing to offer for sale its troll products, cancellation ofthe Company’s U.S. copyright registrations with respect to its various trollproducts, as well as unspecified damages and attorney’s fees andexpenses.  On December 3, 2001, a preliminary injunction was issued by theDistrict 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 thecourt.  The issuance of the preliminaryinjunction was appealed by the Company to the Third Circuit Court of Appeals.On May 14, 2002, the appeals court vacated the preliminary injunction, and thematter was remanded to the district court. The Company believes it hassubstantial defenses to the allegations. In 2002, the sale of troll productsrepresented less than one-half of one percent of the Company’s net sales. As of December 31, 2001 and March 31, 2002, in response to the issuance of thepreliminary injunction, the Company had segregated the amount of its trollproducts inventory and recorded such inventory as a long-term asset in theCompany’s Consolidated Balance Sheet. As a result of the vacation of thepreliminary injunction, such inventory at June 30, 2002, 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 financial condition of the Company.

 

7

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**NOTE 7 - RECENTLY ISSUED ACCOUNTING STANDARDS**

 

InJuly 2002, the Financials Accounting Standards Board (FASB) issued  Statement of Financial Accounting Standards(“SFAS”)  No. 146,”Accounting for CostsAssociated with Exit or Disposal Activities” which requires companies torecognize costs associated with exit or disposal activities when they areincurred rather than at the date of a commitment to an exit or disposal plan.Such costs covered by the standard include lease termination costs and certainemployee severance costs that are associated with a restructuring, discontinuedoperation, plant closing, or other exit or disposal activity.  SFAS No.146 replaces the previous accounting guidance provided by the Emerging IssuesTask Force Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).”  SFAS No. 146 is to be applied prospectivelyto exit or disposal activities initiated after December 31, 2002 and theCompany does not anticipate that the statement will have a material impact onthe Company’s financial statements.

 

 

**NOTE 8 - SUBSEQUENT EVENT**

 

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. In addition to the Sassy brand, theCompany also gained distribution rights to certain baby soothing and comfortingproducts from MAM Babyartikel GmbH, of Vienna, Austria. TheCompany paid approximately $45,000,000 in cash from the Company’s own internalfunds for privately-held Sassy based on Sassy's current and projected earningsbefore interest, taxes, depreciation and amortization, and working capital.Additional consideration in the form of cash, not expected to exceed$5,000,000, may become payable based on future performance and othermeasurements. Sassy had sales of approximately $44,000,000 for the year endedDecember 31, 2001. The acquisition did not have any impact on the Company’sresults of operations, financial condition or cash flows for the three and sixmonths ended June 30, 2002.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS ANDFINANCIAL CONDITION**

 

**RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDEDJUNE  30, 2002 AND JUNE  30, 2001**

 

The Company’s net sales forthe six months ended June 30, 2002 increased 4.7% to $143,644,000 compared tonet sales of $137,207,000 for the six months ended June 30, 2001. This net salesincrease was due primarily to growth in the Company's domestic, European andAustralian markets.

 

Cost of sales were 45.1% ofnet sales for the six months ended June 30, 2002 as compared to the samepercentage for the same period in 2001.  Included in cost of sales for thesix months ended June 30, 2002 was a charitable donation of certain of theCompany’s Troll inventory. Excluding the net impact of this donation, cost ofsales were 44.1% of net sales compared to 45.1% for the same period of 2001. Thispercentage decrease primarily reflects higher gross profit margins on sales ofcertain of the Company’s product line concepts and lower relative volumes beingdistributed through other than normal channels.

 

Selling, general andadministrative expense was $59,594,000 or 41.5% of net sales for the six monthsended June 30, 2002 compared to $57,977,000 or 42.3% of net sales for the sixmonths ended June 30, 2001.  Excluding the unfavorable impact of the 2000stock option repricing, which amounted to a charge of $284,000 for the firstsix months of 2002 and $1,384,000 in the first six months of 2001, selling,general and administrative expense increased $2,717,000, or 4.8%, to$59,310,000 for the six months ended June 30, 2002. This increase in selling,general and administrative expense is due primarily to the Company’s strategicinvestment in new business ventures, primarily Russ Home Inc., costs related toits new facility in the United Kingdom, the development of new products and thecontinued expansion of its worldwide salesforce, offset, in part, by a decreasein showroom related costs, as compared to the six months ended June 30, 2001.

 

Investment and other incomeof $4,559,000 for the six months ended June 30, 2002 compares to $4,494,000 forthe six months ended June 30, 2001.

 

The provision for incometaxes as a percent of income before taxes for the six months ended June 30,2002 was 29.9% compared to 33.1% in the same period for the prior year. This decrease in the effective income tax rate is due primarily to the incometax benefit of the charitable inventory donation described above.

 

Net income for the sixmonths ended June 30, 2002 of $16,709,000 compared to net income of $14,585,000for the same period last year, representing an increase of 14.6%. Excluding the unfavorable impact of the 2000 stock option repricing, whichamounted to a charge of $185,000, after tax, for the first six months of2002, and a charge of $900,000, after tax, for the first six months of  2001, net income would have increased9.1%.  The increase in net income was primarily the result of higher grossprofits due to increased sales volumes and a higher margin product mix offset,in part, by increased selling general and administrative expense, as describedabove.

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDEDJUNE  30, 2002 AND JUNE  30, 2001**

 

The Company’s net sales forthe three months ended June 30, 2002 increased 7.8% to $66,042,000 compared tonet sales of $61,278,000 for the three months ended June 30, 2001. Netsales for the second quarter included approximately $7,700,000 and $6,000,000,for the years 2002 and 2001, respectively, of shipments related to Christmasmerchandise that the Company historically shipped in the third quarter,however, was shipped to certain customers in June due to early productavailability. The Company anticipates this trend to continue in future years.

 

Cost of sales were 47.0% ofnet sales for the three months ended June 30, 2002 as compared to 46.0% for thesame period in 2001.  Included in cost of sales for the second quarter of2002 was a charitable donation of certain of the Company’s Troll  inventory. Excluding the net impact of thisdonation, cost of sales were 44.9% of net sales. This percentage decreaseprimarily reflects higher gross profit margins on sales of certain of theCompany’s product line concepts and lower relative volumes being distributedthrough other than normal channels.

 

Selling, general andadministrative expense was $28,773,000 or 43.6% of net sales for the three monthsended June 30, 2002 compared to $27,087,000 or 44.2% of net sales for the threemonths ended June 30, 2001.  Excluding the unfavorable impact of the 2000stock option repricing, which amounted to a charge of $164,000 in the secondquarter of 2002 and $476,000 in the second quarter of 2001, selling, generaland administrative expense increased $1,998,000, or 7.5% to $28,609,000 for thethree months ended June 30, 2002. The increase in selling, general andadministrative expense is due primarily to the Company’s

 

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strategic investment in newbusiness ventures, primarily Russ Home Inc., the continued expansion of itsworldwide salesforce, costs related to a new facility in the United Kingdom andthe development of new products as compared to the three months ended June 30,2001.

 

Investment and other incomeof $2,251,000 for the three months ended June 30, 2002 compares to $2,716,000for the three months ended June 30, 2001.  This decrease is due primarilyto lower returns on the Company’s investment portfolio offset, in part, byforeign exchange gains recognized by the Company’s international subsidiaries.

 

The provision for incometaxes as a percent of income before taxes for the three months ended June 30,2002 was 20.1% compared to 32.6% in the same period for the prior year. This decrease in the effective tax rate is due primarily to the income taxbenefit of the charitable inventory donation, described above.

 

Net income for the threemonths ended June 30, 2002 of $6,773,000 compared to net income of $5,862,000for the same period last year, representing an increase of 15.5%. Excluding the unfavorable impact of the 2000 stock option repricing, whichamounted to a charge of $107,000, after tax, in the second quarter of 2002and a charge of $309,000, after tax, in the second quarter of 2001, net incomewould have increased 11.5%.  The increase in net income was primarily theresult of higher gross profits due to increased sales volumes, a higher marginproduct mix and the lower effective income tax rate, offset, in part, byincreased selling general and administrative expense and lower investmentincome, as described above.

 

The InternationalLongshoreman Workers Union’s (ILWU) contract with the Pacific MaritimeAssociation expired at midnight on July 1, 2002 and has not yet beenrenewed.  To date, no strike or lockouthas occurred which would stop the flow of goods to shipping ports on the Westcoast. The Company had made preparations earlier in the year for thiscontingency and had accelerated the receipt of certain of its Christmas andeveryday inventory to its California and Canadian distribution centers inanticipation of the July 1, 2002 contract expiration. The Company is carefullymonitoring the status of the union contract, however, if a strike or lockoutdoes occur, it could have a material impact on the Company’s net sales for thethird and fourth quarters of 2002.

 

The Company is dependentupon information technology systems in many aspects of its business. Beginning in the first quarter of 2002, the Company began a project toimplement a new packaged computer software system for the Company and itswholly-owned subsidiaries.  TheCompany’s current custom software, that has been utilized to operate and manageits business, and other third party software systems will be replaced using astrategic and phased approach.  During the second quarter of 2002, theCompany converted its second United States distribution facility and Canadiandistribution facility to a new warehouse management system.  The Companyhas not experienced any significant business disruptions related to thereplacement of these systems and anticipates that the replacement of itscurrent systems will not have a material adverse impact on its financialcondition or results of operations.

 

**Liquidity and Capital Resources**

 

As of June 30, 2002, theCompany had cash, cash equivalents, marketable securities and other investmentsof $263,474,000 compared to cash and cash equivalents and marketable securitiesof $243,053,000 at December 31, 2001.

 

As of June 30, 2002 andDecember 31, 2001, the Company had marketable securities and other investmentsof $160,575,000 and $94,181,000 respectively, included in the amountsabove.  As of June 30, 2002 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 the investment portfolio is to maximizeafter-tax returns while minimizing risk.  The Company’s marketablesecurities are subject to market fluctuations based largely, but notexclusively, on the securities’ sensitivity to changes in interest rates.

 

Working capital requirementsduring the three months ended June 30, 2002 were met entirely throughinternally generated funds.  The Company anticipates capital expenditurerequirements for 2002 to be approximately $18,000,000, primarily for systemsdevelopment and costs related to leasehold improvements in its new facility inthe United Kingdom. Capital expenditures for the three and six months endedJune 30, 2002 were $7,100,000 and $9,800,000, respectively.  The Companyremains in a highly liquid position and believes that the resources availablefrom cash and cash equivalents, marketable securities and other investments,operations and bank lines of credit are sufficient to meet the foreseeablerequirements of its business.

 

The newfacility in the United Kingdom, referenced above, was constructed by, and isbeing leased from an entity controlled by Russell Berrie, one of the Company'sdirectors, who is also Chairman of the Company and a significantshareholder.  The lease, commencing inJune 2002, is for a term of twenty years and includes a tenant's option tobreak at the end of the tenth year. Annual rental is approximately $1,600,000 with rent reviews at the endof every fifth year of the lease, adjusted to an open market rental value.

 

The Company enters intoforward exchange contracts, principally to manage the economic currency risksassociated with the purchase of inventory by its European and Canadiansubsidiaries.  Gains and losses related to such contracts were notmaterial to its results of operations.  The Company does not anticipateany material adverse impact on its results of operations or financial positionfrom these contracts.

 

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As of June 30, 2002, theBoard of Directors had previously authorized the Company to repurchase7,000,000 shares of common stock of which 5,643,200 shares have beenrepurchased since the beginning of the Company’s stock repurchase program inMarch 1990.  During the three months ended June 30, 2002, the Company didnot repurchase any shares. During the six months ended June 30, 2002, theCompany repurchased 7,300 shares for $214,000.

 

The Company is subject tolegal proceedings and claims arising in the ordinary course of its businessthat could possibly have a material adverse impact on the Company’s results ofoperations and cash flows.  See Note 6 of the Notes to ConsolidatedFinancial Statements for information regarding specific litigation.

 

Consistent with its pastpractices and in the normal course of its business, the Company regularlyreviews acquisition opportunities of varying sizes.  There can be noassurance, however, that any discussions arising in connection therewith willresult in definitive purchase agreements and, if they do, what the terms ortiming of any such agreements would be.

 

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. In addition to the Sassy brand, theCompany also gained distribution rights to certain baby soothing and comfortingproducts from MAM Babyartikel GmbH, of Vienna, Austria. TheCompany paid approximately $45,000,000 in cash from the Company’s own internalfunds for privately-held Sassy based on Sassy's current and projected earningsbefore interest, taxes, depreciation and amortization, and working capital.Additional consideration in the form of cash, not expected to exceed$5,000,000, may become payable based on future performance and othermeasurements. Sassy had sales of approximately $44,000,000 for the year endedDecember 31, 2001. The acquisition did not have any impact on the Company’sresults of operations, financial condition or cash flows for the three and sixmonths ended June 30, 2002.

 

**Recently Issued Accounting Standards**

 

Theinformation set forth in Part I, Financial Information, Item 1, "Notes toConsolidated Financial Statements, Note 7 - "Recently Issued AccountingStandards," of this Quarterly Report on Form 10-Q is incorporated hereinby reference thereto.

 

##### **Critical AccountingPolicies**

##### ** **

##### **As of June 30, 2002, there have been no changes in theCompany's critical accounting policies from those previously described in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2001.**

##### ** **

##### ** **

##### **Forward-LookingStatements**

 

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 Exchange Commission (SEC) filings and otherwise. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor forforward-looking statements.  These statements may be identified by the useof 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 risksand uncertainties include, but are not limited to, the ability to continue tomanufacture its products in the Far East, the seasonality of revenues, theactions of competitors, ability to increase production capacity, pricecompetition, the effects of government regulation, possible delays in theintroduction of new products, customer acceptance of products, issues relatedto the Company’s new business ventures, including, but not limited to, theCompany's ability to successfully integrate the business of Sassy, Inc. intoits existing business, the ability to grow its direct sales force, changes in foreigncurrency exchange rates, issues related to the Company’s computer systems,possible delays in the importation of inventory if a strike or lockout of theILWU occurs, the current and future outlook of the global retail market andother factors.

 

 

**ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES****ABOUT MARKET RISK**

 

As of June 30, 2002, therehave been no material changes in the Company’s market risks from December 31,2001.

 

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**PART IIOTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

The information set forth inPart I, Financial Information, Item 1, “Notes to Consolidated FinancialStatements, Note 6 — Litigation,”  of this Quarterly Report on Form 10-Qis incorporated herein by reference thereto.

 

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

On April 24, 2002, theregistrant held its annual meeting of shareholders. Each of the elevennominated directors was elected without contest. No other matters were broughtbefore the shareholders at the annual meeting. The votes for or the voteswithheld for each of the nominees for director were as follows:

 
| **Nominee**         |   | **For**    |   | **Withheld** |   |
|---------------------|--------|------------|--------|--------------|--------|
| Raphael  Benaroya   |   | 18,410,163 |   | 786,162      |   |
| Angelica Berrie     |   | 18,410,123 |   | 786,202      |   |
| Russell Berrie      |   | 16,863,213 |   | 2,333,112    |   |
| Carl Epstein        |   | 18,662,805 |   | 533,520      |   |
| Ilan Kaufthal       |   | 18,433,717 |   | 762,608      |   |
| Charles Klatskin    |   | 18,403,548 |   | 792,777      |   |
| Joseph Kling        |   | 18,431,774 |   | 764,551      |   |
| William A. Landman  |   | 18,433,717 |   | 762,608      |   |
| Sidney Slauson      |   | 18,653,024 |   | 543,301      |   |
| Benjamin J. Sottile |   | 18,665,363 |   | 530,962      |   |
| Josh S. Weston      |   | 18,432,732 |   | 763,593      |   |

 

 

**ITEM5.  OTHER INFORMATION**

 

The information set forth inPart I, Financial Information, Item 1, “Notes to Consolidated FinancialStatements, Note 8 - “Subsequent Event,” of this Quarterly Report on Form10-Q is incorporated herein by reference thereto.

 

 

**ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

 
| a)     | **Exhibits to this Quarterly Report  on Form 10-Q.** |
|--------|------------------------------------------------------|
|   |                                                 |
|   | **Exhibit No.**                                      |   | **Description** |
|   | 2.1                                                  |   | Asset  Purchase Agreement by and among RBSACQ, Inc. and  Sassy, Inc. and its shareholders dated  July 26, 2002. In accordance with Section  601(b)(2) of Regulation S-K, the registrant agrees to furnish supplementally  any omitted schedules to the Commission upon request. |

 
| b)     | **During the quarter ended June 30,  2002, the following current report on Form 8-K was filed by the Company:** |
|--------|-----------------------------------------------------------------------------------------------------------------|
|   |                                                                                                            |
|   |                                                                                                            | (1) | On April 16, 2002, the Company filed a current report on Form 8-K  with respect to Item 4 thereof, “Changes in Registrant’s  Certifying Accountant.” |

 

**Items 2 and 3 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 August 7, 2002 |                           | John D. Wille           |
|                |                           | Vice President and      |
|                |                           | Chief Financial Officer |
|                     |                                |                         |  |  |

 

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