**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 June 30, 2004**                                                                             |
|                                                                                                                              |
| **OR**                                                                                                                            |
|                                                                                                                              |
| **o**                                                                                                                             | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                              |
| **For the transition period  from                 to** |

 

**Commissionfile number  1-8681**

 

**RUSSBERRIE AND COMPANY, INC.**

(Exactname 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 mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15 (d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.Yes  ý   No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes  ý   No  o

 

The number of shares outstanding of each ofthe registrant’s classes of common stock, as of August 2, 2004 was asfollows:

 
| **CLASS**                         | ** ** | **OUTSTANDING AT  August 2, 2004** |
|-----------------------------------|------------|-----------------------------------------|
| Common Stock, $0.10 stated  value |       | 20,829,645                              |

 

 

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**RUSS BERRIE AND COMPANY, INC.**

 

**INDEX**

 
| **PART I – FINANCIAL INFORMATION** |                                                                                                  |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                  |   |
| Item 1.                                 | Financial Statements                                                                                  |   |
|                                    |                                                                                                  |   |
| a)                                      | Consolidated Balance Sheet  as of June 30, 2004 and December 31, 2003                       |   |
|                                    |                                                                                                  |   |
| b)                                      | Consolidated  Statement of Operations for the three and six months ended June 30, 2004  and 2003 |   |
|                                    |                                                                                                  |   |
| c)                                      | Consolidated  Statement of Cash Flows for the six months ended June 30, 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 4.                                 | Submission of Matters to a Vote of Security  Holders                                                  |   |
|                                    |                                                                                                  |   |
| Item 6.                                 | Exhibits and Reports on Form 8-K                                                                      |   |
|                                    |                                                                                                  |   |
| Signatures                              |                                                                                                  |   |

 

2

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**PART 1****- FINANCIAL INFORMATION**

 

**ITEM 1****.  FINANCIAL STATEMENTS**

 

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

 

**CONSOLIDATEDBALANCE SHEET**

 

**(Dollars in Thousands)**

**(UNAUDITED)**

 
| ** **                                                                                                                        | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ***ASSETS***                                                                                                                      |       |                    |       |                        |       |
| Current assets                                                                                                                    |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                         |       | $                       | 76,604     |                        | $          | 81,535 |   |
| Marketable securities                                                                                                             |       | 9,813                   |       | 150,515                     |       |
| Accounts receivable, trade, less allowances of $3,636 in 2004 and  $3,841in 2003                                                  |       | 44,483                  |       | 82,795                      |       |
| Inventories — net                                                                                                            |       | 47,046                  |       | 51,921                      |       |
| Prepaid expenses and other current assets                                                                                         |       | 5,379                   |       | 4,517                       |       |
| Deferred income taxes                                                                                                             |       | 15,274                  |       | 9,671                       |       |
| **Total current assets**                                                                                                          | ** ** | 198,599                 |       | 380,954                     |       |
|                                                                                                                              |       |                    |       |                        |       |
| Property, plant and equipment — net                                                                                          |       | 43,798                  |       | 46,108                      |       |
| Goodwill                                                                                                                          |       | 10,353                  |       | 10,353                      |       |
| Other assets                                                                                                                      |       | 23,373                  |       | 25,333                      |       |
| **Total assets**                                                                                                                  | ** ** | $                       | 276,123    |                        | $          | 462,748 |   |
|                                                                                                                              |       |                    |       |                        |       |
| ***LIABILITIES AND SHAREHOLDERS’  EQUITY***                                                                                  |       |                    |       |                        |       |
| Current liabilities                                                                                                               |       |                    |       |                        |       |
| Accounts payable                                                                                                                  |       | $                       | 5,549      |                        | $          | 10,318 |   |
| Accrued expenses                                                                                                                  |       | 24,978                  |       | 28,684                      |       |
| Accrued income taxes                                                                                                              |       | —                  |       | 8,000                       |       |
| **Total current liabilities**                                                                                                     |       | 30,527                  |       | 47,002                      |       |
| Deferred income taxes                                                                                                        |       | 328                     |       | 328                         |       |
| **Total liabilities**                                                                                                             |       | $                       | 30,855     |                        | $          | 47,330 |   |
| Commitments and contingencies                                                                                                     |       |                    |       |                        |       |
| Shareholders’ equity                                                                                                         |       |                    |       |                        |       |
| Common stock: $.10 stated value per share; authorized 50,000,000  shares; issued 2004, 26,465,929 shares; 2003, 26,296,995 shares |       | 2,648                   |       | 2,631                       |       |
| Additional paid in capital                                                                                                        |       | 88,649                  |       | 85,197                      |       |
| Retained earnings                                                                                                                 |       | 255,327                 |       | 428,704                     |       |
| Accumulated other comprehensive income                                                                                            |       | 8,794                   |       | 9,036                       |       |
| Treasury stock, at cost (5,636,284 shares at June 30, 2004 and at  December 31, 2003)                                        |       | (110,150                | )          | (110,150                    | )          |
|                                                                                                                              |       |                    |       |                        |       |
| **Total shareholders’ equity**                                                                                               | ** ** | 245,268                 |       | 415,418                     |       |
| **Total liabilities and shareholders’ equity**                                                                               | ** ** | $                       | 276,123    |                        | $          | 462,748 |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

3

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

 

**CONSOLIDATED STATEMENT OF OPERATIONS**

 

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

 

**(UNAUDITED)**

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED  JUNE 30,** | ** ** | **SIX MONTHS ENDED  JUNE 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Net sales                                                      |       | $                                     | 53,420     |                                | $          | 67,167 |   | $ | 119,133 |   | $ | 154,718 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Cost of Sales                                                  |       | 42,591                                |       | 31,498                              |       | 75,201 |   | 71,390 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| **Gross profit**                                               |       | 10,829                                |       | 35,669                              |       | 43,932 |   | 83,328 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Selling, general and administrative expense                    |       | 34,029                                |       | 30,996                              |       | 68,471 |   | 65,815 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Investment and other income-net                                |       | 228                                   |       | 1,173                               |       | 2,192 |   | 3,272 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| **(Loss) income before (benefit) provision for income  taxes** |       | (22,972                               | )          | 5,846                               |       | (22,347 | ) | 20,785 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| (Benefit) provision for income taxes                           |       | (7,422                                | )          | 1,668                               |       | (7,233 | ) | 6,628 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| **Net (loss) income**                                          |       | $                                     | (15,550    | )                                   | $          | 4,178 |   | $ | (15,114 | ) | $ | 14,157 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| **Net (loss) income per share:**                               |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                          |       | $                                     | (0.75      | )                                   | $          | 0.20 |   | $ | (0.73 | ) | $ | 0.69 |   |
| Diluted                                                        |       | $                                     | (0.75      | )                                   | $          | 0.20 |   | $ | (0.73 | ) | $ | 0.69 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| **Weighted average shares:**                                   |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                          |       | 20,786,000                            |       | 20,567,000                          |       | 20,735,000 |   | 20,558,000 |   |
| Diluted                                                        |       | 20,786,000                            |       | 20,677,000                          |       | 20,735,000 |   | 20,656,000 |   |

 

*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)**

 
| ** **                                                                                | ** ** | **SIX MONTHS ENDED  JUNE 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| **Cash flows from operating activities:**                                                 |       |                                |       |   |   |
| Net (loss) income                                                                         |       | $                                   | (15,114    | ) | $ | 14,157 |   |
| Adjustments to reconcile net income (loss) to net cash provided by operating  activities: |       |                                |       |   |   |
| Depreciation and amortization                                                             |       | 3,286                               |       | 3,177 |   |
| Provision for accounts receivable reserves                                                |       | 797                                 |       | 798 |   |
| Provision for inventory reserves                                                          |       | 13,988                              |       | 389 |   |
| Deferred income taxes – net                                                          |       | (5,603                              | )          | — |   |
| Other                                                                                     |       | 1,120                               |       | 1,526 |   |
| Changes in assets and liabilities:                                                        |       |                                |       |   |   |
| Accounts receivable                                                                       |       | 37,514                              |       | 11,928 |   |
| Inventories                                                                               |       | (9,112                              | )          | (3,903 | ) |
| Prepaid expenses and other current assets                                                 |       | (862                                | )          | 1,279 |   |
| Other assets                                                                              |       | 1,961                               |       | (987 | ) |
| Accounts payable                                                                          |       | (4,769                              | )          | (996 | ) |
| Accrued expenses                                                                          |       | (3,707                              | )          | (2,996 | ) |
| Accrued income taxes                                                                      |       | (8,000                              | )          | (1,299 | ) |
| Total adjustments                                                                         |       | 26,613                              |       | 8,916 |   |
| Net cash provided by operating activities                                                 |       | 11,499                              |       | 23,073 |   |
|                                                                                      |       |                                |       |   |   |
| **Cash flows from investing activities:**                                                 |       |                                |       |   |   |
| Purchase of marketable securities and other investments                                   |       | (304,054                            | )          | (208,138 | ) |
| Proceeds from sale of marketable securities and other investments                         |       | 443,887                             |       | 196,135 |   |
| Proceeds from sale of property, plant and equipment                                       |       | 45                                  |       | 35 |   |
| Capital expenditures                                                                      |       | (1,163                              | )          | (4,046 | ) |
| Net cash provided by (used in) investing activities                                       |       | 138,715                             |       | (16,014 | ) |
|                                                                                      |       |                                |       |   |   |
| **Cash flows from financing activities:**                                                 |       |                                |       |   |   |
| Proceeds from issuance of common stock                                                    |       | 3,469                               |       | 2,115 |   |
| Dividends paid to shareholders                                                            |       | (158,263                            | )          | (11,512 | ) |
| Net cash (used in) financing activities                                                   |       | (154,794                            | )          | (9,397 | ) |
|                                                                                      |       |                                |       |   |   |
| Effect of exchange rate changes on cash and cash equivalents                              |       | (351                                | )          | 4,890 |   |
| Net (decrease) increase in cash and cash equivalents                                      |       | (4,931                              | )          | 2,552 |   |
| Cash and cash equivalents at beginning of period                                          |       | 81,535                              |       | 93,513 |   |
| Cash and cash equivalents at end of period                                                |       | $                                   | 76,604     |   | $ | 96,065 |   |
|                                                                                      |       |                                |       |   |   |
| **Cash paid during the period for:**                                                      |       |                                |       |   |   |
| Interest                                                                                  |       | $                                   | 64         |   | $ | 13 |   |
| Income taxes                                                                              |       | $                                   | 767        |   | $ | 7,927 |   |

 

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

 

5

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

**NOTE 1 -INTERIM CONSOLIDATED FINANCIAL STATEMENTS**

 

The accompanying unaudited interimconsolidated 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 two segments whichconsist of the Company’s core gift business and the Company’s non-corebusiness.  The Company’s core business designs, manufactures through thirdparties and markets a wide variety of gift and home dècor products to retailstores throughout the United States and throughout the world via the Company’sinternational wholly-owned subsidiaries and distributors.  Until August 2,2004 the Company’s non-core businesses designed and marketed functionalconsumer products sold at comparable price points with comparable gross marginsto each other and consisted of the Company’s wholly-owned subsidiaries Sassy,Inc. and Bright of America, Inc.  Theseproducts are sold to consumers, primarily in the United States, through massmarketers.  Effective August 2, 2004, theCompany sold Bright of America, Inc. (See Note 13 of the Notes to ConsolidatedFinancial Statements).  See “Item 1,Business—Products” of Part I of the Company’s Annual Report on Form 10-K forthe year ended December 31, 2003 (the “2003 10-K”) for a description of theproducts sold by Sassy, Inc., the remaining component of the Company’s non-coresegment.

 

Certain prior year amounts have beenreclassified to conform to the 2004 presentation.

 

This Quarterly Report on Form 10-Q for thethree and six months ended June 30, 2004 should be read in conjunctionwith the Company’s Quarterly Report on Form 10-Q for the three months endedMarch 31, 2004 and the Company’s 2003 10-K.

 

**NOTE 2 –FINANCIAL INSTRUMENTS**

 

**MARKETABLESECURITIES AND OTHER INVESTMENTS**

 

In accordance with SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities,” theCompany’s marketable securities are considered available-for-saleinvestments.  Accordingly, these investments are carried in theaccompanying consolidated balance sheet at fair value, with the differencebetween cost and fair value (unrealized gains and losses) recorded as acomponent of shareholders’ equity, net of tax, in Accumulated OtherComprehensive Income.  These investments consist primarily of U.S.government obligations, municipal obligations, preferred stock, mutual fundsand equity securities.  The Company liquidated, in July 2003, itsequity investment 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 loss of$1,695,000 and $1,488,000 for the three and six months ended June 30, 2003,respectively, is included in investment and other income-net in theConsolidated Statement of Operations.  Additionally, realized losses onsales of the Company’s available-for-sale marketable securities of $150,000 forthe three months ended June 30, 2004 and realized gains of $1,039,000 for thesix months ended June 30, 2004, as determined on a specific identificationbasis, are included in investment and other income, net in the ConsolidatedStatement of Operations.  Realized gainson sale of available-for-sale marketable securities of $2,031,000 and$2,480,000 for the three and six months ended June 30, 2003, respectively, areincluded in investment and other income, net in the Consolidated Statement of Operations.

 

6

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Marketable securities consistof the following:

 
| ** **                  | ** ** | **As of June 30, 2004** | ** ** |
|-----------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **Cost**                     | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  (Loss)** | ** ** | **Fair Value** | ** ** |
| U.S. Government obligations |       | $                            | 992,000    |   | $ | — |   | $ | (16,000 | ) | $ | 976,000 |   |
| Municipal obligations       |       | 6,480,000                    |       | — |   | (231,000 | ) | 6,249,000 |   |
| Preferred stock & other |       | 954,000                      |       | — |   | (68,000 | ) | 886,000 |   |
| Equity securities           |       | 1,137,000                    |       | — |   | (15,000 | ) | 1,122,000 |   |
| Asset backed securities     |       | 617,000                      |       | — |   | (37,000 | ) | 580,000 |   |
|                        |       |                         |       |   |   |   |   |   |   |
| Total marketable securities |       | $                            | 10,180,000 |   | $ | — |   | $ | (367,000 | ) | $ | 9,813,000 |   |

 
| ** **                  | ** ** | **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 weighted average commonshares outstanding to weighted average common shares outstanding assumingdilution is as follows:

 
| ** **                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                       |       |                                  |       |                                |       |   |   |   |   |
| Weighted average common shares outstanding                                 |       | 20,786,000                            |       | 20,567,000                          |       | 20,735,000 |   | 20,558,000 |   |
|                                                                       |       |                                  |       |                                |       |   |   |   |   |
| Dilutive effect of common shares issuable under outstanding stock  options |       | —                                |       | 110,000                             |       | — |   | 98,000 |   |
| Weighted average common shares outstanding assuming dilution               |       | 20,786,000                            |       | 20,677,000                          |       | 20,735,000 |   | 20,656,000 |   |

 

Stock options outstanding at June 30, 2004and June 30, 2003 to purchase 368,848 and 197,969 shares of common stock,respectively, were not included in the computation of earnings per common shareassuming dilution for such period as they are antidilutive.

 

**NOTE 4 -DIVIDENDS**

 

Cash dividends of $152,048,000 ($0.30 pershare regular dividend plus $7.00 per share one-time special dividend) werepaid in the quarter ended June 30, 2004. Cash dividends of $158,263,000 ($0.30 per share per quarter plus $7.00per share special dividend) were paid in the six months ended June 30,2004.  On April 12, 2004, the Companydeclared a one-time special cash dividend in the amount of $7.00 per commonshare payable on May 28, 2004, to shareholders of record of the Company’sCommon Stock on May 14, 2004.  Thisone-time special dividend of $145,799,000 is included in the dividend payment,stated above, for the quarter and six months ended June 30, 2004.  A quarterly dividend of $0.30 per share forthe second quarter was paid on June 4, 2004, to shareholders of record of theCompany’s Common Stock on May 21, 2004.

 

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

 

7

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**NOTE 5 - COMPREHENSIVE INCOME**

 

Comprehensive Income, representing allchanges in Shareholders’ equity during the period other than changes resultingfrom the issuance or repurchase of the Company’s common stock and payment ofdividends, is reconciled to net income for the three and six months endedJune 30, 2004 and 2003 as follows:

 
| ** **                                                                           | ** ** | **Three Months Ended  June 30,** | ** **  | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|-------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                              | ** **  | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net (loss) income                                                                    |       | $                                     | (15,550,000 | )                                   | $          | 4,178,000 |   | $ | (15,114,000 | ) | $ | 14,157,000 |   |
| Other comprehensive income (loss), net of tax:                                       |       |                                  |        |                                |       |   |   |   |   |
| Foreign currency translation adjustments                                             |       | (1,916,000                            | )           | 4,236,000                           |       | (375,000 | ) | 4,961,000 |   |
|                                                                                 |       |                                  |        |                                |       |   |   |   |   |
| Net unrealized gain (loss) on securities available-for-sale                          |       | (154,000                              | )           | 57,000                              |       | (409,000 | ) | (278,000 | ) |
| Net unrealized gain (loss) on foreign currency forward exchange  contracts and other |       | 434,000                               |        | (287,000                            | )          | 544,000 |   | 60,000 |   |
| Other comprehensive (loss) income                                                    |       | (1,636,000                            | )           | 4,006,000                           |       | (240,000 | ) | 4,743,000 |   |
|                                                                                 |       |                                  |        |                                |       |   |   |   |   |
| Comprehensive (loss) income                                                          |       | $                                     | (17,186,000 | )                                   | $          | 8,184,000 |   | $ | (15,354,000 | ) | $ | 18,900,000 |   |

 

**NOTE 6 – LITIGATION ANDCOMMITMENTS**

 

In the ordinary course of its business, theCompany is party to various copyright, patent and trademark infringement,unfair competition, breach of contract, customs, employment and other legalactions incidental to its business, as plaintiff or defendant.  In the opinion of management, the amount ofultimate liability with respect to these actions will not materially adverselyaffect the consolidated results of operations, financial condition or cashflows of the Company.

 

The Company entered into letter agreements,dated January 5, 2004, which superceded previous agreements dated July 2, 2003,with each of eleven employees of the Company, with respect to the payment of aspecial cash bonus to such employees in the event that a change in control (asdefined under the Company’s Change in Control Severance Plan) occurred on orbefore April 30, 2004.  The aggregatepotential amount of the bonuses payable by the Company under all such letteragreements equaled $1,450,000.  Since nochange of control occurred by April 30, 2004, the letter agreements are of nofurther force and effect and no amounts were paid or are payable by theCompany.

 

**NOTE 7 – SEGMENTS OF THE COMPANYAND RELATED INFORMATION**

 

The Company operates in two segments whichconsist of the Company’s core gift business and the Company’s non-corebusiness.  This segmentation of theCompany’s operations reflects how the Company’s Chief Executive Officercurrently views the results of operations.  There are no intersegmentrevenues to eliminate.

 

The Company’s core business designs,manufactures through third parties and markets a wide variety of gift and homedécor products to retail stores throughout the United States and throughout theworld via the Company’s international wholly-owned subsidiaries anddistributors.  Until August 2, 2004 the Company’s non-core businessesdesigned and marketed functional consumer products sold at comparable pricepoints with comparable gross margins to each other and consisted of theCompany’s wholly-owned subsidiaries Sassy, Inc. and Bright of America, Inc.These products are sold to consumers, primarily in the United States, throughmass marketers.  Effective August 2,2004, the Company sold Bright of America, Inc. (See Note 13 of the Notes toConsolidated Financial Statements).  See“Item 1, Business — Products” of Part I of the Company’s 2003 10K for a descriptionof the products sold by Sassy, Inc., the remaining component of the Company’snon-core segment.

 

8

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| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six months Ended  June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Core:                             |       |                                  |       |                                |       |   |   |   |   |
| Net sales                         |       | $                                     | 38,378,000 |                                | $          | 52,493,000 |   | $ | 89,734,000 |   | $ | 125,604,000 |   |
| (Loss) Income before income taxes |       | (24,773,000                           | )          | 4,047,000                           |       | (25,734,000 | ) | 17,237,000 |   |
|                              |       |                                  |       |                                |       |   |   |   |   |
| Non-core:                         |       |                                  |       |                                |       |   |   |   |   |
| Net Sales                         |       | 15,042,000                            |       | 14,674,000                          |       | 29,399,000 |   | 29,114,000 |   |
| Income before income taxes        |       | 1,801,000                             |       | 1,799,000                           |       | 3,387,000 |   | 3,548,000 |   |
|                              |       |                                  |       |                                |       |   |   |   |   |
| Consolidated:                     |       |                                  |       |                                |       |   |   |   |   |
| Net Sales                         |       | 53,420,000                            |       | 67,167,000                          |       | 119,133,000 |   | 154,718,000 |   |
| (Loss) Income before income taxes |       | (22,972,000                           | )          | 5,846,000                           |       | (22,347,000 | ) | 20,785,000 |   |
|                                   |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

Additionally, total assets of each segmentwere as follows:

 
| ** ** | ** ** | **June 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|------------|------------|-------------------------|-------------|-----------------------------|------------|
|       |       |                    |        |                        |       |
| Core       |       | $                       | 203,462,000 |                        | $          | 388,207,000 |   |
| Non-core   |       | 72,661,000              |        | 74,541,000                  |       |
|       |       |                    |        |                        |       |
| Total      |       | $                       | 276,123,000 |                        | $          | 462,748,000 |   |

 

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

 

The significant components of investment andother income—net consist of the following:

 
| ** **                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Investment income                  |       | $                                     | 514,000    |                                | $          | 1,446,000 |   | $ | 2,814,000 |   | $ | 3,275,000 |   |
| Interest (expense)                 |       | (49,000                               | )          | (12,000                             | )          | (64,000 | ) | (13,000 | ) |
| Foreign currency transactions, net |       | (223,000                              | )          | (290,000                            | )          | (638,000 | ) | (56,000 | ) |
| Other, net                         |       | (14,000                               | )          | 29,000                              |       | 80,000 |   | 66,000 |   |
| Total                              |       | $                                     | 228,000    |                                | $          | 1,173,000 |   | $ | 2,192,000 |   | $ | 3,272,000 |   |

 

**NOTE 9 -ACCOUNTING FOR STOCK OPTIONS**

 

The Company follows the disclosure provisionsof SFAS No. 148, “Accounting for Stock-Based Compensation—Transition andDisclosure, an amendment of FASB Statement No. 123” and, therefore, accountsfor its stock option grants in accordance with the provisions of AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees”, and related interpretations using the intrinsic value method of accounting. Accordingly, no compensation cost has been recognized for the options grantedby the Company except for the application of Financial AccountingInterpretation No. 44, “Accounting for Certain Transactions InvolvingStock Compensation”, which resulted in non-cash income of $253,000 and non-cashexpense of $137,000 during the three months ended June 30, 2004, and June 30,2003, respectively, which is included in selling, general and administrativeexpenses in the Consolidated Statement of Operations and non cash income of$223,000 and non-cash expense $82,000 for the six months ended June 30, 2004and June 30, 2003, respectively.  These charges relate only to the optionsgranted during 2000 that were repriced as of February 29, 2000 upon approvalof the Board of Directors and Shareholders.  Had compensation cost for theCompany’s stock grants been determined based on the fair value recognitionprovisions of SFAS No. 123 at the grant date, in the three months and sixmonths ended June 30, 2004 and 2003, the Company’s net (loss) income and (loss)earnings per share would have been reduced to the pro forma amounts indicatedbelow:

 

9

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| ** **                                                                                              | ** ** | **Three Months Ended  June 30,** | ** **  | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|-------------------------------------|------------|
| ** **                                                                                              | ** ** | **2004**                              | ** **  | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net (loss) income-as reported                                                                           |       | $                                     | (15,550,000 | )                                   | $          | 4,178,000 |   | $ | (15,114,000 | ) | $ | 14,157,000 |   |
| Deduction for stock-based compensation expense determined under fair  value method net of tax-pro forma |       | 156,000                               |        | 313,000                             |       | 312,000 |   | 548,000 |   |
|                                                                                                    |       |                                  |        |                                |       |   |   |   |   |
| Net (loss) income-pro forma                                                                             |       | (15,706,000                           | )           | 3,865,000                           |       | (15,426,000 | ) | 13,609,000 |   |
| (Loss) earnings per share (basic) – as reported                                                    |       | (.75                                  | )           | .20                                 |       | (.73 | ) | .69 |   |
| (Loss) earnings per share (basic) – pro forma                                                      |       | (.76                                  | )           | .19                                 |       | (.74 | ) | .66 |   |
| (Loss) earnings per share (diluted) – as reported                                                  |       | (.75                                  | )           | .20                                 |       | (.73 | ) | .69 |   |
| (Loss) earnings per share (diluted) – pro forma                                                    |       | (.76                                  | )           | .19                                 |       | (.74 | ) | .66 |   |
|                                                                                                    |       |                                  |        |                                |       |   |   |   |   |
|                                                                                                         |            |                                       |             |                                     |            |  |  |  |  |  |  |  |  |

 

The fair value of each option granted by theCompany is estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions used for all grants:

 
| ** **                                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dividend yield                                                 |       | 3.52                                  | %          | 3.22                                | %          | 3.52 | % | 3.22 | % |
| Risk-free interest rate                                        |       | 2.40                                  | %          | 2.09                                | %          | 2.40 | % | 2.09 | % |
| Volatility                                                     |       | 30.76                                 | %          | 25.68                               | %          | 30.76 | % | 22.73 | % |
| Expected life (years)                                          |       | 3.8                                   |       | 2.9                                 |       | 3.8 |   | 2.9 |   |
| Weighted average fair value of options granted during the year |       | $                                     | 6.58       |                                | $          | 5.07 |   | $ | 6.58 |   | $ | 4.44 |   |
|                                                                |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

**NOTE 10 - FOREIGN CURRENCYFORWARD EXCHANGE CONTRACTS**

 

Certain of the Company’s foreign subsidiariesperiodically enter into foreign currency forward exchange contracts (“ForwardContracts”) to hedge inventory purchases, both anticipated and firmcommitments, 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 reduceforeign currency risk caused by changes in exchange rates and are used to hedgethese inventory purchases, generally for periods up to 13 months.  At June30, 2004, the Company’s Forward Contracts have expiration dates which rangefrom one to six months.

 

Since there is a direct relationship betweenthe Forward Contracts and the currency denomination of the underlyingtransaction, such Forward Contracts are highly effective in hedging the cashflows of certain of the Company’s foreign subsidiaries related to transactionsdenominated in the United States dollar and certain of the Company’s domesticsubsidiaries related to transactions denominated in the Euro.  TheseForward Contracts meet the criteria for cash flow hedge accounting treatmentand accordingly, gains or losses are included in other comprehensive income(loss) and are recognized in cost of sales based on the turnover of inventory.

 

**NOTE 11 - RECENTLY ISSUEDACCOUNTING STANDARDS**

 

On March 31, 2004, the FinancialAccounting 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 to requirecompanies to recognize the fair value of stock options and other stock-basedcompensation to employees.  The proposedStatement would eliminate the ability to account for share-based compensationtransactions using the intrinsic value method under APB Opinion No. 25,Accounting for Stock Issued to Employees, and generally would require insteadthat such transactions be accounted for using a fair-value-based method.  The proposed requirements in the exposuredraft would be effective for public companies as of the beginning of the firstfiscal year beginning after December 15, 2004.  The Company currently accounts for itsstock-based compensation plans in accordance with APB Opinion No. 25.  Therefore, if the FASB adopts this proposedstatement, as currently drafted, the Company will have to recognize the fairvalue of the stock based compensation in the consolidated statement ofoperations rather than

 

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disclosing the pro forma impact of the stockbased compensation as the Company currently does in Note 9.

 

On March 31, 2004, the Financial AccountingStandards Board ratified the consensus of its Emerging Issues Task Force(“EITF”) regarding the recognition and measurement of other-than-temporaryimpairments of certain investments effective on June 30, 2004.  The Company’s adoption of the provisions ofEITF No. 03-01 did not have a material impact on the Company’s financialstatements.

 

**NOTE 12 – TENDER OFFER**

 

On May 7, 2004, the Company announced thatthe Board of Directors authorized a cash tender offer to purchase outstandingoptions issued under the Company’s various equity compensation plans, as ismore fully described in the Statement on Schedule TO and related amendmentsfiled by the Company with the Securities and Exchange Commission on May 7,2004, May 28, 2004, June 15, 2004, June 22, 2004 and June 30, 2004, respectively.  The tender offer closed in June with anaggregate purchase price of approximately $844,000 paid by the Company, whichwas treated as a compensation expense in the second quarter of 2004.

 

**NOTE 13 –SUBSEQUENT EVENTS**

 

**Bright ofAmerica**

 

Effective August 2, 2004, the Company soldsubstantially all of the net assets from one of its non-core subsidiary, Brightof America, Inc. (“Bright”).  Assets ofapproximately $5.8 million less assumed liabilities of $0.8 million were soldfor $4 million in cash and a $1 million promissory note bearing interest at 9%per annum, payable in 39 months.  TheCompany expects to record a loss of approximately $200,000 net of tax, in thethird quarter 2004 as a result of the sale, due primarily to transactionrelated costs.  For the six months endedJune 30, 2004, Bright generated net sales of approximately $4,000,000 and netincome of $350,000.

 

**ITEM 2****.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The financial and business analysis belowprovides information which the Company believes is relevant to an assessmentand understanding of the Company’s consolidated financial condition, changes infinancial condition and results of operations. This financial and business analysis should be read in conjunction withthe Company’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, theCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004and the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

**OVERVIEW**

 

The Company’s revenues are primarily derivedfrom sales of its products, a significant portion of which is attributable tosales of products in its core segment.  The Company’s core segment hasbeen, and continues to be, negatively impacted by several factors, including,but not limited to, the continued challenging independent retail environmentfor the gift industry in the United States and certain foreign markets. Specifically, the Company believes that the trend of decreasing sales in itscore segment is due primarily to: (i) retailer consolidation and a decliningnumber of independent retail outlets, which has had a negative impact onconsumer traffic and sales of the Company’s customers in the core segment, (ii)the actions of competitors in the gift industry with respect to reduced pricingand more successful product development for independent retail customers, (iii)a shift of consumer buying habits from the independent to mass market retailersand (iv) weak customer response to the Company’s new product introductionsduring the first half of 2004.

 

The Company is responding to thesedevelopments by (i) hiring a new, very experienced chief executive officer, whocommenced employment on June 1, 2004, (ii) focusing on categorizing andimproving the

 

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efficiency of its product line to better meetthe changing demands of its customers and improve its competitive position inthe industry, (iii) segmenting its selling efforts with an increased focus onnational accounts, (iv) continuing to focus on growth opportunities in its internationalmarkets and its non-core business segment, (v) selectively increasing its useof licensing to differentiate its products from its competitors,  including a license of certain intellectualproperty from Marvel Enterprises executed in June of 2004, (vi) pursuingstrategic acquisition opportunities and (vii) “right sizing” its infrastructurein response to changes in the retail environment.

 

**SEGMENTS**

 

The Company operates in two segments whichconsist of the Company’s core gift business and the Company’s non-corebusiness.  The Company’s core businessdesigns, manufactures through third parties and markets a wide variety of giftand home dècor products to retail stores throughout the United States andthroughout the world via the Company’s international wholly-owned subsidiariesand distributors.  Until August 2, 2004the Company’s non-core businesses designed and marketed functional consumerproducts sold at comparable price points with comparable gross margins to eachother and consists of the Company’s wholly-owned subsidiaries Sassy, Inc. andBright of America, Inc.  These products are sold to consumers, primarilyin the United States, through mass marketers. Effective August 2, 2004, the Company sold Bright of America, Inc. (SeeNote 13 of the Notes to Consolidated Financial Statements).  See “Item 1, Business—Products” of Part I ofthe Company’s Annual Report on Form 10-K for the year ended December 31, 2003for a description of the products sold by Sassy, Inc., the remaining componentof the Company’s non-core segment.

 

**RESULTS OF OPERATIONS—SIX MONTHSENDED JUNE 30, 2004 AND 2003**

 

The Company’s consolidated net sales for thesix months ended June 30, 2004 decreased 23.0% to $119,133,000 compared toconsolidated net sales of $154,718,000 for the six months ended June 30,2003.  The net sales decline for the sixmonths ended June 30, 2004 was primarily attributable to the Company’s coresegment, as described below.  The Company’snon-core segment increased 1.0% for the six months ended June 30, 2004 ascompared to the six months ended June 30, 2003.

 

The Company’s core segment’s net sales forthe six months ended June 30, 2004 decreased 28.6% to $89,734,000 comparedto core net sales of $125,604,000 for the six months ended June 30, 2003primarily as a result of the factors discussed in the “Overview” above. Additionally, the Company shipped 2003 Christmas product in the 2nd quarter of2003 totaling $6,400,000.  For 2004,Christmas product will not be shipped until the 2nd half of 2004.  Customer bookings were down approximately 21%for the six months ended June 30, 2004 compared to June 30, 2003.  Net sales in the Company’s core segmentbenefited from foreign exchange rates by approximately $3,800,000 for the sixmonths ended June 30, 2004.  The Company’s non-core segment’s netsales for the six months ended June 30, 2004 increased 1.0% to $29,399,000compared to non-core net sales of $29,114,000 for the six months endedJune 30, 2003.

 

Consolidated cost of sales were 63.1% ofconsolidated net sales for the six months ended June 30, 2004 ascompared to 46.1% of consolidated net sales for the six months endedJune 30, 2003.  The erosion in the consolidated gross profitpercentage is primarily due to a significant increase to our inventory reserve(as discussed below) requirement and lower selling prices in the coresegment.  In response to strategicchanges in product direction made in June 2004 under its recently appointed CEOand continued soft response to its new releases in the first half of 2004, theCompany undertook a comprehensive review of its worldwide inventory during thesecond quarter.  As a result of thisreview, an additional inventory valuation reserve of $13 million (pre tax) wasrecorded in the quarter to reflect excess inventory in the core segment at thelower of its cost or market value.  TheCompany expects to sell substantially all of this inventory through other thanits normal sales channels.  Cost of sales for the Company’s core segment were62.0% of net sales for such segment for the six months ended June 30, 2004as compared to 41.7% of net sales for the six months ended June 30,2003.  Cost of sales for the Company’s non-core segment were 66.6% of netsales for such segment for the six months ended June 30, 2004 as comparedto 65.2% of net sales for the six months ended June 30, 2003.

 

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Consolidated selling, general andadministrative expense was $68,471,000 or 57.5% of consolidated net sales forthe six months ended June 30, 2004 compared to $65,815,000 or 42.5% ofconsolidated net sales for the six months ended June 30, 2003.  Thisincrease in consolidated selling, general and administrative expense is dueprimarily to unfavorable exchange rates variances, costs associated with theCompany’s tender offer for outstanding plan options (See Note 12 of the Notesto Consolidated Financial Statements and “Liquidity and Capital Resources”below and continuing headcount reductions cost incurred in the Company’s “rightsizing” efforts (See “Overview” above).

 

Consolidated investment and other income of$2,192,000 for the six months ended June 30, 2004 compares to $3,272,000for the six months ended June 30, 2003, a decrease of $1,080,000 or33.0%.  This decrease was primarily the result of lower investment incomedue to lower investment balances and higher foreign exchange losses for the sixmonths ended June 30, 2004 as compared six months ended June 30, 2003in the Company’s core segment (See Notes 2 and 8 of the Notes to ConsolidatedFinancial Statements).

 

The consolidated benefit/provision for incometaxes as a percent of income before taxes for the six months endedJune 30, 2004 was relatively flat 32.4% compared to 31.9% for the sixmonths ended June 30, 2003.  Therate reflects the Company’s estimated annual effective tax rate.

 

Consolidated net loss for the six monthsended June 30, 2004 was $15,114,000 compared to consolidated net income of$14,157,000 for the six months ended June 30, 2003, representing adecrease of $29,271,000 and a decrease of $1.42 per diluted share (SeeNote 3 of the Notes to Consolidated Financial Statements).  Thedecrease was primarily the result of lower sales and resultant decreased grossprofit in the Company’s core segment, lower selling prices in its core segment,in addition to the impact of previously discussed inventory reserveadjustments, higher selling, general and administrative expenses and lowerinvestment and other income-net, offset, in part, by a benefit for incometaxes, all as described above.

 

**RESULTS OF OPERATIONS - THREEMONTHS ENDED JUNE 30, 2004 AND 2003**

 

The Company’s consolidated net sales for thequarter ended June 30, 2004 decreased 20.5% to $53,420,000 compared toconsolidated net sales of $67,167,000 for the quarter ended June 30,2003.  See the following paragraph for adiscussion of factors the Company believes contributed to the decline in netsales.

 

The Company’s core segment’s net sales forthe quarter ended June 30, 2004 decreased 26.9% to $38,378,000 compared tocore net sales of $52,493,000 for the quarter ended June 30, 2003primarily as a result of the factors described in the “Overview” above. Additionally, the Company shipped 2003 Christmas product in the 2ndquarter of 2003 totaling $6,400,000.  For2004, Christmas product will not be shipped until the 2nd half of 2004.  Net sales in the Company’s core segmentbenefited from foreign exchange rates by approximately $900,000 in thequarter.  The Company’s non-core segment’s net sales for the quarter endedJune 30, 2004 increased 2.5% to $15,042,000 compared to non-core net salesof $14,674,000 for the quarter ended June 30, 2003 primarily as a resultof increased sales generated by Sassy.

 

Consolidated cost of sales were 79.7% ofconsolidated net sales for the quarter ended June 30, 2004,  as compared to 46.9% of consolidated netsales for the quarter ended June 30, 2003.  Cost of sales for theCompany’s core segment were 85.1% of net sales for such segment for the quarterended June 30, 2004 as compared to 41.8% of net sales for the quarterended June 30, 2003, due primarily to a significant increase to ourinventory reserve requirements (discussed above in the Results of Operationsfor the six months ended June 30, 2004) and lower selling prices in its coresegment.  Cost of sales for the Company’s non-core segment were 66.0% ofnet sales for such segment for the quarter ended June 30, 2004 as comparedto 65.0% of net sales for the quarter ended June 30, 2003.

 

Consolidated selling, general andadministrative expense was $34,029,000 or 63.7% of consolidated net sales forthe quarter ended June 30, 2004 compared to $30,996,000 or 46.1% ofconsolidated net sales for the quarter ended June 30, 2003.  Thisincrease in consolidated selling, general and administrative expense is dueprimarily to unfavorable exchange rates variances, costs associated with theCompany’s

 

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tender offer for outstanding plan options,(See Note 12 of the Notes to Consolidated Financial Statements and “Liquidityand Capital Resources” below) and continuing headcount reductions incurred inconnection with the Company’s “right-sizing” efforts (See “Overview” above) andincreased administrative expenses.

 

Consolidated investment and other income of$228,000 for the quarter ended June 30, 2004 compares to $1,173,000 forthe quarter ended June 30, 2003, a decrease of $945,000, or 80.6%. This decrease was primarily the result of lower investment income due to lowerinvestment balances (See Notes 2 and 8 of the Notes to Consolidated FinancialStatements).

 

The consolidated (benefit) provision forincome taxes as a percent of income before taxes for the quarter endedJune 30, 2004 was 32.3% compared to 28.5% for the quarter endedJune 30, 2003.  The rate reflects the Company’s estimated annualeffective tax rate. Lower tax exempt interest income and lower contributionslead to the higher tax rate.

 

Consolidated net loss for the quarter endedJune 30, 2004 was $15,550,000 compared to consolidated net income of $4,178,000for the quarter ended June 30, 2003, representing a decrease of$19,728,000 and a decrease of $0.95 diluted share (See Note 3 of the Notes toConsolidated Financial Statements).  The decrease was primarily the resultof lower sales and resultant decreased gross profit in the Company’s coresegment, lower selling prices in its core segment, in addition to the impact ofpreviously discussed inventory reserve adjustments, higher selling, general andadministrative expenses and lower investment and other income-net, offset, inpart, by a benefit for income taxes, all as described above.

 

**Liquidityand Capital Resources**

 

As of June 30, 2004, the Company had cash,cash equivalents and marketable securities of $86,417,000 compared to cash,cash equivalents, and marketable securities of $232,050,000 atDecember 31, 2003.  As of June 30,2004 and December 31, 2003, working capital was $168,072,000 and$333,952,000, respectively.  Thesedecreases are predominantly the result of the payment of the special $7.00 pershare dividend discussed in Note 4 of the Notes to Consolidated FinancialStatements and below.

 

As of June 30, 2004 and December 31,2003, the Company had marketable securities of $9,813,000 and $150,515,000respectively, included in the amounts above. This decrease is primarily a result of the Company’s sale of asignificant portion of the Company’s available-for-sale marketable securitiesduring the six months ended June 30, 2004 to fund the aforementioned specialdividend.  As of June 30, 2004, marketablesecurities investments consisted primarily of U.S. government obligations,municipal obligations, preferred stock, mutual funds and equitysecurities.  For more informationregarding financial instruments, see Note 2 of the Notes to Consolidated FinancialStatements.

 

Cash and cash equivalents decreased$4,931,000 during the six months ended June 30, 2004 as compared to an increasein cash and cash equivalents of $2,552,000 for the six months ended June 30,2003.  Net cash provided by operatingactivities was approximately $11,499,000 during the six months ended June 30,2004 as compared to approximately $23,073,000 during the six months ended June30, 2003.  This decrease of $11,574,000was due primarily to the net loss in 2004 compared to net income in 2003,reduced tax liabilities, and amounts paid for accrued expenses, offset in partby cash provided by the collection of accounts receivable and the provision forinventory reserve.  Net cash provided by investing activities wasapproximately $138,715,000 for the six months ended June 30, 2004 as comparedto net cash used in investing activities of approximately $16,014,000 for thesix months ended June 30, 2003.  Thisincrease of approximately $154,729,000 was due primarily to the receipt ofproceeds from sales of marketable securities in the six months ended June 30,2004 as compared to the purchase of marketable securities in the six monthsended June 30, 2003.  Net cash used infinancing activities of $154,794,000 and $9,397,000 for the six months endedJune 30, 2004 and 2003, respectively, consisted of dividends paid toshareholders, 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 six months ended June 30, 2004,the Company paid approximately $767,000 for income taxes.  The Company currently expects that its cashflows will exceed any income tax payments during 2004.

 

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Working capital requirements during the sixmonths ended June 30, 2004 were met entirely through internally generatedfunds.  The Company anticipates capitalexpenditure requirements for 2004 to be approximately $4,000,000 primarily forcontinued system implementation and development costs.  The Company remains in a liquid position andbelieves that the resources available from cash and cash equivalents,marketable securities, operations and bank lines of credit are sufficient tomeet the foreseeable requirements of its business.  Notwithstanding the foregoing, the Companymay consider the use of debt financing to fund a portion of prospectiveacquisitions (discussed below).

 

Cash dividends of $152,048,000 ($0.30 pershare regular dividend plus $7.00 per share one-time special dividend) werepaid in the quarter ended June 30, 2004. Cash dividends of $158,263,000 ($0.30 per share per quarter plus $7.00per share special dividend) were paid in the six months ended June 30, 2004.  On April 12, 2004, the Company declared aone-time special cash dividend in the amount of $7.00 per common share payableon May 28, 2004, to shareholders of record of the Company’s Common Stock on May14, 2004.  This one-time special dividendof $145,799,000 is included in the dividend payment, stated above, for thequarter and six months ended June 30, 2004. The quarterly dividend of $0.30 per share for the second quarter waspaid on June 4, 2004, to shareholders of record of the Company’s Common Stockon May 21, 2004.  The Company remains ina liquid position after the payment of this special dividend as described inthe preceding paragraph.

 

The Company enters into forward exchangecontracts, principally to manage the economic currency risks associated withthe purchase of inventory by its European, Canadian and Australian subsidiariesin the core segment and the remaining subsidiary in the non-core segment.  Gains and losses related to such contractswere not material to its results of operations or cash flows.  The Company does not anticipate any materialadverse impact on its results of operations or financial position from thesecontracts.

 

The Board of Directors had previouslyauthorized the Company to repurchase 7,000,000 shares of common stock.  As of June 30, 2004, 5,643,200 shares havebeen repurchased since the beginning of the Company’s stock repurchase programin March 1990.  During the sixmonths ended June 30, 2004, the Company did not repurchase any shares.

 

On May 7, 2004, the Company announced thatthe Board of Directors has authorized a cash tender offer to purchaseoutstanding options issued under the Company’s various equity compensationplans, as is more fully described in the Statement on Schedule TO and relatedamendments filed by the Company with the Securities and Exchange Commission onMay 7, 2004, May 28, 2004, June 15, 2004, June 22, 2004 and June 30, 2004,respectively.  The tender offer closed inJune 2004, with an aggregate purchase price of approximately $844,000 paid bythe Company, which was recorded as a compensation expense in the second quarterof 2004.  Management does not believethat payment of the foregoing amount had a material impact on the liquidity ofthe Company.

 

Effective August 2, 2004, the Company soldits wholly-owned subsidiary, Bright of America, Inc. for an aggregate purchaseprice of $5,000,000.  (See Note 13 to theNotes to Consolidated Financial Statements.) The sale did not have a material impact on the Company’s results ofoperations and financial condition.

 

The Company has entered into certaintransactions with related parties which are disclosed in Note 13 of theNotes to Consolidated Financial Statements and ITEM 13 “CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS” of the Company’s Annual Report on Form10-K for the year ended December 31, 2003. With respect to such transactions, the Company’s lease of its SouthBrunswick New Jersey facility expired in May 2004, and the Company is nowoccupying the facility on a month-to-month basis.  The parties are currently negotiating a newlease.  In addition, in connection withthe Company’s lease of its Petulama California facility which is scheduled toexpire in June 2005, the parties are currently negotiating an extension to suchlease, and the Company now has until August 20, 2004 to give the noticerequired to extend the term of the current lease by one year.  Finally, with respect to Houndsdown Inc., thelessor of the Houndsdown UK facility, Angelica Berrie is now its soleshareholder.

 

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The Company is dependent upon informationtechnology systems in many aspects of its business.  The Company is continuing implementation ofan Enterprise Resource Planning (“ERP”) system for the Company’s corebusinesses, which began in 2002.  In 2002and 2003, 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 prior custom software that hadbeen utilized to operate and manage its business and other third party softwaresystems are being replaced using a strategic and phased approach.  The Company’s worldwide headquarters in theUnited States completed the implementation of the finance module of the new ERPsystem in the first quarter of 2003 and transitioned to the order managementand inventory modules during the second quarter of 2003.  During 2003 and continuing in 2004, theCompany’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 timetableis meant to continue to enable the Company to enhance its proficiency inutilizing the new system, to help ensure the efficiency of the internationalimplementations and allow the Company to meet its obligations regardinginternal controls as required by Section 404 of the Sarbanes-Oxley Act of2002.  The Company has experiencedcertain startup issues but has not experienced any significant businessdisruptions related to the replacement of these systems.

 

The Company is subject to legal proceedingsand claims arising in the ordinary course of its business that the Companybelieves will not have a material adverse impact on the Company’s consolidatedfinancial condition, results of operations and cash flows.

 

In connection with the Company’s continuingexpansion of its operations in the People’s Republic of China (“PRC”), theCompany completed a voluntary review in 2003 of the activities of its officesin the PRC to assess their compliance with applicable laws and regulations.  As a result of this review, management becameaware of some potential operational and tax compliance issues under applicablePRC laws and regulations and continues to take appropriate corrective actionsincluding the establishment of a new subsidiary in the PRC effective January 2004.  As a result, although the relevant PRCauthorities have broad discretion with respect to the imposition of sanctionson noncompliant companies, the Company does not expect the consequences, ifany, of these matters to have a material impact on its results of operations,financial condition or cash flows.

 

The Board of Directors has discontinued theexploration of various strategic alternatives that had previously been reportedin the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

Consistent with its past practices and in thenormal course of its business, the Company regularly reviews and is pursuingacquisition opportunities of varying sizes. As discussed above, the Company may consider the use of debt financingto fund a portion of prospective acquisitions. There can be no assurance, however, that any discussions arising inconnection therewith will result in definitive purchase agreements and, if theydo, what the terms or timing of any such agreements would be.

 

As no change of control (as defined under theCompany’s Change in Control Severance Plan) occurred by April 30, 2004,the letter agreements referred to in Note 6 above are of no further force andeffect, and no amounts were paid or are payable by the Company thereunder.

 

**Contractual Obligations**

 

As of June 30, 2004, there have been nomaterial changes outside the ordinary course of business in the Company’scontractual obligations as described under the caption “ContractualObligations” of Item 7 of the Company’s Annual Report on Form 10-K for the yearended December 31, 2003.

 

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**Off Balance Sheet Arrangements**

 

As of June 30, 2004, there have been nomaterial changes in the information provided under the caption “Off BalanceSheet Arrangements” of Item 7 of the Company’s Annual Report on Form 10-K forthe year ended December 31, 2003.

 

**CRITICAL ACCOUNTING POLICIES**

 

The SEC has issued disclosure adviceregarding “critical accounting policies”, defined as accounting policies thatmanagement believes are both most important to the portrayal of the Company’sfinancial condition and results and require application of management’s mostdifficult, subjective or complex judgments, often as a result of the need tomake estimates about the effects of matters that are inherently uncertain.

 

Management is required to make certainestimates and assumptions during the preparation of its consolidated financialstatements that effect the reported amounts of assets, liabilities, revenue andexpenses, and related disclosure of contingent assets and liabilities.  Estimates and assumptions are reviewedperiodically, and revisions made as determined to be necessary by management.  There have been no material changes to theCompany’s significant accounting estimates and assumptions or the judgmentsaffecting the application of such estimates and assumptions during the periodcovered by this report but for the change in inventory reserve describedabove.  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 to Consolidated FinancialStatements of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003 contains a summary of the significant accountingpolicies used in the preparation of the Company’s consolidated financialstatements.  The following, however, is adiscussion of those accounting policies which management considers to be“critical” within the SEC definition discussed above.

 

**AccountsReceivable, Trade and Revenue Recognition**

 

In the normal course of business, the Companyextends credit to customers which satisfy established credit criteria.  The Company believes that it does not have asignificant concentration of credit risk due to the significant diversity ofits customer base.  Accounts receivable,trade, as shown on the Consolidated Balance Sheet, is net of allowances,discounts and estimated bad debts.  Anallowance for doubtful accounts is determined through analysis of the aging ofaccounts receivable at the date of the financial statements, assessments ofcollectibility based on historical trends and an evaluation of the impact ofcurrent and projected economic conditions. If such historical trends or economic conditions deteriorate the resultscould differ from the Company’s estimates.

 

The Company principally recognizes revenue inaccordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognitionin Financial Statements (SAB 101), as amended. SAB 101 requires that four basic criteria must be met before revenue canbe recognized: (1) persuasive evidence of a sales arrangement exists;(2) delivery has occurred or services rendered; (3) the amount ofrevenue is fixed and determinable, net of provisions for estimates of salesdiscounts, returns and allowances; and (4) collectibility is reasonablyassured.

 

Determination of criteria (4) is basedon management’s judgments regarding the collectibility of those revenues.

 

**Inventory**

 

The Company values inventory at the lower ofthe actual cost or its current estimated market value.  The Company regularly reviews inventoryquantities on hand, by item, and records a provision for excess inventory basedprimarily on the Company’s historical experience and estimated forecast ofproduct

 

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demand using historical and recent orderingdata relative to the quantity on hand for each item. In response to strategicchanges in product direction made in June 2004 under its recently appointed CEOand continued soft response to its new releases in the first half of 2004, theCompany undertook a comprehensive review of its worldwide inventory during thesecond quarter.  As a result of thisreview, an additional inventory valuation reserve of $13 million (pre tax) wasrecorded in the quarter to reflect inventory in the core segment at its lower ofcost or market value.  The Company expectsto sell substantially all of this inventory through other than its normal saleschannels.  A significant change in demandfor the Company’s products could result in a change in the amount of excessinventories on hand, however the Company manages inventory and monitors productpurchasing to minimize this risk.

 

**Impairment of Long-Lived Assets**

 

In accordance with SFAS No. 144,long-lived assets, such as property, plant, and equipment, and purchasedintangibles subject to amortization, are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of an asset to estimated undiscounted future cash flowsexpected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cashflows, an impairment charge is recognized by the amount by which the carryingamount of the asset exceeds the fair value of the asset, which is generallybased on discounted cash flows.  If suchactual future cash flows are less than the estimated future cash flows, certainof the Company’s long-lived assets could be impaired.

 

Goodwill and intangible assets not subject toamortization are tested annually for impairment, and are tested for impairmentmore frequently if events and circumstances indicate that the asset might beimpaired.  An impairment loss isrecognized to the extent that the carrying amount exceeds the asset’s fairvalue.  Based on the Company’s annualtest performed in 2003 there was no impairment, however, if actual future cashflows are less than the estimated future cash flows, the Company’s goodwill andintangible assets could be impaired.

 

**Accrued Liabilities**

 

The preparation of the Company’s consolidatedfinancial statements in conformity with generally accepted accountingprinciples in the United States requires management to make certain estimatesand assumptions that affect the reported amounts of liabilities and disclosureof contingent liabilities at the date of the financial statements.  Such liabilities include, but are not limitedto, accruals for various legal matters, tax accruals and valuation allowancesfor deferred tax assets.  The settlementof the actual liabilities could differ from the estimates included in theCompany’s consolidated financial statements.

 

**RECENTLYISSUED ACCOUNTING STANDARDS**

 

See Note 11 of the Notes to ConsolidatedFinancial Statements for a description of recently issued accounting standardsincluding the respective dates of adoption and effects on results of operationsand financial condition.

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form 10-Qcontains certain forward-looking statements. Additional written and oral forward-looking statements may be made bythe Company from time to time in Securities and Exchange Commission (SEC)filings and otherwise.  The PrivateSecurities Litigation Reform Act of 1995 provides a safe-harbor forforward-looking statements.  Thesestatements may be identified by the use of forward-looking words or phrasesincluding, but not limited to, “anticipate”, “believe”, “expect”, “intend”,“may”, “planned”, “potential”, “should”, “will” or “would”.  The Company cautions readers that resultspredicted by forward-looking statements, including, without limitation, thoserelating to the Company’s future business prospects, revenues, working capital,liquidity, capital needs, interest costs and income are subject to certainrisks and uncertainties that could cause actual results to differ materiallyfrom those indicated in the forward-looking statements.  Specific risks and uncertainties include, butare

 

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not limited to, the Company’s ability tocontinue 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 anyenforcement action by the People’s Republic of China (“PRC”) authorities withrespect to the Company’s PRC operations, the resolution of various legalmatters, possible delays in the introduction of new products, customeracceptance of products, changes in foreign currency exchange rates, issuesrelated to the Company’s computer systems, the ability to obtain debt financingto fund acquisitions, the current and future outlook of the global retailmarket, and other factors.

 

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

 

As of June 30, 2004, there has been areduction in the market risk of the Company due the significant reduction inmarketable securities discussed in “Item 2, Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalResources” above.  There are no othermaterial changes in the Company’s market risks as described in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003.

 

**ITEM 4****.  CONTROLS AND PROCEDURES**

 

Based on the evaluation required by paragraph(b) of Rule 13a-15 or 15d-15 promulgated under the Securities Exchange Act of1934, as amended (the “Exchange Act”), the Company’s Chief Executive Officerand Chief Financial Officer have concluded that, as of the end of the period coveredby this report, the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) or 15d-15(e) under the Exchange Act), are effective.

 

There has been no change in the Company’sinternal control over financial reporting that occurred during the fiscalquarter ended June 30, 2004 that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

**PART II****- OTHER INFORMATION**

 

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

On May 5, 2004, the registrant held itsannual meeting of shareholders to elect ten Directors to its Board ofDirectors.  Each of the ten nominated directors was elected withoutcontest.  No other matters were broughtbefore the shareholders at the annual meeting.  The votes for and thevotes withheld for each of the nominees for director were as follows:

 
| **Nominee**        | ** ** | **For**    | ** ** | **%** | ** ** | **Withhold** | ** ** | **%** | ** ** |
|--------------------|------------|------------|------------|-------|------------|--------------|------------|-------|------------|
| Raphael Benaroya   |       | 17,130,155 |       | 87.9  |       | 2,357,746    |       | 12.1  |       |
| Angelica Berrie    |       | 18,982,919 |       | 97.4  |       | 504,982      |       | 2.6   |       |
| Carl Epstein       |       | 19,054,787 |       | 97.8  |       | 433,114      |       | 2.2   |       |
| Andrew R. Gatto    |       | 19,000,533 |       | 97.5  |       | 487,368      |       | 2.5   |       |
| Ilan Kaufthal      |       | 17,130,719 |       | 87.9  |       | 2,357,182    |       | 12.1  |       |
| Charles Klatskin   |       | 18,999,329 |       | 97.5  |       | 488,572      |       | 2.5   |       |
| Joseph Kling       |       | 18,999,229 |       | 97.5  |       | 488,672      |       | 2.5   |       |
| William A. Landman |       | 18,999,529 |       | 97.5  |       | 488,372      |       | 2.5   |       |
| Sidney Slauson     |       | 18,994,733 |       | 97.5  |       | 493,168      |       | 2.5   |       |
| Josh S. Weston     |       | 18,835,235 |       | 96.7  |       | 652,666      |       | 3.3   |       |

 

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

 
| a)     |   | Exhibits to this Quarterly  Report on Form 10-Q.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | 10.87                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Offer to  Purchase Specific Options dated May 28, 2004, as amended, incorporated herein  by reference to Amendment No. 4 to the Statement on Schedule TO, as filed  with the Securities and Exchange Commission on June 30, 2004. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   |   | 10.88                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Letter of  Transmittal, incorporated herein by reference to Exhibit (a)(1)(iii) of the  Statement on Schedule TO, as filed with the Securities and Exchange  Commission on May 28, 2004. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   |   | 10.89                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Stock Option  Agreement, dated as of June 1, 2004, between Russ Berrie and Company, Inc.  and Andrew R. Gatto pertaining to options to purchase 100,000 shares of  Common Stock. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   |   | 10.90                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Stock Option  Agreement, dated as of June 1, 2004, between Russ Berrie and Company, Inc.  and Andrew R. Gatto pertaining to options to purchase 150,000 shares of  Common Stock. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   |   | 31.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Certification of CEO  required by Section 302 of the Sarbanes Oxley Act of 2002. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   |   | 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  June 30, 2004, the Company filed a current report on Form 8-K (i) on April  12, 2004, with respect to a press release covering the declaration of a  special dividend of $7 per share, earnings guidance for 2004, the appointment  of a new CEO and the termination of the Board of Directors exploration of  various strategic alternatives as previously announced in the Company’s press  release of November 5, 2003 and (ii) on May 4, 2004 with respect to the  issuance of a press release covering, among other things, results of  operations and financial conditions for the first quarter ended March 31,  2004. |

 

**Items 1 2,3 and 5 are not applicable and have been omitted.**

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                             | RUSS  BERRIE AND COMPANY, INC. |                                          |
|----------------------------------|--------------------------------|-----------------------------------------------|
|                             | (Registrant)                   |                                          |
|                             |                           |                                          |
|                             | By                             | /s/ John D. Wille                             |   |
| Date:  August 9,  2004 |                           | John D. Wille                                 |
|                             | * *                       | *Vice President and  Chief Financial Officer* |
|                                  |                                |                                               |  |  |

 

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Exhibit Index

 
| 10.89 |   | Stock Option  Agreement, dated as of June 1, 2004, between Russ Berrie and Company, Inc.  and Andrew R. Gatto pertaining to options to purchase 100,000 shares of  Common Stock. |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.90 |   | Stock Option  Agreement, dated as of June 1, 2004, between Russ Berrie and Company, Inc.  and Andrew R. Gatto pertaining to options to purchase 150,000 shares of  Common Stock. |
| 31.1  |   | Certification of CEO  required by Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                 |
| 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.                                                                                                 |

 

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