** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

# **WASHINGTON, D.C.20549**

 

**FORM10-Q**

 

**(MarkOne)**

 
| **ý**                                                                                                                                                                                                                     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                           |
| **For  the quarterly period ended March 31, 2003**                                                                                                                                                                             |
|                                                                                                                                                                                                                           |
| **OR**                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                           |
| **o**                                                                                                                                                                                                                          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                                                                                                                                                           |
| **For  the transition period  from                 to                 ** |
|                                                                                                                                                                                                                           |                                                                                            |   |

 

**Commissionfilenumber                                                                  1-8681**

 

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

 

(Former name,former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes ý No o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes ý No o

 

The number of shares outstanding of each of theregistrant’s classes of common stock, as of May 7, 2003 was as follows:

 
| **CLASS**                             |       | **OUTSTANDING  AT  May 7, 2003** |
|---------------------------------------|------------|----------------------------------|
| **Common  Stock, $0.10 stated value** | ** ** | **20,554,003**                   |

 

----

 

**RUSSBERRIE AND COMPANY, INC.**

 

**INDEX**

 
| **PART I – FINANCIAL  INFORMATION** |
|------------------------------------------|
|                                     |
| Item 1.                                  | Financial Statements |
|                                     |   |
| a)                                       | Consolidated Balance Sheet  as of March 31, 2003 and December 31, 2002 |
|                                     |   |
| b)                                       | Consolidated Statement  of Income for the three months ended March 31, 2003 and 2002 |
|                                     |   |
| c)                                       | Consolidated  Statement of Cash Flows for the three months ended March 31, 2003 and 2002 |
|                                     |   |
| d)                                       | Notes to  Consolidated Financial Statements |
|                                     |   |
| Item  2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                     |   |
| Item  3.                                 | Quantitative  and Qualitative Disclosures About Market Risk |
|                                     |   |
| Item 4.                                  | Controls and  Procedures |
|                                     |   |
| **PART  II – OTHER INFORMATION**    |
|                                     |   |
| Item 1.                                  | Legal Proceedings |
|                                     |   |
| Item 6.                                  | Exhibits  and Reports on Form 8-K |
|                                     |   |
| Signatures                               |   |
|                                     |   |
| Certifications                      | 1.   Certification of Chief Executive Officer Required by  Section 302 of the  Sarbanes-Oxley Act of 2002  |
|                                     | 2.   Certification of Chief Financial Officer Required by Section 302 of the  Sarbanes-Oxley Act of 2002 |

 

2

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**PART 1 - FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

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

 

**CONSOLIDATEDBALANCE SHEET**

 

**(Dollarsin Thousands, Except Per Share Data)**

**(UNAUDITED)**

 
| ** **                                                                                                                               | ** ** | **March  31,  2003** | ** ** | **December  31,  2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------------|------------|
| ***ASSETS***                                                                                                                             |       |                 |       |                    |       |
| Current assets                                                                                                                           |       |                 |       |                    |       |
| Cash and cash equivalents                                                                                                                |       | $                    | 91,579     |                    | $          | 93,513 |   |
| Marketable securities                                                                                                                    |       | 114,354              |       | 109,350                 |       |
| Other investments                                                                                                                        |       | 23,095               |       | 22,888                  |       |
| Accounts receivable, trade, less allowances of  $3,832 in 2003 and $3,395 in 2002                                                        |       | 74,788               |       | 73,938                  |       |
| Inventories — net                                                                                                                   |       | 40,624               |       | 44,749                  |       |
| Prepaid expenses and other current assets                                                                                                |       | 4,089                |       | 4,896                   |       |
| Deferred income taxes                                                                                                                    |       | 6,739                |       | 6,548                   |       |
| **Total  current assets**                                                                                                                |       | 355,268              |       | 355,882                 | ** ** |
|                                                                                                                                     |       |                 |       |                    |       |
| Property, plant and equipment — net                                                                                                 |       | 43,224               |       | 42,096                  |       |
| Goodwill                                                                                                                                 |       | 10,388               |       | 10,388                  |       |
| Other assets                                                                                                                             |       | 22,194               |       | 22,086                  |       |
| **Total  assets**                                                                                                                        |       | $                    | 431,074    |                    | $          | 430,452 | ** ** |
|                                                                                                                                     |       |                 |       |                    |       |
| ***LIABILITIES AND SHAREHOLDERS’ EQUITY***                                                                                          |       |                 |       |                    |       |
| Current liabilities                                                                                                                      |       |                 |       |                    |       |
| Accounts payable                                                                                                                         |       | $                    | 7,892      |                    | $          | 10,752 |   |
| Accrued expenses                                                                                                                         |       | 20,930               |       | 26,346                  |       |
| Accrued income taxes                                                                                                                     |       | 7,811                |       | 4,463                   |       |
| **Total  current liabilities**                                                                                                           |       | 36,633               |       | 41,561                  | ** ** |
| Commitments and contingencies                                                                                                            |       |                 |       |                    |       |
| Shareholders’ equity                                                                                                                |       |                 |       |                    |       |
| Common stock:  $.10 stated value per share;  authorized 50,000,000 shares; issued 2003, 26,188,732 shares; 2002,  26,163,986 shares |       | 2,619                |       | 2,618                   |       |
| Additional paid in capital                                                                                                               |       | 81,991               |       | 81,403                  |       |
| Retained earnings                                                                                                                        |       | 421,272              |       | 417,047                 |       |
| Accumulated other comprehensive (loss)                                                                                                   |       | (1,231               | )          | (1,967                  | )          |
| Treasury stock, at cost (5,639,314 shares at March  31, 2003 and at December 31, 2002)                                                   |       | (110,210             | )          | (110,210                | )          |
|                                                                                                                                     |       |                 |       |                    |       |
| **Total  shareholders’ equity**                                                                                                     |       | 394,441              |       | 388,891                 | ** ** |
|                                                                                                                                     |       |                 |       |                    |       |
| **Total  liabilities and shareholders’ equity**                                                                                     |       | $                    | 431,074    |                    | $          | 430,452 | ** ** |

 

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

 

3

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

 

**CONSOLIDATEDSTATEMENT OF INCOME**

 

**(Dollarsin Thousands, Except Per Share Data)**

 

**(UNAUDITED)**

 

 

|                                        |   | **THREE  MONTHS ENDED   MARCH 31,** |   |
|---------------------------------------------|--------|-------------------------------------|--------|
|                                        |   | **2003**                            |   | **2002** |   |
|                                        |   |                                |   |   |   |
| Net sales                                   |   | $                                   | 87,551 |   | $ | 77,602 |   |
|                                        |   |                                |   |   |   |
| Cost of Sales                               |   | 39,892                              |   | 33,716 |   |
|                                        |   |                                |   |   |   |
| **Gross  profit**                           |   | 47,659                              |   | 43,886 |   |
|                                        |   |                                |   |   |   |
| Selling, general and administrative expense |   | 34,819                              |   | 30,821 |   |
|                                        |   |                                |   |   |   |
| Investment and other income-net             |   | 2,099                               |   | 2,308 |   |
|                                        |   |                                |   |   |   |
| **Income  before income taxes**             |   | 14,939                              |   | 15,373 |   |
|                                        |   |                                |   |   |   |
| Provision for income taxes                  |   | 4,960                               |   | 5,437 |   |
|                                        |   |                                |   |   |   |
| **Net****income**                           |   | **$**                               | 9,979  |   | 9,936 |   |
|                                        |   |                                |   |   |   |
| **Net  income per share:**                  |   |                                |   |   |   |
| Basic                                       |   | $                                   | 0.49   |   | $ | 0.49 |   |
| Diluted                                     |   | $                                   | 0.48   |   | $ | 0.49 |   |

 

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

 

4

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

 

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

 

**(Dollarsin Thousands)**

**(UNAUDITED)**

 
|                                                                               |   | **THREE   MONTHS ENDED   MARCH 31,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                               |   | **2003**                                  |   | **2002** |   |
| **Cash  flows from operating activities:**                                         |   |                                      |   |   |   |
| Net income                                                                         |   | $                                         | 9,979  |   | $ | 9,936 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                                      |   |   |   |
| Depreciation and amortization                                                      |   | 1,560                                     |   | 1,040 |   |
| Provision for accounts receivable reserves                                         |   | 467                                       |   | 587 |   |
| Other                                                                              |   | 224                                       |   | (544 | )  |
| Changes in assets and liabilities:                                                 |   |                                      |   |   |   |
| Accounts receivable                                                                |   | (1,317                                    | )      | (2,470 | ) |
| Inventories — net                                                             |   | 4,125                                     |   | 8,061 |   |
| Prepaid expenses and other current assets                                          |   | 809                                       |   | (964 | ) |
| Other assets                                                                       |   | (112                                      | )      | 6 |   |
| Accounts payable                                                                   |   | (2,861                                    | )      | 54 |   |
| Accrued expenses                                                                   |   | (5,415                                    | )      | (3,493 | ) |
| Accrued income taxes                                                               |   | 3,348                                     |   | 3,832 |   |
| Total adjustments                                                                  |   | 828                                       |   | 6,109 |   |
| Net cash provided by operating activities                                          |   | 10,807                                    |   | 16,045 |   |
|                                                                               |   |                                      |   |   |   |
| **Cash  flows from investing activities:**                                         |   |                                      |   |   |   |
| Purchase of marketable securities and other investments                            |   | (65,950                                   | )      | (75,841 | ) |
| Proceeds from sale of marketable securities                                        |   | 60,326                                    |   | 21,716 |   |
| Proceeds from sale of property, plant and equipment                                |   | 25                                        |   | — |   |
| Capital expenditures                                                               |   | (2,634                                    | )      | (2,847 | ) |
| Net cash (used in) investing activities                                            |   | (8,233                                    | )      | (56,972 | )  |
|                                                                               |   |                                      |   |   |   |
| **Cash  flows from financing activities:**                                         |   |                                      |   |   |   |
| Proceeds from issuance of common stock                                             |   | 589                                       |   | 3,760 |   |
| Dividends paid to shareholders                                                     |   | (5,754                                    | )      | (5,294 | ) |
| Purchase of treasury stock                                                         |   | —                                    |   | (214 | ) |
| Net cash (used in) financing activities                                            |   | (5,165                                    | )      | (1,748 | ) |
|                                                                               |   |                                      |   |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                      |   | 657                                       |   | (631 | ) |
| Net (decrease)   in cash and cash equivalents                                 |   | (1,934                                    | )      | (43,306 | ) |
| Cash and cash equivalents at beginning of period                                   |   | 93,513                                    |   | 148,872 |   |
| Cash and cash equivalents at end of period                                         |   | $                                         | 91,579 |   | $ | 105,566 |   |
|                                                                               |   |                                      |   |   |   |
| **Cash  paid during the period for:**                                              |   |                                      |   |   |   |
| Interest                                                                           |   | $                                         | 1      |   | $ | 12 |   |
| Income taxes                                                                       |   | $                                         | 1,612  |   | $ | 1,605 |   |

 

*Theaccompanying notes are an integral part of the consolidated financial statements.*

 

5

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

(Unaudited)

 

**NOTE 1 -INTERIM CONSOLIDATED FINANCIAL STATEMENTS**

 

The accompanying unaudited interim consolidatedfinancial statements have been prepared by Russ Berrie and Company, Inc. andits subsidiaries (the “Company”) in accordance with accounting principlesgenerally accepted in the United States of America for interim financialreporting and the instructions to the Quarterly Report on Form 10-Q and Rule10-01 of Regulation S-X.  Accordingly, certain information and footnotedisclosures normally included in financial statements prepared under generallyaccepted accounting principles have been condensed or omitted pursuant to suchprinciples and regulations.  The information furnished reflects alladjustments, which are, in the opinion of management, of a normal recurringnature and necessary for a fair presentation of the Company’s consolidatedfinancial position, results of operations and cash flows for the interimperiods presented.  Results for interim periods are not necessarily anindication of results to be expected for the year.

 

The Company operates in two segments which consist ofthe Company’s core gift business and the Company’s non-core business, whichincludes the Company’s July 26, 2002 acquisition of Sassy, Inc. TheCompany’s core business designs, manufactures through third parties and marketsa wide variety of gift and home dècor products to retail stores throughout theUnited States and throughout the world via the Company’s internationalwholly-owned subsidiaries and distributors. In March 2003, the Company mergedits wholly-owned subsidiary, Russ Home, Inc., which sold home accessory items,into its parent company, Russ Berrie and Company, Inc., within the coresegment. The Company’s non-core businesses design and market functionalconsumer products sold at comparable price points with comparable gross marginsto each other and consists of Sassy, Inc. since its acquisition on July 26,2002 and the Company’s wholly-owned subsidiary Bright of America, Inc. Theseproducts are sold to consumers, primarily in the United States, through massmarketers.

 

Certain prior year amountshave been reclassified to conform to the 2003 presentation. (See Note 8)

 

This Quarterly Report on Form 10-Q for the threemonths ended March 31, 2003 should be read in conjunction with the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002.

 

### **NOTE 2 - OTHERINVESTMENTS**

 

The Company has aninvestment in a limited partnership which manages a portfolio ofmortgage-backed securities to achieve returns through yield income and priceappreciation.  This investment is accounted for using the equity methodand accordingly the Company’s proportionate share of the limited partnership’sincome or loss amounting to non-cash income of  $207,000 and $567,000 forthe three months ended March 31, 2003 and March 31, 2002, respectively, isincluded in investment and other income-net in the Consolidated Statement ofIncome. Additionally, realized gains on sales of available-for-sale marketablesecurities of $449,000 and $160,000 for the three months ended March 31, 2003and 2002, respectively, as determined on a specific identification basis, areincluded in the Consolidated Statement of Income.

 

6

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**NOTE 3 - EARNINGS PER SHARE**

 

A reconciliation of weighted average common sharesoutstanding to weighted average common shares outstanding assuming dilution isas follows:

 

|                                                                |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                |   | **2003**                           |   | **2002** |   |
|                                                                |   |                               |   |   |   |
| Weighted average common shares outstanding                          |   | 20,548,000                         |   | 20,332,000 |   |
|                                                                |   |                               |   |   |   |
| Dilutive effect of common shares issuable under  stock option plans |   | 85,000                             |   | 120,000 |   |
| Weighted average common shares outstanding assuming  dilution       |   | 20,633,000                         |   | 20,452,000 |   |

 

Stock options outstanding at March 31, 2003 topurchase 192,918 of common stock were not included in the computation ofearnings per common share assuming dilution because the options’ exerciseprices were greater than the average market price of the common shares. Therewere no such options outstanding at March 31, 2002.

 

**NOTE 4 -DIVIDENDS**

 

Cash dividends of $5,754,000 ($0.28 per share)were paid on March 28, 2003 to shareholders of record of the Company’s CommonStock on March 14, 2003. Cash dividends of $5,294,000 ($0.26 per share)were paid on March 31, 2002 to shareholders of record of the Company’s CommonStock on March 8, 2002.

 

### **NOTE 5 - COMPREHENSIVEINCOME**

 

Comprehensive Income, representing all changes inShareholders’ equity during the period other than changes resulting from theissuance or repurchase of the Company’s common stock and payment of dividends,is reconciled to net income for the three months ended March 31, 2003 and 2002as follows:

 

|                                                                |   | **Three  Months Ended  March 31,** |       |
|---------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                |   | **2003**                           |       | **2002** |   |
| Net income                                                          |   | $                                  | 9,979,000  |   | $ | 9,936,000 |   |
| Other comprehensive income (loss), (net of taxes):                  |   |                               |       |   |   |
| Foreign currency translation adjustments                            |   | 724,000                            |       | (771,000 | ) |
|                                                                |   |                               |       |   |   |
| Net unrealized (loss) on securities  available-for-sale             |   | (335,000                           | )          | (919,000 | ) |
| Net unrealized gain on foreign currency forward  exchange contracts |   | 347,000                            |       | 70,000 |   |
| Other comprehensive income (loss)                                   |   | 736,000                            |       | (1,620,000 | ) |
|                                                                |   |                               |       |   |   |
| Comprehensive income                                                |   | $                                  | 10,715,000 |   | $ | 8,316,000 |   |

 

7

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**NOTE 6 -LITIGATION**

 

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

 

An action was commencedagainst the Company on August 22, 2001, in the United States DistrictCourt, District of New Jersey, by Dam Things from Denmark (a/k/a Troll CompanyApS.), alleging, among other things, copyright infringement by the Company ofthe plaintiff’s reinstated United States copyrights for its troll designs,unfair competition under common law and violation of Danish and U.S. copyrightsconstituting copyright infringement under the laws of the Peoples Republic ofChina. The plaintiff is seeking, among other things, injunctive reliefprohibiting the Company from continuing to offer for sale its troll products,cancellation of the Company’s U.S. copyright registrations with respect to itsvarious troll products, as well as unspecified damages and attorney’s fees andexpenses. On December 3, 2001, a preliminary injunction was issued by theDistrict Court which, as subsequently modified, prohibited the Company frommanufacturing and importing its troll products into the United States andselling such products in the United States after a date specified by the court.The issuance of the preliminary injunction was appealed by the Company to theThird Circuit Court of Appeals. On May 14, 2002, the appeals court vacatedthe preliminary injunction, and the matter was remanded to the District Court.The Company believes it has substantial defenses to the allegations. In thequarter ended March 31, 2003, the sale of troll products represented less thanone-half of one percent of the Company’s net sales. As of December 31, 2001 inresponse to the issuance of the preliminary injunction, the Company hadsegregated the amount of its troll products inventory and recorded suchinventory as a long-term asset in the Company’s Consolidated Balance Sheet. Asa result of the vacation of the preliminary injunction, such inventory is nolonger segregated or classified as a long-term asset. The Company does notbelieve that the ultimate resolution of this action will have a materialadverse impact on the consolidated financial condition of the Company; however,the outcome of any litigation is uncertain. The plaintiff has advised theCompany of its intention to amend the claims under the litigation to includealleged infringements of the plaintiff’s copyrights under the laws ofunspecified foreign countries and to seek unspecified damages for sales of theCompany’s troll products sold throughout the world. Since the new assertionshave not, to date, been included in the litigation, the Company cannot evaluatethem or their potential impact on the Company.

 

**NOTE 7 -AQUISITION**

 

On July 26, 2002,pursuant to the terms of an asset purchase agreement, a wholly-owned subsidiaryof the Company acquired the business and substantially all of the assets ofSassy, Inc. (“Sassy”), a designer, manufacturer and distributor of babyand juvenile products based in Grand Rapids, Michigan, including, but notlimited to, real property, tangible personal property, inventory, most accountsreceivable, designated contracts, intellectual property rights, governmentalauthorizations and intangible rights. The assets acquired will continue to beused by the Company in Sassy’s business. In addition to the Sassy brand, theCompany also gained distribution rights to certain baby soothing and comfortingproducts from MAM Babyartikel GmbH, of Vienna, Austria. The Company purchasedprivately held Sassy, Inc. for approximately $46,204,000 (includingacquisition costs and the working capital adjustment) using the Company’s owninternal funds, based on Sassy’s current and projected earnings beforeinterest, taxes, depreciation and amortization, and working capital. Additionalpayments, not expected to exceed $4,300,000, may become payable based on futureperformance and other measurements and will be expensed as incurred in theCompany’s Consolidated Statement of Income. The results of operations ofSassy, Inc. are included in the Company’s Consolidated Statement of Incomesince July 26, 2002.

 

8

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The following tablesummarizes the fair values of the assets acquired and liabilities assumed atthe date of acquisition based upon a third-party valuation of property, plantand equipment and certain intangible assets:

 
|                                         |   | **At July 26, 2002  (000’s)****** |   |
|----------------------------------------------|--------|----------------------------------------|--------|
|                                         |   |                                   |   |
| Current assets                               |   | $                                      | 16,995 |   |
| Property, plant  and equipment               |   | 4,796                                  |   |
| Goodwill                                     |   | 10,176                                 |   |
| MAM distribution  agreement and relationship |   | 10,400                                 |   |
| Sassy trade name                             |   | 7,100                                  |   |
| Backlog                                      |   | 210                                    |   |
| Non-competition  agreement                   |   | 90                                     |   |
|                                         |   |                                   |   |
| Total assets  acquired                       |   | 49,767                                 |   |
| Current  liabilities                         |   | 3,563                                  |   |
|                                         |   |                                   |   |
| Total  liabilities assumed                   |   | 3,563                                  |   |
|                                         |   |                                   |   |
| Net assets  acquired                         |   | $                                      | 46,204 |   |

 

The Company believes that the intangible assetsidentified and valued based upon the third party valuation have an indefinitelife. The backlog was amortized during the Company’s third quarter endedSeptember 30, 2002 and the non-competition agreement is being amortized overfive years. The goodwill was assigned to the Company’s non-core segment. Theaggregate amount of goodwill expected to be deductible for tax purposes isestimated to be $10,176,000.

 

The following unauditedpro forma consolidated results of operations for the three months endedMarch 31, 2002 assumes the acquisition of Sassy, Inc. occurred as ofJanuary 1, 2002.

 
| **(000’s)**       |   | **2002** |   |
|------------------------|--------|----------|--------|
|                   |   |     |   |
| Net sales              |   | $        | 89,376 |   |
| Net income             |   | $        | 10,950 |   |
| Net income per  share: |   |     |   |
| Basic                  |   | $        | 0.54   |   |
| Diluted                |   | $        | 0.54   |   |

 

The above amounts arebased upon certain assumptions and estimates, and do not reflect any benefitsfrom combined operations. The pro forma results have not been audited and donot necessarily represent results which would have occurred if the acquisitionhad taken place on the basis assumed above, and may not be indicative of theresults of future combined operations.

 

9

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The changes in thecarrying amount of goodwill during the quarter ended March 31, 2003 are asfollows:

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

 

10

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**NOTE 8 –SEGMENTS OF THE COMPANY AND RELATED INFORMATION**

 

The Company operates intwo segments which consist of the Company’s core gift business and theCompany’s non-core business, which includes the Company’s July 26, 2002acquisition of Sassy, Inc. This segmentation of the Company’s operationsreflects how the Company’s Chief Executive Officer currently views the resultsof operations. There are no intersegment revenues to eliminate. Prior to theacquisition of Sassy, Inc., the Company had only one reportable segment, assuch, the Company has reclassified the prior year’s single segment informationto be consistent with the current period’s presentation.

 

The Company’s corebusiness designs, manufactures through third parties and markets a wide varietyof gift and home décor products to retail stores throughout the United Statesand throughout the world via the Company’s international wholly-ownedsubsidiaries and distributors.  TheCompany’s non-core business designs and markets functional consumer productssold at comparable price points with comparable gross margins to each other andconsists of the Company’s wholly-owned subsidiaries, Sassy, Inc. and Bright ofAmerica, Inc. The products are sold to consumers, primarily in the UnitedStates, through mass marketers.

 

| **(In thousands)** |   |   |   |   |   |
|--------------------|--------|--------|--------|--------|--------|

 

|                       |   | **Three  months ended  March 31,** |   |
|----------------------------|--------|------------------------------------|--------|
|                       |   | **2003**                           |   | **2002** |   |
| Core                       |   |                               |   |   |   |
| Net sales                  |   | $                                  | 73,111 |   | $ | 75,487 |   |
| Income before income taxes |   | 13,190                             |   | 15,133 |   |
|                       |   |                               |   |   |   |
| Non-core                   |   |                               |   |   |   |
| Net sales                  |   | 14,440                             |   | 2,115 |   |
| Income before income taxes |   | 1,749                              |   | 240 |   |
|                       |   |                               |   |   |   |
| Consolidated               |   |                               |   |   |   |
| Net sales                  |   | 87,551                             |   | 77,602 |   |
| Income before income taxes |   | 14,939                             |   | 15,373 |   |
|                            |        |                                    |        |  |  |  |  |

 

Additionally, totalassets of each segment were as follows:

 
|     |   | **March  31, 2003** |   | **December  31, 2002** |   |
|----------|--------|---------------------|--------|------------------------|--------|
|     |   |                |   |                   |   |
| Core     |   | 364,160             |   | 363,820                |   |
| Non-core |   | 66,914              |   | 66,632                 |   |
|     |   |                |   |                   |   |
| Total    |   | 431,074             |   | 430,452                |   |

 

**NOTE 9 –ACCOUNTING FOR STOCK OPTIONS**

 

During the fourth quarterof 2002, the Company adopted the disclosure provisions of SFAS No. 148. The Company had previously adopted the disclosure-only provisions of SFASNo. 123, “Accounting for Stock-Based Compensation” and, therefore,accounts for its stock option plans in accordance with the provisions ofAccounting Principles Board (APB) Opinion No. 25, “Accounting for StockIssued to Employees”, and related interpretations using the intrinsic valuemethod of accounting. Accordingly, no compensation cost has been recognized forthe options granted under these Stock Plans except for the adoption ofFinancial Accounting Interpretation No. 44, “Accounting for CertainTransactions Involving Stock Compensation”, which resulted in non cash incomeof $55,000 and a non cash charge of $120,000 during the three months endedMarch 31, 2003 and March 31, 2002,

 

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respectively, and included in the ConsolidatedStatement of Income. The income and charge relate only to the options grantedduring 2000 that were repriced as of February 29, 2000 upon approval ofthe Board of Directors and Shareholders. Had compensation cost for theCompany’s Stock Plans been determined based on the fair value recognitionprovisions of SFAS No. 123 at the grant date, in the first quarters of2003 and 2002, the Company’s net income and earnings per share would have beenreduced to the pro forma amounts indicated below: 

 
| **Three months ended March 31,**                          |   |     |      |     |   |
|-----------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                      |   | **2003** |      | **2002** |   |
|                                                      |   |     |      |     |   |
| Net income-as  reported                                   |   | $        | 9,979,000 |     | $      | 9,936,000 |   |
| Deduction for  stock-based compensation expense-pro forma |   | $        | 253,000   |     | $      | 163,000 |   |
|                                                      |   |     |      |     |   |   |   |
| Net income-pro  forma                                     |   | $        | 9,726,000 |     | $      | 9,773,000 |   |
| Earnings per  share (basic)—as reported              |   | $        | 0.49      |     | $      | 0.49 |   |
| Earnings per  share (basic)—pro forma                |   | $        | 0.47      |     | $      | 0.48 |   |
| Earnings per  share (diluted)—as reported            |   | $        | 0.48      |     | $      | 0.49 |   |
| Earnings per  share (diluted)—pro forma              |   | $        | 0.47      |     | $      | 0.48 |   |

 

The fair value of eachoption granted under the Stock Option Plans is estimated on the date of grantusing the Black-Scholes option-pricing model with the following assumptionsused for all grants: 

 
|                                                            |   | **2003** |   | **2002** |   |
|-----------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                            |   |     |   |     |   |
| Dividend yield                                                  |   | 3.22     | %      | 3.36     | %      |
| Risk-free  interest rate                                        |   | 2.09     | %      | 3.69     | %      |
| Volatility                                                      |   | 34.48    | %      | 23.57    |   |
| Expected life  (years)                                          |   | 3.4      |   | 3.4      |   |
| Weighted average  fair value of options granted during the year |   | $        | 7.34   |     | $      | 4.87 |   |
|                                                                 |        |          |        |          |        |  |  |

 

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

 

Certainof the Company’sforeign subsidiaries periodically enter into foreign currency forward exchangecontract ("Forward Contracts") to hedge inventory purchases, bothanticipated and firm commitments, denominated in the United States dollar.  These contracts reduce foreign currency riskcaused by changes in exchange rates and are used to hedge these inventorypurchases, generally for periods up to 13 months. At March 31, 2003, theCompany’s Forward Contracts have expiration dates which range from one totwelve months.

 

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

 

 

**NOTE 11- RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In June 2001, FASB issuedSFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 willrequire the Company to record the fair value of an asset retirement obligationas a liability in the period in which it incurs a legal obligation associatedwith the retirement of tangible long-lived assets that result from theacquisition, construction, development, and/or normal use of the assets. TheCompany also will record a corresponding asset that is depreciated over thelife of the asset. Subsequent to the initial measurement of the assetretirement obligation, the obligation will be adjusted at the end of eachperiod to reflect the passage of time and changes in the estimated future cashflows underlying the obligation. The Company adopted SFAS No. 143 on January 1,2003 and such adoption did not have a material effect on the Company’s consolidatedfinancial statements.

 

In April 2002, the FASBissued Statement of Financial Accounting Standard No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections” 

 

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(“SFAS No. 145”). SFAS No. 145 requires companies toapply the criteria in APB Opinion No. 30, Reporting the Results of Operations -Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequency Occurring Events and Transaction(Opinion No. 30), in determining the classification of gains and lossesresulting from the extinguishment of debt. Additionally, SFAS No. 145 amendsSFAS No. 13 to require that certain lease modifications that have economiceffects similar to sale-leaseback transactions be accounted for in the samemanner as sale-leaseback transactions. SFAS No.145 is effective for fiscalyears beginning after May 15, 2002, or 2003 for the Company, and did not have amaterial impact on its consolidated financial statements.

 

In June 2002, the FASBissued SFAS No. 146, Accounting for Costs Associated with Exit or DisposalActivities. SFAS No. 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies Emerging Issues TaskForce (EITF) Issue 94-3, Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity. The provisions of this Statementare effective for exit or disposal activities that are initiated afterDecember 31, 2002. The adoption of SFAS No. 146 would effect the Company’sconsolidated financial statements if it were to engage in the aforementionedactivities, however, did not have a material impact on the Company’s consolidatedfinancial statements.

 

In November 2002, theFASB issued Interpretation No. 45, Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers. This Interpretation elaborates on the disclosures to be made by aguarantor in its interim and annual financial statements about its obligationsunder guarantees issued. The Interpretation also clarifies that a guarantor isrequired to recognize, at inception of a guarantee, a liability for the fairvalue of the obligation undertaken. The initial recognition and measurementprovisions of the Interpretation are applicable to guarantees issued ormodified after December 31, 2002 and did not have a material effect on theCompany’s consolidated financial statements.

 

In January 2003, the FASBissued Interpretation No. 46, Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51. This Interpretation addresses the consolidationby business enterprises of variable interest entities as defined in theInterpretation. The Interpretation applies immediately to variable interests invariable interest entities created after January 31, 2003, and to variableinterests in variable interest entities obtained after January 31, 2003.The application of this Interpretation did not have a material effect on theCompany’s consolidated financial statements.

 

In April 2003, the FASBissued No. 149, “Amendment of Statement 133 on Derivatives Instruments andHedging Activities”. SFAS No. 149 amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentembedded in other contracts (collectively referred to as derivatives) and forhedging activities under SFAS No. 133 “Accounting for Derivative Instruments andHedging Activities.” The changes are for decisions made as part of thederivatives implementation group process that effectively required amendmentsto Statement 133, in connection with other board projects dealing withfinancial instruments, and in connection with implementation issues raised inrelation to the application of the definition of a derivative, in particular,the meaning of an initial net investment that is smaller than would be requiredfor other types of contracts that would be expected to have a similar responseto changes in market factors, the meaning of underlying, and thecharacteristics of a derivative that contains financing components. SFAS No.149 will be effective for contracts entered into or modified after June 30,2003 except for implementation issues that have been effective for fiscalquarters that began prior to June 15, 2003, should continue to be applied inaccordance with their respective dates, and for hedging relationshipsdesignated after June 30, 2003 and all provisions of this Statement should beapplied prospectively. The Company does not believe the adoption of thisstatement will have a material impact on its consolidated financial statements.

 

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

 

The financial andbusiness analysis below provides information which the Company believes isrelevant to an assessment and understanding of the Company’s consolidatedfinancial condition, changes in financial condition and results of operations.This financial and business analysis should be read in conjunction withItem 1 of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

**SEGMENTS**

 

The Company operates intwo segments which consist of the Company’s core gift business and theCompany’s non-core business, which includes the Company’s July 26, 2002acquisition of Sassy, Inc. The Company’s core business designs, manufacturesthrough third parties and markets a wide variety of gift and home dècorproducts to retail stores throughout the United States and throughout the worldvia the Company’s international wholly-owned subsidiaries and distributors. InMarch 2003, the Company merged its wholly-owned subsidiary, Russ Home, Inc.,which sells home accessory items, into its parent company, Russ Berrie andCompany, Inc. within the core segment. The Company’s non-core businesses designand market functional consumer products sold at comparable price points with comparablegross margins to each other and consists of Sassy, Inc. since its acquisitionon July 26, 2002 and the Company’s wholly-owned subsidiary Bright ofAmerica, Inc. These products are sold to consumers, primarily in the UnitedStates, through mass marketers.

 

**RESULTSOF OPERATIONS—THREE MONTHS  ENDED MARCH31, 2003 AND 2002**

 

The Company’s consolidated net sales for the first quarter ended March31, 2003 increased 12.8% to $87,551,000 compared to consolidated net sales of$77,602,000 for the first quarter ended March 31, 2002. The net sales increasewas primarily attributable to the Company’s non-core segment, specifically,from sales generated by Sassy, Inc., whose results of operations are includedsince its acquisition on July 26, 2002, offset in part, by the decline innet sales in the Company’s core segment in its United States and certaininternational markets.

 

The Company’s core segment’s net sales for the first quarter endedMarch 31, 2003 decreased 3.2% to $73,111,000 compared to core net sales of$75,487,000 for the first quarter ended March 31, 2002. Net sales in theCompany’s core segment would also have been approximately $2.6 million lower inthe quarter had first quarter 2002 exchange rates remained in effect.  The Company’s non-core segment’s net salesfor the first quarter ended March 31, 2003 increased to $14,440,000 compared tonon-core net sales of $2,115,000 for the first quarter ended March  31,2002 as a result of the acquisition of Sassy, Inc.

 

Consolidated cost ofsales were 45.6% of net sales for the first quarter ended March 31, 2003 ascompared to 43.4% of consolidated net sales for the first quarter ended March31, 2002. The erosion in the consolidated gross profit percentage is primarilydue to the addition of Sassy, Inc. to the Company’s non-core segment at lowergross profit margins, offset, in part, by higher gross profit margins on salesof certain of the Company’s core product line concepts. Cost of sales for theCompany’s core segment were 41.7% of net sales for such segment for the firstquarter ended March 31, 2003 as compared to 43.0% of net sales for the firstquarter ended March 31, 2002. Cost of sales for the Company’s non-coresegment were 65.3% of net sales for such segment for the first quarter endedMarch 31, 2003 as compared to 60.7% of net sales for the first quarter endedMarch 31, 2002.

 

  Consolidated selling, general andadministrative expense was $34,819,000 or 39.8% of net sales for the firstquarter ended March 31, 2003 compared to $30,821,000 or 39.7% of net sales forthe first quarter 

 

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ended March 31, 2002. This increase in consolidated selling, general and administrativeexpense is due primarily to the addition of Sassy, Inc. to its non-core segmentand increased selling expenses and the new facility in the United Kingdom inits core segment. 

 

Consolidated investmentand other income of $2,099,000 for the first quarter ended March 31, 2003compares to $2,308,000 for the first quarter ended March 31, 2002, a decreaseof $209,000, or 9.1%. This decrease was primarily the result of lowerinvestment income, offset, in part, by foreign exchange gains of $234,000 inthe quarter ended March 31, 2003 compared to foreign exchange losses of$204,000 in the quarter ended March 31, 2002 in the Company’s core segment.

 

The consolidatedprovision for income taxes as a percent of income before taxes for the quarterended March 31, 2003 was 33.2% compared to 35.4% for the quarter ended March31, 2002. The decrease in the effective income tax rate is due primarily tolower effective tax rates of certain of the Company’s foreign operations,change in the Company’s valuation allowance and the income tax benefit ofinventory donations. 

 

Consolidated net incomefor the quarter ended March 31, 2003 was $9,979,000 compared to consolidatednet income of $9,936,000 for the quarter ended March 31, 2002, representing anincrease of $43,000 or 0.4% and a decrease of $0.01 or 2.0% per diluted share(See Note 3). The increase in consolidated net income was primarily the resultof increased sales, offset by increased consolidated selling, general andadministrative expense and lower investment and other income in the Company’score segment, as described above.

 

The Company is dependentupon information technology systems in many aspects of its business. During2002, the Company began a project to implement a new Enterprise ResourcePlanning (“ERP”) system for the Company’s core businesses and successfullycompleted the replacement of its warehouse management system in its SouthBrunswick, New Jersey and Petaluma, California, Canadian and Europeandistribution facilities in addition to the implementation of the purchasingmodule of its new ERP system worldwide. The Company’s prior custom softwarethat had been utilized to operate and manage its business and other third partysoftware systems are being replaced using a strategic and phased approach. TheCompany’s worldwide headquarters in the United States has also successfullycompleted the implementation of the finance module of the new ERP system andhas begun the transition to the order management and inventory modules duringthe second quarter of 2003. The Company’s international subsidiaries have begunto phase-in certain aspects of the Company’s new ERP system and the transitionto order management, inventory and finance modules is anticipated by the end of2003. The Company has not experiencedany significant business disruptions related to the replacement of thesesystems and anticipates that the replacement of its current systems will nothave a material adverse impact on its consolidated financial condition orresults of operations.

 

**Liquidityand Capital Resources**

 

As of March 31, 2003, theCompany had cash, cash equivalents, marketable securities and other investmentsof $229,028,000 as compared to $225,751,000 at December 31, 2002.

 

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As of March 31, 2003 andDecember 31, 2002, the Company had marketable securities and other investmentsof $137,449,000 and $132,238,000 respectively, included in the amounts above.This increase is primarily a result of the Company’s investment of additionalcash and cash equivalents in marketable securities. As of March 31, 2003 theseinvestments consist of U.S. government obligations, municipal obligations,preferred stock, mutual funds and an equity investment in a limited partnershipwhich primarily invests in mortgage-backed securities. The objective of theinvestment portfolio is to maximize after-tax returns while minimizing risk.The Company’s marketable securities are subject to market fluctuations basedlargely, but not exclusively, on the securities’ sensitivity to changes ininterest rates. For more information regarding other investments, see Note 2 ofthe Notes to Consolidated Financial Statements.

 

Working capitalrequirements during the quarter ended March 31, 2003 were met entirely throughinternally generated funds. The Company anticipates capital expenditurerequirements for 2003 to be approximately $8,000,000, primarily for systemsdevelopment costs. Capital expenditures for the quarter ended March 31, 2003were $2,600,000 which were primarily for systems development. The Companyremains in a highly liquid position and believes that the resources availablefrom cash and cash equivalents, marketable securities and other investments,operations and bank lines of credit are sufficient to meet the foreseeablerequirements of its business.

 

Certain buildings,including the newly constructed facility in the United Kingdom, are leased fromentities or parties owned or controlled by, or related to the late RussellBerrie, one of the Company’s former directors, who was also Chairman and ChiefExecutive Officer of the Company and a significant shareholder, until his deathon December 25, 2002. Ms. Angelica Berrie, Chief Executive Officer and adirector of the Company, is the beneficial owner of the landlord of the UKfacility as distributee under a trust established by the late Mr. Berrie,subject to administration by the executors of the Estate of Russell Berrie andby the trustees of said trust. The lease, which commenced in April 2002, is fora term of twenty years and includes a tenant’s option to terminate the lease atthe end of the tenth year. The Company occupied the facility June 2002.Annual base rental is approximately $1,600,000 with rent reviews at the end ofevery fifth year of the lease, adjusted to an open market rental value. Adiscussion of other related party information is included in Item13,"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS", of the Company'sAnnual Report on Form 10-K for the year ended December 31, 2002. 

 

The Company enters intoforward exchange contracts, principally to manage the economic currency risksassociated with the purchase of inventory by its European and Canadiansubsidiaries. Gains and losses related to such contracts were not material toits results of operations or cash flows. The Company does not anticipate anymaterial adverse impact on its results of operations or financial position fromthese contracts.

 

As of March 31, 2003, theBoard of Directors had previously authorized the Company to repurchase7,000,000 shares of common stock of which 5,643,200 shares have beenrepurchased since the beginning of the Company’s stock repurchase program inMarch 1990. During the quarter ended March 31, 2003, no shares were repurchasedby the Company.

 

Cash dividends of$5,754,000 ($0.28 per share) and $5,294,000 ($0.26 per share) were paid in the quarters ended March 31,2003 and March 31, 2002, respectively.

 

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

 

In connection with theCompany’s continuing expansion of its operations in the People’s Republic ofChina (“PRC”), the Company has voluntarily undertaken a review of theactivities of its offices in the PRC to assess their compliance with applicablelaws and regulations. As a result of this review, management has become awareof some potential operational and tax compliance issues under applicable PRClaws and regulations and is evaluating and intends to take any appropriatecorrective actions. As a result, although the relevant PRC authorities havebroad discretion with respect to the imposition of sanctions on 

 

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noncompliant companies, the Company does not expectthe consequences, if any, of these matters to have a material impact on itsresults of operations, financial condition or cash flows.

 

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

 

**CRITICALACCOUNTING POLICIES**

 

Financial ReportingRelease No. 60, “Cautionary Advice Regarding Disclosure about CriticalAccounting Policies”, issued by the Securities and Exchange Commission (“SEC”),advises companies to include a discussion of critical accounting policies ormethods used in the preparation of financial statements. Note 2 of theNotes to Consolidated Financial Statements on the Company’s Annual Report onForm 10-K for the year ended December 31, 2002,  includes a summary of the significant accounting policies andmethods used in the preparation of the Company’s Consolidated FinancialStatements. The following is a brief discussion of those accounting policiesand methods used by the Company which require subjective judgments and areconsidered critical to the understanding of the Company’s consolidatedfinancial condition, results of operations and cash flows.

 

**MarketableSecurities and Other Investments**

 

The Company has asignificant amount of marketable securities, all of which are considered asavailable-for-sale investments, in accordance with SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities”.Accordingly, these investments, except for the investment in the limitedpartnership, are carried in the accompanying consolidated balance sheet at fairvalue, with the difference between cost and fair value recorded as a componentof shareholders’ equity, net of tax, in Accumulated Other Comprehensive Income/Loss.The investment in the limited partnership is accounted for using the equitymethod and accordingly the Company’s proportionate share of the limitedpartnership’s income or loss amounting to non-cash income of $207,000 for thequarter ended March 31, 2003, which is included in investment and otherincome-net in the Consolidated Statement of Income. Realized gains and losseson sales of investments, as determined on a specific identification basis, areincluded in the Consolidated Statement of Income. As of March 31, 2003,marketable securities were comprised primarily of U.S. government obligations,municipal obligations, preferred stock and mutual funds. The Company’smarketable securities are subject to market fluctuations based largely, but notexclusively, on the securities’ sensitivity to changes in interest rates.

 

**AccountsReceivable, Trade and Revenue Recognition**

 

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

 

The Company recognizesrevenue in accordance with SEC Staff Accounting Bulletin No. 101, RevenueRecognition in Financial Statements (SAB 101), as amended. SAB 101 requiresthat four basic criteria must be met before revenue can be recognized:(1) persuasive evidence of a sales arrangement exists; (2) deliveryhas occurred or services rendered; (3) the amount of revenue is fixed anddeterminable; and (4) collectibility is reasonably assured.

 

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Determination of criteria(3) and (4) are based on management’s judgments regarding the fixed nature ofthe amounts billed to the Company’s customers for products delivered andservices rendered and the collectibility of those revenues.

 

**Inventory**

 

The Company valuesinventory at the lower of the actual cost or its current estimated marketvalue. The Company regularly reviews inventory quantities on hand, by item, andrecords a provision for excess inventory based primarily on the Company’shistorical experience and estimated forecast of product demand using historicaland recent ordering data relative to the quantity on hand for each item. Asignificant decrease in demand for the Company’s products could result in anincrease in the amount of excess inventory quantities on hand, however, theCompany manages inventory and monitors product purchasing to minimize thisrisk.

 

**Impairmentof Long-Lived Assets**

 

In accordance with SFASNo. 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 ismeasured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset. If thecarrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount ofthe asset exceeds the fair value of the asset, which is generally based ondiscounted cash flows.

 

Goodwill and intangibleassets not subject to amortization are tested annually for impairment, and aretested for impairment more frequently if events and circumstances indicate thatthe asset might be impaired. An impairment loss is recognized to the extentthat the carrying amount exceeds the asset’s fair value.

 

**AccruedLiabilities**

 

The preparation of theCompany’s consolidated financial statements in conformity with generallyaccepted accounting principles in the United States requires management to makecertain estimates and assumptions that affect the reported amounts ofliabilities and disclosure of contingent liabilities at the date of thefinancial statements. Such liabilities include, but are not limited to,accruals for various legal matters, tax accruals and valuation allowances, selffunded medical claims for its domestic business, product liability claims,sales commissions and bonuses and management incentive compensation plans. Thesettlement of the actual liabilities could differ from the estimates includedin the Company’s consolidated financial statements.

 

**RECENTLYISSUED ACCOUNTING STANDARDS**

 

The information set forth in Part I, FinancialInformation, Item 1, “Notes to Consolidated Financial Statements, Note 10 -“Recently Issued Accounting Standards”, of this Quarterly Report on Form 10-Qis incorporated herein by reference thereto.

 

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##### **FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form 10-Q contains certainforward-looking statements. Additional written and oral forward-lookingstatements may be made by the Company from time to time in Securities andExchange Commission (SEC) filings and otherwise. The Private SecuritiesLitigation Reform Act of 1995 provides a safe-harbor for forward-lookingstatements. These statements may be identified by the use of forward-lookingwords or phrases including, but not limited to, “anticipate”, “believe”,“expect”, “intend”, “may”, “planned”, “potential”, “should”, “will” or “would”.The Company cautions readers that results predicted by forward-lookingstatements, including, without limitation, those relating to the Company’s futurebusiness prospects, revenues, working capital, liquidity, capital needs,interest costs and income are subject to certain risks and uncertainties thatcould cause actual results to differ materially from those indicated in theforward-looking statements. Specific risks and uncertainties include, but arenot limited to, the Company’s ability to integrate its acquisition of Sassy, 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 Republic of China (“PRC”) authorities withrespect to the Company’s PRC operations, the resolution of various legal matters,possible delays in the introduction of new products, customer acceptance ofproducts, issues related to the Company’s new business ventures, changes inforeign currency exchange rates, issues related to the Company’s computersystems, the current and future outlook of the global retail market, and otherfactors.

 

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES****ABOUTMARKET RISK**

 

As of March 31, 2003, there have been no materialchanges in the Company’s market risks as described in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2002.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

Based on their evaluation, as of a date within90 days of the filing date of this Quarterly Report on Form 10-Q, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat the Company’s disclosure controls and procedures (as defined inRules 13a – 14(c) and 15d – 14(c) under the Security Exchange Act of1934, as amended) are effective. There have been no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of their evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

The information set forth in Part I, FinancialInformation, Item 1, “Notes to Consolidated Financial Statements, Note 6 –Litigation,”  of this Quarterly Report on Form 10-Q is incorporated hereinby reference thereto.

 

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**ITEM 6.  EXHIBITS AND REPORTS ONFORM 8-K**

 

a)             Exhibits to this Quarterly Report on Form 10-Q.

 

10.71 Agreementdated March 25, 2003 between Russ Berrie and Company, Inc. and Jeff Bialosky.

 

99.1 Certificationof CEO required by Section 906 of the Sarbanes Oxley Act of 2002.

 

99.2 Certificationof CFO required by Section 906 of the Sarbanes Oxley Act of 2002.

 

b)            During the quarter ended March 31, 2003, the Companyfiled a current report on Form 8-K with respect to Item 1.  Changes in Control of Registrant on January 9, 2003.

 

**Items 2,3, 4 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  May 15, 2003 |                           | John D. Wille           |
|                    |                           | Vice President and      |
|                    |                           | Chief Financial Officer |
|                         |                                |                         |  |  |

 

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**CERTIFICATIONS**

 

I, Angelica Berrie,certify that:

 

1.               I have reviewed this quarterly report onForm 10-Q of Russ Berrie and Company, Inc.;

 

2.               Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

(a)   designedsuch disclosure controls and procedures to ensure that material

information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

(b)   evaluatedthe effectiveness of the registrant’s disclosure controls and procedures

as of a date within 90 days prior to the filing dateof this quarterly report (the “Evaluation Date”); and

 

(c)   presentedin this quarterly report our conclusions about the effectiveness of the

disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

(a)   allsignificant deficiencies in the design or operation of internal controls which

could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

(b)   any fraud,whether or not material, that involves management or other employees

who have a significant role in the registrant’sinternal controls; and

 

6.               The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:  | May 15, 2003 |                     | /s/ ANGELICA BERRIE |
|--------|--------------|--------------------------|---------------------|
|   |         | Angelica Berrie          |
|   |         | Chief Executive  Officer |

 

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**CERTIFICATIONS**

 

I, John D. Wille, certifythat:

 

1.               I have reviewed this quarterly report onForm 10-Q of Russ Berrie and Company, Inc.;

 

2.               Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

(a)   designedsuch disclosure controls and procedures to ensure that material

information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

(b)   evaluatedthe effectiveness of the registrant’s disclosure controls and procedures

as of a date within 90 days prior to the filing dateof this quarterly report (the “Evaluation Date”); and

 

(c)   presentedin this quarterly report our conclusions about the effectiveness of the

disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

(a)   all significantdeficiencies in the design or operation of internal controls which

could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

(b)   any fraud,whether or not material, that involves management or other employees

who have a significant role in the registrant’sinternal controls; and

 

6.               The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  | May 15, 2003 |                                        | /s/ JOHN D. WILLE |
|--------|--------------|---------------------------------------------|-------------------|
|   |         | John D. Wille                               |
|   |         | Vice President  and Chief Financial Officer |

 

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