** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

| **(Mark  One)** |
|-----------------|
| **ý**      |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

| **For the quarterly period ended  September 30, 2001** |
|--------------------------------------------------------|
|                                                   |   |   |
|                                                   | **OR** |   |
|                                                   |   |   |

 

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

 

| **For  the transition period from _____________ to _____________** |
|--------------------------------------------------------------------|
|                                                               |
| **Commission  file number**                                        | **1-8681** |   |   |   |

 

** **

**RUSS BERRIE AND COMPANY, INC.**

(Exact name ofregistrant 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'stelephone number, including area code)

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ýNo o

 

The number of sharesoutstanding of each of the registrant’s classes of common stock, as of November7, 2001 was as follows:

 

| **CLASS**                         |   | **OUTSTANDING AT NOVEMBER 7, 2001** |
|-----------------------------------|--------|-------------------------------------|
| Common Stock, $0.10  stated value |   | 20,121,727                          |

#  

 

 

**RUSS BERRIE AND COMPANY, INC.**

** **

**INDEX**

 
| **PART I -  FINANCIAL INFORMATION** |                                                                                   |
|-------------------------------------|----------------------------------------------------------------------------------------|
|                                |                                                                                   |
| Item 1.                             | Financial Statements                                                                   |   |
|                                |                                                                                   |   |   |
|                                | a)                                                                                     | Consolidated Balance Sheet  as of September 30, 2001 and December 31, 2000 |   |
|                                |                                                                                   |   |   |
|                                |                                                                                   |   |   |
|                                | b)                                                                                     | Consolidated Statement of Income for the three  months and the nine months ended September 30, 2001 and 2000 |   |
|                                |                                                                                   |   |   |
|                                |                                                                                   |   |   |
|                                | c)                                                                                     | Consolidated  Statement of Cash Flows for the nine months ended September 30, 2001 and 2000 |   |
|                                |                                                                                   |   |   |
|                                |                                                                                   |   |   |
|                                | d)                                                                                     | Notes to  Consolidated Financial Statements |   |
|                                |                                                                                   |   |   |
|                                |                                                                                   |   |   |
| Item  2.                            | Management's  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                |                                                                                   |   |   |
| Item  3.                            | Quantitative  and Qualitative Disclosures About Market Risk                            |   |
|                                |                                                                                   |   |   |
|                                |                                                                                   |   |   |
| **PART II - OTHER INFORMATION**     |                                                                                   |
|                                |                                                                                   |   |   |
| Item 1.                             | Legal Proceedings                                                                      |   |
|                                |                                                                                   |   |   |
| Item 6.                             | Exhibits and  Reports on Form 8-K                                                      |   |
|                                |                                                                                   |   |   |
| Signatures                          |                                                                                   |

 

 

 
| **PART 1****-  FINANCIAL INFORMATION** |
|----------------------------------------|
|                                   |   |
|                                   | **ITEM 1****.  FINANCIAL STATEMENTS** |
|                                   |   |
|                                   | **RUSS BERRIE AND COMPANY, INC. AND  SUBSIDIARIES** |
|                                   | **CONSOLIDATED BALANCE SHEET** |
|                                   | **(Dollars in Thousands)** |

 
|                                                                                                                     |   | **(UNAUDITED)**   |          |
|--------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------------|
|                                                                                                                     |   | **September 30,** |          | **December  31,** |   |
|                                                                                                                     |   | **2001**          |          | **2000** |   |
| ***ASSETS***                                                                                                             |   |              |          |   |   |
| Current  assets                                                                                                          |   |              |          |   |   |
| Cash  and cash equivalents                                                                                               |   | $                 | 108,136       |   | $ | 77,794 |   |
| Marketable  securities                                                                                                   |   | 123,675           |          | 141,032 |   |
| Accounts  receivable, trade, less allowances of $3,753 in 2001 and $3,460 in 2000                                        |   | 80,922            |     | 58,673 |     |
| Inventories  – net                                                                                                  |   | 38,832            |          | 47,430 |   |
| Prepaid  expenses and other current assets                                                                               |   | 4,040             |          | 5,508 |   |
| Deferred  income taxes                                                                                                   |   | 5,884             |          | 6,628 |   |
| **Total  current assets**                                                                                                |   | **361,489**       | ** **    | **337,065** | ** ** |
|                                                                                                                     |   |              |          |   |   |
| Property,  plant and equipment – net                                                                                |   | 25,444            |          | 26,745 |   |
| Other  assets                                                                                                            |   | 3,842             |          | 3,199 |   |
| **Total  assets**                                                                                                        |   | **$**             | **390,775**   | ** ** | **$** | **367,009** | ** ** |
|                                                                                                                     |   |              |          |   |   |
| ***LIABILITIES AND SHAREHOLDERS' EQUITY***                                                                               |   |              |          |   |   |
| Current  liabilities                                                                                                     |   |              |          |   |   |
| Accounts  payable                                                                                                        |   | $                 | 4,756         |   | $ | 4,913 |   |
| Accrued  expenses                                                                                                        |   | 19,989            |          | 20,313 |   |
| Accrued  income taxes                                                                                                    |   | 7,594             |          | 7,192 |   |
| **Total  current liabilities**                                                                                           |   | **32,339**        | ** **    | **32,418** | ** ** |
| Commitments  and contingencies                                                                                           |   |              |          |   |   |
| Shareholders'  equity                                                                                                    |   |              |          |   |   |
| Common  stock: $.10 stated value; authorized 50,000,000 shares; issued 2001,  25,749,309 shares; 2000, 25,413,626 shares |   | 2,575             |          | 2,541 |   |
| Additional  paid in capital                                                                                              |   | 70,388            |          | 63,103 |   |
| Retained  earnings                                                                                                       |   | 398,054           |          | 381,479 |   |
| Accumulated  other comprehensive loss                                                                                    |   | (2,507            | )             | (4,310 | ) |
| Unearned  compensation                                                                                                   |   | (93               | )             | (149 | ) |
| Treasury  stock, at cost (5,631,514 shares at September 30, 2001 and 5,557,514 shares  at December 31, 2000)             |   | (109,981          | )             | (108,073 | ) |
|                                                                                                                     |   |              |          |   |   |
| **Total  shareholders' equity**                                                                                          |   | **358,436**       | ** **    | **334,591** | ** ** |
|                                                                                                                     |   |              |          |   |   |
| **Total  liabilities and shareholders' equity**                                                                          |   | **$**             | **390,775**   | ** ** | **$** | **367,009** | ** ** |

 

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

 

##  

| **RUSS BERRIE AND COMPANY, INC. AND  SUBSIDIARIES** |
|-----------------------------------------------------|
| **CONSOLIDATED  STATEMENT OF INCOME**               |
| **(Dollars in Thousands, Except Per Share Data)**   |

 
|                                         |   | **(UNAUDITED)**        |       | **(UNAUDITED)**       |       |
|----------------------------------------------|--------|------------------------|------------|-----------------------|------------|
|                                         |   | **THREE MONTHS ENDED** |       | **NINE MONTHS ENDED** |       |
|                                         |   | **SEPTEMBER 30,**      |       | **SEPTEMBER 30,**     |       |
|                                         |   | **2001**               |       | **2000**              |       | **2001** |   | **2000** |   |
|                                         |   |                   |       |                  |       |   |   |   |   |
| Net  sales                                   |   | $                      | 87,441     |                  | $          | 97,251 |   | $ | 224,648 |   | $ | 233,104 |   |
|                                         |   |                   |       |                  |       |   |   |   |   |
| Cost of Sales                                |   | 38,808                 |       | 41,718                |       | 100,736 |   | 101,216 |   |
|                                         |   |                   |       |                  |       |   |   |   |   |
| **Gross  profit**                            |   | **48,633**             | ** ** | **55,533**            | ** ** | **123,912** | ** ** | **131,888** | ** ** |
|                                         |   |                   |       |                  |       |   |   |   |   |
| Selling,  general and administrative expense |   | 27,887                 |       | 28,291                |       | 85,864 |   | 83,144 |   |
|                                         |   |                   |       |                  |       |   |   |   |   |
| Investment and  other income-net             |   | 1,677                  |       | 3,236                 |       | 6,171 |   | 6,764 |   |
|                                         |   |                   |       |                  |       |   |   |   |   |
| **Income  before taxes**                     |   | **22,423**             | ** ** | **30,478**            | ** ** | **44,219** | ** ** | **55,508** | ** ** |
|                                         |   |                   |       |                  |       |   |   |   |   |
| Provision for  income taxes                  |   | 5,981                  |       | 9,932                 |       | 13,192 |   | 18,160 |   |
|                                         |   |                   |       |                  |       |   |   |   |   |
| **Net**  i**ncome**                          |   | **$**                  | **16,442** | ** **            | **$**      | **20,546** | ** ** | **$** | **31,027** | ** ** | **$** | **37,348** | ** ** |
|                                         |   |                   |       |                  |       |   |   |   |   |
| **Net  income per share:**                   |   |                   |       |                  |       |   |   |   |   |
| Basic                                        |   | $                      | 0.82       |                  | $          | 1.03 |   | $ | 1.55 |   | $ | 1.84 |   |
| Diluted                                      |   | $                      | 0.81       |                  | $          | 1.02 |   | $ | 1.53 |   | $ | 1.84 |   |

 

 

***The accompanyingnotes are an integral part of the consolidated financial statements.***

 

 

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

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

**(Dollars in Thousands)**

 
|                                                                               |   | **(UNAUDITED)**       |          |
|------------------------------------------------------------------------------------|--------|-----------------------|---------------|
|                                                                               |   | **NINE MONTHS ENDED** |          |
|                                                                               |   | **SEPTEMBER 30,**     |          |
|                                                                               |   | **2001**              |          | **2000** |   |
| **Cash  flows from operating activities:**                                         |   |                  |          |   |   |
| Net income                                                                         |   | $                     | 31,027        |   | $ | 37,348 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                  |     |   |     |
| Depreciation  and amortization                                                     |   | 2,998                 |          | 3,014 |   |
| Provision  for accounts receivable reserves                                        |   | 1,623                 |          | 2,018 |   |
| Income  from contingency reserve reversal (Note 1)                                 |   | -                     |          | (1,607 | ) |
| Other                                                                              |   | 1,641                 |          | 667 |   |
| Changes  in assets and liabilities:                                                |   |                  |          |   |   |
| Accounts receivable                                                                |   | (23,872               | )             | (23,116 | ) |
| Inventories  – net                                                            |   | 8,598                 |          | (1,729 | ) |
| Prepaid  expenses and other current assets                                         |   | 1,468                 |          | (108 | ) |
| Other  assets                                                                      |   | 31                    |          | (298 | ) |
| Accounts  payable                                                                  |   | (157                  | )             | (2,161 | ) |
| Accrued  expenses                                                                  |   | (324                  | )             | 1,539 |   |
| Accrued  income taxes                                                              |   | 402                   |          | 3,330 |   |
| Total  adjustments                                                                 |   | (7,592                | )             | (18,451 | ) |
| Net cash provided by operating activities                                          |   | 23,435                |          | 18,897 |   |
|                                                                               |   |                  |          |   |   |
| **Cash  flows from investing activities:**                                         |   |                  |          |   |   |
| Purchase  of marketable securities                                                 |   | (69,696               | )             | (35,144 | ) |
| Proceeds  from sale of marketable securities                                       |   | 88,310                |          | 38,422 |   |
| Proceeds  from sale of fixed assets                                                |   | 59                    |          | 52 |   |
| Capital  expenditures                                                              |   | (2,096                | )             | (3,330 | ) |
| Net cash provided by investing activities                                          |   | 16,577                |          | - |   |
|                                                                               |   |                  |          |   |   |
| **Cash  flows from financing activities:**                                         |   |                  |          |   |   |
| Proceeds  from issuance of common stock                                            |   | 7,319                 |          | 1,343 |   |
| Dividends  paid to shareholders                                                    |   | (14,452               | )             | (13,391 | ) |
| Purchase  of treasury stock                                                        |   | (1,908                | )             | (15,027 | ) |
| Net  cash (used in) financing activities                                           |   | (9,041                | )             | (27,075 | ) |
|                                                                               |   |                  |          |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                      |   | (629                  | )             | (1,435 | ) |
| Net  increase (decrease) in cash and cash equivalents                              |   | 30,342                |          | (9,613 | ) |
| Cash  and cash equivalents at beginning of period                                  |   | 77,794                |          | 64,908 |   |
| Cash and cash equivalents at end of period                                         |   | $                     | 108,136       |   | $ | 55,295 |   |
|                                                                               |   |                  |          |   |   |
| **Cash  paid during the period for:**                                              |   |                  |          |   |   |
| Interest                                                                           |   | $                     | 148           |   | $ | 100 |   |
| Income taxes                                                                       |   | $                     | 12,790        |   | $ | 14,829 |   |

 

 

 

***The accompanyingnotes are an integral part of the consolidated financial statements.***

 

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

(Unaudited)

 

**NOTE 1 – INTERIM CONSOLIDATED FINANCIAL STATEMENTS**

 

The accompanying unaudited interim consolidated financial statementshave been prepared by Russ Berrie and Company, Inc. and its subsidiaries (the“Company”) in accordance with generally accepted accounting principles forinterim financial reporting and the instructions to Form 10-Q and Rule 10-01 ofRegulation 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 information furnished reflects all adjustments, which are, inthe opinion of management, of a normal recurring nature and necessary for afair presentation of the Company’s financial position, results of operationsand cash flows for the interim periods presented.  Results for interim periods are not necessarily an indication ofresults to be expected for the year.

 

This report on Form 10-Q for the three and nine months ended September30, 2001 should be read in conjunction with the Company’s Quarterly Reports onForm 10-Q for the periods ended March 31, 2001 and June 30, 2001, and itsAnnual Report on Form 10-K for its year ended December 31, 2000.  Certain prior year amounts have beenreclassified to conform with current year’s presentation.

 

Investment and other income-net for the three and nine months endedSeptember 30, 2000 includes income of $1,607,000, before tax, or $1,012,000($0.05 per diluted share), after tax, for the reversal of certain contingencyreserves related to the Company’s sale of its toy business segment in May 1997.

 

### **NOTE 2 - EARNINGSPER SHARE**

 

A reconciliation of weighted average common shares outstanding toweighted average common shares outstanding assuming dilution is as follows:

 
|                                                |   | **Three Months Ended** |          | **Nine Months Ended** |          |
|-----------------------------------------------------|--------|------------------------|---------------|-----------------------|---------------|
|                                                |   | **September 30,**      |          | **September 30,**     |          |
|                                                |   | **2001**               |          | **2000**              |          | **2001** |   | **2000** |   |
|                                                |   |                   |          |                  |          |   |   |   |   |
| Average common shares  outstanding                  |   | 20,162,000             |          | 20,004,000            |          | 20,060,000 |   | 20,303,000 |   |
| Dilutive effect of  common shares issuable (1)      |   | 186,000                |          | 70,000                |          | 170,000 |   | 48,000 |   |
| Average common shares outstanding assuming dilution |   | 20,348,000             |     | 20,074,000            |     | 20,230,000 |     | 20,351,000 |   |

 

----

(1)  Issuable under stock option plans.

 

Stock optionsoutstanding at September 30, 2000 to purchase 383,929 shares of common stockwere not included in the computation of earnings per common share assumingdilution because the options’ exercise prices were greater than the averagemarket price of the common shares. There were no such options outstanding at September 30, 2001.

 

The Notes to these consolidated financial statements reflect basicearnings per share unless otherwise stated or indicated.

###  

### **NOTE3 - DIVIDENDS**

 

Cash dividends of$4,842,000  ($0.24 per share) were paidon August 31, 2001 to shareholders of record of the Company’s Common Stock onAugust 17, 2001.  Cash dividends of$14,452,000 ($0.24 per share per quarter) were paid in the nine months endedSeptember 30, 2001.  See also Part I,Financial Information, Item 2, "Liquidity and Capital Resources," ofthis Report on Form 10-Q regarding a subsequent event for the declaration of aone-time special dividend.

 

Cash dividends of $4,394,000 ($0.22 per share) were paid on September1, 2000 to shareholders of record of the Company's Common Stock on August 18,2000.  Cash dividends of $13,391,000 ($0.22per share per quarter) were paid in the nine months ended September 30, 2000.

 

### ** **

### **NOTE4 - COMPREHENSIVE INCOME**

 

In accordance with Statement of Financial Accounting Standards (SFAS)No. 130, “Reporting Comprehensive Income”, comprehensive income, representingall changes in Shareholders’ equity during the period other than changesresulting from the issuance or repurchase of the Company’s common stock andpayment of dividends and unearned compensation, is reconciled to net income forthe three and nine months ended September 30, 2001 and 2000 as follows:

 
|                                                                          |   | **Three Months Ended** |       | **Nine  Months Ended** |       |
|-------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|------------|
|                                                                          |   | **September 30,**      |       | **September  30,**     |       |
|                                                                          |   | **2001**               |       | **2000**               | ** ** | **2001** |   | **2000** |   |
|                                                                          |   |                   |       |                   |       |   |   |   |   |
| Net income                                                                    |   | $                      | 16,442,000 |                   | $          | 20,546,000 |   | $ | 31,027,000 |   | $ | 37,348,000 |   |
| Other comprehensive income (loss), net of taxes:                              |   |                   |       |                   |       |   |   |   |   |
| Foreign currency  translation adjustments                                     |   | 924,000                |       | (1,530,000             | )          | (1,002,000 | ) | (3,134,000 | ) |
| Net unrealized gain on  securities available-for-sale                         |   | 1,040,000              |       | 630,000                |       | 1,885,000 |   | 466,000 |   |
| Net unrealized gain on  foreign currency forward exchange contracts and other |   | 317,000                |       | -                      |       | 920,000 |   | - |   |
|                                                                          |   |                   |       |                   |       |   |   |   |   |
| Other  comprehensive income (loss)                                            |   | 2,281,000              |       | (900,000               | )          | 1,803,000 |   | (2,668,000 | ) |
|                                                                          |   |                   |       |                   |       |   |   |   |   |
| Comprehensive  income                                                         |   | $                      | 18,723,000 |                   | $          | 19,646,000 |   | $ | 32,830,000 |   | $ | 34,680,000 |   |

** **

** **

**NOTE 5 – LITIGATION**

** **

This information is incorporated herein by reference to Part II, OtherInformation, Item 1, "Legal Proceedings" of this Report on Form 10-Q.

 

 

**NOTE 6 – RECENT ACCOUNTING CHANGES**

** **

**SFAS No.133**

 

InJune 1998, the Financial Accounting Standards Board ("FASB") issuedSFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities”,as amended by SFAS No. 138, “Accounting for Certain Derivatives and CertainHedging Activities, an amendment of SFAS No. 133”, establishing the accountingand reporting for derivatives and hedging activities.

 

Underthe deferral permitted by SFAS No. 137, “Accounting for Derivatives and HedgingActivities – Deferral of the Effective Date of SFAS No. 133”, SFAS No. 133 asamended by SFAS No. 138, was adopted by the Company effective January 1, 2001and did not have a material effect on the Company’s consolidated financialstatements upon adoption and for the three and the nine months ended September30, 2001.

 

ForeignCurrency Forward Exchange Contracts

 

Certainof the Company’s foreign subsidiaries periodically enter into foreign currencyforward exchange contracts ("Forward Contracts") to hedge inventorypurchases, both anticipated and firm commitments, denominated in the UnitedStates dollar.  These contracts reduceforeign currency risk caused by changes in exchange rates and are used to hedgethese inventory purchases, generally for periods from 3 to 12 months.

 

Sincethere is a direct relationship between the Forward Contracts and the currencydenomination of the underlying transactions, such Forward Contracts are highlyeffective in hedging the cash flows of certain of the Company’s foreignsubsidiaries related to transactions denominated in the United States dollar.  These Forward Contracts meet the criteriafor cash flow hedge accounting treatment and accordingly, gains or losses, areincluded in other comprehensive income (loss) and are recognized in cost ofsales based on the turnover of inventory.

 

Thefair value of the Forward Contracts was estimated by obtaining quotes for suchcontracts with similar terms, adjusted where necessary for maturitydifferences, and was included in the Consolidated Balance Sheet within othercurrent assets with the corresponding offset included in accumulated othercomprehensive loss.

 

Optionsand Futures Contracts

 

TheCompany periodically enters into options and futures contracts in connectionwith managing interest rate risk associated with a portion of its preferredsecurities investment portfolio.  TheCompany does not designate these derivatives as hedges.  The derivatives are marked to fair valuethrough the Consolidated Statement of Income and the preferred securities aremarked to fair value through other comprehensive income (loss).  The fair value of the options and futurescontracts are included in the Consolidated Balance Sheet within marketablesecurities.

 

 

**SFASNos. 141, 142 and 143**

 

InJuly 2001, the FASB issued SFAS Nos. 141 and 142. SFAS No. 141, “BusinessCombinations” is effective for all business combinations initiated after June30, 2001 and requires that the purchase method of accounting be used.  Use of the pooling of interests method ofaccounting is prohibited except for transactions initiated prior to July 1,2001. This statement also requires that other intangible assets be recognizedas assets apart from goodwill if they arise from contractual or other legalrights, or if they are separable or capable of being separated from theacquired entity and sold, transferred, licensed, rented or exchanged. TheCompany does not currently have any pending acquisitions that will be impactedby this statement.

 

SFASNo. 142, “Goodwill and Other Intangible Assets” specifies the financialaccounting and reporting for goodwill and other intangible assets.  Amortization of goodwill, including goodwillrecorded in past business combinations, will cease for fiscal years beginningafter December 15, 2001. Goodwill recognized on or before June 30, 2001, shouldbe assigned to one or more reporting units and shall be tested, at leastannually, for impairment as of the beginning of the fiscal year in which SFASNo. 142 is initially applied in its entirety. The useful lives of otherintangible assets acquired on or before June 30, 2001 should be reassessed andthe remaining amortization periods adjusted accordingly.  Previously recognized other intangibleassets deemed to have indefinite lives should be tested for impairment. Thereassessment of other intangible assets must be completed during the firstquarter of 2002 and the assignment of goodwill to reporting units, along withcompletion of the first step of the transitional goodwill impairment tests,must be completed during the first six months of 2002. The Company is currentlyevaluating the effect of the adoption of SFAS No. 142 that becomes effectiveJanuary 1, 2002.

 

SFASNo. 143, “Accounting for Asset Retirement Obligations” was adopted by the FASBin July 2001 and requires the recognition of a liability for an assetretirement obligation in the period in which it is incurred.  When the liability is initially recorded,the carrying amount of the related long-lived asset is correspondinglyincreased. Over time, the liability is accreted to its present value and therelated capitalized charge is depreciated over the useful life of the asset.SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, orcalendar year 2003 for the Company. The Company is currently reviewing theimpact, if any, of SFAS No. 143.

 

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

 

**RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED**

** SEPTEMBER 30, 2001AND SEPTEMBER 30, 2000**

 

The Company's netsales for the nine months ended September 30, 2001 decreased 3.6% to$224,648,000 compared to net sales of $233,104,000 for the nine months endedSeptember 30, 2000. Net sales for the nine months ended September 30, 2001would have been approximately $4,000,000 higher had exchange rates for the ninemonths ended September 30, 2000 remained in effect for the nine months endedSeptember 30, 2001 and were also effected by the continued soft retail marketand recent tragic events.  Net Sales for the nine months ended September30, 2000 have been restated to conform to the presentation for the nine monthsended September 30, 2001, reflecting the impact of the new accounting standardfor shipping and handling fees and costs.

 

Cost of sales were 44.8% of net sales for the nine months endedSeptember 30, 2001 as compared to 43.4% for the same period in 2000.  Thisincrease primarily reflects lower gross profit margins on sales of certain ofthe Company’s product line concepts due to a change in the Company’s productmix offset, in part, by lower relative volumes being distributed through otherthan normal channels.  Cost of sales for the nine months ended September30, 2000 have been restated to conform to the presentation for the nine monthsended September 30, 2001, reflecting the impact of the new accounting standardfor shipping and handling fees and costs.

 

Selling, general and administrative expense was $85,864,000 or 38.2% ofnet sales for the nine months ended September 30, 2001 compared to $83,144,000or 35.7% of net sales for the nine months ended September 30, 2000, an increaseof $2,720,000 or 3.3% compared to the same period in the prior year. Included in selling, general and administrative expense for the nine monthsended September 30, 2001, was a charge of $1,132,000 resulting from theincrease of the Company’s stock price during the nine months ended September30, 2001, subsequent to stock options granted and repriced during 2000. Excluding this charge, selling, general and administrative expense increased$1,588,000, or 1.9% to $84,732,000, representing an increase to 37.7% of netsales for the nine months ended September 30, 2001. This increase in selling,general and administrative expense is due primarily to the Company’s strategicdeployment of resources in implementing new systems, developing new business venturesand products and expanding the worldwide salesforce. Selling, general andadministrative expense for the nine months ended September 30, 2000 has beenrestated to conform to the presentation for the nine months ended September 30,2001, reflecting the impact of the new accounting standard for shipping andhandling fees and costs.

Investment and other income of $6,171,000 for the nine months endedSeptember 30, 2001 compares to $6,764,000 for the nine months ended September30, 2000.  Included in investment and other income for the nine monthsended September 30, 2000 was income of $1,607,000 for the reversal of certaincontingency reserves related to the Company’s sale of its toy business segmentin May 1997. Excluding the income from this reserve reversal, investment andother income increased $1,014,000. This increase primarily relates to increasedinvestment income attributable to lower losses recognized on the sale ofcertain of the Company’s investment securities and lower foreign exchangelosses recognized by the Company’s international subsidiaries.

 

The provision for incometaxes as a percent of income before taxes for the nine months ended September30, 2001 was  29.8% as compared to 32.7% for the nine months endedSeptember 30, 2000. This decrease in the effective tax rate is due primarily tothe reversal of certain tax contingency reserves, relatively higher permanentitems for tax reporting purposes and the change in the mix of the foreignsubsidiaries income before taxes.

 

Net income for the nine months ended September 30, 2001 of $31,027,000compares to net income of $37,348,000 for the same period of the prior year,representing a decline of $6,321,000 or 16.9%.  Included in net income forthe nine months ended September 30, 2001, was a charge of $736,000 ($1,132,000before tax), resulting from the increase of the Company’s stock price duringthe nine months ended September 30, 2001, subsequent to stock options grantedand repriced during 2000. Included in net income for the nine months endedSeptember 30, 2000 was income of $1,012,000 ($1,607,000 before tax) for thereversal of certain contingency reserves related to the Company’s sale of itstoy business segment in May 1997. Excluding the charge for the stock optionrepricing and the reserve reversal, net income declined $4,573,000, or 12.6%,which was due principally to lower gross profit and increased selling, generaland administrative expense offset in part, by a lower provision for incometaxes and by higher investment and other income.

 

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER30, 2001 AND SEPTEMBER 30, 2000**

 

The Company's netsales for the three months ended September 30, 2001 decreased 10.1% to$87,441,000 compared to net sales of $97,251,000 for the three months endedSeptember 30, 2000.  Net sales for the quarter excluded approximately$6,000,000 of shipments related to Christmas merchandise that is typicallyshipped in the third quarter, however was shipped in the second quarter due toearly availability. Had these shipments occurred in the third quarter of2001, net sales for the quarter would have decreased 3.9%, due principally tolower sales volume resulting from the continued soft retail market and recenttragic events. Net sales for the third quarter of 2001 would have beenapproximately $1,100,000 higher had third quarter 2000 exchange rates remainedin effect for the third quarter of 2001.  Net Sales for the three monthsended September 30, 2000 have been restated to conform to the presentation forthe three months ended September 30, 2001, reflecting the impact of the newaccounting standard for shipping and handling fees and costs.

Cost of sales were44.4% of net sales for the three months ended September 30, 2001 as compared to42.9% for the same period in 2000, primarily reflecting lower gross profitmargins on sales of certain of the Company’s product line concepts.  Costof sales for the three months ended September 30, 2000 have been restated toconform to the presentation for the three months ended September 30, 2001,reflecting the impact of the new accounting standard for shipping and handlingfees and costs.

 

 

Selling, generaland administrative expense was $27,887,000 or 31.9% of net sales for the threemonths ended September 30, 2001 compared to $28,291,000 or 29.1% of net salesfor the three months ended September 30, 2000, a decrease of $404,000 or 1.4%compared to the same period in the prior year. The decrease in selling,general and administrative expense is due primarily to the Company’s loweradvertising costs as compared to the three months ended September 30, 2000.Selling, general and administrative expense for the three months endedSeptember 30, 2000 has been restated to conform to the presentation for thethree months ended September 30, 2001, reflecting the impact of the newaccounting standard for shipping and handling fees and costs.

 

Investment andother income of $1,677,000 for the three months ended September 30, 2001compares to $3,236,000 for the three months ended September 30, 2000. Thisdecrease is due primarily to the  incomeof $1,607,000, which was included in the three months ended September 30, 2000,for the reversal of certain contingency reserves related to the Company’s sale ofits toy business segment in May 1997.

 

The provision for incometaxes as a percent of income before taxes for the three months ended September30, 2001 was 26.7% compared to 32.6% in the same period of the prioryear.  This decrease in the effective tax rate is due primarily to thereversal of certain tax contingency reserves, relatively higher permanent itemsfor tax reporting purposes and the change in the mix of the foreignsubsidiaries’ income before taxes.

 

Net income for the three months ended September 30, 2001 of $16,442,000compares to net income of $20,546,000 for the same period last year.  Thisrepresents a decrease in net income in the amount of $4,104,000 or 20.0%. Included in net income for the three months ended September 30, 2000 was incomeof $1,012,000, after tax, for the reversal of certain contingency reservesrelated to the Company’s sale of its toy business segment in May 1997.Excluding the reserve reversal, net income decreased $3,092,000, or 15.8%,which was due principally to lower gross profit offset, in part, by decreasedselling, general and administrative expense and a lower provision for incometaxes.

**Liquidityand Capital Resources**

 

As of September 30, 2001, the Company had cash and cash equivalents andmarketable securities of $231,811,000 compared to cash and cash equivalents andmarketable securities of $218,826,000 at December 31, 2000.

 

As of September 30, 2001, the Company had marketable securities of$123,675,000, included in the amounts above. These investments consist of U.S.government obligations, municipal obligations and preferred stock.  Theobjective of the investment portfolio is to maximize after tax returns whileminimizing risk. The Company’s portfolio of preferred securities investmentsare subject to market fluctuations based largely, but not exclusively, on thesecurities’ sensitivity to changes in interest rates.

 

The Company enters into forward exchange contracts and currencyoptions, principally to manage the economic currency risks associated with thepurchase of inventory by its European and Canadian operations.  Gains andlosses, related to such contracts, were not material to its results ofoperations.  The Company does not anticipate any material adverse impacton its results of operations or financial position from these contracts.

 

Working capital requirements during the nine months ended September 30,2001 were met entirely through internally generated funds.  The Companyremains in a highly liquid position and believes that the resources availablefrom investments, operations and bank lines of credit are sufficient to meetthe foreseeable requirements of its business.

 

As of September 30, 2001, the Board of Directors had previouslyauthorized the Company to repurchase 7,000,000 shares of common stock of which5,635,400 shares have been repurchased since the beginning of the Company’sstock repurchase program in March 1990.  During the three months endedSeptember 30, 2001, the Company repurchased 74,000 shares for $1,908,000.

 

On October 31, 2001, in addition to the quarterly cash dividend of$0.24 per common share, payable on November 30, 2001, to shareholders of recordon November 16, 2001, the Company declared a one-time special cash dividend inthe amount of $0.50 per common share payable on December 14, 2001, toshareholders of record on November 29, 2001.

 

Consistent with its past practices and as a normal course of business,the Company regularly reviews acquisition opportunities of varying sizes. There can be no assurance, however, that any discussions arising in connectiontherewith will result in definitive purchase agreements and, if they do, whatthe terms or timing of any such agreements would be.

 

**Forward-Looking Statements**

** **

This Quarterly Report on Form 10-Q contains certain forward-lookingstatements.  Additional written and oral forward-looking statements may bemade by the Company from time to time in Securities and Exchange Commission(SEC) filings and otherwise.  The Private Securities Litigation Reform Actof 1995 provides a safe-harbor for forward-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 Companycautions readers that results predicted by forward-looking statements,including, without limitation, those relating to the Company's future businessprospects, revenues, working capital, liquidity, capital needs, interest costs,and income are subject to certain risks and uncertainties that could causeactual results to differ materially from those indicated in the forward-lookingstatements.  Specific risks and uncertainties include, but are not limitedto, the Company’s ability to continue to manufacture its products in the Far East,the seasonality of revenues, the actions of competitors, ability to increaseproduction capacity, price competition, the effects of government regulation,possible delays in the introduction of new products, customer acceptance ofproducts, issues related to the Company’s Russ Trading division, the ability togrow its direct sales force, changes in foreign currency exchange rates, issuesrelated to the Company’s computer systems, the current and future outlook ofthe Global retail market and other factors.

 

 

 

**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES****ABOUT MARKET RISK**

 

As of September 30, 2001, there have been no material changes in theCompany’s market risks from December 31, 2000.

 

 

**PART II OTHER INFORMATION**

 

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

 

Anaction was commenced against the Company on August 22, 2001, in the UnitedStates District Court, District of New Jersey, by Dam Things from Denmark(a/k/a Troll Company ApS.), alleging, among other things, copyrightinfringement by the Company of the plaintiff's reinstated United Statescopyrights for its troll designs and unfair competition under common law.  The plaintiff is seeking, among otherthings, injunctive relief prohibiting the Company from continuing to offer forsale its troll products, cancellation of the Company's U.S. copyrightregistrations with respect to its various troll products, as well asunspecified damages and attorney's fees and expenses.  The Company believes it has substantial defenses to theallegations.  A Court hearing on plaintiff'smotion for a preliminary injunction was held on October 29, 2001, and nodetermination has been issued to date.

 

TheCompany does not believe that the ultimate resolution of this controversy willhave a material adverse impact on the financial condition of the Company.

 

Theplaintiff has informally advised that it will assert copyright infringementclaims against the Company and/or its subsidiaries in foreign countriesrelating to the Company's troll products. The Company will evaluate such claims when, and if, they are formallyasserted.

 

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

 
| a) |   | There are no  exhibits to this Quarterly Report on Form 10-Q.                   |
|----|--------|---------------------------------------------------------------------------------|
| b) |   | During the  quarter ended September 30, 2001 no reports on Form 8-K were filed. |

 

 

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

 

 

 

 

**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

 

 

 
|                                        | RUSS BERRIE AND  COMPANY, INC. |               |
|---------------------------------------------|--------------------------------|--------------------|
|                                        | (Registrant)                   |               |
|                                        |                           |               |
|                                        |                           |               |
|                                        | By                             | /s/ John D.  Wille |   |   |
| Date      11-13-01 | John D. Wille                  |               |
|                                        | Vice President and             |               |
|                                        | Chief Financial Officer        |               |
|                                             |                                |                    |  |  |