**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

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| x      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                              |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
|   | ** ** | ** **                                                                                                                                |
|   | ** ** | **For the  quarterly period ended March 31, 2007**                                                                                        |
|   | ** ** | ** **                                                                                                                                |
|   | ** ** | **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**

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**RUSS BERRIE ANDCOMPANY, INC.**(Exact name of registrant as specified in its charter)

| **New Jersey**                                                      |   | **22-1815337**                           |
|---------------------------------------------------------------------|--------|------------------------------------------|
| (State of or  other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
| ** **                                                          |   | ** **                               |
| **111  Bauer Drive, Oakland, New Jersey**                           |   | **07436**                                |
| (Address of  principal executive offices)                           |   | (Zip Code)                               |
| ** **                                                          |
| **(201)  337-9000**                                                 |
| (Registrant’s  Telephone Number, including area code)          |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x              No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.  (Check one):

Large accelerated filer o             Acceleratedfiler x             Non-acceleratedfiler   o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes o             No x

The number of shares outstanding of each of theregistrant’s classes of common stock, as of May 4, 2007 was as follows:

| ****CLASS                         | ** ** | **OUTSTANDING  At May 4, 2007** |
|-----------------------------------|------------|------------------------------------------------|
| Common Stock,  $0.10 stated value |       | 21,076,496                                     |

 

 

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**RUSS BERRIE AND COMPANY, INC.**

**INDEX**
| **PART I – FINANCIAL  INFORMATION** |
|------------------------------------------|
|                                     |
| Item 1.                                  |   | Financial Statements  (unaudited) |
|                                     |   |   |
| a)                                       |   | Consolidated  Balance Sheets as of March 31, 2007 and December 31, 2006 |
|                                     |   |   |
| b)                                       |   | Consolidated  Statements of Operations for the three months ended March 31, 2007 and  2006 |
|                                     |   |   |
| c)                                       |   | Consolidated  Statements of Cash Flows for the three months ended March 31, 2007 and  2006 |
|                                     |   |   |
| d)                                       |   | Notes to Unaudited 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 1A.                                 |   | Risk  Factors |
|                                     |   |   |
| Item 6.                                  |   | Exhibits |
|                                     |   |   |
| Signatures                               |

 

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**PART 1 — FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

**RUSS BERRIE AND COMPANY, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

**(Dollars in Thousands, except shareand per share data)(UNAUDITED)**
| ** **                                                                                                                         | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Assets**                                                                                                                         | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                    |       |                         |       |                            |       |
| Cash and cash  equivalents                                                                                                         |       | $                            | 11,066     |                            | $          | 11,526 |   |
| Accounts  receivable, trade, less allowances of $1,973 in 2007 and $1,402 in 2006                                                  |       | 66,903                       |       | 55,976                          |       |
| Inventories, net                                                                                                                   |       | 48,147                       |       | 48,026                          |       |
| Prepaid expenses  and other current assets                                                                                         |       | 5,401                        |       | 12,025                          |       |
| Income tax  receivable                                                                                                             |       | 565                          |       | 2,200                           |       |
| Deferred income  taxes                                                                                                             |       | 2,366                        |       | 2,331                           |       |
| **Total  current assets**                                                                                                          |       | 134,448                      |       | 132,084                         |       |
| Property, plant  and equipment, net                                                                                                |       | 13,154                       |       | 13,993                          |       |
| Goodwill                                                                                                                           |       | 89,242                       |       | 89,242                          |       |
| Intangible  assets                                                                                                                 |       | 61,593                       |       | 61,600                          |       |
| Restricted cash                                                                                                                    |       | 831                          |       | 824                             |       |
| Deferred income  taxes                                                                                                             |       | 1,008                        |       | 957                             |       |
| Other assets                                                                                                                       |       | 5,187                        |       | 5,067                           |       |
| **Total  assets**                                                                                                                  |       | $                            | 305,463    |                            | $          | 303,767 |   |
| **Liabilities and Shareholders’  Equity**                                                                                     | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current liabilities:                                                                                                               |       |                         |       |                            |       |
| Current portion  of long-term debt                                                                                                 |       | $                            | 9,250      |                            | $          | 9,000 |   |
| Short-term debt                                                                                                                    |       | 29,390                       |       | 21,832                          |       |
| Accounts payable                                                                                                                   |       | 10,702                       |       | 16,286                          |       |
| Accrued expenses                                                                                                                   |       | 22,137                       |       | 24,056                          |       |
| Income taxes  payable                                                                                                              |       | 5,280                        |       | 15,038                          |       |
| **Total  current liabilities**                                                                                                     |       | 76,759                       |       | 86,212                          |       |
| Income taxes  payable long-term                                                                                                    |       | 9,816                        |       | —                          |       |
| Deferred income  taxes                                                                                                             |       | 1,156                        |       | 160                             |       |
| Long-term debt,  excluding current portion                                                                                         |       | 21,000                       |       | 23,500                          |       |
| Other long-term  liabilities                                                                                                       |       | 3,158                        |       | 3,231                           |       |
| **Total  liabilities**                                                                                                             |       | 111,889                      |       | 113,103                         |       |
| Commitments and  contingencies                                                                                                     |       |                         |       |                            |       |
| Shareholders’ equity:                                                                                                         |       |                         |       |                            |       |
| Common stock:  $0.10 stated value; authorized 50,000,000 shares; issued 26,712,780 shares at  March 31, 2007 and December 31, 2006 |       | 2,673                        |       | 2,673                           |       |
| Additional paid  in capital                                                                                                        |       | 91,910                       |       | 91,836                          |       |
| Retained  earnings                                                                                                                 |       | 193,866                      |       | 191,320                         |       |
| Accumulated  other comprehensive income                                                                                            |       | 15,275                       |       | 14,985                          |       |
| Treasury stock,  at cost, 5,636,284 shares at March 31, 2007 and December 31, 2006                                                 |       | (110,150                     | )          | (110,150                        | )          |
| **Total  shareholders’ equity**                                                                                               |       | 193,574                      |       | 190,664                         |       |
| **Total liabilities and  shareholders’ equity**                                                                               |       | $                            | 305,463    |                            | $          | 303,767 |   |

 

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

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**RUSSBERRIE AND COMPANY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollars in Thousands, Except Shareand Per Share Data)(UNAUDITED)**
| ** **                                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net sales                                                                           |       | $                                                    | 75,073     |   | $ | 77,146 |   |
|                                                                                |       |                                                 |       |   |   |
| Cost of sales                                                                       |       | 43,746                                               |       | 44,973 |   |
| ** **                                                                          |       |                                                 |       |   |   |
| **Gross profit**                                                                    |       | 31,327                                               |       | 32,173 |   |
|                                                                                |       |                                                 |       |   |   |
| Selling, general  and administrative expenses                                       |       | 26,458                                               |       | 32,154 |   |
|                                                                                |       |                                                 |       |   |   |
| **Operating income**                                                                |       | 4,869                                                |       | 19 |   |
|                                                                                |       |                                                 |       |   |   |
| Other (expense)  income:                                                            |       |                                                 |       |   |   |
| Interest expense, including amortization and  write-off of deferred financing costs |       | (1,236                                               | )          | (5,795 | ) |
| Interest and investment income                                                      |       | 192                                                  |       | 152 |   |
| Other, net                                                                          |       | (78                                                  | )          | 365 |   |
|                                                                                |       | (1,122                                               | )          | (5,278 | ) |
|                                                                                |       |                                                 |       |   |   |
| **Income (loss) before income tax provision  (benefit)**                            |       | 3,747                                                |       | (5,259 | ) |
|                                                                                |       |                                                 |       |   |   |
| Income tax  provision (benefit)                                                     |       | 1,201                                                |       | (267 | ) |
|                                                                                |       |                                                 |       |   |   |
| **Net income (loss)**                                                               |       | $                                                    | 2,546      |   | $ | (4,992 | ) |
|                                                                                |       |                                                 |       |   |   |
| **Net  income (loss) per share:**                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Basic                                                                               |       | $                                                    | 0.12       |   | $ | (0.24 | ) |
| Diluted                                                                             |       | $                                                    | 0.12       |   | $ | (0.24 | ) |
|                                                                                |       |                                                 |       |   |   |
| **Weighted  average shares:**                                                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Basic                                                                               |       | 21,076,000                                           |       | 20,836,000 |   |
| Diluted                                                                             |       | 21,141,000                                           |       | 20,836,000 |   |

 

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

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**RUSS BERRIE AND COMPANY, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in Thousands)(UNAUDITED)**
| ** **                                                                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                                   |       | $                                                    | 2,546      |   | $ | (4,992 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                                        |       | 1,163                                                |       | 1,395 |   |
| Amortization and write-off of deferred financing  costs                                              |       | 157                                                  |       | 2,688 |   |
| Accounts receivable allowance                                                                        |       | 739                                                  |       | 349 |   |
| Provision for inventory reserve                                                                      |       | (770                                                 | )          | 716 |   |
| Deferred income taxes                                                                                |       | 929                                                  |       | (775 | ) |
| Share-based compensation expense                                                                     |       | 75                                                   |       | 9 |   |
| Other                                                                                                |       | 295                                                  |       | (319 | ) |
| Change in assets and liabilities:                                                                    |       |                                                 |       |   |   |
| Restricted cash                                                                                      |       | 12                                                   |       | 9 |   |
| Accounts receivable                                                                                  |       | (11,535                                              | )          | (8,929 | ) |
| Income tax receivable                                                                                |       | 1,079                                                |       | 226 |   |
| Inventories                                                                                          |       | 763                                                  |       | 5,428 |   |
| Prepaid expenses and other current assets                                                            |       | 6,055                                                |       | 1,123 |   |
| Other assets                                                                                         |       | (277                                                 | )          | 38 |   |
| Accounts payable                                                                                     |       | (5,602                                               | )          | (8,921 | ) |
| Accrued expenses                                                                                     |       | (1,419                                               | )          | (2,587 | ) |
| Accrued income taxes                                                                                 |       | 595                                                  |       | (386 | ) |
| Total adjustments                                                                                    |       | (7,741                                               | )          | (9,936 | ) |
| Net cash used in operating activities                                                                |       | (5,195                                               | )          | (14,928 | ) |
|                                                                                                 |       |                                                 |       |   |   |
| **Cash  flows from investing activities:**                                                           |       |                                                 |       |   |   |
| Proceeds from  sale of property, plant and equipment                                                 |       | —                                               |       | 26 |   |
| Capital  expenditures                                                                                |       | (656                                                 | )          | (121 | ) |
| Net cash used in investing activities                                                                |       | (656                                                 | )          | (95 | ) |
|                                                                                                 |       |                                                 |       |   |   |
| **Cash  flows from financing activities:**                                                           |       |                                                 |       |   |   |
| Proceeds from  issuance of common stock                                                              |       | —                                               |       | 33 |   |
| Issuance of  long-term debt                                                                          |       | —                                               |       | 59,250 |   |
| Repayment of  long-term debt                                                                         |       | (2,250                                               | )          | (76,516 | ) |
| Net borrowing on  revolving credit facility                                                          |       | 7,558                                                |       | 16,750 |   |
| Payment of  deferred financing costs                                                                 |       | —                                               |       | (2,052 | ) |
| Net cash provided by (used in) financing activities                                                  |       | 5,308                                                |       | (2,535 | ) |
|                                                                                                 |       |                                                 |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                        |       | 83                                                   |       | 52 |   |
| Net decrease in  cash and cash equivalents                                                           |       | (460                                                 | )          | (17,506 | ) |
| Cash and cash  equivalents at beginning of period                                                    |       | 11,526                                               |       | 28,667 |   |
| Cash and cash  equivalents at end of period                                                          |       | $                                                    | 11,066     |   | $ | 11,161 |   |
| **Cash  paid during the period for:**                                                                | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Interest expense                                                                                     |       | $                                                    | 918        |   | $ | 1,796 |   |
| Income taxes                                                                                         |       | $                                                    | 46         |   | $ | 518 |   |

 

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

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**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 currently operates in two segments: (i)its gift business and (ii) its infant and juvenile business.  This segmentation of the Company’s operationsreflects how the chief operating decision makers currently view the results ofoperations.

The Company’s gift segment designs, manufacturesthrough third parties and markets a wide variety of gift products to retailstores throughout the United States and throughout the world via the Company’sinternational wholly-owned subsidiaries and independent distributors.

The Company’s infant and juvenile segment designs,manufactures through third parties and markets products in a number of babycategories including, among others, infant bedding and accessories, bath toysand accessories, developmental toys, feeding items and baby comfortingproducts. The infant and juvenile segment consists of Sassy, Inc. (“Sassy”),and Kids Line LLC (“Kids Line”).  Theseproducts are sold to consumers, primarily in the United States, through massmerchandisers, toy, specialty, food, drug and independent retailers, apparelstores and military post exchanges.

Certain prior year amounts have been reclassified toconform to the 2007 presentation.

This Quarterly Report on Form 10-Q for the threemonths ended March 31, 2007 should be read in conjunction with the Company’sAnnual Report on Form 10-K for the year ended December 31, 2006 (the “200610-K”).

**NOTE 2 — SHAREHOLDERS’ EQUITY**

On January 1, 2006, the Company adopted the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-BasedPayment” (“SFAS 123R”), which requires the costs resulting from all share-basedpayment transactions to be recognized in the financial statements at their fairvalues. The Company adopted SFAS 123R using the modified prospectiveapplication method under which the provisions of SFAS 123R apply to new awardsand to awards modified, repurchased, or cancelled after the adoption date.  Results for prior periods have not been restated.

The fair value of options granted is estimated on the date of grant usinga Black-Scholes options pricing model. Expected volatilities are calculatedbased on the historical volatility of the Company’s stock. Management monitorsstock option exercise and employee termination patterns to estimate forfeituresrates within the valuation model. The Company has established separate groupsfor employees and directors for valuation purposes. The expected holding periodof stock options represents the period of time that stock options are expectedto be outstanding. The risk-free interest rate is based on the Treasury noteinterest rate in effect on the date of grant for the expected term of the stockoption.

***Stock Plans***

The Company currently maintains the 2004 Stock Option, Restricted andNon-Restricted Stock Plan (the “2004 Option Plan”) and the Amended and Restated2004 Employee Stock Purchase Plan (the “2004 ESPP”).  As of January 1, 2007 there were an aggregateof 1,513,720 shares of common stock reserved for issuance under the 2004 OptionPlan and the 2004 ESPP.    The Companyalso continues to have options outstanding under the 1999 and 1994 Stock Optionand Restricted Stock Plans, the 1999 and 1994 Stock Option Plans and the 1999and 1994 Stock Option Plans for Outside Directors, (collectively, the “PredecessorPlans”).  No awards could be made afterDecember 31, 2003 with respect to the 1999 Predecessor Plans and after December31, 1998 with respect to the 1994 Predecessor Plans.  See Notes 2 and 18 of the Notes toConsolidated Financial Statements of the 2006 10-K for further details withrespect to option plans.

The exercise price for options issued under the 2004 Option Plan and thePredecessor Plans is generally equal to the closing price of the Company’scommon stock as of the date the option is granted. Generally, stock optionsunder 

6

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the 2004 Option Plan and the Predecessor Plans vest over a period rangingfrom one to five years from the grant date unless otherwise stated by thespecific grant. Options generally expire 10 years from the date of grant.

***Stock Options***

The following table summarizes activity regarding outstanding options asof March 31, 2007, and changes during the three months ended March 31, 2007:
| ** **                                | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price   per Option** | ** ** | **Option Price per Share** | ** ** | **Weighted  Average  Remaining   Contractual   Term   (years)** | ** ** | **Aggregate   Intrinsic Value  $(000)** | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| Options  outstanding at December 31, 2006 |       | 1,516,740   |       | $                                                                 | 17.99      |                                      | $          | 11.19 - $34.80                                                                 |       | 7.5                                               |       | $ | 1,620 |   |
| Granted                                   |       | —      |       | —                                                            |       | —                                    |       |                                                                           |       |                                              |       |
| Exercised                                 |       | —      |       | —                                                            |       | —                                    |       |                                                                           |       |                                              |       |
| Forfeited/cancelled                       |       | (32,305     | )          | $                                                                 | 14.37      |                                      | $          | 13.06 - $18.50                                                                 |       |                                              |       |   |   |
| Options  outstanding at March 31, 2007    |       | 1,484,435   |       | $                                                                 | 18.06      |                                      | $          | 11.19 - $34.80                                                                 |       | 7.3                                               |       | $ | 715 |   |
| Vested and exercisable  at March 31, 2007 |       | 1,349,435   |       | $                                                                 | 18.37      |                                      |       |                                                                           | 7.1        |                                              | $          | 715 |   |

 

There were no stock options granted during the three months ended March31, 2007.

Share-based compensation expense related to the Company’s stock optionsrecorded in the consolidated statements of operations for the three monthsended March 31, 2007 and 2006 was approximately $37,000 and $9,000,respectively.  No compensation costrelated to stock options was capitalized in inventory or any other assets forthe three months ended March 31, 2007 and 2006. For the three months endedMarch 31, 2007 and 2006, there were no excess tax benefits recognized resultingfrom share-based compensation cost.

***Non-vested Stock Options***

As of March 31, 2007, there was approximately$682,000 of total unrecognized compensation cost related to 135,000non-vested stock options granted under the 2004 Option Plan on November 1,2006. This cost is expected to be recognized over a weighted-average period of4.6 years.

Asummary of the Company’s non-vested stock options at March 31, 2007 and changes during the three months ended March 31, 2007 are presentedbelow:

|                                        | ** ** | ** ** | ** ** | **Weighted Average**     | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **Grant Date Fair** | ** ** |
| **Non-vested stock options** | ** ** | **Shares** | ** ** | **Value**                     | ** ** |
| Non-vested at  December 31, 2006  |       | 150,000    |       | $                             | 15.05      |   |
| Granted                                |       | —     |       | —                        |       |
| Vested                                 |       | —     |       | —                        |       |
| Forfeited                              |       | (15,000    | )          | 15.05                         |       |
| Non-vested at  March 31, 2007          |       | 135,000    |       | $                             | 15.05      |   |

 

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**Employee Stock Purchase Plan**

Under the 2004 ESPP, eligible employees are providedthe opportunity to purchase the Company’s common stock at a discount.  Pursuant to this plan, options are granted toparticipants as of the first trading day of each plan year, which is thecalendar year, and may be exercised as of the last trading day of each planyear, to purchase from the Company the number of shares of common stock that maybe purchased at the relevant purchase price with the aggregate amountcontributed by each participant.  In eachplan year, an eligible employee may elect to participate in the plan by filinga payroll deduction authorization form for up to 10% (in whole percentages) ofhis or her compensation.  No employeeshall have the right to purchase the Company’s common stock under the 2004 ESPPwhich has a fair market value in excess of $25,000 in any plan year.  The purchase price is the lesser of 85% ofthe closing market price of the Company’s common stock on either the firsttrading day or the last trading day of the plan year.  If an employee does not elect to exercise hisor her option, the total amount credited to his or her account during that planyear is returned to such employee, and his or her option expires.  As of March 31, 2007, the 2004 ESPP hadapproximately 106,000 shares reserved for future issuance.

Total share-based compensation expense related to the2004 ESPP was approximately $38,000 for the three months ended March 31, 2007.

The fair value of each option granted under the 2004Employee Stock Purchase Plan is estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions:

 

|                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Dividend yield           |       | —                                           |       | — |   |
| Risk-free  interest rate |       | 4.98                                             | %          | 4.38 | % |
| Volatility               |       | 36.70                                            | %          | 50.40 | % |
| Expected life (years)    |       | 1                                                |       | 1 |   |

 

**NOTE 3 — WEIGHTED AVERAGE COMMONSHARES**

Theweighted average common shares outstanding included in the computation of basicand diluted net income (loss) per share is set forth below (in thousands):

|                                                                           | ** ** | **Three Months Ended   March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| Weighted average  common shares outstanding                               |       | 21,076                                                 |       | 20,836 |   |
| Dilutive effect  of common shares issuable upon exercise of stock options |       | 65                                                     |       | — |   |
| Weighted average common  shares outstanding assuming dilution             |       | 21,141                                                 |       | 20,836 |   |

 

The average number of diluted shares outstanding forthe three months ended March 31, 2006 excludes shares issuable upon exercise ofoutstanding stock options because there was a net loss and such shares wouldhave been anti-dilutive.  Stock optionsto purchase approximately 1.5 and 1.8 million shares were outstanding at March31, 2007 and 2006, respectively. For the three months ended March 31, 2007,approximately 0.9 million stock options were excluded from the computation ofdiluted earnings per share because the exercise price was greater than theaverage market price of the common stock during such period.

**NOTE 4 — CONTINGENCY**

In December 2004, the Company purchased all of theoutstanding equity interests and warrants in Kids Line, LLC (the “Purchase”),in accordance with the terms and provisions of a Membership Interest PurchaseAgreement (the “Purchase Agreement”).  Atclosing, the Company paid approximately $130.6 million, which represented theportion of the purchase price due at closing plus various transactioncosts.  The aggregate purchase priceunder the Purchase Agreement includes the potential payment of contingentconsideration (the “Earnout Consideration”). The Earnout Consideration shall equal 11.724% of the Agreed EnterpriseValue (described below) of Kids Line as of the last day of the MeasurementPeriod (the three year period ending November 30, 2007).  The Agreed Enterprise 

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Value shall be the product of (i) Kids Line’s EBITDAduring the twelve (12) months ending November 30, 2007 and (ii) the applicablemultiple (ranging form zero to eight) as set forth in the PurchaseAgreement.  Pursuant to the PurchaseAgreement, 90% of the estimated Earnout Consideration is due in December 2007,and any remaining portion earned, following the determination of the finalAgreed Upon Enterprise Value, is due in January 2008.  The Company cannot currently determine theprecise amount of the Earnout Consideration that will be required to be paidpursuant to the Purchase Agreement. However, based on current projections, the Company anticipates that theEarnout Consideration will be approximately $30 million, although the amountcould be more or less depending on the actual performance of Kids Line for theremaining portion of the Measurement Period. The amount of the Earnout Consideration will be charged to goodwill whenearned.  The Company currently anticipatesthat cash flow from operations and anticipated availability under theInfantline Credit Agreement (described in Note 5 below) will be sufficient tofund the payment of the Earnout Consideration. However, there can be no assurance that unforeseen events or changes inthe Company’s business would not have a material adverse impact on the abilityto pay the Earnout Consideration and therefore on our liquidity.  As described in Note 5 (Section 1.A and 1.D)below, the Infantline Borrowers (defined below) have agreed, on a joint andseveral basis, to assume sole responsibility to pay the Earnout Considerationin place of RB (as defined in Note 5).

**NOTE 5**—**DEBT**

In connection withthe Purchase of Kids Line in December 2004, the Company and certain of its subsidiariesentered into a financing agreement (the “Financing Agreement”). The FinancingAgreement consisted of a term loan in the original principal amount of $125.0million which was scheduled to mature on November 14, 2007 (the “2004 TermLoan”).  The Company used the proceeds of the 2004 Term Loan tosubstantially finance the Purchase and pay fees and expenses relatedthereto.  The 2004 Term Loan was repaid in full and the FinancingAgreement was terminated in connection with the execution of the 2005 CreditAgreement, defined in Note 8 in the 2006 10-K, as of June 28, 2005. There were no fees paid as a result of the early termination of the FinancingAgreement.  However, during 2005, in connection with the termination ofthe 2004 Term Loan, the Company wrote-off the remaining unamortized balance ofapproximately $4.8 million in deferred financing costs.

In order to reduceoverall interest expense and gain increased flexibility with respect to thefinancial covenant structure of the Company’s senior financing, on March 14,2006, the 2005 Credit Agreement was terminated and the obligations thereunderwere refinanced (the “LaSalle Refinancing”). In connection with the LaSalle Refinancing, all outstanding obligations under the 2005 Credit Agreement (approximately$76.5 million) were repaid using proceeds from the Infantline Credit Agreementdefined below, which is part of the LaSalle Refinancing.  The Company paid a fee of approximately $1.3million in connection with the early termination of the 2005 CreditAgreement.  In addition, in 2006, theCompany wrote-off approximately $2.5 million in deferred financing costs inconnection with the LaSalle Refinancing.

As part of the LaSalle Refinancing, the Company formeda wholly-owned Delaware subsidiary, Russ Berrie U.S. Gift, Inc. (“U.S. Gift”),to which it assigned (the “Assignment”) substantially all of its assets andliabilities which pertain primarily to its domestic gift business, such thatseparate loan facilities could be made directly available to each of theCompany’s domestic gift business and its infant and juvenile business.  The Assignment transaction reinforces theoperation of the Company as two separate segments, and the credit facilitiesthat have been extended to each segment are separate and distinct.  There are no cross-default provisions betweenthe Infantline Credit Agreement and Giftline Credit Agreement (which aredescribed below).

Long-term debt at March 31, 2007 and December 31, 2006consists of the following (in thousands):
| (in thousands)                     | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Term Loan  (Infantline CreditAgreement) |       | $                            | 30,250     |                            | $          | 32,500 |   |
| Less current  portion                   |       | 9,250                        |       | 9,000                           |       |
| Long-term debt                          |       | $                            | 21,000     |                            | $          | 23,500 |   |

 

At  March 31, 2007, there was approximately $22.9million borrowed under the Infantline Revolver and approximately $6.5 millionborrowed under the Giftline Revolver (each defined below), all of which isclassified as short-term debt.

1.             The LaSalle Refinancing — Effective March 14, 2006

*A.  The Infantline Credit Agreement*

On March 14, 2006(the “Closing Date”), as amended as of December 22, 2006 (discussed below),Kids Line, LLC (“KL”), and Sassy, Inc. (“Sassy”, and together with KL, the “InfantlineBorrowers”), entered into a credit agreement 

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as borrowers, on ajoint and several basis, with LaSalle Bank National Association asadministrative agent and arranger (the “Agent”), the lenders from time to timeparty thereto, RB as loan party representative, Sovereign Bank as syndicationagent, and Bank of America, N.A. as documentation agent (as amended, the “InfantlineCredit Agreement”).  Unless otherwisespecified herein, capitalized terms used but undefined in this Note 5, Section1.A  shall have the meanings ascribed tothem in the Infantline Credit Agreement.

The commitmentsunder the Infantline Credit Agreement consist of (a) a $35.0 million revolvingcredit facility (the “Infantline Revolver”), with a sub-facility for letters ofcredit in an amount not to exceed $5.0 million, and (b) a $60.0 million termloan facility (the “Term Loan”).  TheInfantline Borrowers drew down approximately $79.7 million on the InfantlineCredit Agreement on the Closing Date, including the full amount of the TermLoan, which reflects the payoff of all amounts outstanding under the 2005Credit Agreement and certain fees and expenses associated with the LaSalleRefinancing.  As of March 31, 2007, theoutstanding balance on the Infantline Revolver was $22.9 million, theoutstanding balance on the Term Loan was $30.3 million and there was $750,000utilized under the letter of credit sub-facility.  At March 31, 2007, availability under theInfantline Revolver was approximately $10.2 million.

As of December 22, 2006, the Infantline CreditAgreement was amended (the “First Amendment”) to permit the  repayment and subsequent reborrowing of up to$20 million under the Term Loan, which is intended to enable the InfantlineBorrowers to continue to utilize cash flows expected to be generated fromoperations to repay debt until the Earnout Consideration becomes due.  The Company currently anticipates that cashflows from operations and anticipated availability under the Infantline CreditAgreement will be sufficient to fund the payment of the Earnout Consideration.

Pursuant to theFirst Amendment, the Infantline Borrowers borrowed $20 million under theInfantline Revolver, the outstanding balance of which had previously beenreduced to zero, and utilized the proceeds of such draw to prepay $20 millionof the Term Loan.  The lenders agreed toprovide an additional Term Loan reborrowing commitment (the “TR Commitment”) ofan aggregate maximum principal amount of $20 million, which amounts may only bereborrowed during specified periods and only to fund the payment of the EarnoutConsideration.  Pursuant to the FirstAmendment, the Infantline Borrowers will pay a non-use fee in respect ofundrawn amounts of the TR Commitment at a per annum rate of 0.375% of the dailyaverage of the undrawn amounts.

The InfantlineLoans bear interest at a rate per annum equal to the Base Rate (for Base RateLoans) or the LIBOR Rate (for LIBOR Loans) at the Company’s option, plus anapplicable margin, in accordance with a pricing grid based on the most recentquarter-end Total Debt to EBITDA Ratio, which applicable margin shall rangefrom 1.75% - 2.50% for LIBOR Loans and from 0.25% - 1.00% for Base RateLoans.  The applicable interest ratemargins as of March 31, 2007 were: 1.75% for LIBOR Loans and 0.25% for BaseRate Loans.  The weighted averageinterest rates for the outstanding loans as of March 31, 2007 were asfollows:  

|                      | ** ** | **At March 31, 2007** | ** ** |
|----------------------|------------|--------------------------------------|------------|
| ** **           | ** ** | **LIBOR Loans**                 | ** ** | **Base Rate Loans** | ** ** |
| Infantline  Revolver |       | 7.10                                 | %          | 8.50 | % |
| Infantline Term Loan |       | 7.17                                 | %          | 8.50 | % |

 

Interest is dueand payable (i) with respect to Base Rate Loans, monthly in arrears on the lastday of each calendar month, upon a prepayment and at maturity and (ii) withrespect to LIBOR Loans, on the last day of each Interest Period, upon aprepayment (and if the Interest Period is in excess of three months, on thethree-month anniversary of the first day of such Interest Period), and atmaturity.

In connection withthe execution of the Infantline Credit Agreement, the Infantline Borrowers paidaggregate closing fees of $1.4 million and an aggregate agency fee of$25,000.  An aggregate agency fee of$25,000 will be payable on each anniversary of the Closing Date.  The Infantline Revolver is subject to anannual non-use fee (payable monthly, in arrears, and upon termination of therelevant obligations) of 0.50% for unused amounts under the InfantlineRevolver, an annual letter of credit fee (payable monthly, in arrears, and upontermination of the relevant obligations) for undrawn amounts with respect toeach letter of credit based on the most recent quarter-end Total Debt to EBITDARatio ranging from 1.75% - 2.50% and other customary letter of creditadministration fees.

The InfantlineBorrowers are required to make prepayments of the Term Loan upon the occurrenceof certain transactions, including most asset sales or debt or equityissuances.   Additionally, for eachfiscal year commencing in early 2008 with respect to the most recentlycompleted fiscal year, in the event that the Total Debt to EBITDA ratio forsuch fiscal year exceeds 2.00:1.00, annual mandatory prepayments of the TermLoan shall be required in an amount equal to 50% of Excess Cash Flow.

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The InfantlineCredit Agreement contains customary affirmative and negative covenants, as wellas the following financial covenants (the “Infantline Financial Covenants”):  (i) a minimum EBITDA test, (ii) a minimumFixed Charge Coverage Ratio, (iii) a maximum Total Debt to EBITDA Ratio and(iv) an annual capital expenditure limitation. In addition, upon the occurrence of an event of default under theInfantline Credit Agreement, the lenders could elect to declare all amountsoutstanding thereunder to be immediately due and payable.

As of March 31, 2007, the Company was in compliancewith the financial covenants contained in the Infantline Credit Agreement.

The Infantline Credit Agreement contains significantlimitations on the ability of the Infantline Borrowers to distribute cash toRuss Berrie and Company, Inc. (“RB”), which became a  corporate holding company by virtue of theAssignment, for the purpose of paying dividends to the shareholders of RB orfor the purpose of paying their allocable portion of RB’s corporate overheadexpenses, including a cap (subject to certain exceptions) of $2.0 million peryear on the amount that can be provided to RB to pay such corporate overheadexpenses.

As a result of the LaSalle Refinancing, the obligationto pay the Earnout Consideration pursuant to the Kids Line acquisition (seeNote 4) is no longer the obligation of RB, but the joint and several obligationof the Infantline Borrowers.  Withrespect to the Earnout Consideration, the Infantline Borrowers will bepermitted to pay all or a portion of the Earnout Consideration to the extentthat, before and after giving effect to such payment, (i) Excess Revolving LoanAvailability will equal or exceed $3.0 million and (ii) no violation of theInfantline Financial Covenants would then exist, or would, on a pro formabasis, result there from.

In order to securethe obligations of the Infantline Borrowers, (i) the Infantline Borrowers havepledged and have granted security interests to the Agent in substantially allof their existing and future personal property, (ii) each Infantline Borrowerhas guaranteed the performance of the other Infantline Borrower, (iii) Sassygranted a mortgage for the benefit of the Agent and the lenders on its realproperty located at 2305 Breton Industrial Park Drive, S.E., Kentwood, Michiganand (iv) the Company pledged 100% of the equity interests of each of theInfantline Borrowers to the Agent (the “Infantline Pledge Agreement”).  Pursuant to the Infantline Pledge Agreement,RB has agreed that it will function solely as a holding company and will not,without the prior written consent of the Agent, engage in any business oractivity except for specified activities, including those relating to itsinvestments in its subsidiaries existing on the Closing Date, the maintenanceof its existence and compliance with law, the performance of obligations underspecified contracts and other specified ordinary course activities.

*B.  The Giftline Credit Agreement*

On March 14, 2006as amended on April 11, 2006, August 8, 2006, and December 28, 2006, U.S. Giftand other specified wholly-owned domestic subsidiaries of RB (collectively, the“Giftline Borrowers”), entered into a credit agreement as borrowers, on a jointand several basis, with LaSalle Bank National Association, as issuing bank (the“Issuing Bank”), LaSalle Business Credit, LLC as administrative agent (the “AdministrativeAgent”), the lenders from time to time party thereto, and RB, as loan partyrepresentative (as amended, the “Giftline Credit Agreement” and, together withthe Infantline Credit Agreement, the “2006 Credit Agreements”).  Unless otherwise specified herein,capitalized terms used but undefined in this Note 5, Section 1.B to theconsolidated financial statements shall have the meanings ascribed to them inthe Giftline Credit Agreement.

The GiftlineCredit Agreement, as amended, consists of a maximum revolving credit loancommitment in an amount equal to the lesser of (i) $15.0 million (with amaximum availability of $13.5 million) and (ii) the then-current Borrowing Base,in each case minus amounts outstanding under the Canadian Credit Agreement (the“Giftline Revolver”), with a sub-facility for letters of credit to be issued bythe Issuing Bank in an amount not to exceed $8.0 million.  The Third Amendment (defined below) alsoamended the definition of Revolving Loan Availability so that it now equals thelesser of (i) $13.5 million and (ii) the then-current Borrowing Base, in eachcase minus amounts outstanding under the Canadian Loan Agreement.  The Borrowing Base is primarily a function ofa percentage of eligible accounts receivable and eligible inventory.  As of March 31, 2007, the outstanding balanceon the Giftline Revolver was $6.5 million, the outstanding balance on the CanadianRevolving Loan (see Section 1.C below) was $0, and there was $1.0 millionutilized under the Canadian sub-facility for letters of credit.  At March 31, 2007, based on availablecollateral, the unused amount available to be borrowed under the Giftline Revolverwas $5.8 million.

All outstandingamounts under the Giftline Revolver are due and payable on March 14, 2011,subject to earlier termination in accordance with the terms of the GiftlineCredit Agreement.

The GiftlineRevolver bears interest at a rate per annum equal to the sum of the Base Rate(for Base Rate Loans) or the LIBOR Rate (for LIBOR Loans), at RB’s option plusan applicable margin, which margin was originally 2.75% for LIBOR Loans and1.25% for Base Rate Loans.  However,pursuant to the December 28, 2006 amendment to the Giftline Credit Agreement(the “Third Amendment”), the interest rates applicable to the Giftline Revolverwere 

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reduced such thatthe applicable margin is now determined in accordance with a pricing grid based on the most recent quarter-endDaily Average Excess Revolving Loan Availability, which applicable marginsshall range from 2.00% - 2.75% for LIBOR Loans and from 0% - 0.50% for BaseRate Loans.   Interest is due and payablein the same manner as with respect to the Infantline Loans.  The applicable interest rate margins as ofMarch 31, 2007 were 2.50% for LIBOR Loans and 0.25 % for Base Rate Loans.  As of March 31, 2007, the interest rate was8.50 % for the one outstanding Base Rate loan. There are no LIBOR loans outstanding as of March 31, 2007.

In connection withthe execution of the Giftline Credit Agreement, the Infantline Borrowers paid(on behalf of the Giftline Borrowers) aggregate closing fees of $0.15 millionand an aggregate agency fee of $20,000. Aggregate agency fees of $20,000 will be payable by the GiftlineBorrowers on each anniversary of the Closing Date.  Pursuant to the Third Amendment, the GiftlineRevolver is subject to an annual non-use fee (payable monthly, in arrears, andupon termination of the relevant obligations), ranging from 0.375% to 0.50% forunused amounts under the Giftline Revolver, and an annual letter of credit feeranging from 2.00% to 2.75%.  Other feesare as described in the Giftline Credit Agreement.

Receivable anddisbursement bank accounts of the Giftline Borrowers are required to be withthe Administrative Agent or its affiliates, and cash in such accounts will beswept on a daily basis to pay down outstanding amounts under the GiftlineRevolver.

The Giftline Credit Agreement contains customaryaffirmative and negative covenants substantially similar to those applicable tothe Infantline Credit Agreement.  TheGiftline Credit Agreement originally contained the following financialcovenants:  (i) a minimum EBITDA test,(ii) a minimum Excess Revolving Loan Availability requirement of $5.0 million,(iii) an annual capital expenditure limitation and (iv) a minimum Fixed ChargeCoverage Ratio (for quarters commencing with the quarter ended March 31,2008).  On August 8, 2006, the GiftlineCredit Agreement was amended to lower the threshold on the Minimum EBITDAcovenant by $1.0 million per fiscal quarter for each of four consecutive fiscalquarters commencing with the fiscal quarter ending September 30, 2006.  The Third Amendment (i) eliminated in their entirety both the minimum EBITDAfinancial covenant and the Fixed Charge Coverage Ratio financial covenant and(ii) reduced the minimum Excess Revolving Loan Availability requirement from$5,000,000 to $3,500,000.  As of March31, 2007, the Company was in compliance with the remaining financial covenantscontained in the Giftline Credit Agreement.

The Giftline Credit Agreement contains significantlimitations on the ability of the Giftline Borrowers to distribute cash to RBfor the purpose of paying dividends to RB’s shareholders or for the purpose ofpaying RB’s corporate overhead expenses, including a cap (subject to certainexceptions) on the amount that can be provided to RB to reimburse for itsallocable portion of corporate overhead expenses equal to $4.5 million per yearfor each of fiscal years 2006 and 2007, and $5.0 million for each fiscal yearthereafter, of which approximately $3.9 million was paid in 2006.  The Third Amendment permits the GiftlineBorrowers to pay dividends or make distributions to RB if no default or eventof default exists or would result there from, and immediately after givingeffect to such payments, there is at least $1.5 million available to be drawnunder the Giftline Revolver.  The amountof any such payments to RB cannot exceed the amount of capital contributionsmade by RB to the Giftline Borrowers after December 28, 2006, which are used bythe Giftline Borrowers to pay down the Giftline Revolver minus the total amountof dividends or other distributions made by the Giftline Borrowers to RB underthis provision of the Giftline Credit Agreement.  As of March 31, 2007, the amount of capitalcontributions made after December 28, 2006 by RB under this provision of theThird Amendment to the Giftline Borrowers was $3.0 million.

In order to securethe obligations of the Giftline Borrowers, the Giftline Borrowers pledged andhave granted security interests to the Administrative Agent in substantiallyall of their existing and future personal property, and each Giftline Borrowerguaranteed the performance of the other Giftline Borrowers under the GiftlineCredit Agreement.  In addition, RBprovided a limited recourse guaranty of the obligations of the GiftlineBorrowers under the Giftline Credit Agreement. This guarantee is secured by a lien on the assets intended to beassigned to U.S. Gift pursuant to the Assignment.  RB also pledged 100% of the equity interestsof each of the Giftline Borrowers and 65% of its equity interests in certain ofits First Tier Foreign Subsidiaries to the Administrative Agent (the “GiftlinePledge Agreement”).  The Giftline PledgeAgreement contains substantially similar limitations on the activities of RB asis set forth in the Infantline Pledge Agreement.

*C.Canadian Credit Agreement*

As contemplated bythe 2005 Credit Agreement, on June 28, 2005, as amended on August 4, 2005,December 7, 2005 and March 14, 2006, RB’s Canadian subsidiary, Amram’sDistributing Ltd. (“Amrams”), executed a separate Credit Agreement(acknowledged by RB) with the financial institutions party thereto and LaSalleBusiness Credit, a division of ABN AMRO Bank, N.V., Canada Branch, a Canadianbranch of a Netherlands bank, as issuing bank and administrative agent (asamended, the “Canadian Credit Agreement”), and related loan documents withrespect to an original maximum U.S. $10.0 million revolving loan (the “CanadianRevolving Loan”).  RB executed anunsecured 

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Guarantee (the “CanadianGuarantee”) to guarantee the obligations of Amrams under the Canadian CreditAgreement.  In connection with the LaSalleRefinancing, on March 14, 2006, the Canadian Credit Agreement was amended to(i) replace references to the LaSalle Credit Agreement with the Giftline CreditAgreement (such that, among other conforming changes, a default under theGiftline Credit Agreement will be a default under the Canadian CreditAgreement), (ii) release RB from the Canadian Guaranty and (iii) provide for amaximum U.S. $5.0 millionrevolving loan.  In connection with therelease of RB from the Canadian Guaranty, U.S. Gift executed an unsecuredGuarantee  to guarantee the obligationsof Amrams under the Canadian Credit Agreement. A default under the Infantline Credit Agreement will not constitute adefault under the Canadian Credit Agreement**. **As of****March31, 2007, there were no borrowings under the Canadian Revolving Loan.

The Commitments under theCanadian Credit Agreement bear interest at a rate per annum equal to the sum ofthe Base Rate (for Base Rate Loans) or the LIBOR Rate (for LIBOR Loans) plus anapplicable margin.  As of December 31, 2006, there were no Base Rate orLibor Loans outstanding.

*D. Earnout Security Documents*

All capitalizedterms used but undefined in this Note 5, Section 1.D, shall have the meaningsascribed to them in the Giftline Credit Agreement.

As has been previously reported RB, was obligated topay the Earnout Consideration under the Kids Line Purchase Agreement.  Pursuant to the Letter Agreement dated  March 14, 2006 between the InfantlineBorrowers and California KL Holdings, Inc., and the other parties thereto (the “LetterAgreement”), the Infantline Borrowers have agreed, on a joint and severalbasis, to assume sole responsibility to pay the Earnout Consideration in theplace of RB.  In connection therewith,the Earnout Security Documents have been amended to effect the partial releaseof RB as obligor and the full release of the security interests grantedthereunder by any Giftline Borrowers.  Tosecure the obligations of the Infantline Borrowers to pay the EarnoutConsideration, the Infantline Borrowers have granted a subordinated lien onsubstantially all of their assets, on a joint and several basis, and RB hasgranted a subordinated lien on the equity interests of each of the InfantlineBorrowers to the Earnout Sellers Agent. All such security interests and liens are subordinated to the seniorindebtedness of the Infantline Borrowers arising under the Infantline CreditAgreement.  The Earnout Consideration isnot secured by the Giftline Borrowers or their assets or equity interests.  The Company cannot currently determine theprecise amount of the Earnout Consideration that will be required to be paidpursuant to the Purchase Agreement. However, based on current projections, the Company anticipates that theEarnout Consideration will be approximately $30 million, although the amountcould be more or less depending on the actual performance of Kids Line for theremaining portion of the Measurement Period. The Company currently anticipates that cash flow from operations andanticipated availability under the Infantline Credit Agreement will besufficient to fund the obligation to pay the Earnout Consideration, and thatsuch payment will be permitted under the terms of the Infantline CreditAgreement and related documentation.  Theamount of the Earnout Consideration will be charged to goodwill.

2              .Russ Berrie (UK) Limited Business Overdraft Facility

On March 19, 2007, Russ Berrie UK Limited entered intoa Business Overdraft Facility (the “Facility”) with National Westminster BankPLC (the “Bank”) and The Royal Bank of Scotland plc (“RBS”), acting as agentfor the Bank.  The Facility consists of amaximum credit line of £1 million, with seasonal increases to £1.5 million fromJanuary 1st to March 31st annually.  Interestwill be charged on amounts outstanding under the Facility at an annual rate of1.5% over the Bank’s Base Rate, which interest rate spread will be increased to3.5% for any amounts outstanding in excess of the maximum limit.  The Facility is secured by a lien onsubstantially all of the assets of Russ Berrie UK Limited.  The Facility replaces the Framework Agreementwith Barclays Bank Plc described in Item 7 of the 2006 10-K, which wasterminated as of March 31, 2007.  TheFacility, like the Framework Agreement facility, was established to assist inmeeting the working capital requirements of Russ Berrie UK Limited.

**NOTE 6 — GOODWILL AND INTANGIBLEASSETS**

Thesignificant components of intangible assets consist of the following (inthousands):

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| ** **                                   | ** ** | **Weighted   Average   Amortization   Period** | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| MAM distribution  agreement and relationship |       | Indefinite  life                                              |       | $                        | 10,400     |                        | $          | 10,400 |   |
| Sassy trade name                             |       | Indefinite  life                                              |       | 7,100                    |       | 7,100                       |       |
| Applause trade  name                         |       | Indefinite  life                                              |       | 7,646                    |       | 7,646                       |       |
| Kids Line  customer relationships            |       | Indefinite  life                                              |       | 31,100                   |       | 31,100                      |       |
| Kids Line trade  name                        |       | Indefinite  life                                              |       | 5,300                    |       | 5,300                       |       |
| Other intangible  assets                     |       | 4.4  years                                                    |       | 47                       |       | 54                          |       |
|                                         |       |                                                          |       | $                        | 61,593     |                        | $          | 61,600 |   |

 

Other intangible assets as of March 31, 2007 andDecember 31, 2006 include Kids Line and Sassy non-compete agreements, which arebeing amortized over four and five years, respectively, and a patent.  Amortization expense was approximately $7,000for the first three months of 2007 and 2006.

All of the Company’s goodwill is in the infant andjuvenile segment and results from the acquisition of Kids Line, LLC in 2004,and Sassy in 2002.  There were no changesto the carrying amount of goodwill for the three months ended March 31, 2007.

**NOTE 7 — RESTRUCTURING AND RELATED COST**

During 2006, theCompany continued restructuring efforts with respect to its domestic giftbusiness to reduce expenses, right-size the infrastructure consistent withcurrent business levels, and re-align domestic gift operations to better meetthe needs of different distribution channels. During the first quarter of 2006, the Company recorded a $0.6 millionrestructuring charge related to severance cost of employees at its Petaluma,California distribution center, and reduced sales staff in its U.S. giftsegment, and a charge of $2.1 million related to down-sizing of its operationsin Europe.  During the year endedDecember 31, 2006, the Company recorded restructuring charges of $4.2million.  Restructuring charges incurredfor the U.S. operations in 2006 totaled approximately $1.6 million, whichconsisted of severance costs related to employees at its Petaluma, Californiadistribution center and additional sales and operational personnel at itsOakland, N.J. operation. International restructuring costs of approximately$2.6 million were incurred in 2006 which were comprised primarily of severancecosts.  The Company also incurred aone-time charge of $1.3 million during 2006, which is included in selling,general and administrative expenses in connection with the relocation of its distributionfacility in the United Kingdom, primarily related to the write-off of fixedassets and moving costs.  The Companyrecorded a one-time charge of $0.4 million (not classified as a restructuringcharge and therefore not reflected in the table below) during the quarter endedMarch 31, 2007, which is included in selling, general and administrativeexpenses, in connection with the closure of one of its showrooms for the giftsegment.

The Companyreassesses the reserve requirements under the restructuring efforts at the endof each reporting period.  A rollforwardof the restructuring accrual is set forth below (in thousands):  
|                              | ** ** | **Employee**   | ** ** | **Facility**        | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------|------------|---------------------|------------|------------|------------|
| ** **                   | ** ** | **Separation** | ** ** | **Exit Costs** | ** ** | **Total**  | ** ** |
| Balance @  December 31, 2006 |       | $              | 1,041      |                | $          | 65         |       | $ | 1,106 |   |
| 2007 Provision               |       | 193            |       | —              |       | 193        |       |
| Less Payments                |       | 600            |       | 19                  |       | 619        |       |
| Balance @ March 31,  2007    |       | $              | 634        |                | $          | 46         |       | $ | 680 |   |

 

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

The Company operates in twosegments: (i) the Company’s gift business; and (ii) the Company’s infant andjuvenile business, which includes Sassy, Inc. and Kids Line,LLC.  This segmentation of the Company’soperations reflects how the Company’s chief operating decision makers currentlyview the results of operations.  Thereare no inter-segment revenues to eliminate. Corporate assets and overhead expenses are included in the gift segment.

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|                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|
| **(in thousands)**                          | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Gift:**                                        |       |                                                 |       |   |   |
| Net sales                                        |       | $                                                    | 36,391     |   | $ | 40,032 |   |
| Selling, general and administrative expenses (a) |       | 19,766                                               |       | 27,031 |   |
| Operating (loss)                                 |       | (3,316                                               | )          | (11,123 | ) |
| Other income                                     |       | 80                                                   |       | 290 |   |
| Depreciation and amortization                    |       | 990                                                  |       | 1,188 |   |
| Loss before income taxes                         |       | $                                                    | (3,236     | ) | $ | (10,834 | ) |
| **Infant  and juvenile:**                        |       |                                                 |       |   |   |
| Net sales                                        |       | $                                                    | 38,682     | ** ** | $ | 37,114 | ** ** |
| Selling, general and administrative expenses     |       | 6,692                                                |       | 5,123 |   |
| Operating income                                 |       | 8,185                                                |       | 11,142 |   |
| Other expense (b)                                |       | (1,202                                               | )          | (5,568 | ) |
| Depreciation and amortization                    |       | 173                                                  |       | 207 |   |
| Income before income taxes                       |       | $                                                    | 6,983      |   | $ | 5,575 |   |
| **Consolidated:**                                |       |                                                 |       |   |   |
| Net sales                                        |       | $                                                    | 75,073     |   | $ | 77,146 |   |
| Selling, general and administrative expenses     |       | 26,458                                               |       | 32,154 |   |
| Operating income                                 |       | 4,869                                                |       | 19 |   |
| Other expense                                    |       | (1,122                                               | )          | (5,278 | ) |
| Depreciation and amortization                    |       | 1,163                                                |       | 1,395 |   |
| Income (loss)  before income taxes               |       | $                                                    | 3,747      |   | $ | (5,259 | ) |

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(a)          The Gift segmentselling, general and administrative expense includes: (i) in the first quarterof 2007, $0.4 million related to the closure of a showroom and (ii) in thefirst quarter of 2006, $2.7 million in charges associated with restructuringactivities in the U.S. and European gift divisions and $1.3 million ofconsulting costs incurred in connection with the development of the PIP.

(b)   Included in the infant and juvenile segmentother expense in the first quarter of 2006 was the write-off of $2.5 million indeferred financing costs and a prepayment penalty of $1.3 million associatedwith the termination of the 2005 Credit Agreement.

Totalassets of each segment were as follows:

| (Dollars in thousands) | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Gift                             |       | $                            | 96,555     |                            | $          | 98,360 |   |
| Infant and  juvenile             |       | 208,908                      |       | 205,407                         |       |
| Total                            |       | $                            | 305,463    |                            | $          | 303,767 |   |

 

**Concentrationof Risk**

As disclosed in the 2006 10-K, approximately 87.3% ofthe Company’s purchases are attributable to manufacturers in the People’sRepublic of China.  The supplieraccounting for the greatest dollar volume of purchases accounted forapproximately 20% and the five largest suppliers accounted for approximately48% in the aggregate.  The Company utilizes approximately 62 manufacturersin Eastern Asia and believes that there are many alternative manufacturers forthe Company’s products and sources of raw materials.  As a result, theCompany does not believe there is a concentration of risk associated with anysignificant manufacturing relationship. See Item 1A, “Risk Factors”, of the2006 10-K

With respect to customers, Toys “R” Us, Inc. andBabies “R” Us, Inc., in the aggregate, accounted for 23.8% and 20.8% of theCompany’s consolidated net sales during the three month periods ended March 31,2007 and 2006, respectively.  See Item1A, “Risk Factors,” of the 2006 10-K.

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**NOTE 9 — FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS**

Certain of the Company’s subsidiaries periodicallyenter into foreign currency forward exchange contracts to hedge inventorypurchases, both anticipated and firm commitments, denominated in the United Statesdollar. These contracts reduce foreign currency risk caused by changes inexchange rates and are used to offset the currency impact of these inventorypurchases, generally for periods up to 13 months. At March 31, 2007, theCompany’s forward contracts had expiration dates which ranged from one to ninemonths.

The Company accounts for its forward exchangecontracts as an economic hedge, with subsequent changes in fair value recordedin the Consolidated Statements of Operations. Unrealized losses of $99,000 and $14,000 relating to forward contracts are included in accrued expenses asof March 31, 2007 and December 31, 2006, respectively.

The Company has forward contracts to exchange Britishpounds, Canadian dollars and Australian dollars for United States dollars withnotional amounts of $8.2 million and $5.9 million as of March 31, 2007 andDecember 31, 2006, respectively. The Company has forward contracts toexchange United States dollars to Euros with notional amounts of $0 million and$2.3 million as of March 31, 2007 and December 31, 2006, respectively. TheCompany does not anticipate any material adverse impact on its results ofoperations or financial position from these contracts.

**NOTE 10 — COMPREHENSIVE INCOME (LOSS)**

Comprehensive Income (loss), representing all changesin Shareholders’ 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 (loss) for the three months ended March 31,2007 and 2006 as follows (in thousands):

|                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net income (loss)                         |       | $                                                    | 2,546      |   | $ | (4,992 | ) |
| Other comprehensive  income:              |       |                                                 |       |   |   |
| Foreign currency  translation adjustments |       | 290                                                  |       | 51 |   |
| Comprehensive income  (loss)              |       | $                                                    | 2,836      |   | $ | (4,941 | ) |

 

**NOTE 11 — INCOME TAXES**

In July 2006 theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) and FASB StaffPosition (“FSP”) FSP FIN 48-1 (issued May 2007).  FIN 48 prescribes a comprehensive model forhow a company should recognize, measure, present and disclose in its financialstatements uncertain tax positions that the company has taken or expects totake on a tax return.  FIN 48 states thata tax benefit from an uncertain tax position may be recognized only if it ismore “likely than not” that the position is sustainable, based on its technicalmerits.  The tax benefit of a qualifyingposition is the largest amount of tax benefit that is greater than 50% likelyof being realized upon settlement with a taxing authority having full knowledgeof all relevant information.  A taxbenefit from an uncertain position was previously recognized if it was probableof being sustained.  Under FIN 48, theliability for unrecognized tax benefits is classified as noncurrent unless theliability is expected to be settled in cash within twelve months of thereporting date.  FIN 48 is effective asof the beginning of the first fiscal year beginning after December 15,2006.  The Company adopted the provisionsof FIN 48 on January 1, 2007.  TheCompany believes that the balance sheet as of December 31, 2006 is consistentwith the implementation of FIN 48.  TheCompany has not made any additional adjustments to its opening balance sheetrelated to the implementation of FIN 48, other than to relcassify the portionof its tax liabilities to non-current which the Company does not anticipatewill settle, or for which the statute of limitations will not close, in thenext twelve months, and the Company has not made any adjustments to its openingretained earnings related to the implementation of FIN 48.

The Companyoperates in multiple tax jurisdictions, both within the United States andoutside of the United States, and faces audits from various tax authoritiesregarding the inclusion of certain items in taxable income, the deductibilityof certain expenses, transfer pricing, the utilization and carryforward ofvarious tax credits, and the utilization of various carryforward items such ascharitable contributions and net operating loss carryforwards.  At March 31, 2007, the amount of liabilityfor unrecognized tax benefits related to federal, state, and foreign taxes wasapproximately $15.1 million, including approximately $0.6 million of accruedinterest.  The Company has various taxattributes such as NOL’s, charitable contribution carryovers, and foreign taxcredit carryovers which could be utilized to offset these uncertain taxpositions.

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The Company iscurrently under examination in several tax jurisdictions and remains subject toexamination until the statute of limitations expires for the respective taxjurisdiction.  Based upon the expirationof statutes of limitations and/or the conclusion of tax examinations in severaljurisdictions, the Company believes it is reasonably possible that the totalamount of previously unrecognized tax benefits discussed above may decrease byup to $5.2 million within twelve months of March 31, 2007.  If recognized, approximately $1.3 million ofthe decrease would impact the Company’s effective tax rate.  For the remaining amounts, the Companyanticipates that the valuation allowances related to the deferred tax assetsassociated with various tax attributes such as NOL and foreign tax creditcarryovers would be increased based on management’s belief that it is morelikely than not that the full value of these tax attributes would not berealized.

The Company’spolicy is to classify interest and penalties related to unrecognized taxbenefits as income tax expense.

**NOTE 12 — LITIGATION AND COMMITMENTS**

In the ordinary course of its business, the Company isparty to various copyright, patent and trademark infringement, unfaircompetition, breach of contract, customs, employment and other legal actionsincidental to its business, as plaintiff or defendant.  In the opinion of management, the amount ofultimate liability with respect to such actions that are currently pending willnot materially adversely affect the consolidated results of operations,financial condition or cash flows of the Company.

In connection with the Company’s purchase of Kids LineLLC, the aggregate purchase price includes a payment of Earnout Considerationas more fully described in Note 4.  TheCompany cannot currently determine the precise amount of the EarnoutConsideration that will be required to be paid pursuant to the PurchaseAgreement.  However, based on currentprojections, the Company currently anticipates that the Earnout Considerationwill be approximately $30 million, although the amount could be more or lessdepending on the actual performance of Kids Line for the remaining portion ofthe Measurement Period.

The Company enters into various license agreementsrelating to trademarks, copyrights, designs, and products which enable theCompany to market items compatible with its product line.  All license agreements other than theagreement with MAM Babyartikel GmbH (which has a remaining term of four years),are for three year terms with extensions if agreed to by both parties.  Several of these license agreements requireprepayments of certain minimum guaranteed royalty amounts.  The amount of minimum guaranteed royaltypayments with respect to all license agreements through the end of theiroriginal terms aggregates approximately $ 5.7 million, of which approximately$1.5 million remained unpaid at March 31, 2007, substantially all of which isdue prior to December 31, 2007.  Duringthe year ended December 31, 2006, the Company recorded charges to cost of salesof $1.5 million against these royalty prepayments for amounts that managementbelieved will not be realized.  RoyaltyExpense for the three months ended March 31, 2007 and 2006 was $1.2 million and$0.6 million, respectively.

**NOTE 13 — RECENTLY ISSUED ACCOUNTINGSTANDARDS**

In September 2006,the FASB issued SFAS no. 157, *Fair Value Measurement*(“SFAS No. 157”).  SFAS No. 157 definesfair value, establishes a framework for measuring fair value and expandsdiscloses about fair value measurements. SFAS No. 157 is effective for the Company’s year beginning January 1,2009.  The Company is currentlyevaluating the impact of adopting SFAS No. 157 on its consolidated financialposition and results of operations.

InFebruary 2007, FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities.”  SFASNo. 159 provides companies with an option to report selected financial assetsand liabilities at fair value and establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets andliabilities.  SFAS No. 159 is effectivefor fiscal years beginning after November 15, 2007.  The Company is currently evaluating theimpact, if any, on its consolidated financial statements of SFAS No. 159.

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

The financial and business analysis below providesinformation which the Company believes is relevant to an assessment andunderstanding of the Company’s consolidated financial condition, changes infinancial condition and results of operations. This financial and businessanalysis should be read in conjunction with the Company’s consolidatedfinancial statements and accompanying Notes to Unaudited Consolidated FinancialStatements set forth in Part I, Financial Information, Item 1, “FinancialStatements” of this Quarterly Report on Form 10-Q and the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006 (the “2006 10-K”).

**OVERVIEW**

The Company is a leader in the gift and infant andjuvenile industries. The Company’s gift business designs, manufactures throughthird parties and markets a wide variety of gift products to retail storesthroughout the world.  The Company’sinfant and juvenile businesses design, manufacture through third parties andmarket products in a number of baby categories, including infant bedding andaccessories, bath toys and accessories, developmental toys, feeding items andbaby comforting products. These products are sold to consumers, primarily inthe United States and certain foreign countries, through mass merchandisers,toy, specialty, food, drug and independent retailers, apparel stores, militarypost exchanges and other venues.

The Company’s revenues are primarily derived fromsales of its products.  For the threemonths ended March 31, 2007, 48.5% of revenues were generated by the giftsegment and 51.5% of revenues were generated by the infant and juvenilesegment, as compared to 51.7% and 48.3%, respectively, for the same period inthe prior year.

The Company’s global business strategy for 2006focused on: (i) capitalizing on growth opportunities with respect to its infantand juvenile segment, particularly in international markets, as well as (ii)continued efforts to streamline its gift business, concentrating on moreprofitable product lines and creating operational efficiencies.  The Company believes that it made substantialprogress in successfully implementing this strategy during 2006.  Specifically, revenues in the infant andjuvenile segment continued to grow throughout the year, primarily as a resultof new product development and increased distribution, particularly ininternational markets.  With respect toits gift business, the Company renewed its focus on product categories where itbelieves it can command an authoritative position, and has made substantialprogress in rejuvenating its product line. The Company has reduced the number of SKUs offered by its gift segmentfrom approximately 13,000 in 2005 to approximately 5,700 at the end of 2006,and approximately 70% of the product line developed for 2007 consists of newproduct introductions.

In addition, the Company believes it has substantiallycompleted its gift segment restructuring activities. During 2006, the Companydeveloped and substantially implemented its Profit Improvement Program (“PIP”),which is described in more detail in the Company’s 2006 10-K.  As a result of the successful implementationof the PIP, the Company believes that its gift segment infrastructure is nowappropriately sized in light of the current gift retail environment. Sincemid-2004, the Company has reduced its global gift segment operating expenses byapproximately $40 million, with approximately $25 million of those reductionshaving been achieved from November 2005 through December 2006. TheCompany anticipates that the first full year effect of these annualized expensereductions will be realized in fiscal 2007. See Item 7 of the 2006 10-K for a detailed discussion of the Company’srestructuring activities in recent periods.

The Company believes that its 2007 product line hasbeen favorably received by retailers and consumers.  In particular, the Company recentlyintroduced a product range called Shining Stars® that has been very wellreceived to date.  Each “Shining StarsFriend” includes a high-quality plush animal, entitles its owner to name a starin the sky, and provides access to a website that includes a virtual universewhere children of all ages can send e-cards, play customized games and find agalaxy of other fun activities.  Duringthe three months ended March 31, 2007, the Company shipped a limited amount ofShining Star product due to the fact that goods first became available forshipment only at the end of March and then only in limited supply becauseinitial orders exceeded expectations.  Todate, the Company has received orders for a significant quantity of ShiningStars product but has not delivered meaningful quantities of the product tocustomers.  However, the Companyanticipates that it will sell a greater quantity of this product during thesecond quarter of 2007 and a significantly greater quantity during the thirdquarter of 2007.  The Company hasrecently secured additional manufacturing capacity for Shining Stars productand believes that it will soon be able to more adequately service increaseddemand.  However, there can be noassurance that demand for Shining Stars product will continue at currentlevels, that the Company will be able to manufacture adequate supplies ofproduct, that such products will continue to be well received or that existingor future competition for similar products will not have an adverse effect onthe Company’s expectations for the success of the Shining Stars product range.

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As a result of the favorable reception to new productintroductions in the gift segment, including Shining Stars, the Company’sbacklog in the gift segment as of March 31, 2007 increased by 31% as comparedto March 31, 2006.

**SEGMENTS**

TheCompany currently operates in two segments:  (i) its gift businessand (ii) its infant and juvenile business.

**RESULTS OF OPERATIONS—THREE MONTHS ENDED MARCH 31, 2007AND 2006**

The Company’s consolidated net sales for the threemonths ended March 31, 2007 decreased 2.7% to $75.1 million compared to $77.1million for the three months ended March 31, 2006, primarily as a result of adecrease in the gift segment of $3.6 million, partially offset by an increaseof $1.6 million in the infant and juvenile segment.

The Company’s gift segment net sales for the threemonths ended March 31, 2007 decreased 9.1% to $36.4 million compared to $40.0million for the three months ended March 31, 2006, primarily as a result ofweakness in the international gift segment, resulting largely from the closureof several European direct sales force operations, as well as a reduction inthe size of the Company’s worldwide gift sales force.  Net sales in the Company’s gift segment werefavorably impacted by approximately $1.0 million for the three months endedMarch 31, 2007 as a result of foreign exchange rates.  Net sales for theinfant and juvenile segment for the three months ended March 31, 2007 increased4.2% to $38.7 million, compared to $37.1 million for the three months endedMarch 31, 2006, primarily resulting from additional sales growth in the Company’sKids Line subsidiary.

Consolidated gross profit of 41.7% of consolidated netsales was the same for the three months ended March 31, 2007 as compared to thethree months ended March 31, 2006.  Gross profit for the Company’s gift segment increased from 39.7% for thethree months ended March 31, 2006 to 45.2% for the three months ended March 31,2007, primarily as a result of new product introductions that command highermargins.  Gross profit for the Company’s infant and juvenile segmentdecreased from 43.8% of net sales for the three months ended March 31, 2006 ascompared to 38.5% of net sales for the three months ended March 31, 2007,primarily as a result of competitive pressures, increased raw material costsand product mix.

Consolidated selling, general and administrativeexpense was $26.5 million, or 35.2% of consolidated net sales, for the threemonths ended March 31, 2007, compared to $32.2 million, or 41.7% ofconsolidated net sales, for the three months ended March 31, 2006. Selling, general and administrative expense in the Company’s gift segmentdecreased by $7.3 million to $19.8 million in the first quarter of 2007 from$27.0 million in the prior year period. This decrease is a result of expense reductions resulting fromimplementation of the PIP and similar cost reduction initiatives that wereimplemented in prior years.   Included inthe gift segment selling, general and administrative expense in the firstquarter of 2006 was $2.7 million in charges associated with the restructuringactivities in the U.S. and European gift divisions and $1.3 million of consultingcosts incurred in connection with the development of the PIP.  Selling, general and administrative expensein the Company’s infant and juvenile segment increased from $5.1 million, or 13.8%of net sales in the first quarter of 2006 to $6.7 million, or 17.3% of netsales, in the first quarter of 2007, primarily as a result of efforts tosupport growth in this segment.

Consolidated other expense was $1.1 million for thethree months ended March 31, 2007 compared to $5.3 million for the three monthsended March 31, 2006, or a decrease of $4.2 million.  Other income in the Company’s gift segmentfor the three months ended March 31, 2007 decreased to $80,000 from $290,000 inthe prior year.  Other expense in theCompany’s infant and juvenile segment decreased by $4.4 million to $1.2 millioncompared to $5.6 million in the prior year period.  The decrease in the infant and juvenilesegment was primarily due to expense recorded in the first quarter of 2006 inconnection with the write-off of $2.5 million in deferred financing costs and aprepayment penalty of $1.3 million associated with the termination of the 2005Credit Agreement.

The Companyrecorded a domestic income tax expense of approximately $1.0 million for thethree months ended March 31, 2007, primarily related to the deferred taxliability associated with the tax amortization of intangible assets relating tothe Kids Line, Sassy, and Applause acquisitions.  These deferred tax liabilities are indefinitein nature for accounting purposes, and therefore can not be offset by theCompany’s deferred tax assets.  TheCompany has recorded full valuation allowances against these deferred taxassets as management believes it is more likely than not that those netdeferred tax assets will not be realized. For the three months ended March 31, 2006, the Company recorded a netdomestic income tax benefit of approximately $(0.7) million primarily relatedto the Company’s domestic net operating loss offset by the deferred taxliability associated with the tax amortization of intangible assets relating tothe Kids Line, Sassy, and Applause acquisitions.  The Company recorded approximately $0.2million of foreign tax expense related to profitable operations in Canada, HongKong, and Australia for the three months ended March 31, 2007 versus $0.4million for the three months ended March 31, 2006.

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As a result of the foregoing, consolidated net incomefor the three months ended March 31, 2007 was $2.5 million, or $0.12 perdiluted share, compared to consolidated net loss of $5.0 million, or a loss of$0.24 per diluted share, for the three months ended March 31, 2006,representing an increase of $7.5 million, or $0.36 per diluted share.

**Liquidity and Capital Resources**

The Company’s principal sources of liquidity are cash andcash equivalents, funds from operations, and availability under its bankfacilities. The Company believes that cash flow from operations and futureborrowings will be sufficient to fund its operating needs and capitalrequirements, including the payment of the Earnout Consideration, for at leastthe next 12 months.  However, if theCompany’s 2007 gift product line, including Shining Stars, continues to befavorably received by customers, the Company may require additional workingcapital in order to maximize the potential opportunity.  The Company is currently evaluating potentialalternatives in the event it requires such additional working capital.

As of March 31, 2007, the Company had cash andcash equivalents of $11.1 million compared to $11.5 million atDecember 31, 2006.  This reductionof $0.4 million was primarily related to the net income generated during thefirst quarter of 2007, reduced prepaid and other assets, net borrowings of $5.3million, offset by reduced accounts payable and increased accounts receivable.The increase in accounts receivable was due primarily to the termination of thefactoring arrangement with Barclays during the first quarter of 2007.  As of March 31, 2007 andDecember 31, 2006, working capital was $57.7 million and $45.9million, respectively.  This increase of$11.8 million was primarily the result of a reclassification of a tax liabilityunder FIN 48 from current to long term in the amount of $9.8 million, anincrease in accounts receivable, and a reduction in accounts payable, partiallyoffset by a decrease in prepaid expenses and other current assets.

Cash and cash equivalents decreased by $0.4 millionduring the three months ending March 31, 2007 compared to a decrease of $17.5million during the three months ending March 31, 2006. The decrease during thethree months ended March 31, 2007 was primarily a result of the factorsdescribed in the preceding paragraph. The decrease during the three months ended March 31, 2006 was primarilydue to the payment of debt, reduced accounts payable and increased accountsreceivable, partially offset by lower inventory levels.  Net cash used by operating activities was approximately$5.2 million during the three months ended March 31, 2007 compared to net cashused by operating activities of approximately $14.9 million during the threemonths ended March 31, 2006. The decrease of $9.7 million was due primarily tonet income of $2.7 in the first quarter of 2007 as compared to a net loss of$5.0 million in the first quarter of 2006, a decrease in prepaid expenses andother current assets in the first quarter 2007, partially offset by a decreasein inventory in the first quarter of 2006 which was relatively unchanged in thefirst quarter of 2007.  Net cash used ininvesting activities was approximately $0.7 million for the three months endedMarch 31, 2007 compared to net cash used of approximately $0.1 million for thethree months ended March 31, 2006. The increased usage was primarily related toincreased capital expenditures.  Net cashprovided by financing activities was approximately $5.3 million for the threemonths ended March 31, 2007 compared to a usage of $2.5 million for the threemonths ended March 31, 2006.  Theincrease of $7.8 million was due primarily to debt incurred under the creditfacility.

Kids Line andRelated Financing

*Background.*  The Company purchased all of the outstandingequity interests and warrants in Kids Line, LLC (the “Purchase”) in accordancewith the terms and provisions of a Membership Interest Purchase Agreement (the “PurchaseAgreement”) executed as of December 15, 2004. At closing, the Company paidapproximately $130.5 million, which represented the portion of the purchaseprice due at closing plus various transaction costs. The aggregate purchaseprice under the Purchase Agreement, however, also includes the potentialpayment of the Earnout Consideration, which is defined as 11.724% of the AgreedEnterprise Value of Kids Line as of the last day of the three year periodending November 30, 2007 (the “Measurement Period”). The Earnout Considerationshall be paid as described in Note 4 to the Notes to Unaudited ConsolidatedFinancial Statements herein (approximately the third anniversary of the ClosingDate). The “Agreed Enterprise Value” shall be the product of (i) Kids Line’sEBITDA during the twelve (12) months ending on the last day of the MeasurementPeriod and (ii) the applicable multiple (ranging from zero to eight) as setforth in the Purchase Agreement. The Company cannot currently determine theprecise amount of the Earnout Consideration that will be required to be paidpursuant to the Purchase Agreement. However, based on current projections, the Company anticipates that theEarnout Consideration will be approximately $30 million, although the amountcould be more or less depending on the actual performance of Kids Line for theremaining portion of the Measurement Period. The amount of the EarnoutConsideration will be charged to goodwill when it is earned. The Companycurrently anticipates that cash flow from operations and anticipatedavailability under the Infantline Credit Agreement (defined below) will besufficient to fund the payment of the Earnout Consideration (and that suchpayment will be permitted under the Infantline Credit Agreement), 

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however there canbe no assurance that unforeseen events or changes in our business would nothave a material adverse impact on our ability to pay the Earnout Considerationand therefore on our liquidity.

The Kids Lineacquisition was financed with the proceeds of a term loan, which wassubsequently replaced by a $105 million credit facility with LaSalle Bank asagent (the “2005 Credit Agreement”) and the 2005 Canadian Credit Agreement(defined below), which are described in the Current Report on Form 8-K filed bythe Company with the SEC on July 5, 2005.

In order to reduceoverall interest expense and gain increased flexibility with respect to thefinancial covenant structure of the Company’s senior bank financing, on March14, 2006, the 2005 Credit Agreement was terminated and the obligationsthereunder were refinanced (the “LaSalle Refinancing”).  For a detailed description of the 2006 CreditAgreements, which are defined and summarized below, see Note 5 of the Notes toUnaudited Consolidated Financial Statements above.  On March 14, 2006, in connection with theLaSalle Refinancing, all outstanding obligations under the 2005 CreditAgreement (approximately $76.5 million) were repaid using proceeds from theInfantline Credit Agreement.

As part of theLaSalle Refinancing, the Company formed a wholly-owned Delaware subsidiary,Russ Berrie U.S. Gift, Inc. (“U.S. Gift”), to which it assigned (the “Assignment”)substantially all of its assets and liabilities which pertain primarily to itsdomestic gift business, such that separate loan facilities could be madedirectly available to each of the Company’s domestic gift business and infantand juvenile business, respectively. Pursuant to the Assignment, our parent company, Russ Berrie and Company,Inc. (“RB”), is now organized as a holding company, with all of its operationsbeing conducted through its subsidiaries. RB, however, has continuing cashneeds for corporate overhead expenses, taxes and other purposes (collectively,the “Requirements”). The 2006 Credit Agreements (defined below) containsignificant limitations on the ability of RB’s domestic subsidiaries todistribute cash, including in the form of dividends, loans or other advances,to RB to pay for its Requirements (such limitations are described in moredetail below). Management believes that the amounts permitted to be distributedto RB by its domestic subsidiaries will be sufficient to fund the requirements,although there can be no assurance that such requirements will not exceedcurrent estimates. Although there are no restrictions in the 2006 CreditAgreements on the ability of RB’s foreign subsidiaries to distribute cash toRB, available cash there from may be insufficient to cover the Requirementswithout additional distributions from RB’s domestic subsidiaries. Because RB isdependent upon cash distributions from its domestic subsidiaries, if suchdomestic subsidiaries are unable to distribute sufficient cash to RB to meetits requirements without triggering a default under the 2006 Credit Agreements,this could have a material adverse impact on the Company’s liquidity.

As a result of theLaSalle Refinancing, the obligation to pay the Earnout Consideration is nolonger the obligation of RB, but the joint and several obligation of theInfantline Borrowers (defined below). The Infantline Borrowers will be permitted to pay all or a portion ofthe Earnout Consideration to the extent that, before and after giving effect tosuch payment, (i) Excess Revolving Loan Availability under the InfantlineCredit Agreement will equal or exceed $3.0 million and (ii) no violation of thefinancial covenants in the Infantline Credit Agreement would then exist, orwould, on a pro forma basis, result there from. 

*InfantlineCredit Agreement.*   OnMarch 14, 2006, as amended as of December 22, 2006 (discussed below), KidsLine, LLC and Sassy, Inc. (collectively, the “Infantline Borrowers”), enteredinto a credit agreement as borrowers, on a joint and several basis, withLaSalle Bank National Association as administrative agent and arranger (the “Agent”),the lenders from time to time party thereto, RB as loan party representative,Sovereign Bank as syndication agent, and Bank of America, N.A. as documentationagent (as amended, the “Infantline Credit Agreement”). Unless otherwisespecified herein, capitalized terms used but undefined in this section shallhave the meanings ascribed to them in the Infantline Credit Agreement.

The commitmentsunder the Infantline Credit Agreement consist of (a) a $35.0 million revolvingcredit facility (the “Revolving Loan”), with a sub facility for letters ofcredit in an amount not to exceed $5.0 million, and (b) a $60.0 million termloan facility (the “Term Loan”).  As ofMarch 31, 2007, the outstanding balance on the Revolving Loan was $22.9 millionand the outstanding balance on the Term Loan was $30.0 million, and there was$750,000 utilized on the letter of credit sub-facility. At March 31, 2007, theavailability under the Revolving Loan was approximately $10.2 million.

The principal ofthe Term Loan will be repaid in installments as described in Note 5 to theNotes to Unaudited Consolidated Financial Statements, with a final installmentin the aggregate amount of the unpaid principal balance of the Term Loan (inaddition to all outstanding amounts under the Revolving Loan) is due andpayable on 

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March 14, 2011, ineach case subject to customary early termination provisions (without anyprepayment penalty) in accordance with the terms of the Infantline CreditAgreement.

As of December 22,2006, the Infantline Credit Agreement was amended (the “First Amendment”) topermit the temporary repayment and subsequent reborrowing of certain amountsunder the Term Loan, which was intended to enable the Infantline Borrowers tocontinue to utilize cash flow expected to be generated from operations to repaydebt until the Earnout Consideration becomes due.  Pursuant to the First Amendment, theInfantline Borrowers borrowed $20 million under the Revolving Loan, theoutstanding balance of which had previously been reduced to zero, and utilizedthe proceeds of such draw to prepay $20 million under the Term Loan. Thelenders agreed to provide an additional Term Loan reborrowing commitment (the “TRCommitment”) of an aggregate maximum principal amount of $20 million, whichamounts may only be reborrowed during specified periods and only in connectionwith the payment of the Earnout Consideration. Pursuant to the First Amendment,the Infantline Borrowers will pay a non-use fee in respect of undrawn amountsof the TR Commitment at a per annum rate of 0.375% of the daily average of theundrawn amounts.

The Infantline Loans bear interest at a rate per annumequal to the Base Rate (for Base Rate Loans) or the LIBOR Rate (for LIBORLoans) at the option of the Infantline Borrowers, plus an applicable margin, inaccordance with a pricing grid based on the most recent quarter-end Total Debtto EBITDA Ratio, which applicable margin shall range from 1.75% - 2.50% forLIBOR Loans and from 0.25% - 1.00% for Base Rate Loans. The applicable interestrate margins as of March 31, 2007 were: 1.75% for LIBOR Loans and 0.25% forBase Rate Loans.  The weighted averageinterest rates for the outstanding loans as of March 31, 2007 were asfollows:  
|                | ** ** | **At March 31, 2007** | ** ** |
|----------------|------------|--------------------------------------|------------|
| ** **     | ** ** | **LIBOR Loans**                 | ** ** | **Base Rate Loans** | ** ** |
| Revolving Loan |       | 7.10                                 | %          | 8.50 | % |
| Term Loan      |       | 7.17                                 | %          | 8.50 | % |

 

The InfantlineBorrowers are required to make prepayments of the Term Loan as is described inNote 5 to the Notes to Unaudited Consolidated Financial Statements.

The InfantlineCredit Agreement contains customary affirmative and negative covenants, as wellas the following financial covenants: (i) a minimum EBITDA test, (ii) a minimumFixed Charge Coverage Ration, (iii) a maximum total Debt to EBITDA Ratio and(iv) an annual capital expenditure limitation. As of March 31, 2007, theInfantline Borrowers were in compliance with the financial covenants containedin the Infantline Credit Agreement.

*GiftlineCredit Agreement*.  Also on March 14, 2006, as amended on April 11, 2006, August 8, 2006,and December 28, 2006, U.S. Gift and other specified wholly-owned domesticsubsidiaries of RB (collectively, the “Giftline Borrowers”), entered into acredit agreement as borrowers, on a joint and several basis, with LaSalle BankNational Association, as issuing bank (the “Issuing Bank”), LaSalle BusinessCredit, LLC as administrative agent (the “Administrative Agent”), the lendersfrom time to time party thereto, and RB, as loan party representative (asamended, the “Giftline Credit Agreement” and, together with the InfantlineCredit Agreement, the “2006 Credit Agreements”). Unless otherwise specifiedherein, capitalized terms used but undefined in this section shall have themeanings ascribed to them in the Giftline Credit Agreement.

The facility underthe Giftline Credit Agreement consists of a revolving loan commitment in anamount equal to the lesser of (i) $15.0 million, with a maximum availability of$13.5 million, and (ii) the then-current Borrowing Base, in each case minusamounts outstanding under the Canadian Credit Agreement (the “Giftline Revolver”),with a sub facility for letters of credit to be issued by the Issuing Bank inan amount not to exceed $8.0 million. The Borrowing Base is primarily afunction of a percentage of eligible accounts receivable and eligibleinventory. As of March 31, 2007, the outstanding balance on the GiftlineRevolver was $6.5 million and the balance on the Canadian Revolving Loan(defined below) was $0, and there was $1.0 million utilized under the Canadiansub-facility for letters of credit. At March 31, 2007 the availability underthe Giftline Revolver was approximately $5.8 million.

All outstandingamounts under the Giftline Revolver are due and payable on March 14, 2011,subject to earlier termination in accordance with the terms of the GiftlineCredit Agreement.

On December 28,2006, pursuant to the third amendment to the Giftline Credit Agreement (the “ThirdAmendment”), the interest rates applicable to the Giftline Revolver werereduced such that the applicable margin is 

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nowdetermined  in accordance with a pricinggrid based on the most recent quarter-end daily average Excess Revolving LoanAvailability, which applicable margins shall range from 2.00% - 2.75% for LIBORLoans and from 0% - 0.50% for Base Rate Loans. Interest is due and payable in the same manner as with respect to theInfantline Loans. The applicable interest rate margins as of March 31, 2007were 2.50% for LIBOR Loans and 0.25% for Base Rate Loans. As of March 31, 2007,the interest rate was 8.50% for the one outstanding Base Rate loan.  There are no LIBOR Loans outstanding.

Disbursement andreceivable bank accounts of the Giftline Borrowers are required to be with theAdministrative Agent or its affiliates, and cash in such accounts will be swepton a daily basis to pay down outstanding amounts under the Giftline Revolver.

The GiftlineCredit Agreement contains customary affirmative and negative covenantssubstantially similar to those applicable to the Infantline Credit Agreement.The Giftline Credit Agreement originally contained the following financialcovenants:  (i) a minimum EBITDA test,(ii) a minimum Excess Revolving Loan Availability requirement of $5.0 million,(iii) an annual capital expenditure limitation and (iv) a minimum Fixed ChargeCoverage Ratio (for quarters commencing with the quarter ended March 31, 2008).On August 8, 2006, the Giftline Credit Agreement was amended to lower thethreshold on the Minimum EBITDA covenant by $1.0 million per fiscal quarter foreach of four consecutive fiscal quarters commencing with the fiscal quarterending December 31, 2006. On December 28, 2006, the Third Amendment (i) eliminatedin their entirety both the minimum EBITDA financial covenant and the FixedCharge Coverage Ratio financial covenant and (ii) reduced the minimum ExcessRevolving Loan Availability requirement from $5,000,000 to $3,500,000. TheThird Amendment also amended the definition of Revolving Loan Availability sothat it now equals the lesser of (i) $13,500,000 and (ii) the then-currentBorrowing Base, in each case minus amounts outstanding under the Canadian LoanAgreement. As of March 31, 2007, the Company was in compliance with theremaining financial covenants contained in the Giftline Credit Agreement.

As contemplated bythe 2005 Credit Agreement, on June 28, 2005, as amended as of August 4, 2005,December 7, 2005 and March 14, 2006, RB’s Canadian subsidiary, Amram’sDistributing Ltd. (“Amrams”), executed a separate Credit Agreement(acknowledged by RB) with the financial institutions party thereto and LaSalleBusiness Credit, a division of ABN AMRO Bank, N.V., Canada Branch, a Canadianbranch of a Netherlands bank, as issuing bank and administrative agent (asamended, the “Canadian Credit Agreement”), and related loan documents withrespect to an original maximum U.S. $10.0 million revolving loan (the “CanadianRevolving Loan”). RB executed an unsecured Guarantee (the “Canadian Guarantee”)to guarantee the obligations of Amrams under the Canadian Credit Agreement. Inconnection with the LaSalle Refinancing, the March 14, 2006 amendment to theCanadian Credit Agreement: (i) replaced references to the 2005 Credit Agreementwith the Giftline Credit Agreement (such that, among other conforming changes,a default under the Giftline Credit Agreement will be a default under theCanadian Credit Agreement), (ii) released RB from the Canadian Guaranty and(iii) provided for a maximum U.S. $5.0 million revolving loan. In connectionwith the release of RB from the Canadian Guaranty, U.S. Gift executed anunsecured Guarantee to guarantee the obligations of Amrams under the CanadianCredit Agreement. A default under the Infantline Credit Agreement will notconstitute a default under the Canadian Credit Agreement. As of March 31, 2007,there were no borrowings under this facility.

The Companybelieves that the lower interest rates that were extended to the Company’ssubsidiaries in connection with the LaSalle Refinancing will enable the Companyto reduce its aggregate interest expense, on a comparable basis, byapproximately $2.0 million per year. However, because the 2006 Credit Agreements are extended directly to RB’sdomestic subsidiaries, RB is dependent upon its operating subsidiaries toprovide the cash necessary to enable the Company to fund its corporate overheadand other expenses.

The 2006 CreditAgreements restrict the ability of RB’s domestic subsidiaries to distributecash to RB for the purpose of paying dividends to RB’s shareholders or for thepurpose of satisfying RB’s corporate overhead expenses.  Among other limitations, the InfantlineCredit Agreement contains a cap (subject to certain exceptions) of $2.0 millionper year on the amount that can be provided to RB to pay corporate overheadexpenses, and the Giftline Credit Agreement contains a similar cap (subject tocertain exceptions) equal to $4.5 million per year for each of fiscal years2006 and 2007, and $5.0 million for each fiscal year thereafter, of whichapproximately $3.9 million was paid in 2006. The Third Amendment permits the Giftline Borrowers to pay dividends ormake distributions to RB if no default or event of default exists or wouldresult there from, and immediately after giving effect to such payments, thereis at least $1.5 million available to be drawn under the GiftlineRevolver.  The amount of any suchpayments to RB cannot exceed the amount of capital contributions made by RB tothe Giftline Borrowers after December 28, 2006, which are used by the GiftlineBorrowers to pay down the Giftline Revolver minus the total amount of dividendsor other distributions made by the Giftline Borrowers to RB under thisprovision of the Giftline Credit Agreement. As of March 31, 2007, the amount of capital contributions made afterDecember 28, 2006 by RB under this provision of the Third Amendment to theGiftline Borrowers was $3.0 million.

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RB believes thatthe amounts permitted to be distributed to it by its subsidiaries will besufficient to fund its corporate overhead expenses, although there can be noassurance that such expenses will not exceed current estimates.

During the three months ended March 31, 2007, theCompany paid approximately $46,000 for income taxes. The Company currentlyexpects that its cash flows will exceed any income tax payments during 2007.

**Other Events and CircumstancesPertaining to Liquidity**

In the event that additional initiatives related tothe PIP are implemented, certain significant restructuring charges may berecognized.  As the determination toimplement any or all such initiatives has not yet been made, estimates of therange of any additional charges or other related expenditures cannot be determinedat this time.  See “Overview” from the2006 10-K for a description of the PIP and the restructuring activitiesundertaken in 2005 and 2006.

The Company enters into foreign currency forwardexchange contracts, principally to manage the economic currency risksassociated with the purchase of inventory by its European, Canadian andAustralian subsidiaries in the gift segment and by Sassy Inc. in the infant andjuvenile segment.  As of March 31, 2007,the Company had outstanding forward contracts with a notional amount totalingapproximately $8.2 million.

The Company is dependent upon information technologysystems in many aspects of its business. In 2002, the Company commenced aglobal implementation of an Enterprise Resource Planning (“ERP”) system for itsgift businesses.  During 2003 andcontinuing into 2004, certain of the Company’s international gift subsidiariesbegan to phase in aspects of the new ERP system.  In late 2005, the Company began to explorealternative global information technology systems for its gift business thatcould provide greater efficiencies, lower costs and greater reportingcapabilities than those provided by the current ERP system.  As a result of this review, all remaininginternational implementations were placed on hold pending a decision on whetheror not to replace the current ERP system. The Company expects to make a decision on whether to replace its currentERP system during fiscal 2007 or later.

The Company is subject to legal proceedings and claimsarising in the ordinary course of its business that the Company believes willnot have a material adverse impact on the Company’s consolidated financialcondition, results of operations or cash flows.

Consistent with its past practices and in the normalcourse of its business, the Company regularly reviews acquisition opportunitiesof varying sizes. The Company may consider the use of debt or equity financingto fund potential acquisitions.  The 2006 Credit Agreements imposerestrictions on the Company that could limit its ability to respond to marketconditions or to take advantage of acquisitions or other businessopportunities.

**Contractual Obligations**

The following table summaries the Company’ssignificant known contractual obligations as of March 31, 2007 and the futureperiods in which such obligations are expected to be settled in cash (inthousands):
| ** **                        | ** ** | **Total** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
|-----------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Operating Lease  Obligations      |       | $         | 38,403     |     | $          | 4,745    |       | $        | 5,797      |     | $          | 5,146    |       | $              | 4,737      |   | $ | 4,240 |   | $ | 13,738 |   |
| Purchase Obligations(1)           |       | $         | 39,379     |     | $          | 39,379   |       | $        | —     |     | $          | —   |       | $              | —     |   | $ | — |   | $ | — |   |
| Debt Repayment  Obligations(2)(3) |       | $         | 30,250     |     | $          | 6,750    |       | $        | 11,500     |     | $          | 12,000   |       | $              | —     |   | $ | — |   | $ | — |   |
| Royalty Obligations               |       | $         | 1,478      |     | $          | 1,333    |       | $        | 70         |     | $          | —   |       | $              | 75         |   | $ | — |   | $ | — |   |
| Total Contractual Obligations     |       | $         | 109,510    |     | $          | 52,207   |       | $        | 17,367     |     | $          | 17,146   |       | $              | 4,812      |   | $ | 4,240 |   | $ | 13,738 |   |

 

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(1)             TheCompany’s purchase obligations consist of purchase orders for inventory.

(2)             Reflects repaymentobligations under the Infantline Credit Agreement.  Mandatory repayment obligations under theInfantline Credit Agreements are as follows (in thousands) $6,750 in 2007;$11,500 in 2008; and $12,000 in 2009. See Note 5 of Notes to Unaudited Consolidated Financial Statements for adescription of the Infantline Credit Agreement, including provisions thatcreate, increase and/or accelerate obligations thereunder.

(3)             The Company hasrevolving loan facilities that expire on March 14, 2011.  At March 31, 2007, there was approximately$6.5 million borrowed under the Giftline Revolver and approximately $22.9 millionborrowed under the Infantline Revolver.

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(4)             Of the total incometax payable of $15.1 million, the Company has classified $5.3 million ascurrent, as such amount is expected to be resolved within one year.  The remaining amount has been classified as along term liability.  These amounts arenot included in the above table as the timing of their potential settlement wasnot reasonably estimable.

**OffBalance Sheet Arrangements**

As of March 31, 2007, there have been no materialchanges in the information provided under the caption “Off Balance SheetArrangements” of Item 7 of the 2006 10-K.

**CRITICAL ACCOUNTING POLICIES**

The SEC has issued disclosure advice regarding “criticalaccounting policies”, defined as accounting policies that management believesare both most important to the portrayal of the Company’s financial conditionand results and require application of management’s most difficult, subjectiveor complex judgments, often as a result of the need to make estimates about theeffects of matters that are inherently uncertain.

Management is required to make certain estimates andassumptions during the preparation of its consolidated financial statementsthat affect the reported amounts of assets, liabilities, revenue and expenses,and related disclosure of contingent assets and liabilities. Estimates andassumptions are reviewed periodically, and revisions made as determined to benecessary by management.  There have beenno material changes to the Company’s significant accounting estimates andassumptions or the judgments affecting the application of such estimates andassumptions during the period covered by this report from those described inthe Company’s 2006 10-K.

Also see Note 2 of Notes to Consolidated FinancialStatements of the 2006 10-K for a summary of the significant accountingpolicies used in the preparation of the Company’s consolidated financialstatements.  See Note 2 to Notes toUnaudited Consolidated Financial Statements herein for a discussion of SFAS No.123R, and the assumptions used in option valuations.

The Companyadopted “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January1, 2007. The impact of the adoption of FIN 48 was not material to the Company’sconsolidated financial position or results of operations. See Note 11 to Notesto Unaudited Consolidated Financial Statements herein for a discussion of FIN48.

**RecentlyIssued Accounting Standards**

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurement*(“SFAS No. 157”).  SFAS No. 157 definesfair value, establishes a framework for measuring fair value and expandsdiscloses about fair value measurements. SFAS No. 157 is effective for the Company’s fiscal year beginningJanuary 1, 2009.  The Company iscurrently evaluating the impact of adopting SFAS No. 157 on its consolidatedfinancial position and results of operations.

InFebruary 2007, FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities.”  SFASNo. 159 provides companies with an option to report selected financial assetsand liabilities at fair value and establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets andliabilities.  SFAS No. 159 is effectivefor fiscal years beginning after November 15, 2007.  The Company is currently evaluating theimpact, if any, on its consolidated financial statements of SFAS No. 159..

**Forward-Looking Statements**

This Quarterly Report on Form 10-Q containscertain forward-looking statements.  Additional written and oralforward-looking statements may be made by the Company from time to time inSecurities and Exchange Commission (SEC) filings and otherwise.  ThePrivate Securities Litigation Reform Act of 1995 provides a safe-harbor forforward-looking statements.  These statements may be identified by the useof forward-looking words or 

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phrases including, but not limited to, “anticipate”, “project”,“believe”, “expect”, “intend”, “may”, “planned”, “potential”, “should”, “will”or “would”.  The Company cautions readers that results predicted byforward-looking statements, including, without limitation, those relating tothe Company’s future business prospects, revenues, working capital, liquidity,capital needs, interest costs and income are subject to certain risks anduncertainties that could cause actual results to differ materially from thoseindicated in the forward-looking statements.   Specific risks and uncertainties include, butare not limited to, those set forth under Item 1A, “Risk Factors”, of the 200610-K.  The Company undertakes noobligation to publicly update any forward-looking statement, whether as aresult of new information, future events or otherwise.

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

As of March 31, 2007, there have been no material changesin the Company’s market risks associated with marketable securities and foreigncurrency exchange rates, as described in Item 7A of the 2006 10-K.  The interest applicable to the 2006 CreditAgreements is based upon (i) the LIBOR Rate and (ii) the Base Rate (each asdefined in the 2006 Credit Agreements), plus an applicable margin.  At March 31, 2007, a sensitivity analysis tomeasure potential changes in applicable interest rates indicates that a onepercentage point increase in interest rates would increase the Company’sinterest expense by approximately $0.6 million annually, based upon the levelof debt at March 31, 2007.  See Note 5 ofNotes to Unaudited Consolidated Financial Statements for a description of theinterest rates applicable to the loans under the 2006 Credit Agreements.

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**ITEM4.  CONTROLS AND PROCEDURES**

***Evaluation ofDisclosure Controls and Procedures***

We maintain disclosurecontrols and procedures as defined in Rules 13a-15(e) or15d-15(e) of the Exchange Act that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s (the “SEC”) rules and forms and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer (together, the “CertifyingOfficers”), to allow for timely decisions regarding required disclosure.

In designing and evaluatingdisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable, not absolute assurance of achieving the desired objectives. Also,the design of a control system must reflect the fact that there are resource constraintsand the benefits of controls must be considered relative to their costs. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty and that breakdowns can occur because of simple error or mistake.

Under the supervision andwith the participation of management, including the Certifying Officers, wecarried out an evaluation of the effectiveness of the design and operation ofour disclosure controls and procedures pursuant to paragraph (b) of ExchangeAct Rules 13a-15 or 15d-15 as of March 31, 2007.  Based upon that evaluation, the CertifyingOfficers have concluded that our disclosure controls and procedures areeffective as of March 31, 2007.

***Changes in InternalControl over Financial Reporting***

There was no change in ourinternal control over financial reporting identified in connection with theevaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 thatoccurred during the fiscal quarter ended March 31, 2007 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

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**PART II —OTHER INFORMATION**

**ITEM 1A. RISK FACTORS**

Therehave been no material changes to the risk factors set forth in Part I, Item 1A,“Risk Factors”, of the Company’s 2006 10-K.

**ITEM 6.  EXHIBITS** 
| Exhibits to this Quarterly  Report on Form 10-Q. |
|--------------------------------------------------|
|                                             |   |   |
| 4.21                                             |   | Debenture among Russ Berrie (UK) Limited and  National Westminster Bank Plc. |
|                                             |   |   |
| 4.22                                             |   | Business Overdraft Facility among Russ Berrie (UK)  Limited and The Royal Bank of Scotland |
|                                             |   |   |
| 31.1                                             |   | Certification of CEO required by Section 302 of  the Sarbanes Oxley Act of 2002. |
|                                             |   |   |
| 31.2                                             |   | Certification of CFO required by Section 302 of  the Sarbanes Oxley Act of 2002. |
|                                             |   |   |
| 32.1                                             |   | Certification of CEO required by Section 906 of  the Sarbanes Oxley Act of 2002. |
|                                             |   |   |
| 32.2                                             |   | Certification of CFO required by Section 906 of  the Sarbanes Oxley Act of 2002. |

 

**Items 1, 2, 3, 4 and 5 are not applicable and have beenomitted.**

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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/ James J. O’Reardon, Jr.           |   |
| Date:  | May 10, 2007 |   |                          |                                       | James J. O’Reardon, Jr. |
|   |         |   |                          | Vice President and Chief Financial Officer |
|        |              |        |                               |                                            |  |  |  |

 

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**EXHIBITINDEX**
| 4.21   |   | Debenture among Russ Berrie (UK) Limited and National  Westminster Bank Plc.               |
|--------|--------|--------------------------------------------------------------------------------------------|
|   |   |                                                                                       |
| 4.22   |   | Business Overdraft Facility among Russ Berrie (UK)  Limited and The Royal Bank of Scotland |
|   |   |                                                                                       |
| 31.1   |   | Certification of CEO required by Section 302 of  the Sarbanes Oxley Act of 2002.      |
|   |   |                                                                                       |
| 31.2   |   | Certification of CFO required by Section 302 of  the Sarbanes Oxley Act of 2002.      |
|   |   |                                                                                       |
| 32.1   |   | Certification of CEO required by Section 906 of  the Sarbanes Oxley Act of 2002.      |
|   |   |                                                                                       |
| 32.2   |   | Certification of CFO required by Section 906 of  the Sarbanes Oxley Act of 2002.      |

 

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