-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MQ4bz8zm913BQViJD03uzijnJNIk4AqRy2Dx7WHZrNJ9U4RFBMXdlPzf3ViEZJsP hQz/lC1lQlejbALVAZDvUg== 0001104659-05-022154.txt : 20050510 0001104659-05-022154.hdr.sgml : 20050510 20050510154608 ACCESSION NUMBER: 0001104659-05-022154 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RUSS BERRIE & CO INC CENTRAL INDEX KEY: 0000739878 STANDARD INDUSTRIAL CLASSIFICATION: DOLLS & STUFFED TOYS [3942] IRS NUMBER: 221815337 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08681 FILM NUMBER: 05816486 BUSINESS ADDRESS: STREET 1: 111 BAUER DR CITY: OAKLAND STATE: NJ ZIP: 07436 BUSINESS PHONE: 2013379000 MAIL ADDRESS: STREET 2: 111 BAUER DRIVE CITY: OAKLAND STATE: NJ ZIP: 07436 FORMER COMPANY: FORMER CONFORMED NAME: BERRIE RUSS & CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 a05-7927_110q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

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

For the transition period from to

Commission file number 1-8681

RUSS BERRIE AND COMPANY, INC.

(Exact name of registrant as specified in its charter)

New Jersey		22-1815337
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

111 Bauer Drive, Oakland, New Jersey		07436
(Address of principal executive offices)		(Zip Code)

(201) 337-9000
(Registrant’s telephone number, including area code)


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

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

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

The number of shares outstanding of each of the registrant’s classes of common stock, as of April 30, 2005 was as follows:

CLASS		OUTSTANDING At April 30, 2005
Common Stock, $0.10 stated value		20,824,475

RUSS BERRIE AND COMPANY, INC.

INDEX

PART I – FINANCIAL INFORMATION

Item 1.		Financial Statements

a)		Consolidated Balance Sheet as of March 31, 2005 and December 31, 2004

b)		Consolidated Statement of Income for the three months ended March 31, 2005 and 2004

c)		Consolidated Statement of Cash Flows for the three months ended March 31, 2005 and 2004

d)		Notes to Consolidated Financial Statements

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Item 4.		Controls and Procedures

PART II – OTHER INFORMATION

Item 6.		Exhibits

Signatures

PART 1 - - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)
(UNAUDITED)

	March 31, 2005			December 31, 2004
*ASSETS*
Current assets
Cash and cash equivalents	$	41,646		$	48,099
Restricted cash	¾			4,604
Accounts receivable, trade, less allowances of $3,299 in 2005 and $2,950 in 2004	64,198			75,722
Inventories — net	41,326			47,391
Prepaid expenses and other current assets	6,229			6,090
Income tax receivable	12,577			11,359
Deferred income taxes	2,830			2,860
Total current assets	168,806			196,125

Property, plant and equipment — net	27,080			28,690
Goodwill	89,213			89,213
Intangible assets	61,683			61,927
Restricted cash	11,082			11,026
Deferred income taxes	4,518			4,518
Other assets	11,353			10,852
Assets held for sale	¾			8,747
Total assets	$	373,735		$	411,098

*LIABILITIES AND SHAREHOLDERS’ EQUITY*
Current liabilities
Current portion of long term debt	$	7,000		$	25,250
Accounts payable	6,622			12,137
Accrued expenses	26,331			35,204
Accrued income taxes	4,365			4,241
Total current liabilities	44,318			76,832
Long term debt, excluding current portion	98,000			99,750
Total liabilities	$	142,318		$	176,582
Commitments and contingencies
Shareholders’ equity
Common stock: $.10 stated value per share; authorized 50,000,000 shares; issued 2005, 26,460,759 shares; 2004 – 26,460,759 shares	2,648			2,648
Additional paid in capital	88,685			88,693
Retained earnings	236,215			237,937
Accumulated other comprehensive income	14,019			15,388
Treasury stock, at cost (5,636,284 shares at March 31, 2005 and at December 31, 2004)	(110,150		)	(110,150		)

Total shareholders’ equity	231,417			234,516
Total liabilities and shareholders’ equity	$	373,735		$	411,098

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

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

(UNAUDITED)

	THREE MONTHS ENDED MARCH 31,
	2005			2004

Net sales	$	70,740		$	65,713

Cost of Sales	39,344			32,610

Gross profit	31,396			33,103

Selling, general and administrative expenses	30,685			34,441

Investment and other (expense) income-net	(3,451		)	1,963

(Loss) income before (benefit) provision for income taxes	(2,740		)	625

(Benefit) provision for income taxes	(1,018		)	189

Net (loss) income	$	(1,722	)	$	436

Net (loss) income per share:
Basic	$	(0.08	)	$	0.02
Diluted	$	(0.08	)	$	0.02

Weighted average shares:
Basic	20,824,000			20,684,000
Diluted	20,824,000			20,762,000

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

RUSS BERRIE AND COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in Thousands)
(UNAUDITED)

	THREE MONTHS ENDED MARCH 31,
	2005			2004
Cash flows from operating activities:
Net income	$	(1,722	)	$	436
Adjustments to reconcile net(loss) income to net cash provided by operating activities:
Depreciation and amortization	1,898			1,673
Amortization of Deferred financing cost	416			¾
Provision for accounts receivable reserves	96			620
Other	90			751
Changes in assets and liabilities :
Restricted cash	4,548			¾
Accounts receivable	11,428			18,699
Inventories—net	6,065			3,844
Prepaid expenses and other current assets	(139		)	(346		)
Other assets	(129		)	2,113
Accounts payable	(5,515		)	(3,165		)
Accrued expenses	(8,873		)	(10,163		)
Income taxes	(1,064		)	(2,259		)
Total adjustments	8,821			11,767
Net cash provided by operating activities	7,099			12,203
Cash flows from investing activities:
Purchase of marketable securities and other investments	¾			(138,334		)
Proceeds from sale of marketable securities and other investments	¾			234,263
Proceeds from sale of property, plant and equipment	8,761			45
Capital expenditures	(320		)	(723		)
Other	(31		)	¾
Net cash provided by investing activities	8,410			95,251
Cash flows from financing activities:
Proceeds from issuance of common stock	—			1,647
Dividends paid to shareholders	¾			(6,215		)
Payment of Deferred Financing cost	(788		)	¾
Payment of Long Term Debt	(20,000		)	¾
Net cash (used in) financing activities	(20,788		)	(4,568		)
Effect of exchange rate changes on cash and cash equivalents	(1,174		)	1,137
Net (decrease) increase in cash and cash equivalents	(6,453		)	104,023
Cash and cash equivalents at beginning of period	48,099			81,535
Cash and cash equivalents at end of period	$	41,646		$	185,558
Cash paid during the year for:
Interest expense	$	3,077		$	15
Income taxes	$	405		$	2,237

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

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim consolidated financial statements have been prepared by Russ Berrie and Company, Inc. and its subsidiaries (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles have been condensed or omitted pursuant to such principles and regulations. The information furnished reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the interim periods presented. Results for interim periods are not necessarily an indication of results to be expected for the year.

Prior to the acquisition of Kids Line, LLC, the Company had two reportable segments: the core segment, which consisted of the Company’s gift business, and the non-core segment, which consisted of the businesses of Sassy, Inc. and Bright of America, Inc. After the acquisition of Kids Line as of December 15, 2004, the Company reclassified its operations into three reportable segments: (i) the Company’s gift business, (ii) the Company’s infant and juvenile business, which consists of the businesses of Sassy, Inc. and Kids Line, LLC, and (iii) its non-core business, which consisted of Bright of America, Inc., until its sale effective August 2, 2004. The Company has redefined its 2004 segment disclosures to conform to the new segment classifications. Note, however, that as a result of the sale of Bright of America, the Company currently operates in two segments: (i) its gift business and (ii) its infant and juvenile business. The segmentation of the Company’s operations reflects how the Company’s chief executive officer currently views results of operations. There are no intersegment revenues.

The Company’s gift business designs, manufactures through third parties and markets a wide variety of gift products to retail stores throughout the United States and throughout the world via the Company’s international wholly-owned subsidiaries and distributors. The Company’s infant and juvenile businesses design and market products in a number of baby categories including, among others, infant bedding and accessories, bath toys and accessories, developmental toys, feeding items and baby comforting products, and consists of Sassy, Inc. and Kids Line LLC. These products are sold to consumers, primarily in the United States, through mass merchandisers, toy, specialty, food, drug and independent retailers, apparel stores and military post exchanges. The Company’s non-core business consisted of Bright of America, Inc. until its sale by the company effective August 2, 2004. Non-core products included educational products, placemats, candles and home fragrance products, which were sold to customers primarily in the United States through mass marketers.

Certain prior year amounts have been reclassified to conform to the 2005 presentation.

This Quarterly Report on Form 10-Q for the three months ended March 31, 2005 should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

NOTE 2 - ACCOUNTING FOR STOCK OPTIONS

The Company follows the disclosure only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123” and, accounts for its stock option grants in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations using the intrinsic value method of accounting. Accordingly, no compensation cost has been recognized for the options granted by the Company with an initial exercise price equal to the fair value of the common stock except for the application of Financial Accounting Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation”, which resulted in non-cash income of $8,600 and non-cash expense of $30,000 during the three months ended March 31, 2005 and March 31, 2004, respectively, due to options granted during 2000 that were repriced as of February 29, 2000 upon approval of the Board of Directors and Shareholders. Had compensation cost for the Company’s stock grants been determined based on the fair recognition provisions of SFAS No. 123 at the grant date, in the three months ended March 31, 2005 and 2004, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

	Three Months Ended March 31,
	2005			2004
Net (loss) income-as reported	$	(1,722,000	)	$	436,000
Deduction for stock-based compensation expense determined under fair value method net of tax-pro forma	118,000			187,000

Net (loss) income-pro forma	(1,840,000		)	249,000

(Loss) earnings per share (basic) - as reported	(0.08		)	0.02
(Loss) earnings per share (basic) – pro forma	(0.09		)	0.01
(Loss) earnings per share (diluted) – as reported	(0.08		)	0.02
(Loss) earnings per share (diluted) – pro forma	(0.09		)	0.01

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

	Three Months Ended March 31,
	2005			2004
Dividend yield	5.04		%	3.52		%
Risk-free interest rate	4.12		%	2.40		%
Volatility	29.43		%	23.56		%
Expected life (years)	4.2			3.9
Weighted average fair value of options granted during the year	$	3.93		$	5.06

NOTE 3 - EARNINGS PER SHARE

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

	Three Months Ended March 31,
	2005	2004

Weighted average common shares outstanding	20,824,000	20,684,000

Dilutive effect of common shares issuable under outstanding stock options	¾	78,000
Weighted average common shares outstanding assuming dilution	20,824,000	20,762,000

Stock options outstanding at March 31, 2005 and March 31, 2004 to purchase 613,000 and 186,000 of common stock, respectively, were not included in the computation of earnings per common share assuming dilution for such period because the options’ exercise prices were greater than the average market price of the common shares.

NOTE 4 – ACQUISITIONS

As previously disclosed in the Company’s 2004 Annual Report on Form 10-K, in December 2004, the Company purchased all of the outstanding equity interests and warrants in Kids Line, LLC (the “Purchase”), in accordance with the terms and provisions of a Membership Interest Purchase Agreement (the “Purchase Agreement”) executed on December 16, 2004, as of December 15, 2004. Kids Line is a designer and distributor of infant bedding products, and its assets consist primarily of accounts receivable and inventory and intangible assets. At closing, the Company paid approximately $130,532,000, which represented the portion of the purchase price due at closing plus various transaction costs. The aggregate purchase price under the Purchase Agreement, however, includes the

potential payment of contingent consideration (the “Earnout Consideration”). The Earnout Consideration shall equal 11.724% of the Agreed Enterprise Value (described below) of Kids Line as of the last day of the Measurement Period (the three year period ended November 30, 2007), and shall be paid at the times described in the Purchase Agreement (approximately the third anniversary of the closing date). The “Agreed Enterprise Value” shall be the product of (i) Kids Line’s EBITDA during the twelve (12) months ending on the last day of the Measurement Period and (ii) the applicable multiple (ranging from zero to eight) as set forth in the Purchase Agreement. The amount of the Earnout Consideration will be charged to goodwill when and if it is earned.

In connection with the Purchase, the Company and certain of its subsidiaries entered into a Financing Agreement dated as of December 15, 2004, as amended on March 18 and March 31, 2005 (the “Financing Agreement”) with the lenders named therein and Ableco Finance LLC, as collateral agent and as administrative agent (the “Agent”). The Financing Agreement consists of a term loan in the original principal amount of $125 million which matures on November 14, 2007 (the “Term Loan”). The Company used the proceeds of the Term Loan to substantially finance the Purchase and pay fees and expenses related thereto. The Financing Agreement is described in Note 5 to the Unaudited Consolidated Financial Statements.

Pro Forma Information

The following unaudited pro forma consolidated results of operations for the three months ended March 31, 2004 assumes the acquisition of KidsLine LLC occurred as of January 1, 2004.

	Three Months Ended March 31, 2004
Net sales	$	79,030,000
Net income	1,408,000
Net income per share:
Basic	$	0.07
Diluted	$	0.07

The above amounts are based upon certain assumptions and estimates, and do not reflect any benefits from combined operations. The pro forma results have not been audited and do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, and may not be indicative of the results of future combined operations.

NOTE 5 – DEBT

In connection with the Purchase of Kids Line, LLC, the Company and certain of its subsidiaries entered into a Financing Agreement dated as of December 15, 2004, amended on March 18, 2005 and March 31, 2005, as described below (the “Financing Agreement”) with the lenders named therein and Ableco Finance LLC, as collateral agent and as administrative agent (the “Agent”). The Financing Agreement consists of a term loan in the original principal amount of $125 million which matures on November 14, 2007 (the “Term Loan”). The Company used the proceeds of the Term Loan to substantially finance the Purchase and pay fees and expenses related thereto.

The Financing Agreement, as originally executed, provided the Company with two interest rate options for the borrowing under the Term Loan, to which a margin spread is added: (1) the LIBOR Rate (which is subject to a minimum rate of 1.75% per annum) plus a spread of 7.00% per annum and (2) JPMorgan Chase Bank’s base or prime rate (the “Reference Rate”) (which is subject to a minimum rate of 4.75% per annum) plus a spread of 4.25% per annum. Pursuant to the terms of the March 31, 2005 amendment, (the “Amendment”) the Term Loan shall bear interest as follows: (i) if the relevant portion of the Term Loan is a LIBOR Rate Loan (as described in the Financing Agreement), at a rate per annum equal to the LIBOR Rate plus 8.00 percentage points, and (ii) otherwise, at a rate per annum equal to the Reference Rate plus 5.25 percentage points; provided that if the Company’s Consolidation EBITDA equals or exceeds the applicable amount set forth opposite the fiscal quarter end appearing below, the Term Loan shall bear interest during the immediately following fiscal quarter, as follows: (i) if the relevant portion of the Term Loan is a LIBOR Rate Loan, at a rate per annum equal to the LIBOR Rate plus 7.00 percentage points, and (ii) otherwise, at a rate per annum equal to the Reference Rate plus 4.25% percentage points:

Fiscal Quarter End	Consolidated EBITDA
March 31, 2005	$	29,000,000
June 30, 2005	$	34,000,000
September 30, 2005	$	39,000,000
December 31, 2005	$	44,000,000
March 31, 2006	$	46,000,000
June 30, 2006	$	50,000,000
September 30, 2006	$	52,000,000
December 31, 2006	$	52,000,000
March 31, 2007	$	55,000,000
June 30, 2007	$	55,000,000
September 30, 2007 and thereafter	$	55,000,000

Under the Financing Agreement, as amended, the Company is required to make prepayments of the Term Loan in an amount equal to $1,750,000 per quarter with the balance due at maturity. The first such prepayment was made on March 31, 2005; subsequent prepayments will be payable on the last day of the relevant quarter. In connection with the Amendment, as further described below, the Company made a $18,250,000 prepayment on March 31, 2005. In addition, beginning with the fiscal year ending December 31, 2005, the Company will be required to make annual mandatory prepayments of the Term Loan, with specified percentages of excess cash flow (as defined in the Financing Agreement) and the proceeds of certain asset sales, debt issuances, equity issuances, tax refunds other than the Federal tax refund that the Company expects to receive as a result of net operating loss carrybacks for 2004, insurance and other extraordinary receipts.

Ableco Finance LLC, as agent, has a lien on substantially all of the assets of the Company, pursuant to the terms of the Security Agreement dated as of December 15, 2004 among the Company, its domestic subsidiaries party thereto and Ableco. Such lien includes a mortgage on the real property located at 2305 Breton Industrial Park Drive, S.E., Kentwood, MI (the “Facility Encumbrance”). California KL Holdings, Inc., as agent, has a subordinated lien with respect to the Facility Encumbrance, among other things, pursuant to the terms of the Subordinated Security Agreement dated as of December 15, 2004 among the agent, the Company and its domestic subsidiaries party thereto.

On March 18, 2005, the Agent waived, with respect to the year ending December 31, 2004, the Company’s non-compliance with a covenant in the Financing Agreement as originally executed, that limited the amount of its aggregate operating lease expense, and amended such covenant to increase the amount of the annual expense limitation for the term of the Financing Agreement. In addition, the Financing Agreement, as originally executed, contains, among other things, various financial covenants to which the Company and its subsidiaries must adhere on a monthly and quarterly basis (a Funded Debt Ratio, a Fixed Charge Coverage Ratio, a Consolidated EBITDA covenant, an Infant Line EBITDA covenant and a Minimum Qualified Cash covenant, all as defined in the Financing Agreement). The Company was in compliance with such financial covenants as of December 31, 2004. However, because management believed that the Company would not be in compliance as of March 31, 2005, with the Consolidated EBITDA Covenant and the Funded Debt Ratio set forth in the Financing Agreement as originally executed, and had substantial concerns over whether the Company would be in compliance with such covenants for the remainder of 2005, on March 31, 2005, the Agent, the Required Lenders under the Financing Agreement, the Company and its subsidiaries party thereto executed the Amendment, which amended the Consolidated EBITDA covenant for the quarters ending March 31, June 30, September 30 and December 31, 2005 (in light of the additional $18,250,000 prepayment of principal discussed above, no amendment of the Funded Debt Ratio or any other financial covenant was required).

The amended covenants are set forth below:

	Original Required Consolidated EBITDA		Amended Required Consolidated EBITDA

March 31, 2005	$	29,000,000	$	27,500,000
June 30, 2005	$	34,000,000	$	31,000,000
September 30, 2005	$	39,000,000	$	33,000,000
December 31, 2005	$	44,000,000	$	36,000,000

principal payment), (ii) amend the interest rate provisions applicable to the term loan as discussed above, (iii) increase the Minimum Qualified Cash level (as defined) required by the Financing Agreement from $40,000,000 to $45,000,000, (iv) maintain the Term Loan LC (as defined below) throughout the term of the Financing Agreement (such Term Loan LC would otherwise have been released when the Funded Debt Ratio is less than 3.0:1.0), and (v) pay a fee of $787,500 in connection with the execution of the Amendment.

In accordance with the Amendment, as long as all or any portion of the Term Loan is outstanding, the Company is not permitted to declare and/or pay dividends unless, except in all cases with respect to the dividend declared by the Company on March 31, 2005 and paid during the month of April, 2005 (the “First Quarter 2005 Dividend”), (i) no Default or Event of Default (as defined in the Financing Agreement) shall have occurred and be continuing either before or after giving effect to such declaration and payment; (ii) at the time of declaration of such dividends, the chief financial officer of the Company shall have certified in writing to the Agent that as of such date and after due investigation and inquiry, such chief financial officer has no reason to believe that, after giving effect to the payment of such dividends, the Company will not be in compliance with any of the financial covenants in the Financing Agreement generally as of the end of the fiscal quarter in which such dividends are to be paid; and (iii) the Company satisfies a minimum Consolidated EBITDA test for the fiscal quarter immediately preceding the fiscal quarter in which such dividend is to be paid (in any event, no such dividend shall exceed $6,250,000 per quarter); provided further, notwithstanding the foregoing or any other provision of the Financing Agreement, (a) the Company may declare and pay only the December 2004 Dividend in the fiscal quarter ending December 31, 2004; (b) the amount of the First Quarter 2005 Dividend shall be no greater than either (i) ten cents ($0.10) per share or (ii) $2,100,000; and (c) the Company may declare and pay a dividend not greater than either $0.05 per share (subject to corresponding adjustment for stock splits, stock dividends and recapitalizations) or $1,050,000 for each of the second, third and fourth quarters of 2005, provided that the Company has the Dollar Equivalent Amount of Qualified Cash (as defined in the Financing Agreement) of at least $55,000,000, after giving effect to any such dividend, and the Company is in compliance with clauses (i), (ii) and (iii) above. In light of the foregoing, the Company cannot assure the ability to pay dividends in the future.

The Financing Agreement contains certain events of default, including, among others, non-payment of principal, interest, fees or other amounts, breach of representations and warranties, violation of covenants, cross defaults, bankruptcy events, judgments, ERISA violations, environmental costs that could reasonably be expected to result in a material adverse effect, the occurrence of a change of control of the Company, the occurrence of an event or development which results in a material adverse effect and/or the failure of the Company’s current chief executive officer to remain as the chief executive officer of the Company under specified circumstances (unless the termination of his employment has been approved by 75% of the Board of Directors of the Company, excluding the vote of the current chief executive officer and rounded down to the nearest whole number). If an event of default occurs: (i) the Agent (on behalf of the lenders) is entitled to, among other things, to the extent permitted in the Financing Agreement, accelerate the Term Loan (provided that upon events of bankruptcy, the Term Loan will be immediately due and payable), and (ii) a default interest rate will become applicable to the Term Loan at a rate per annum equal to the rate of interest otherwise in effect from time to time under the Financing Agreement plus 2.0 percentage points, or, if a rate of interest is not otherwise in effect, interest at the highest rate specified therein for the Term Loan prior to the Event of Default plus 2.0 percentage points.

The Company has pledged the equity interests of certain of its subsidiaries to the Agent in order to secure its obligations under the Financing Agreement pursuant to the terms of a Security Agreement made on December 15, 2004 among the Company, its subsidiaries party thereto and the Agent (the “Security Agreement”). The Company has also provided an evergreen irrevocable letter of credit an amount of $10,000,000 which the Agent may draw upon if there is an Event of Default (as defined in the Financing Agreement) or other events specified under the Financing Agreement occur (the “Term Loan LC”). In addition, pursuant to the Financing Agreement, the Company’s domestic subsidiaries have provided guarantees, and pursuant to the Security Agreement, have granted security interests, to the Agent in substantially all of their personal property in order to secure the Company’s obligations to the lenders and such subsidiaries’ guarantees under the Financing Agreement.

In connection with the original execution and amendments to the Financing Agreement, the Company incurred an aggregate of approximately $5,800,000 in specified fees. These costs are included in “other assets” on the Consolidated Balance Sheet for the applicable periods and are being amortized over the three year term of the loan.

The domestic lines of credit in place prior to December 15, 2004 totaling $50,000,000 have been canceled effective December 15, 2004. The maximum amounts available to the Company’s foreign operations at March 31, 2005, under local lines of credit are approximately $20,684,000.

In connection with the purchase of imported merchandise, the Company at March 31, 2005, had letters of credit outstanding of $2,716,000, all related to foreign operations, were collateralized under their existing lines of credit.

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

The significant components of intangible assets consist of the following:

	Weighted Average Amortization Period	March 31, 2005		December 31, 2004

MAM distribution agreement and relationship	Indefinite life	$	10,400,000	$	10,400,000
Sassy trade name	Indefinite life	7,100,000		7,100,000
Applause trade name	Indefinite life	7,711,000		7,679,000
Kids Line customer relationships	Indefinite life	31,100,000		31,100,000
Kids Line trade name	Indefinite life	5,300,000		5,300,000
Other intangible assets	0.3 years	72,000		348,000

Total intangible assets		$	61,683,000	$	61,927,000

Other intangible assets as of March 31, 2005 includes Kidsline and Sassy non-compete agreements which are being amortized over four and five years, respectively. Other intangible assets as of December 31, 2004 includes Kids Line backlog which was amortized over two months and Kids Line and Sassy non-compete agreements. Amortization expense was $275,000 and $5,000 for the first three months of 2005 and 2004, respectively.

All of the Company’s goodwill is in the infant and juvenile segment. There were no changes to the carrying amount of goodwill for the three months ended March 31, 2005:

Balance as of December 31, 2004	$	89,213,000
Adjustments to goodwill	0
Balance as of March 31, 2005	$	89,213,000

NOTE 7 - DIVIDENDS

No cash dividends were paid during the three months ending March 31, 2005. Cash dividends of $6,215,000 ($0.30 per share) were paid on March 26, 2004 to shareholders of record of the Company’s Common Stock on March 12, 2004. See Note 14 – Subsequent Events for a description of dividends declared on March 31, 2005, paid on April 21, 2005.

As is discussed in Note 5, in accordance with the terms of the Amendment, as long as all or any portion of the Term Loan is outstanding, the Company is not permitted to declare and/or pay dividends unless, except in all cases with respect to the First Quarter 2005 Dividend, (i) no Default or Event of Default (as defined in the Financing Agreement) shall have occurred and be continuing either before or after giving effect to such declaration and payment; (ii) at the time of declaration of such dividends, the chief financial officer of the Company shall have certified in writing to the Agent that as of such date and after due investigation and inquiry, such chief financial officer has no reason to believe that, after giving effect to the payment of such dividends, the Company will not be in compliance with any of the financial covenants in the Financing Agreement generally as of the end of the fiscal quarter in which such dividends are to be paid; and (iii) the Company satisfies a minimum Consolidated EBITDA test for the fiscal quarter immediately preceding the fiscal quarter in which such dividend is to be paid (in any event, no such dividend shall exceed $6,250,000 per quarter); provided further, notwithstanding the foregoing or any other provision of the Financing Agreement, (a) the Company may declare and pay only the December 2004 Dividend in the fiscal quarter ending December 31, 2004; (b) the amount of the First Quarter 2005 Dividend shall be no greater than either (i) ten cents ($0.10) per share or (ii) $2,100,000; and (c) the Company may declare and pay a dividend not greater than either $0.05 per share (subject to corresponding adjustment for stock splits, stock dividends and recapitalizations) or $1,050,000 for each of the second, third and fourth quarters of 2005, provided that the Company has the Dollar Equivalent Amount of Qualified Cash (as defined in the Financing Agreement) of at least $55,000,000, after giving effect to any such dividend, and the Company is in compliance with clauses (i), (ii), and (iii) above. In light of the foregoing, the Company cannot assure the ability to pay dividends in the future.

NOTE 8 – COST ASSOCIATED WITH DISPOSAL ACTIVITY

On September 28, 2004, Russ Berrie and Company, Inc. announced a corporate restructuring designed to align the Company’s management and sales organization with its strategic plans and to right-size its expense structure. The

restructuring included the immediate elimination of approximately 75 domestic positions, and resulted in a pretax charge of $4.1 million in the third quarter of 2004, primarily related to severance costs. Although these employees are no longer employees of the Company, payments will continue through the third quarter of 2005. These costs are shown in selling general and administrative expenses in the Consolidated Statement of Operations and are all related to the Company’s gift segment.

In furtherance of its efforts to right-size its infrastructure, during the fourth quarter of 2004, Russ Berrie reduced headcount by 38 positions in the Company’s Far East operations and recorded a restructuring charge of $.6 million in connection therewith. Also during the fourth quarter of 2004, with respect to its domestic operations, the Company reduced headcount by 9 positions and recorded a restructuring charge of $1.6 million in connection therewith. Although these employees are no longer employees of the Company, payments will continue through the fourth quarter of 2005. All costs associated with these restructurings have been recorded in selling, general and administrative expenses in the Consolidated Statement of Operations and are all related to the Company’s gift segment.

The Company reassesses the reserve requirement under the restructuring plan at the end of each reporting period. Below is the rollforward of the restructuring accrual:

	Balance 12/31/04		2005 Provision		Payments/ Write-offs		Additional Cost Incurred		Balance at 3/31/05
Employee separation	$	3,935,000	$	—	$	1,452,000	$	—	$	2,483,000
Facility exit cost	20,000		—		20,000		—		—
Total	$	3,955,000	$	—	$	1,472,000	$	—	$	2,483,000

See “Overview” of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the facts and circumstances leading up to the restructuring charges discussed herein.

The Company may incur further restructuring costs as it continues to investigate other areas for cost reduction and efficiency improvements in its efforts to right-size its infrastructure, although the Company has no current intention to incur any material restructuring charges in the immediate future.

NOTE 9 – SEGMENTS OF THE COMPANY AND RELATED INFORMATION

The Company’s infant and juvenile businesses design and market products in a number of baby categories including, among others, infant bedding and accessories, bath toys and accessories, developmental toys, feeding items and baby comforting products, and consists of Sassy, Inc. and Kids Line LLC. These products are sold to consumers, primarily in the United States, through mass merchandisers, toy, specialty, food, drug and independent retailers, apparel stores and military post exchanges.

The Company’s non-core business consisted of Bright of America, Inc. until its sale by the Company effective August 2, 2004. Non-core products included educational products, placemats, candles and home fragrance products, which were sold to customers primarily in the United States through mass marketers.

	Three Months Ended March 31,
	2005			2004
Gift:
Net sales	$	37,905,000		$	51,356,000
(Loss) before income taxes	(7,649,000		)	(961,000		)

Infant and juvenile:
Net sales	32,835,000			12,270,000
Income before income taxes	4,909,000			1,354,000

Non-core:
Net Sales	¾			2,087,000
Income before income taxes	¾			232,000

Consolidated:
Net Sales	70,740,000			65,713,000
(Loss) income before income taxes	(2,740,000		)	625,000

Additionally, total assets of each segment were as follows:

	March 31, 2005		December 31, 2004

Gift	$	169,548,000	$	201,096,000
Infant and juvenile	204,187,000		210,002,000
Non-core	¾		¾
Total	$	373,735,000	$	411,098,000

Concentration of Risk

As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, while 88% of purchases are attributable to manufacturers in the People’s Republic of China, the supplier accounting for the greatest dollar volume of purchases accounted for approximately 13% and the five largest suppliers accounted for approximately 41% in the aggregate. The Company utilizes approximately 100 manufacturers in the Far East. The Company believes that there are many alternative manufacturers for the Company’s products and sources of raw materials. As a result, the Company does not believe there is a concentration of risk associated with any significant relationship.

NOTE 10 - FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS

Certain of the Company’s foreign subsidiaries periodically enter into foreign currency forward exchange contracts (“Forward Contracts”) to hedge inventory purchases, both anticipated and firm commitments, denominated in the United States dollar. One of the Company’s domestic subsidiaries periodically enters into Forward Contracts to hedge inventory purchases, both anticipated and firm commitments, denominated in the Euro. These contracts reduce foreign currency risk caused by changes in exchange rates and are used to hedge these inventory purchases, generally for periods up to 13 months. At March 31, 2005, the Company’s Forward Contracts have expiration dates which range from one to nine months.

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

NOTE 11 - COMPREHENSIVE INCOME

Comprehensive Income, representing all changes in Shareholders’ Equity during the period other than changes resulting from the issuance or repurchase of the Company’s common stock and payment of dividends, is reconciled to net income for the three months ended March 31, 2005 and 2004 as follows:

	Three Months Ended March 31,
	2005			2004
Net (loss) income	$	(1,722,000	)	$	436,000
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments	(1,448,000		)	1,541,000

Net unrealized (loss) on securities available-for-sale	¾			(255,000		)
Net unrealized gain on foreign currency forward exchange contracts and other	79,000			109,000
Other comprehensive income	(1,369,000		)	1,395,000

Comprehensive (loss) income	$	(3,091,000	)	$	1,831,000

NOTE 12—INVESTMENT AND OTHER INCOME – NET

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

	Three Months Ended March 31,
	2005			2004
Investment income	$	302,000		$	2,299,000
Interest expense	(3,076,000		)	(15,000		)
Amortization of Deferred Financial cost	(416,000		)	¾
Foreign currency transactions, net	(105,000		)	(415,000		)
Other	(156,000		)	94,000
Total	$	(3,451,000	)	$	1,963,000

NOTE 13 – LITIGATION AND COMMITMENTS

In the ordinary course of its business, the Company is party to various copyright, patent and trademark infringement, unfair competition, breach of contract, customs, employment and other legal actions incidental to its business, as plaintiff or defendant. In the opinion of management, the amount of ultimate liability with respect to these actions will not 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 Line LLC, the aggregate purchase price includes a potential payment of Earnout Consideration as more fully described in Note 4. The amount of Earnout Consideration, if any, is not currently determinable.

The Company enters into various license agreements relating to trademarks, copyrights, designs, and products which enable the Company to market items compatible with its product line. All license agreements other than the agreement with MAM Babyartikel GmbH (which has a remaining term of six years), are for three year terms with extensions agreed to by both parties. Some of these license agreements include prepayments and minimum guarantee royalty payments. The amount of guaranteed royalty payments with respect to all license agreements over the next three years aggregates $5.8 million. The Company’s royalty expense for the first three months of 2005 and 2004 were $437,000 and $190,000, respectively.

An action was commenced against the Company on August 22, 2001, in the United Stated District Court, District of New Jersey, by Dam Things from Denmark (a.k.a. Troll Company ApS.), alleging, among other things, copyright infringement by the Company of the plaintiff’s reinstated United States copyrights for its troll designs, unfair competition under common law and violation of Danish and U.S. copyrights constituting copyright infringement under the laws of the People’s Republic of China. The plaintiff was seeking, among other things, injunctive relief prohibiting the Company from continuing to offer for sale its troll products, cancellation of the Company’s U.S. copyright registrations with respect to its various troll products, as well as unspecified damages and attorney’s fees and expenses. On February 28, 2004, the parties to this litigation executed a worldwide settlement agreement, pursuant to which among other things (i) the parties have executed and filed with the appropriate court a stipulation and order of dismissal of the lawsuit with prejudice, (ii) the Company paid $3,000,000 to the plaintiff, which amount was accrued as of December 31, 2003, (iii) the Company assigned to plaintiff any rights it has in trademark “Good Luck Troll”, as well as any other trademarks relating to the Company’s troll products (executive of trademarks or designations in the word “Russ”) as well as relevant copyright registrations owned by the Company to its troll products, (iv) transferred its remaining inventory of troll products to the plaintiff, and (v) the Company agreed to refrain from making, using, or selling any work that is substantially similar to the Company’s troll products.

In connection with the Company’s continuing expansion of its operations in the People’s Republic of China (“PRC”), the Company completed a voluntary review in 2003 of the activities of its offices in the PRC to assess their compliance with applicable laws and regulations. As a result of this review, management became aware of some potential operational and tax compliance issues under applicable PRC laws and regulations and has taken appropriate corrective actions, including the establishment of a new subsidiary in the PRC which became effective January, 2004, and settlement of prior year individual income tax underpayments and associated penalties, totaling approximately $464,000, which was expensed in 2004.

On March 31, 2005, the Company declared a cash dividend of $0.10 per common share, payable on April 21, 2005 to shareholders of record on April 11, 2005.

NOTE 14 – SUBSEQUENT EVENTS

Cash dividends of $2,082,000 ($0.10) per share were paid on April 21, 2005 to shareholders of record of the Company’s Common Stock on April 11, 2005.

NOTE 15 – RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payments, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This statement is a revision to SFAS 123, Stock-Based Compensation and supersedes APB opinion No. 25, accounting for stock issued to employees. SFAS 123 R requires Companies to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans, based on the grant-date fair value of the award. Due to the extention of the compliance deadline, SFAS No. 123(R) will be effective beginning with the first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005 (for the Company, the first quarter of 2006). The Company is currently evaluating the standard to determine its effect on the Consolidated Financial Statements.

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

The financial and business analysis below provides information which the Company believes is relevant to an assessment and understanding of the Company’s consolidated financial condition, changes in financial condition and results of operations. This financial and business analysis should be read in conjunction with the Company’s consolidated financial statements and accompanying notes to the consolidated financial statements set forth in Part I, Financial Information, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 10-K”).

OVERVIEW

The Company’s revenues are primarily derived from sales of its products, a significant portion of which is attributable to sales of products in its gift segment. Sales and operating profits in the Company’s gift segment began to decline during 2003 as a result of several factors, including (i) retailer consolidation and a declining number of independent retail outlets, which in turn had a negative impact on sales from such outlets, (ii) increased competition from other entities, both wholesellers and retailers, which offered lower pricing and achieved greater customer acceptance of their products and (iii) changing buying habits of consumers, marked by a shift from independent retailers to mass market retailers. During the first half of 2003, management realized that the factors discussed above were unlikely to abate, and as a result, began an evaluation of how best to respond. The result was a multi-pronged approach begun in the third quarter of 2003, which consisted of (i) focusing on categorizing and rationalizing its product range, (ii) segmenting its selling efforts to address management’s perception of new customer requirements and shifting channels of distribution, (iii) focusing on growing its international business and infant and juvenile segment and (iv) restructuring its operations in order to reduce overhead expenses through headcount reductions and the closure of certain domestic showrooms (including restructuring charges of $1.3 million and $1.0 million in the third and fourth quarters of 2003, respectively). See the 2004 10-K for a discussion of the impact of such 2003 restructurings.

During the first half of 2004, the Company continued to be negatively impacted by the factors discussed above. As a result, its gift segment’s sales continued to decline. In response to this continued decline, in addition to the initiatives described above, the Company discontinued pursuit of previously announced strategic alternatives and hired Andrew Gatto as its President and Chief Executive Officer (“CEO”), effective June 1, 2004. In June

2004, the new CEO implemented a comprehensive strategic review of Russ Berrie’s worldwide inventory, with a view towards his perception of the Company’s future direction in light of the current factors affecting its gift segment. As a result of this review, an additional inventory write-down of $13 million (pre tax) was recorded in cost of sales in the second quarter of 2004 to reflect inventory in the gift segment at the lower of its cost or market value. The Company is selling substantially all of this inventory through other than its normal sales channels. Therefore, no future impact on results of operations or liquidity is anticipated related to this inventory. Although the Company does not anticipate further material inventory write-downs at this time, a significant change in demand for the Company’s products could result in a change in the amount of excess inventories on hand. The Company manages inventory and monitors product purchasing to minimize this risk.

Concurrently with the inventory review discussed above, the Company continued to evaluate “right sizing” its infrastructure in response to the changing business environment. As a result of such evaluation, and as disclosed in the Company’s 8-K filed on September 28, 2004, Russ Berrie reduced headcount by approximately 75 positions and recorded a restructuring charge of $4.1 million in the third quarter of 2004. Management believes that future operating expenses, predominantly through reduced employee cost, will be reduced by approximately $7.5 million as a result of these reductions. The effects of these reduced costs began in the fourth quarter of 2004. Although these employees are no longer employees of the Company, and the charges were recorded in the third quarter of 2004, payments will continue through the third quarter of 2005. All costs associated with this restructuring have been recorded in selling, general and administrative expenses.

As discussed in the 2004 10-K, in its continuing efforts to address the negative factors affecting its gift segment and to create more efficient worldwide operations, during the fourth quarter of 2004, the Company continued its “right-sizing” efforts and further reduced headcount by 38 positions in the Company’s Far East operations and recorded a restructuring charge of $.6 million in connection therewith. Management believes that future operating expenses, predominantly through reduced employee cost, will be reduced by approximately $1.3 million. Also during the fourth quarter of 2004, with respect to its domestic operations, the Company reduced headcount by 9 positions and recorded a restructuring charge of $1.6 million in connection therewith. Management believes that future operating expenses, predominantly through reduced employee cost, will be reduced by approximately $1.7 million. The effects of these reduced costs began in the fourth quarter of 2004. Although these employees are no longer employees of the Company, payments will continue through the fourth quarter of 2005. All costs associated with these restructurings have been recorded in selling, general and administrative expenses.

In addition to the “right-sizing” efforts discussed above, the Company is continuing to respond to these developments affecting its gift business by (i) continuing to focus on realigning its product line and distribution channels to better meet the changing demands of its customers and improve its competitive position in the industry, (ii) segmenting its selling efforts with an increased focus on national accounts, in order to build and strengthen the Company's presence in the mass market (the Company intends to use the APPLAUSE® Trademark as the brand platform upon which the Company's growth in the mass market will be positioned), (iii) continuing to focus on realigning growth opportunities in its international markets and its infant and juvenile business segment, as demonstrated by the acquisition of Kids Line, LLC as of December 15, 2004, (iv) selectively increasing its use of licensing to differentiate its products from its competitors, including during 2004 the license of certain intellectual property from Marvel Enterprises, Inc. relating to Spider-Man® and X-Men™ classic characters and certain other characters; Andrew McMeel Universal (licensing representative for Ziggy® and Friends, Inc.) to create a “Ziggy”® product line, Sanrio, Inc. to develop and market certain products in connection with the “KEROPPI” property; DreamWorks Animation L.L.C. to design and market certain products related to an anticipated 2005 animated movie (Madagascar™); Warner Brothers Consumer Products Inc. relating to Scooby-Doo™ and certain other characters; Hasbro International, Inc. and Simm R Schuster, Inc. relating to the Raggedy Ann and Andy™ property; and during the first quarter of 2005, the license of certain intellectual property from Universal Studios relating to Curious George™; and the Beanstock Group relating to Zelda Wisdom™, (v) pursuing strategic acquisition opportunities; and (vi) implementing a three tiered “good”, “better”, “best” branding strategy within its gift segment to differentiate products sold into the mass market, Russ Berrie’s traditional specialty retail market and upscale department store market. As full implementation of the initiatives discussed above is an on going process, the Company does not anticipate immediate material results from the foregoing program of changes. Management does believe, however, that such changes are appropriate to address the various developments affecting its gift business, and will yield positive results in the future.

See “Kids Line and Related Financing” under “Liquidity and Capital Resources” below for a discussion on amendments to the Financing Agreement.

SEGMENTS

and Bright of America, Inc. After the acquisition of Kids Line as of December 15, 2004, the Company reclassified its operations into three reportable segments: (i) the Company’s gift business, (ii) the Company’s infant and juvenile business, which consists of the businesses of Sassy, Inc. and Kids Line, LLC, and (iii) its non-core business, which consisted of Bright of America, Inc., until its sale effective August 2, 2004. Note, however, that as a result of the sale of Bright of America, the Company currently operates in two segments: (i) its gift business and (ii) its infant and juvenile business. See Note 9 of the Notes to the Consolidated Financial Statements for a discussion on reclassification of the Company’s segments. The Company’s gift business designs, manufactures through third parties and markets a wide variety of gift products to retail stores throughout the United States and throughout the world via the Company’s international wholly-owned subsidiaries and distributors. The Company’s infant and juvenile businesses design and market products in a number of baby categories including, among others, infant bedding and accessories, bath toys and accessories, developmental toys, feeding items and baby comforting products. These products are sold to consumers, primarily in the United States, through mass merchandisers, toy, specialty, food, drug and independent retailers, apparel stores and military post exchanges. Until the Company’s sale of Bright of America, Inc. effective August 2, 2004, the Company’s non-core products included educational products, placemats, candles and home fragrance products, which were sold primarily to customers in the United States through mass marketers.

RESULTS OF OPERATIONS—THREE MONTHS ENDED MARCH 31, 2005 AND 2004

The Company’s consolidated net sales for the three months ended March 31, 2005 increased 7.6% to $70,740,000 compared to $65,713,000 for the three months ended March 31, 2004. The net sales increase was attributable to the Company’s infant and juvenile segment, which has included sales of KidsLine LLC since its acquisition in the fourth quarter of 2004.

The Company’s gift segment’s net sales for the three months ended March 31, 2005 decreased 26.2% to $37,905,000 compared to $51,356,000 for the three months ended March 31, 2004, primarily as a result of the factors discussed in the “Overview” above. Net sales in the Company’s gift segment benefited from foreign exchange rates by approximately $746,000 for the three months ended March 31, 2005. The Company’s infant and juvenile segment’s net sales for the three months ended March 31, 2005 increased 167.6% to $32,835,000 compared to $12,270,000 for the three months ended March 31, 2004. This increase is comprised of $18,873,000 million of sales attributable to Kids Line and sales growth of 13.8% ($1.7 million) in Sassy Inc. There were no non-core sales for the three months ended March 31, 2005 compared to $2,087,000 for the three months ended March 31, 2004, as a result of the sale of Bright of America, Inc. effective August 2004.

Consolidated gross profit was 44.4% of consolidated net sales for the three months ended March 31, 2005 as compared to 50.4% of consolidated net sales for the three months ended March 31, 2004. The decline in the consolidated gross profit percentage is primarily due to competitive pricing pressure in the gift segment, and the increase in infant and juvenile sales as a percent of consolidated sales, which have lower gross profit margins compared to gift segment margins. Gross profit for the Company’s gift segment was 48.1% of net sales for such segment for the three months ended March 31, 2005 as compared to 55.3% of net sales for the three months ended March 31, 2004. Gross Profit for the Company’s infant and juvenile segment was 40.1% of net sales for such segment for the three months ended March 31, 2005 as compared to 31.8% of net sales for the three months ended March 31, 2004 resulting from the acquisition of KidsLine.

Consolidated selling, general and administrative expense was $30,685,000 or 43.4% of consolidated net sales for the three months ended March 31, 2005 compared to $34,441,000 or 52.4% of consolidated net sales for the three months ended March 31, 2004. This decrease in consolidated selling, general and administrative expense is due primarily to lower selling, product development, administration and advertising cost, predominately as a result of our restructuring efforts in 2004. These reductions were partially offset by selling, general and administrative expense as a result of the acquisition of Kids Line.

Consolidated investment and other income/(expense) was an expense of $3,451,000 for the three months ended March 31, 2005 compared to income of $1,963,000 for the three months ended March 31, 2004, a decrease of $5,414,000. This decrease was primarily the result of interest expense incurred in connection with the Term Loan under the Financing Agreement (each as defined in “Kids Line and Related Financing” below) and lower interest income as all marketable security balances where liquidated in 2004.

The income tax (benefit) in the three months ended March 31, 2005 was $(1,018,000) as compared to an income tax provision of $189,000 in the first three months of 2004. This change reflects that the Company incurred a pre-tax loss in the three months ended March 31, 2005 of $(2,740,000) as compared to generating pre-tax income of $625,000 in the three months ended March 31, 2004. The consolidated (benefit)/provision for income taxes as a percent of income before taxes for the three months ended March 31, 2005 was a (37.2%) benefit compared to a 30.2% provision for the three

months ended March 31, 2004. The increase in the effective rate relates to a decrease in tax-advantaged investment income, and an increase in state taxes associated with a reduction in the Company’s deferred state tax asset, and an increase in the effective state rate related to franchise/capital stock taxes constituting a larger percentage relative to the reduced pre-tax profit.

As a result of the foregoing, consolidated net loss for the three months ended March 31, 2005 was $1,722,000 or ($0.08) per diluted share compared to consolidated net income of $436,000 or $0.02 per diluted share for the three months ended March 31, 2004, representing a decrease of $2,158,000 and a decrease of $.10 per diluted share.

Liquidity and Capital Resources

The Company’s principal sources of liquidity are cash and cash equivalents and funds from operations. The Company believes that it will able to fund its capital expenditure requirements for 2005 from such sources. In addition, subject to the discussion below under “Kids Line and Related Financing” with respect to the Earnout Consideration, the Company believes that after payment of the expenditures set forth in this “Liquidity and Capital Resources” section, the Company remains in a liquid position, and that such sources will be sufficient to meet the currently anticipated requirements of its business.

As of March 31, 2005, the Company had cash and cash equivalents of $41,646,000 compared to $48,099,000 at December 31, 2004. This reduction of $6,453,000 was primarily related to the repayment of debt, offset somewhat by proceeds from the sale of assets in the UK and Hong Kong, and collections of accounts receivable. As of March 31, 2005 and December 31, 2004, working capital was $124,488,000 and $119,293,000, respectively. This increase of $5,195,000 was primarily the result of proceeds from the sale of assets in the UK and Hong Kong.

Cash and cash equivalents decreased by $6,453,000 during the three months ending March 31, 2005 compared to an increase of $104,023,000 during the three months ending March 31, 2004. The increase in the first quarter of 2004 was primarily the result of the Company’s sale of a significant portion of its available-for-sale marketable securities during the three months ended March 31, 2004. Net cash provided by operating activities was approximately $6,691,000 during the three months ending March 31, 2005 as compared to approximately $12,203,000 during the three months ending March 31, 2004. This decrease of $5,512,000 was due primarily to the net loss in the first quarter of 2005 compared to net income in the first quarter of 2004. Net cash provided by investing activities was approximately $8,410,000 for the three months ending March 31, 2005 as compared to approximately $95,251,000 for the three months ending March 31, 2004. This decrease of approximately $86,841,000 was due primarily to proceeds from the sale of marketable securities in the first three months of 2004. Net cash used in financing activities of $20,380,000 and $4,568,000 for the three months ending March 31, 2005 and 2004, respectively, consisted primarily of payment of long-term debt obligations during the first three months of 2005 (as described in “Kids Line and Related Financing” below) and payment of dividends in during the first three months of 2004.

During the three months ending March 31, 2005, the Company paid approximately $405,000 for income taxes. The Company currently expects that its cash flows will exceed any income tax payments during 2005 and expects to receive a United States federal tax refund of approximately $9,452,000 generated as a result of net operating loss carry-backs for the calendar year ended December 31, 2004 (the “Tax Refund”).

Working capital requirements during the three months ending March 31, 2005 were met entirely through internally generated funds. The Company’s capital expenditures during the three months ending March 31, 2005 were approximately $320,000 primarily for continued system implementation and development costs. In the 2004 10K, the Company anticipates capital expenditure requirements for 2005 to be approximately $3,800,000 for distribution center improvements and continued system and development costs. Due to revised estimates based on actual costs related to such items in first quarter of 2005, capital expenditures for 2005 are now estimated to be approximately $2,000,000 in the aggregate.

Kids Line and Related Financing

The Company purchased all of the outstanding equity interests and warrants in Kids Line, LLC (the “Purchase”), in accordance with the terms and provisions of a Membership Interest Purchase Agreement (the “Purchase Agreement”) executed on December 16, 2004, as of December 15, 2004. At closing, the Company paid approximately $130,532,000, which represented the portion of the purchase price due at closing plus various transaction costs. The aggregate purchase price under the Purchase Agreement, however, includes the potential payment of the Earnout Consideration, which is defined as 11.724% of the Agreed Enterprise Value of Kids Line, LLC as of the last day of the three year period ending November 30, 2007 (the “Measurement Period”). The Earnout Consideration shall be paid at the times described in the Purchase Agreement (approximately the third anniversary of the Closing Date.) The “Agreed Enterprise Value” shall be the product of (i) Kids Line’s EBITDA during the twelve (12) months ending on the last day of the Measurement Period and (ii) the applicable multiple (ranging from zero to eight) as set forth in the Purchase Agreement. The amount of the Earnout Consideration will be charged to goodwill if and when it is earned. Because the amount payable with respect to the Earnout Consideration, if any, and the Company’s financial condition at the time any such payment is due, are not currently determinable, the

Company cannot assure that payment of the Earnout Consideration will not have a material impact on the Company’s liquidity.

In connection with the Purchase, the Company and certain of its subsidiaries entered into a Financing Agreement dated as of December 15, 2004 amended on March 18, 2005 and March 31, 2005, as described below, (the “Financing Agreement”), with the lenders named therein and Ableco Finance LLC, as collateral agent and as administrative agent (the “Agent”). The Financing Agreement consists of a term loan in the original principal amount of $125 million which matures on November 14, 2007 (the “Term Loan”). The Company used the proceeds of the Term Loan to substantially finance the Purchase and pay fees and expenses related thereto. The terms of the Financial Agreement are further described below and in Note 5 to the Notes to Consolidated Financial Statements.

Fiscal Quarter End	Consolidated EBITDA
March 31, 2005	$	29,000,000
June 30, 2005	$	34,000,000
September 30, 2005	$	39,000,000
December 31, 2005	$	44,000,000
March 31, 2006	$	46,000,000
June 30, 2006	$	50,000,000
September 30, 2006	$	52,000,000
December 31, 2006	$	52,000,000
March 31, 2007	$	55,000,000
June 30, 2007	$	55,000,000
September 30, 2007 and thereafter	$	55,000,000

Under the Financing Agreement, as amended, the Company is required to make prepayments of the Term Loan in an amount equal to $1,750,000 per quarter with the balance due at maturity. The first such prepayment was made on March 31, 2005; subsequent prepayments will be payable on the last day of the relevant quarter. In connection with the Amendment, further described below, the Company made a $18,250,000 prepayment on March 31, 2005. In addition, beginning with the fiscal year ending December 31, 2005, the Company will be required to make annual mandatory prepayments of the Term Loan, with specified percentages of excess cash flow (as defined in the Financing Agreement) and the proceeds of certain asset sales, debt issuances, equity issuances, tax refunds other than the Federal tax refund that the Company expects to receive as a result of net operating loss carrybacks for 2004, insurance and other extraordinary receipts.

Financing Agreement). The Company was in compliance with such financial covenants as of December 31, 2004. However, because management believed that the Company would not be in compliance as of March 31, 2005, with the Consolidated EBITDA Covenant and the Funded Debt Ratio set forth in the Financing Agreement as originally executed, and had substantial concerns over whether the Company would be in compliance with such covenants for the remainder of 2005, on March 31, 2005, the Agent, the Required Lenders under the Financing Agreement, the Company and its subsidiaries party thereto executed the Amendment, which amended the Consolidated EBITDA covenant for the quarters ending March 31, June 30, September 30 and December 31, 2005 (in light of the additional $18,250,000 prepayment of principal discussed above, no amendment of the Funded Debt Ratio or any other financial covenant was required). The amended covenants are set forth below:

	Original Required Consolidated EBITDA		Amended Required Consolidated EBITDA

March 31, 2005	$	29,000,000	$	27,500,000
June 30, 2005	$	34,000,000	$	31,000,000
September 30, 2005	$	39,000,000	$	33,000,000
December 31, 2005	$	44,000,000	$	36,000,000

Management believes that the Company will be in compliance with such amended covenants and all of the covenants of the Financing Agreement through March 31, 2006. In connection with the Amendment, in addition to the dividend restrictions set forth below, the Company agreed to (i) simultaneously with the execution of the Amendment, prepay a portion of the principal of the Term Loan in the amount of $18,250,000 (in lieu of payment to the Agent of a portion of the Federal tax refund that the Company expects to receive as a result of net operating loss carrybacks for 2004, as required in the original Financing Agreement prior to the Amendment but in addition to the required quarterly principal payment), (ii) amend the interest rate provisions applicable to the term loan as discussed above, (iii) increase the Minimum Qualified Cash level (as defined) required by the Financing Agreement from $40,000,000 to $45,000,000, (iv) maintain the Term Loan LC (as defined below) throughout the term of the Financing Agreement (such Term Loan LC would otherwise have been released when the Funded Debt Ratio is less than 3.0:1.0), and (v) pay a fee of $787,500 in connection with the execution of the Amendment.

In connection with the original execution of and amendments to the Financing Agreement, the Company incurred an aggregate of approximately $5,800,000 in specified fees. These costs are included in “other assets” on the Consolidated Balance Sheet for the applicable periods and are being amortized over the three year term of the loan. Additionally, under the Financing Agreement, the Company was required to establish a standby letter of credit of $10,000,000 in support of the Term Loan (the “Term Loan LC”).

Other Events and Circumstances Pertaining to Liquidity

Cash dividends of $2,082,000 ($0.10) per share were paid on April 21, 2005 to shareholders of record of the Company’s Common Stock on April 11, 2005. Cash dividends of $6,215,000 per ($0.30) share were paid on March 26, 2004 to shareholders of record of the Company’s Common Stock on March 12, 2004. See “Kids Line and

Related Financing” above for a discussion of the restrictions on the Company’s ability to pay dividends as long as all or any portion of the Term Loan remains outstanding.

During the fourth quarter of 2004, the Company entered into a sales agreement to sell one of its two office locations in Hong Kong as a result of the Company transitioning a number of functions that had previously been performed in Hong Kong into our offices in mainland China. The sales price was $2.8 million and the closing occurred on January 31, 2005. As a result of this transaction, the Company recorded an impairment charge of $1.9 million pre-tax. In addition, during 2004, the Company had also decided to sell one of its two distribution centers in the UK to reduce future operating expenses. The sales price was $5.9 million and the closing occurred on March 14, 2005. As a result of this transaction, the Company recorded an impairment charge of $1.7 million pre-tax. These impairments were both recorded in the fourth quarter of 2004.

The Company enters into forward exchange contracts, principally to manage the economic currency risks associated with the purchase of inventory by its European, Canadian and Australian subsidiaries in the gift segment and by Sassy Inc. in the infant and juvenile segment.

The Company is dependent upon information technology systems in many aspects of its business. The Company is continuing implementation of an Enterprise Resource Planning (“ERP”) system for the Company’s gift businesses, which began in 2002. In 2002 and 2003, the Company successfully completed the replacement of its warehouse management system in its South Brunswick, New Jersey and Petaluma, California, Canadian and European distribution facilities in addition to the implementation of the purchasing module of its new ERP system worldwide. The Company’s prior custom software that had been utilized to operate and manage its business and other third party software systems are being replaced using a strategic and phased approach. The Company’s worldwide headquarters in the United States completed the implementation of the finance module of the new ERP system in the first quarter of 2003 and transitioned to the order management and inventory modules during the second quarter of 2003. During 2003 and continuing in 2005, the Company’s international subsidiaries began and continued to phase-in certain aspects of the Company’s new ERP system and the transition to order management, inventory and finance modules is now anticipated to be substantially complete by the end of the third quarter of 2005. This timetable is meant to continue to enable the Company to enhance its proficiency in utilizing the new system, to help ensure the efficiency of the international implementations and allow the Company to continue to comply with its obligations regarding internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002. The Company has experienced certain startup issues but has not experienced any significant business disruptions related to the replacement of these systems.

In March 1990, The Board of Directors had authorized the Company to repurchase an aggregate of 7,000,000 shares of common stock. As of March 31, 2005, 5,643,200 shares have been repurchased since the beginning of the Company’s stock repurchase program. During the three months ended March 31, 2005, the Company did not repurchase any shares pursuant to this program or otherwise.

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

The Company may incur further restructuring costs as it continues to investigate other areas for cost reduction and efficiency improvements in its efforts to right-size its infrastructure, although the Company has no current intention to incur and material restructuring charges in the immediate future. See “Overview” above.

Consistent with its past practices and in the normal course of its business, the Company regularly reviews acquisition opportunities of varying sizes. The Company may consider the use of debt financing to fund prospective acquisitions. Note that the Financing Agreement imposes restrictions on the Company which could limit its ability to respond to market conditions or to take advantage of business opportunities.

The Company has entered into certain transactions with related parties which are disclosed in Note 16 of the Notes to Consolidated Financial Statements and ITEM 13 “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Contractual Obligations

As of March 31, 2005, there have been no material changes outside the ordinary course of business in the Company’s contractual obligations as described under the caption “Contractual Obligations” of Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Off Balance Sheet Arrangements

As of March 31, 2005, there have been no material changes in the information provided under the caption “Off Balance Sheet Arrangements” of Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

CRITICAL ACCOUNTING POLICIES

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

Management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements that effect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Estimates and assumptions are reviewed periodically, and revisions made as determined to be necessary by management. The Company’s significant accounting estimates have historically been and are expected to remain reasonably accurate, but actual results could differ from those estimates under different assumptions or conditions. There have been no material changes to the Company’s significant accounting estimates and assumptions or the judgments affecting the application of such estimates and assumptions during the period covered by this report from those described in the Company's 2004 10-K.

There have been no changes to the critical accounting polices in the first quarter of 2005 from those disclosed in the Company’s 2004 10K.

Note 2 of the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10K for the year ended December 31, 2004 contains a summary of the significant accounting policies used in the preparation of the Company’s consolidated financial statements.

Recently Issued Accounting Standards

See Note 15 of the Notes to Consolidated Financial Statements for a description of recently issued accounting standards including the respective dates of adoption and effects on results of operations and financial condition.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission (SEC) filings and otherwise. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements. These statements may be identified by the use of forward-looking words or phrases including, but not limited to, “anticipate”, “believe”, “expect”, “intend”, “may”, “planned”, “potential”, “should”, “will” or “would”. The Company cautions readers that results predicted by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Specific risks and uncertainties include, but are not limited to, the Company’s ability to continue to manufacture its products in the Far East, the seasonality of revenues, the actions of competitors, ability to increase production capacity, price competition, the effects of government regulation, results of any enforcement action by the People’s Republic of China (“PRC”) authorities with respect to the Company’s PRC operations, the resolution of various legal matters, possible delays in the introduction of new products, customer acceptance of products, changes in foreign currency exchange rates, issues related to the Company’s computer systems, the ability to obtain debt financing to fund acquisitions, the current and future outlook of the global retail market, the ability to integrate new business ventures, the ability to meet covenants in Financing Agreement and other factors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of March 31, 2005, there have been no material changes in the Company’s market risks as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

Based on the evaluation required by paragraph (b) of Rule 13a-15 or 15d-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s Chief Executive Officer and Chief

Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act), are effective.

There has been no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS

		Exhibits to this Quarterly Report on Form 10-Q.

		3.2 (n)		Amendment to Revised Bylaws of the Company, adopted March 31, 2005, effective as of March 11, 2005

		4.4		Amendment Number Two to the Financing Agreement, dated March 31, 2005 by and among Russ Berrie and Company, Inc., the lenders party thereto, and Ableco Finance LLC as collateral agent and administrative agent.

		10.93		Incentive Compensation Program adopted on March 11, 2005.

		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 been omitted.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		RUSS BERRIE AND COMPANY, INC.
		(Registrant)


		By	/s/ John D. Wille
Date:	May 10, 2005		John D. Wille
			Vice President and Chief Financial Officer

EXHIBIT INDEX

3.2(n)		Amendment to Revised Bylaws of the Company, adopted March 31, 2005 effective as of March 11, 2005.

4.4		Amendment Number Two to the Financing Agreement, dated March 31, 2005 by and among Russ Berrie and Company, Inc., the lenders party thereto and Ableco Finance LLC as collateral agent and administrative agent.

10.93		Incentive Compensation Program adopted on March 11, 2005.

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.

EX-3.2(N) 2 a05-7927_1ex3d2n.htm EX-3.2(N)

Exhibit 3.2 (n)

RESOLVED that effective as of March 11, 2005, the first sentence of paragraph 2.1 of the Revised By-Laws of the Company be, and it hereby is, amended to read as follows:

“The business of the Corporation shall be managed by the Board which shall consist of no fewer than three directors nor more than nine directors, who shall be at least 18 years old.”

EX-4.4 3 a05-7927_1ex4d4.htm EX-4.4

Exhibit No. 4.4

AMENDMENT NUMBER TWO
TO FINANCING AGREEMENT

This AMENDMENT NUMBER TWO TO FINANCING AGREEMENT (this “Amendment”) is entered into as of March 31, 2005, by and among RUSS BERRIE AND COMPANY, INC., a New Jersey corporation (the “Borrower”), the lenders party to the Financing Agreement referenced below (each a “Lender” and collectively, the “Lenders”), ABLECO FINANCE LLC, a Delaware limited liability company (“Ableco”), as collateral agent for the Lenders (in such capacity, together with any successor collateral agent, the “Collateral Agent”), and Ableco, as administrative agent for the Lenders (in such capacity, together with any successor administrative agent, the “Administrative Agent” and together with the Collateral Agent, each an “Agent” and collectively, the “Agents”), with reference to the following:

WHEREAS, Borrower, each subsidiary of the Borrower listed as a “Guarantor” on the signature pages thereto, the Lenders and the Agents are parties to that certain Financing Agreement, dated as of December 15, 2004 (as amended, restated, supplemented, or otherwise modified from time to time, the “Financing Agreement”), pursuant to which Lenders have made certain loans and financial accommodations available to Borrower;

WHEREAS, Borrower has requested that the Lenders and the Agents make certain amendments to the Financing Agreement; and

WHEREAS, subject to the terms and conditions set forth herein, the Lenders and the Agents are willing to make such amendments, as set forth herein.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Financing Agreement, as amended hereby.

2. Amendment to Financing Agreement. The Financing Agreement is hereby amended as follows:

(a) Section 1.01 of the Financing Agreement is hereby amended by adding the following defined terms “Additional March 2005 Prepayment”, “Amendment Number Two”, “Australia Subsidiary Pledge Agreement”, and “First Quarter 2005 Dividend” in alphabetical order:

“Additional March 2005 Prepayment” means the prepayment of principal in respect of the Term Loan in the amount of $18,250,000 made by the Borrower in accordance with Section 3(d) of Amendment Number Two.

“Amendment Number Two” means that certain Amendment Number Two to Financing Agreement dated as of March 31, 2005.

“Australia Subsidiary Pledge Agreement” means that certain Limited Pledge Agreement dated as of March 29, 2005, between the Borrower and the Collateral Agent providing for the pledge by the Borrower of 65% of the stock of Russ Australia Pty. Limited.

“First Quarter 2005 Dividend” has the meaning specified therefor in Section 7.02(s).

(b) Section 1.01 of the Financing Agreement is hereby amended by amending and restating the defined terms “Backup Letter of Credit Requirement Termination Date” and “Loan Document” in their entirety as follows:

“Backup Letter of Credit Requirement Termination Date” means the first day upon which all Obligations and any other amounts owing to the Agents and the Lenders under the Loan Documents have been indefeasibly paid in full (as defined in Section 4.04(d)) and all Commitments of the Lenders have been terminated.

“Loan Document” means this Agreement, the Australia Subsidiary Pledge Agreement, any Guaranty, any Security Agreement, any Mortgage, any Intercompany Subordination Agreement, the Seller Subordination Agreement, the Backup Letter of Credit, any UCC Filing Authorization Letter and any other agreement, instrument, and other document executed and delivered pursuant hereto or thereto or otherwise evidencing or securing the Term Loan, or any other Obligation.

(c) The defined term “Excess Cash Flow” in Section 1.01 of the Financing Agreement is hereby amended by adding the phrase “including without limitation the Additional March 2005 Prepayment” after “all scheduled and mandatory cash principal payments on the Term Loan made during such period,” in clause (B) of such defined term.

(d) The defined term “Fixed Charge Coverage Ratio” in Section 1.01 of the Financing Agreement is hereby amended by adding the phrase “which shall not include the Additional March 2005 Prepayment” after “during such fiscal quarter” in clause (A) of such defined term.

(e) Section 2.04(a) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(a) Term Loan. The Term Loan shall bear interest on the principal amount thereof from time to time outstanding, from the date of the making of the Term

Loan until such principal amount is repaid, as follows: (i) if the relevant portion of the Term Loan is a LIBOR Rate Loan, at a rate per annum equal to the LIBOR Rate plus 8.00 percentage points, and (ii) otherwise, at a rate per annum equal to the Reference Rate plus 5.25 percentage points; provided that if TTM EBITDA of the Borrower and its Subsidiaries equals or exceeds the applicable amount set forth opposite the fiscal quarter end appearing below, the Term Loan shall bear interest on the principal amount thereof outstanding during the immediately following fiscal quarter, as follows: if the relevant portion of the Term Loan is a LIBOR Rate Loan, at a rate per annum equal to the LIBOR Rate plus 7.00 percentage points, and (ii) otherwise, at a rate per annum equal to the Reference Rate plus 4.25 percentage points:

Fiscal Quarter End	TTM EBITDA
March 31, 2005	$	29,000,000
June 30, 2005	$	34,000,000
September 30, 2005	$	39,000,000
December 31, 2005	$	44,000,000
March 31, 2006	$	46,000,000
June 30, 2006	$	50,000,000
September 30, 2006	$	52,000,000
December 31, 2006	$	52,000,000
March 31, 2007	$	55,000,000
June 30, 2007	$	55,000,000
September 30, 2007 and thereafter	$	55,000,000

(f) Section 2.05(c)(ii) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(ii) Immediately upon receipt of any proceeds of any Disposition by any Loan Party or its Subsidiaries other than a Permitted Disposition (other than a Permitted Disposition of the type described in clauses (b) and (c) of the definition of Permitted Disposition), the Borrower shall prepay the outstanding principal amount of the Term Loan in an amount equal to 100% of the Net Cash Proceeds received by such Person in connection with such Disposition; provided, however, that there shall be no prepayment required out of the Net Cash Proceeds of the Exempt Foreign Dispositions except the Additional March 2005 Prepayment. Nothing contained in this clause (ii) shall permit any Loan Party or any of its Subsidiaries to make a Disposition of any property other than a Permitted Disposition.

(g) Section 2.05(c)(iv) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(iv) Upon the receipt by any Loan Party or any of its Subsidiaries of any Extraordinary Receipts in excess of the first $25,000 of such Extraordinary Receipts received in any Fiscal Year, the Borrower shall prepay the outstanding principal of the

Term Loan in an amount equal to 100% of such Extraordinary Receipts, net of any customary and reasonable expenses (including, without limitation, any attorney, accountant or other professional fees) incurred in collecting such Extraordinary Receipts; provided, however, that there shall be no prepayment required out of the Borrower’s receipt of United States federal income tax refunds attributable to its fiscal year ended December 31, 2004 except the Additional March 2005 Prepayment. Any payments required to be made under this Section 2.05(c)(iv) shall be applied as set forth in Section 2.05(d); provided, however, that so long as no Default or Event of Default has occurred and is continuing or would result therefrom, the Borrower may, on or prior to the date of any insurer’s payment of the proceeds of Extraordinary Receipts in the form of proceeds of insurance, by written notice to the Agents, request that the amount of the required prepayment, as set forth in this Section 2.05(c)(iv), not occur at such time and that such proceeds instead be used to repair, replace or restore the casualty which precipitated receipt of such proceeds of insurance, with such notice setting forth in particular the proposed usage of such proceeds of insurance. If such notice is timely given and if, in the reasonable judgment of the Collateral Agent, the Loan Parties have Cash and Cash Equivalents and/or casualty and business interruption insurance proceeds in amounts sufficient to ensure that Borrower will be able to make payment as and when due of the Obligations that will be payable during the period of repair, replacement, or restoration, the Collateral Agent shall notify the applicable insurer to permit payment of such proceeds to Borrower, and Borrower shall be relieved of its obligation to make such mandatory prepayment at such time. If, within 270 days after the date of the Borrower’s receipt of the proceeds of such Extraordinary Receipts, the Borrower provides the Administrative Agent reasonably detailed reporting indicating that the Borrower has invested all or a portion of such proceeds in assets used or useful in the business of the Borrower as it exists as of the date hereof, then the required prepayment shall be reduced on a dollar-for-dollar basis with the amount of the proceeds so invested; provided further, however, that if, on such 270^th day all or any portion of such proceeds have not been so invested, the portion remaining shall be used to make the required prepayment (as set forth above) as of such 270^th day.

(h) Section 2.09 of the Financing Agreement is hereby amended by deleting subsection (e) thereof in its entirety.

(i) Section 7.02(s) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(s) Dividends by the Borrower. Declare or pay a dividend with respect to the common shares of the Borrower’s Capital Stock, except that Borrower may declare and pay such dividend in cash in an aggregate amount (subject to the limitations set forth below) not to exceed $6,250,000 during any fiscal quarter of the Borrower, but only to the extent that (i) except with respect to the dividend to be declared by the Borrower on March 31, 2005 and paid by the Borrower during the month of April, 2005 (the “First Quarter 2005 Dividend”), no Default or Event of Default shall have occurred and be continuing either before or after giving effect to such declaration and payment; (ii)

except with respect to the First Quarter 2005 Dividend, at the time of declaration of such dividends, the chief financial officer of Borrower shall have certified in writing to the Administrative Agent that as of such date and after due investigation and inquiry, such chief financial officer has no reason to believe that, after giving effect to the payment of such dividends, Borrower will not be in compliance with any of the financial covenants set forth in Section 7.03 as of the end of the fiscal quarter in which such dividends are to be paid (or in the case of the financial covenant contained in Section 7.03(e), as of the end of each fiscal month occurring in the fiscal quarter in which such dividends shall be paid); and (iii) except with respect to the First Quarter 2005 Dividend, Consolidated EBITDA of the Borrower and its Subsidiaries for the fiscal quarter immediately preceding the fiscal quarter in which such dividend is to be paid, equals or exceeds the applicable amount set forth opposite such immediately preceding fiscal quarter end appearing below:

Fiscal Quarter Ending		Fiscal Quarter Minimum Consolidated EBITDA
December 31, 2004		Not Applicable
March 31, 2005		2,500,000
June 30, 2005		2,200,000
September 30, 2005		15,900,000
December 31, 2005		18,800,000
March 31, 2006		8,900,000
June 30, 2006		8,600,000
September 30, 2006		24,100,000
December 31, 2006		21,000,000
March 31, 2007		11,100,000
June 30, 2007		9,500,000
September 30, 2007 and thereafter		28,300,000

provided, further, notwithstanding the foregoing or any other provision of this Agreement (a) the Borrower may declare and pay only the December 2004 Dividend in the fiscal quarter ending December 31, 2004; (b) the amount of the First Quarter 2005 Dividend shall be no greater than either (i) ten cents ($0.10) per share or (ii) $2,100,000; and (c) with respect to quarterly dividends that are declared by Borrower during the second, third and fourth fiscal quarters of 2005 (to be paid either during such quarters or during the immediately following quarters), each such dividend may be declared and paid only if (in addition to compliance with the other requirements of this Section 7.02(s)) Borrower has the Dollar Equivalent Amount of Qualified Cash of at least $55,000,000 after giving effect to the payment of such dividend and, in such event, the amount of each such quarterly dividend shall be no greater than either five cents ($0.05) per share (subject to corresponding adjustment for stock splits, stock dividends and recapitalizations) or (ii) $1,050,000.

(j) ection 7.03(c) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(c) TTM EBITDA. Permit TTM EBITDA of the Borrower and its Subsidiaries as of the last day of each fiscal quarter set forth below to be less than the applicable amount set forth below:

Fiscal Quarter End	TTM EBITDA
December 31, 2004	$	29,000,000
March 31, 2005	$	27,500,000
June 30, 2005	$	31,000,000
September 30, 2005	$	33,000,000
December 31, 2005	$	36,000,000
March 31, 2006	$	46,000,000
June 30, 2006	$	50,000,000
September 30, 2006	$	52,000,000
December 31, 2006	$	52,000,000
March 31, 2007	$	55,000,000
June 30, 2007	$	55,000,000
September 30, 2007 and thereafter	$	55,000,000

(k) Section 7.03(e) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(e) Minimum Qualified Cash. Permit the Dollar Equivalent Amount of Qualified Cash to be, as of the end of each fiscal month, less than the applicable amount set forth below opposite the Funded Debt Ratio most recently reported in the certificate of Authorized Officer of Borrower required to be delivered pursuant to Section 7.01(a)(iv):

Funded Debt Ratio	Minimum Qualified Cash
Equal to or greater than 2.75:1	$	45,000,000
Less than 2.75:1 but equal to or greater than 2.50:1	$	30,000,000
Less than 2.50:1 but equal to or greater than 2.00:1	$	20,000,000
Less than 2.00:1	$	0

provided, however, that if the Borrower fails to provide the certificate of Authorized Officer of the Borrower as required by Section 7.01(a)(iv) containing the Funded Debt Ratio, on or before the date when due thereunder, the minimum Dollar Equivalent Amount of Qualified Cash required hereunder shall be $45,000,000 until the date five Business Days after the appropriate certificate of Authorized Officer containing the Funded Debt Ratio is actually furnished as so required.

3. Conditions Precedent to Amendment. The satisfaction of each of the following shall constitute conditions precedent to the effectiveness of this Amendment and each and every provision hereof:

(a) The Administrative Agent shall have received this Amendment, duly executed by the parties hereto, and the same shall be in full force and effect.

(b) The Administrative Agent shall have received a reaffirmation and consent substantially in the form attached hereto as Exhibit A, duly executed and delivered by each Guarantor.

(c) The Administrative Agent shall have received, on behalf of the Lenders, the principal payment of $1,750,000 that is due and payable in respect of the Term Loan on March 31, 2005 pursuant to Section 2.03(a) of the Financing Agreement.

(d) The Administrative Agent shall have received, on behalf of the Lenders, a prepayment of principal in respect of the Term Loan in the amount of $18,250,000, which shall be applied by the Lenders in accordance with Section 2.05(d) of the Financing Agreement.

(e) The Administrative Agent shall have received, on behalf of the Lenders in accordance with their respective Pro Rata Shares (after giving effect to the payments referenced in clauses (c) and (d) above), an amendment fee of $787,500 in the aggregate.

(f) The representations and warranties herein and in the Financing Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date hereof (after giving effect to the transactions contemplated herein), as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date).

(g) No Default or Event of Default shall have occurred and be continuing on the date hereof (after giving effect to the transactions contemplated herein), nor shall result from the consummation of the transactions contemplated herein.

(h) No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any Governmental Authority against Borrower, any Guarantor, any Agent, or any Lender.

4. Representations and Warranties. Borrower represents and warrants to the Agents and the Lenders that (a) the execution, delivery, and performance of this Amendment and of the Financing Agreement, as amended hereby, (i) are within its powers, (ii) have been duly authorized by all necessary action, and (iii) are not in contravention of any law, rule, or regulation applicable to it, or any order, judgment, decree, writ, injunction, or award of any

arbitrator, court, or Governmental Authority, or of the terms of its governing documents, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (b) this Amendment and the Financing Agreement, as amended hereby, are legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms; and (c) no Default or Event of Default has occurred and is continuing on the date hereof (after giving effect to the transactions contemplated herein) or as of the date upon which the conditions precedent set forth herein are satisfied (after giving effect to the transactions contemplated herein).

5. Choice of Law. The validity of this Amendment, its construction, interpretation and enforcement, the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the laws of the State of New York.

6. Counterpart Execution. This Amendment may be executed in any number of counterparts, all of which when taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart. Delivery of an executed counterpart of this Amendment by telefacsimile or electronic mail shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile or electronic mail also shall deliver an original executed counterpart of this Amendment, but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment.

7. Effect on Loan Documents.

(a) The Financing Agreement, as amended hereby, and each of the other Loan Documents shall be and remain in full force and effect in accordance with their respective terms and hereby are ratified and confirmed in all respects. The execution, delivery, and performance of this Amendment shall not operate, except as expressly set forth herein, as a modification or waiver of any right, power, or remedy of any Agent or any Lender under the Financing Agreement or any other Loan Document. The waivers, consents, and modifications herein are limited to the specifics hereof, shall not apply with respect to any facts or occurrences other than those on which the same are based, shall not excuse future non-compliance with the Loan Documents, and shall not operate as a consent to any further or other matter under the Loan Documents.

(b) Upon and after the effectiveness of this Amendment, each reference in the Financing Agreement to “this Agreement”, “hereunder”, “herein”, “hereof” or words of like import referring to the Financing Agreement, and each reference in the other Loan Documents to “the Financing Agreement”, “thereunder”, “therein”, “thereof” or words of like import referring to the Financing Agreement, shall mean and be a reference to the Financing Agreement as modified and amended hereby.

(c) To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Financing Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed

modified or amended accordingly to reflect the terms and conditions of the Financing Agreement as modified or amended hereby.

(d) This Amendment is a Loan Document.

8. Entire Agreement. This Amendment embodies the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and supersedes any and all prior or contemporaneous agreements or understandings with respect to the subject matter hereof, whether express or implied, oral or written.

[signature page follows]

IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written.

RUSS BERRIE AND COMPANY, INC.,
a New Jersey corporation


By:	/s/ John D. Wille
Name:			John D. Wille
Title: Vice President and Chief Financial Officer

ABLECO FINANCE LLC.,
a Delaware limited liability company, as the Collateral Agent and the Administrative Agent

By:	/s/ Kevin Genda
Name:		Kevin Genda
Title: Senior Vice President


ABELCO FINANCE LLC.,
a Delaware limited liability company, as a Lender, on behalf of itself and its affiliate assigns

By:	/s/ Kevin Genda
Name: Kevin Genda
Title: Senior Vice President


WELLS FARGO FOOTHILL, INC., a California corporation, as a Lender


By:	/s/ Thomas P. Shughrue
Name: Thomas P. Shughrue
Title: Vice President

A-1

	AZURE FUNDING, a company organized under the laws of the Cayman Islands, as a Lender


	By:
	Name:
	Title:

A-2

Exhibit A

REAFFIRMATION AND CONSENT

Dated as of March 31, 2005

Reference hereby is made to that certain Amendment Number Two to Financing Agreement, dated as of the date hereof (the “Amendment”), among RUSS BERRIE AND COMPANY, INC., a New Jersey corporation (the “Borrower”), the lenders from time to time party thereto (each a “Lender” and collectively, the “Lenders”), ABLECO FINANCE LLC, a Delaware limited liability company (“Ableco”), as collateral agent for the Lenders (in such capacity, together with any successor collateral agent, the “Collateral Agent”), and Ableco, as administrative agent for the Lenders (in such capacity, together with any successor administrative agent, the “Administrative Agent” and together with the Collateral Agent, each an “Agent” and collectively, the “Agents”). Capitalized terms used herein shall have the meanings ascribed to them in that Financing Agreement, dated as of December 15, 2004 (as amended, restated, supplemented, or otherwise modified from time to time, the “Financing Agreement”), among Borrower, each subsidiary of the Borrower listed as a “Guarantor” on the signature pages thereto, Agents, and the Lenders. Each of the undersigned hereby (a) represents and warrants that the execution and delivery of this Reaffirmation and Consent are within its powers, have been duly authorized by all necessary action, and are not in contravention of any law, rule, or regulation applicable to it, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or Governmental Authority, or of the terms of its governing documents, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected, (b) consents to the amendment of the Financing Agreement set forth in the Amendment and any waivers granted therein; (c) acknowledges and reaffirms all obligations owing by it to the Agents and Lenders under any Loan Document to which it is a party; (d) agrees that each Loan Document to which it is a party is and shall remain in full force and effect, and (e) ratifies and confirms its consent to any previous amendments of the Financing Agreement and any previous waivers granted with respect to the Financing Agreement. Although each of the undersigned have been informed of the matters set forth herein and have acknowledged and agreed to same, each of the undersigned understands that the Agents and Lenders shall have no obligation to inform the undersigned of such matters in the future or to seek the undersigned’s acknowledgement or agreement to future amendments, waivers, or modifications, and nothing herein shall create such a duty.

IN WITNESS WHEREOF, the undersigned have executed this Reaffirmation and Consent as of the date first set forth above.

[signature pages follow]

R-1

	KIDS LINE, LLC,
	a Delaware limited liability company


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer


	SASSY, INC.,
	an Illinois corporation


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer


	RUSS BERRIE & CO. (WEST), INC.,
	a California corporation


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer


	RBCACQ, INC.,
	a California corporation


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer

[Signature page to Reaffirmation and Consent]

R-2

	RUSS BERRIE AND COMPANY
	PROPERTIES, INC.,
	a New Jersey corporation


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer


	RUSSPLUS, INC.,
	a New Jersey corporation


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer


	FLUF N’ STUF, INC.,
	a Pennsylvania corporation


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer


	RBTACQ, INC.,
	an Ohio corporation


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer

[Signature page to Reaffirmation and Consent]

R-3

	RUSS BERRIE AND COMPANY
	INVESTMENTS, INC.,
	a New Jersey corporation


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer


	BOA DONE, INC.,
	a West Virginia corporation


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer


	P/F DONE, INC.,
	a Pennsylvania corporation


	By:	/s/ John D. Wille
	Name: John D. Wille
	Title: Vice President and Chief Financial Officer

[Signature page to Reaffirmation and Consent]

R-4

EX-10.93 4 a05-7927_1ex10d93.htm EX-10.93

Exhibit No. 10.93

RUSS BERRIE AND COMPANY, INC.
INCENTIVE COMPENSATION (“IC”) PROGRAM

I. PURPOSE AND PHILOSOPHY OF THE IC PROGRAM

The IC Program has been established to provide designated associates of Russ Berrie and Company, Inc. (the “Company”) and its subsidiaries with an opportunity, each year that this IC Program is in effect, to earn substantial cash remuneration based on (i) the attainment of specified operating objectives by the Company (or specified divisions thereof), (ii) fulfillment of specified individual goals and objectives established for each participating associate, and (iii) fulfillment of (x) specified individual initiatives established for each eligible associate and (y) initiatives to be mutually agreed upon between such associate and his/her direct supervisor. Thus, the IC Program provides a framework in which eligible associates can achieve significant incentive compensation based not only upon the Company achieving its financial corporate objectives, but also based upon recognition of and rewards for achieving individual goals and objectives and individual initiatives. In addition, the IC Program seeks to, among other things, (1) more closely align associates’ interests with those of shareholders, (2) reward associates for contributing to the short and long-term growth of the business, (3) provide associates with a more meaningful role in the attainment of maximum compensation levels, (4) provide a competitive platform for compensation vis-à-vis the marketplace, and (5) serve as a recruitment and retention tool.

II. ASSOCIATES ELIGIBLE FOR PARTICIPATION;
LEVEL OF IC ELIGIBLITY

Eligibility

Individuals from specified participant groups (“Participant Groups”) selected on an annual basis by the CEO in his sole discretion and in consultation with the heads of business units and certain senior executives of his choice, in each case as approved by the Compensation Committee of the Board of Directors of the Company (the “Comp Committee”). Eligible individuals will generally have the rank of vice president or above, but titles will not be determinative. Participant Groups currently consist of the following:

A. Corporate Participants: Individuals whose responsibilities are not limited to a particular business unit of the Company.

B. Gift U.S.A. Participants: Individuals who operate primarily in the Company’s core U.S.A. gift business.

C. International Participants: Individuals who operate primarily in either the Company’s core or non-core international business.

D. Sassy Participants: Individuals who operate primarily in the Company’s Sassy business; provided that individuals party to employment agreements with Sassy will not be eligible to participate in this IC Program.

E. Kids Line Participants: Individuals who operate primarily in the Company’s Kid’s Line business; provided that individuals party to employment agreements with Kids Line will not be eligible to participate in this IC Program.

All decisions with respect to eligibility to participate in the IC Program, definition of Participant Groups and categorization in a particular Participant Group shall be final and binding on all associates of the Company.

Applicable Percentage

Members of each Participant Group will be eligible to participate in the IC Program at specified IC Percentages Ranges (expressed as a percent of annual base salary at the time payout is determined). The IC Percentage Ranges for each Participant Group will be determined on an annual basis by the CEO and approved by the Comp Committee. The particular IC Percentage of a participant within the applicable IC Percentage Range (such participant’s “Applicable Percentage”) will be determined on an annual basis by the CEO in his sole discretion, in each case as approved by the Comp Committee. Each Participant’s Applicable Percentage for the subsequent year (and whether an associate has been selected to participate in the IC Program for such year) shall be communicated to such participant during his/her year-end performance appraisal. All decisions with respect to IC Percentage Ranges and the determination of Applicable Percentages shall be final and binding on all participants.

III. COMPOSITION OF INCENTIVE COMPENSATION

Each participant’s annual base salary multiplied by such participant’s Applicable Percentage (as described above) shall equal a number (the “IC Factor”) that will be used to determine such participant’s total incentive compensation earned for the relevant year (the “Earned IC Amount”).

Each participant’s Earned IC Amount will be comprised of three separate components (described in detail in Section IV below). Each component may entitle a participant to earn a specified percentage of the IC Factor, summarized as follows:

• Part A Component: From 0% to 100% of a participant’s IC Factor can be earned in the event that the Company (in the case of Corporate Participants) or specified business units (in the case of all other Participant Groups) achieves the specified levels of performance measurements set forth on Exhibit A, which exhibit will be amended each year.

• Part B Component: From 0% to 30% of a participant’s IC Factor can be earned in the event of achievement by such participant of his/her individual goals and objectives.

• Part C Component: From 0% to 20% of a participant’s IC Factor can be earned in the event of achievement by such participant of his/her individual initiatives.

IV. CALCULATION OF EARNED IC AMOUNTS

A participant’s total Earned IC Amount is calculated as follows:

• Establishing Corporate Objectives for the Part A Component:

Corporate objectives for each Participant Group will consist of three separate levels of achievement (“Targets”) with respect to one or several specified measures of operating performance each year, such as operating income, EBITDA, etc. (the “Chosen Metric”). Both the Chosen Metric and the Targets required will be determined by the CEO on an annual basis, as approved by the Comp Committee. There is no requirement that the Targets be based on or refer to budgeted levels of operating performance, or to any other plan or projection with respect to the Company’s business.

The Targets will consist of the following: (i) a specified minimum level of achievement in the Chosen Metric required to earn a specified amount of IC compensation (the “Minimum Target”), (ii) a specified level of achievement in the Chosen Metric in excess of the Minimum Target (the “Target”), and (iii) a specified level of achievement in the Chosen Metric in excess of the Target (the “Maximum Target”). Note that (i) the Chosen Metric may change from year to year, e.g., operating income in one year and EBITDA in another, (ii) different measurements may be used for different Participant Groups within the same year, e.g., operating income for Corporate Participants and EBITDA for Sassy Participants, and (iii) the Targets will change each year). The Targets will be based on consolidated Company performance in the case of Corporate Participants and will be based on the performance of the relevant business unit in the case of all other Participant Groups. All determinations with respect to (i) the Chosen Metrics, (ii) the applicable Targets and (iii) whether and/or to what extent the Company (or the relevant business unit) has achieved the applicable Targets shall be final and binding on all participants in the IC Program.

The Chosen Metrics and Targets for each Participant Group for each year will be set forth on Exhibit A hereto. Exhibit A will be amended each year (and such amendment will be distributed to associates designated to participate in the IC Program for such year during such associate’s year-end performance appraisal)

and will reflect (x) the Chosen Metrics for such year and (y) the Targets required in the applicable Chosen Metric for each Participating Group for such year. With respect to the International Participant Group, different Targets may be set for participants in the Company’s operations in Canada, Australia and Europe.

• Calculating the Part A Component:

For all participants, 50% of such participant’s IC Factor shall be referred to herein as the “Part A Amount”. If the Company, or the relevant business unit, as applicable, achieves the Minimum Target, then an amount equal to 20% of the Part A Amount will be paid. If the Company, or relevant business unit, as applicable, achieves the Target, then an amount equal to 100% of the Part A Amount will be paid. If the Company, or relevant business unit, as applicable, achieves the Maximum Target, then an amount equal to 200% of the Part A Amount (or 100% of the IC Factor) will be paid. Earned IC Amounts for achievement of results in between (i) the Minimum Target and the Target and (ii) the Target and the Maximum Target, will in each case be determined by a straight-line interpolation. No Earned IC Amount will be paid for achievement of results below the Minimum Target. No additional Earned IC Amount will be paid for achievement of results in excess of the Maximum Target.

• Calculating the Part B Component:

The individual goals and objectives for each participant for each year will be determined by the CEO in his sole discretion in the event that the CEO is the participant’s direct supervisor, or by the CEO in consultation with the participant’s direct supervisor in the event that the CEO is not the direct supervisor of the participant. Each participant’s individual goals and objectives will be communicated to such participant during his/her year-end performance appraisal, and may be modified by the CEO or the participant’s direct supervisor, as applicable, in the participant’s subsequent mid-year performance appraisal. Each participant’s individual goals and objectives will be evaluated by the participant’s direct supervisor, who will determine in his/her sole discretion whether and to what extent such goals and objectives have been met, and what, if any, percentage (from 0% to 30%) of the IC Factor has been earned. Note that not all goals and objectives will be given equal weight in the determination of what percentage of the IC Factor, if any, has been earned for the Part B component. Such evaluation and determination shall be communicated to the participant during his/her year-end performance appraisal. All decisions with respect to the extent of achievement of individual goals and objectives and the percentage of IC Factor earned, if any, shall be final and binding on all participants. Anywhere between 0% and 30% of the IC Factor can be earned with respect to the Part B component of the IC Program.

• Calculating the Part C Component:

The individual initiatives, which will reflect a participant’s contributions that favorably affect sales, gross margin, profitability, expenses and/or other efficiencies, will

be determined by the CEO in his sole discretion in the event that the CEO is the participant’s direct supervisor, or by the CEO in consultation with the participant’s direct supervisor in the event that the CEO is not the direct supervisor of the participant. Each participant’s individual initiatives will be communicated to such participant during his/her year-end performance appraisal, and may be modified by the CEO or the participant’s direct supervisor, as applicable, in the participant’s subsequent mid-year performance appraisal. Individual initiatives will also include initiatives which have been mutually agreed upon by the associate and his/her direct supervisor. Each participant’s individual initiatives will be evaluated by the participant’s direct supervisor, who will determine in his/her sole discretion whether and to what extent such initiatives have been achieved and what, if any, percentage (from 0% to 20%) of the IC Factor has been earned. Note that not all initiatives will be given equal weight in the determination of what percentage of the IC Factor, if any, has been earned for the Part C component. Such evaluation and determination shall be communicated to the participant during his/her year-end performance appraisal. All decisions with respect to the extent of achievement of individual initiatives and the percentage of IC Factor earned, if any, shall be final and binding on all participants. Anywhere between 0% and 20% of the IC Factor can be earned with respect to the Part C component of the IC Program.

NOTE: A participant may be paid on the Part B or Part C component even if the no amount of the Part A component has been earned.

IC PARTICIPANT POTENTIAL EARNED IC AMOUNT EXAMPLE

Annual Base Salary:	$	225,000

Applicable Percentage	40		%

IC Factor ($225,000 x 40%)	$	90,000

Part A Amount (50% of IC Factor)	$	45,000

Part B Maximum Amount (30% of IC Factor)	$	27,000

Part C Maximum Amount (20% of IC Factor)	$	18,000

Part A Earning Potential:	$	0-$90,000

Part B Earning Potential:	$	0-$27,000

Part C Earning Potential	$	0-$18,000

Earned IC Amount Calculation Example: Part A

Chosen Metric:	Consolidated Operating Income

Minimum Target:	$	40,000,000

Target:	$	46,000,000

Maximum Target:	$	55,000,000

If the Company achieves $40,000,000, then payout is 20% of the Part A Amount:	$	9,000

If the Company achieves $46,000,000, then payout is 100% of the Part A Amount:	$	45,000

If the Company achieves $55,000,000, then payout is 200% of the Part A Amount:	$	90,000

If the Company achieves $50,500,000, then payout is 150% of the Part A Amount:	$	67,500

Earned IC Amount Calculation Example: Part B

Payout can range from $0 - $27,000 on the Part B component (0% to 30% of the IC Factor).

Earned IC Amount Calculation Example: Part C

Payout can range from $0 - $18,000 on the Part C component (0% to 20% of the IC Factor)

Total potential Earned IC Amount:

135,000

V. EXCLUSIONS AND OTHER PROGRAMS

Notwithstanding anything herein to the contrary, members of the sales force are not eligible to participate in this IC Program. Such individuals may be eligible for a different bonus program based on achieving certain sales growth levels.

Non-sales associates who are not eligible for the IC Program may be eligible to receive a discretionary bonus. The Discretionary Bonus Program is described in a separate document.

Associates who are eligible to participate in this IC Program (i) are not eligible to participate in the Company’s Discretionary Bonus Program, and (ii) are not entitled to the December holiday bonus of one week’s pay.

The IC Program supersedes the Company’s former (i) worldwide “annual bonus program”, (ii) worldwide “annual performance bonus program”, and such programs and policies shall be of no further force and effect.

Note additional exclusions to the Sassy Participants and the Kids Line Participants set forth in Section II above.

VI. NO RIGHT OF CONTINUED EMPLOYMENT

Participation in the IC Program confers no right of continued employment. Employment remains “at will” and may be terminated at any time, with or without cause, by the associate or by the Company, without any entitlement to any IC payment.

VII. ACCRUAL FOR AND TIMING OF IC PAYMENTS

IC payments will be accrued on the Company’s financial statements throughout the year. Targets will be calculated to include a reserve to fund IC payments. Earned IC Amounts will be paid as soon as is reasonably practicable after the first meeting of the Board of Directors of the Company following the closing of the books for the relevant year (the “Payout Date”). IC payments are subject to applicable withholding taxes.

VIII. VESTING OF IC PAYMENTS

Unless otherwise provided in a participant’s employment agreement, a participant must be employed by the Company through and including the Payout Date in order to receive any Earned IC Amounts for the preceding year. For purposes of clarification, Earned IC Amounts to which a participant would otherwise be entitled will not be paid in whole or in part in the event that the employment of a participant terminates for any reason prior to the Payout Date.

IX. TERMINATION RIGHTS

The Company has the right to terminate the entire IC Program at any time, without notice, for any reason, without incurring any liability to any participant therein.

EX-31.1 5 a05-7927_1ex31d1.htm EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Andrew Gatto, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Russ Berrie and Company, Inc.;

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

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2005	/s/ ANDREW GATTO
	Andrew Gatto
	President and Chief Executive Officer

A signed original of this written statement has been provided to Russ Berrie and Company, Inc. and will be retained by Russ Berrie and Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.2 6 a05-7927_1ex31d2.htm EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, John D. Wille, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Russ Berrie and Company, Inc.;

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2005	/s/ JOHN D. WILLE
	John D. Wille
	Vice President and Chief Financial Officer

EX-32.1 7 a05-7927_1ex32d1.htm EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Russ Berrie and Company, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew Gatto, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	May 10, 2005

	/s/ ANDREW GATTO

	Andrew Gatto
	President and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Russ Berrie and Company, Inc. and will be retained by Russ Berrie and Company, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 8 a05-7927_1ex32d2.htm EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Russ Berrie and Company, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John D. Wille, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	Date: May 10, 2005

	/s/ JOHN D. WILLE

	John D. Wille
	Vice President and Chief Financial Officer

-----END PRIVACY-ENHANCED MESSAGE-----

1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Financing Agreement, as amended hereby.

2. Amendment to Financing Agreement. The Financing Agreement is hereby amended as follows:

(a) Section 1.01 of the Financing Agreement is hereby amended by adding the following defined terms “Additional March 2005 Prepayment”, “Amendment Number Two”, “Australia Subsidiary Pledge Agreement”, and “First Quarter 2005 Dividend” in alphabetical order:

(b) Section 1.01 of the Financing Agreement is hereby amended by amending and restating the defined terms “Backup Letter of Credit Requirement Termination Date” and “Loan Document” in their entirety as follows:

(d) The defined term “Fixed Charge Coverage Ratio” in Section 1.01 of the Financing Agreement is hereby amended by adding the phrase “which shall not include the Additional March 2005 Prepayment” after “during such fiscal quarter” in clause (A) of such defined term.

(e) Section 2.04(a) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(f) Section 2.05(c)(ii) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(g) Section 2.05(c)(iv) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(h) Section 2.09 of the Financing Agreement is hereby amended by deleting subsection (e) thereof in its entirety.

(i) Section 7.02(s) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(j) ection 7.03(c) of the Financing Agreement is hereby amended and restated in its entirety as follows:

(k) Section 7.03(e) of the Financing Agreement is hereby amended and restated in its entirety as follows:

3. Conditions Precedent to Amendment. The satisfaction of each of the following shall constitute conditions precedent to the effectiveness of this Amendment and each and every provision hereof:

(a) The Administrative Agent shall have received this Amendment, duly executed by the parties hereto, and the same shall be in full force and effect.

(b) The Administrative Agent shall have received a reaffirmation and consent substantially in the form attached hereto as Exhibit A, duly executed and delivered by each Guarantor.

(c) The Administrative Agent shall have received, on behalf of the Lenders, the principal payment of $1,750,000 that is due and payable in respect of the Term Loan on March 31, 2005 pursuant to Section 2.03(a) of the Financing Agreement.

(d) The Administrative Agent shall have received, on behalf of the Lenders, a prepayment of principal in respect of the Term Loan in the amount of $18,250,000, which shall be applied by the Lenders in accordance with Section 2.05(d) of the Financing Agreement.

(e) The Administrative Agent shall have received, on behalf of the Lenders in accordance with their respective Pro Rata Shares (after giving effect to the payments referenced in clauses (c) and (d) above), an amendment fee of $787,500 in the aggregate.

(g) No Default or Event of Default shall have occurred and be continuing on the date hereof (after giving effect to the transactions contemplated herein), nor shall result from the consummation of the transactions contemplated herein.

(h) No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any Governmental Authority against Borrower, any Guarantor, any Agent, or any Lender.

5. Choice of Law. The validity of this Amendment, its construction, interpretation and enforcement, the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the laws of the State of New York.

7. Effect on Loan Documents.

(c) To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Financing Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed

modified or amended accordingly to reflect the terms and conditions of the Financing Agreement as modified or amended hereby.

(d) This Amendment is a Loan Document.

II. ASSOCIATES ELIGIBLE FOR PARTICIPATION; LEVEL OF IC ELIGIBLITY

III. COMPOSITION OF INCENTIVE COMPENSATION

• Part B Component: From 0% to 30% of a participant’s IC Factor can be earned in the event of achievement by such participant of his/her individual goals and objectives.

• Part C Component: From 0% to 20% of a participant’s IC Factor can be earned in the event of achievement by such participant of his/her individual initiatives.

IV. CALCULATION OF EARNED IC AMOUNTS

• Establishing Corporate Objectives for the Part A Component:

• Calculating the Part A Component:

• Calculating the Part B Component:

• Calculating the Part C Component:

The individual initiatives, which will reflect a participant’s contributions that favorably affect sales, gross margin, profitability, expenses and/or other efficiencies, will

V. EXCLUSIONS AND OTHER PROGRAMS

VI. NO RIGHT OF CONTINUED EMPLOYMENT

VII. ACCRUAL FOR AND TIMING OF IC PAYMENTS

VIII. VESTING OF IC PAYMENTS

IX. TERMINATION RIGHTS

II. ASSOCIATES ELIGIBLE FOR PARTICIPATION;
LEVEL OF IC ELIGIBLITY