**United States Securities andExchange 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.** |
|--------|-----------------------------------------------------------------------------------------------|

 

### **Forthe Quarterly Period Ended March 31, 2004**

### ** **

**OR**

 

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

 

### **Forthe Transition period from          to         **

### ** **

**Commission FileNumber:  001-14843**

 
| **The Boyds Collection, Ltd.**                                   |
|------------------------------------------------------------------|
| (Exact Name of Registrant as  Specified in its Charter)          |
|                                                             |   |   |
| **Maryland**                                                     |   | **52-1418730** |
| (State  or Other Jurisdiction of Incorporation or  Organization) |   | (I.R.S.  Employer Identification No.) |
|                                                             |   |   |
| **350 South  Street, McSherrystown,**                            |   |   |
| **Pennsylvania,  Attn.:  Joseph E. Macharsky**              |   | **17344** |
| (Address  of Principal Executive Offices)                        |   | (Zip  Code) |
|                                                             |   |   |
| **(717)  633-9898**                                              |
| (Registrant’s  Telephone Number, Including Area Code)       |

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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  ýNo o

 

Indicate by check mark whetherthe Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act) Yes oNo ý

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

 
| **Common Stock,  par value $.0001 per share** |   | **59,004,202**                      |
|-----------------------------------------------|--------|-------------------------------------|
| (Class)                                       |   | (Outstanding  as of April 28, 2004) |

 

 

----

 

**THE BOYDS COLLECTION, LTD.**

 

**TABLE OF CONTENTS**

 
| PART I.     | FINANCIAL  INFORMATION                                                                                   |   |
|-------------|----------------------------------------------------------------------------------------------------------|--------|
|        |                                                                                                     |   |
| **Item 1.** | **Financial Statements:**                                                                                |   |
|        |                                                                                                     |   |
|        | Condensed Consolidated Balance Sheets as of  December 31, 2003 and March 31, 2004                        |   |
|        |                                                                                                     |   |
|        | Condensed Consolidated Statements of Income  for the Three Months Ended March 31, 2003 and 2004          |   |
|        |                                                                                                     |   |
|        | Condensed Consolidated Statement of  Stockholders’ Equity for the Three Months Ended March 31, 2004 |   |
|        |                                                                                                     |   |
|        | Condensed Consolidated Statements of Cash  Flows for the Three Months Ended March 31, 2003 and 2004      |   |
|        |                                                                                                     |   |
|        | Notes to Condensed Consolidated Financial  Statements                                                    |   |
|        |                                                                                                     |   |
| **Item 2.** | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**          |   |
|        |                                                                                                     |   |
| **Item 3.** | **Quantitative and Qualitative Disclosures  About Market Risk**                                          |   |
|        |                                                                                                     |   |
| **Item 4.** | **Controls and Procedures**                                                                              |   |
|        |                                                                                                     |   |
| PART  II.   | OTHER  INFORMATION                                                                                       |   |
|        |                                                                                                     |   |
| **Item 1.** | **Legal Proceedings**                                                                                    |   |
|        |                                                                                                     |   |
| **Item 2.** | **Changes in Securities and Use of Proceeds**                                                            |   |
|        |                                                                                                     |   |
| **Item 3.** | **Defaults Upon Senior Securities**                                                                      |   |
|        |                                                                                                     |   |
| **Item 4.** | **Submission of Matters to a Vote of Security Holders**                                                  |   |
|        |                                                                                                     |   |
| **Item 5.** | **Other Information**                                                                                    |   |
|        |                                                                                                     |   |
| **Item 6.** | **Exhibits and Reports on Form 8-K**                                                                     |   |
|        |                                                                                                     |   |
|        | Signatures                                                                                               |   |
|        |                                                                                                     |   |
|        | Index  to Exhibits                                                                                       |   |

 

2

----

 

**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.    FinancialStatements.**

 

**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

**As of December 31, 2003 andMarch 31, 2004**

**(Unaudited)**

 
|                                                                                                                                       |   | **December  31,  2003** |    | **March 31,  2004** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|---------------------|--------|
|                                                                                                                                       |   | **(in  thousands)**     |    |
| **ASSETS**                                                                                                                                 |   |                    |    |                |   |
|                                                                                                                                       |   |                    |    |                |   |
| **CURRENT ASSETS:**                                                                                                                        |   |                    |    |                |   |
| Cash and cash equivalents                                                                                                                  |   | $                       | 4,173   |                | $      | 4,235 |   |
| Accounts receivable, less allowances  of  $2,189 at December 31, 2003, and  $1,650 at March 31, 2004                                  |   | 8,174                   |    | 11,198              |   |
| Inventory - primarily finished goods, less  allowance for obsolete inventory of $2,855 at December 31, 2003, and $2,872  at March 31, 2004 |   | 9,404                   |    | 9,479               |   |
| Inventory in transit                                                                                                                       |   | 3,653                   |    | 1,475               |   |
| Other current assets                                                                                                                       |   | 932                     |    | 906                 |   |
| Income taxes receivable                                                                                                                    |   | 1,964                   |    | 3,502               |   |
| Deferred income taxes                                                                                                                      |   | 21,047                  |    | 21,047              |   |
| Total current assets                                                                                                                       |   | 49,347                  |    | 51,842              |   |
|                                                                                                                                       |   |                    |    |                |   |
| **PROPERTY AND EQUIPMENT - NET**(Note  4)                                                                                                  |   | 21,726                  |    | 23,177              |   |
|                                                                                                                                       |   |                    |    |                |   |
| **OTHER ASSETS:**                                                                                                                          |   |                    |    |                |   |
| Deferred debt issuance costs                                                                                                               |   | 961                     |    | 881                 |   |
| Deferred tax asset                                                                                                                         |   | 147,997                 |    | 143,565             |   |
| Other assets                                                                                                                               |   | 2,923                   |    | 2,895               |   |
| Total other assets                                                                                                                         |   | 151,881                 |    | 147,341             |   |
| **TOTAL ASSETS**                                                                                                                           |   | $                       | 222,954 |                | $      | 222,360 |   |
|                                                                                                                                       |   |                    |    |                |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                              |   |                    |    |                |   |
|                                                                                                                                       |   |                    |    |                |   |
| **CURRENT LIABILITIES:**                                                                                                                   |   |                    |    |                |   |
| Accounts payable                                                                                                                           |   | $                       | 2,514   |                | $      | 2,522 |   |
| Accrued expenses                                                                                                                           |   | 5,452                   |    | 4,747               |   |
| Interest payable                                                                                                                           |   | 626                     |    | 1,398               |   |
| Current portion of long-term debt (Note 5)                                                                                                 |   | 14,000                  |    | 10,500              |   |
| Total current liabilities                                                                                                                  |   | 22,592                  |    | 19,167              |   |
|                                                                                                                                       |   |                    |    |                |   |
| **LONG-TERM DEBT**(Note  5)                                                                                                                |   | 62,392                  |    | 62,392              |   |
|                                                                                                                                       |   |                    |    |                |   |
| **COMMITMENTS AND CONTINGENCIES**(Notes  2 and 9)                                                                                          |   |                    |    |                |   |
|                                                                                                                                       |   |                    |    |                |   |
| **STOCKHOLDERS’ EQUITY:**                                                                                                             |   |                    |    |                |   |
| Common stock (61,838 shares issued at  December 31, 2003, and March 31, 2004, respectively) and paid-in capital in  excess of par          |   | (41,221                 | )       | (41,221             | )      |
| Other comprehensive income:                                                                                                                |   |                    |    |                |   |
| Accumulated other comprehensive loss                                                                                                       |   | (244                    | )       | (208                | )      |
| Retained earnings                                                                                                                          |   | 206,873                 |    | 209,668             |   |
| Less: Treasury shares at cost (2,834 at  December 31, 2003, and at March 31, 2004, respectively)                                           |   | (27,438                 | )       | (27,438             | )      |
| Total stockholders’ equity                                                                                                            |   | 137,970                 |    | 140,801             |   |
|                                                                                                                                       |   |                    |    |                |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                        |   | $                       | 222,954 |                | $      | 222,360 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**For the Three Months Ended March31, 2003 and 2004**

**(Unaudited)**

 
|                                                |   | **Three  Months Ended  March 31,**            |   |
|-----------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                |   | **2003**                                      |   | **2004** |   |
|                                                |   | **(in  thousands, except per share amounts)** |   |
|                                                |   |                                          |   |   |   |
| **NET SALES**                                       |   | $                                             | 35,101 |   | $ | 26,337 |   |
| **COST OF GOODS SOLD**                              |   | 12,748                                        |   | 10,454 |   |
| **GROSS PROFIT**                                    |   | 22,353                                        |   | 15,883 |   |
| **SELLING, GENERAL AND ADMINISTRATIVE  EXPENSES**   |   | 8,250                                         |   | 9,926 |   |
| **INCOME FROM OPERATIONS**                          |   | 14,103                                        |   | 5,957 |   |
| **OTHER INCOME/(EXPENSE)**                          |   | 42                                            |   | (78 | ) |
| **INTEREST EXPENSE:**                               |   |                                          |   |   |   |
| Interest expense                                    |   | 1,411                                         |   | 1,014 |   |
| Amortization of deferred debt issuance  costs       |   | 118                                           |   | 80 |   |
| **TOTAL INTEREST EXPENSE**                          |   | 1,529                                         |   | 1,094 |   |
|                                                |   |                                          |   |   |   |
| **INCOME BEFORE PROVISION FOR INCOME TAXES**        |   | 12,616                                        |   | 4,785 |   |
| **PROVISION FOR INCOME TAXES**(Note  8)             |   | 4,641                                         |   | 1,990 |   |
| **NET INCOME**                                      |   | $                                             | 7,975  |   | $ | 2,795 |   |
|                                                |   |                                          |   |   |   |
| **EARNINGS PER SHARE:**                             |   |                                          |   |   |   |
| Basic and Dilutive Earnings Per Share - Net  Income |   | $                                             | 0.13   |   | $ | 0.05 |   |

 

See notes to condensed consolidated financial statements.

 

4

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**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**For the Three Months Ended March31, 2004**

**(Unaudited)**

 
|                          |   | **Common  Stock**   |   | **Common  Stock** |   |               |    | **Accumulated** |    |              |   |         |   |              |    |
|-------------------------------|--------|---------------------|--------|-------------------|--------|--------------------|---------|-----------------|---------|-------------------|--------|--------------|--------|-------------------|---------|
|                          |   | **Shares**          |   |              |   | **and  Paid-in**   |    |            |    | **Other**         |   |         |   | **Other**         |    | **Total** |   |
|                          |   | **Issued And**      |   | **Treasury**      |   | **Capital in**     |    | **Treasury**    |    | **Comprehensive** |   | **Retained** |   | **Comprehensive** |    | **Stockholders’** |   |
|                          |   | **Outstanding**     |   | **Stock**         |   | **Excess of  Par** |    | **Stock**       |    | **Income/(Loss)** |   | **Earnings** |   | **Income**        |    | **Equity** |   |
|                          |   | **(in  thousands)** |   |
|                          |   |                |   |              |   |               |    |            |    |              |   |         |   |              |    |   |   |
| **BALANCE, JANUARY 1, 2004**  |   | 61,838              |   | 2,834             |   | $                  | (41,221 | )               | $       | (27,438           | )      | $            | (244   | )                 | $       | 206,873 |   |   |   | $ | 137,970 |   |
| Other  comprehensive income:  |   |                |   |              |   |               |    |            |    |              |   |         |   |              |    |   |   |
| Foreign  currency translation |   | —              |   | —            |   | —             |    | —          |    | 36                |   | —       |   | $                 | 36      |   | 36 |   |
| Net  income                   |   | —              |   | —            |   | —             |    | —          |    | —            |   | 2,795        |   | 2,795             |    | 2,795 |   |
| Comprehensive  income         |   | —              |   | —            |   | —             |    | —          |    | —            |   | —       |   | $                 | 2,831   |   | — |   |
|                          |   |                |   |              |   |               |    |            |    |              |   |         |   |              |    |   |   |
| **BALANCE, March 31, 2004**   |   | 61,838              |   | 2,834             |   | $                  | (41,221 | )               | (27,438 | )                 | $      | (208         | )      | $                 | 209,668 |   |   |   | $ | 140,801 |   |
|                               |        |                     |        |                   |        |                    |         |                 |         |                   |        |              |        |                   |         |  |  |  |  |  |  |  |  |

 

See notes to condensed consolidated financial statements.

 

5

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**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Three Months Ended March 31, 2003 and 2004**

**(Unaudited)**

 
|                                                                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                               |   | **2003**                           |   | **2004** |   |
|                                                                               |   | **(in  thousands)**                |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          |   |                               |   |   |   |
| Net income                                                                         |   | $                                  | 7,975  |   | $ | 2,795 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                               |   |   |   |
| Depreciation and amortization                                                      |   | 535                                |   | 471 |   |
| Amortization and write off of deferred debt  issuance costs                        |   | 118                                |   | 80 |   |
| Gain/(loss) on sale of equipment                                                   |   | —                             |   | (3 | ) |
| Deferred taxes                                                                     |   | 4,431                              |   | 4,432 |   |
| Changes in assets and liabilities:                                                 |   |                               |   |   |   |
| Accounts receivable - net                                                          |   | (4,667                             | )      | (3,024 | ) |
| Inventory - net                                                                    |   | (574                               | )      | (75 | ) |
| Inventory in transit                                                               |   | 2,552                              |   | 2,178 |   |
| Other current assets                                                               |   | 218                                |   | 26 |   |
| Other assets                                                                       |   | (18                                | )      | (1 | ) |
| Accounts payable                                                                   |   | (1,169                             | )      | 8 |   |
| Income taxes receivable                                                            |   | 1,513                              |   | (1,538 | ) |
| Accrued expenses                                                                   |   | (76                                | )      | (705 | ) |
| Interest payable                                                                   |   | 1,066                              |   | 772 |   |
| Other liabilities                                                                  |   | (92                                | )      | — |   |
| Net cash provided by operating activities                                          |   | 11,812                             |   | 5,416 |   |
|                                                                               |   |                               |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          |   |                               |   |   |   |
| Purchase of property and equipment                                                 |   | (485                               | )      | (1,890 | ) |
| Net cash used in investing activities                                              |   | (485                               | )      | (1,890 | ) |
|                                                                               |   |                               |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          |   |                               |   |   |   |
| Repayment of debt                                                                  |   | (6,000                             | )      | (3,500 | ) |
| Net cash used in financing activities                                              |   | (6,000                             | )      | (3,500 | ) |
|                                                                               |   |                               |   |   |   |
| Effect of exchange rate changes on cash                                            |   | 18                                 |   | 36 |   |
|                                                                               |   |                               |   |   |   |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                      |   | 5,345                              |   | 62 |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                                |   | 5,875                              |   | 4,173 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                       |   | $                                  | 11,220 |   | $ | 4,235 |   |
| **CASH PAID DURING THE PERIOD FOR INTEREST**                                       |   | $                                  | 344    |   | $ | 242 |   |
| **CASH RECEIVED DURING THE PERIOD FOR INCOME  TAXES**                              |   | $                                  | (1,304 | ) | $ | (934 | ) |

 

See notes to condensed consolidated financial statements.

 

6

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**THE BOYDS COLLECTION, LTD.**

#### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts in thousands, except share and pershare amounts)**

**(Unaudited)**

 

**1.             INTERIM FINANCIAL STATEMENTS**

 

The Boyds Collection, Ltd. (“Boyds” or the“Company”) operates in two segments which consist of the Company’s wholesale giftbusiness and the Company’s retail gift/entertainment business. In September2002, Boyds Bear Countryä store opened in Gettysburg, Pennsylvania.The Company expects to open its second retail store in Pigeon Forge, Tennesseein December of 2004.  These retailstores are being used to generate income and expand the brand awareness andimage of Boyds.  Substantially all ofthe Company’s products are sourced from foreign manufacturers in China throughbuying agencies.

 

The condensed consolidated balance sheet asof March 31, 2004, the condensed consolidated statements of income for thethree months ended March 31, 2003 and 2004, the condensed consolidatedstatement of stockholders’ equity for the three months ended March 31, 2004 andthe condensed consolidated statements of cash flows for the three months endedMarch 31, 2003 and 2004 are unaudited. In the opinion of management, all adjustments, consisting only of normalrecurring adjustments, necessary for a fair presentation of such interimfinancial statements have been included. The results of operations for the three months ended March 31, 2004 arenot necessarily indicative of the results to be expected for the fullyear.  These financial statements shouldbe read in conjunction with the financial statements and notes included inBoyds’ Annual Report on Form 10-K filed with the Securities and ExchangeCommission on March 29, 2004.

 

In November 2002, the FASB issued Interpretation No. 45, “GuarantorsAccounting and Disclosure Requirements for Guarantees.”  The disclosure requirements are effective forfinancial statements issued after December 15, 2002, and therecognition/measurement requirements are effective on a prospective basis forguarantees issued or modified after December 31, 2003.  The adoption of this statement did not havea material impact on the financial position, results of operations or cash flowof Boyds.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidationof Variable Interest Entities.”  TheInterpretation clarifies the application of Accounting Research Bulletin No.51, “Consolidated Financial Statements” to certain entities in which the equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  The Interpretation appliesimmediately to variable interest entities created after January 31, 2003, or inwhich the Company obtains an interest after that date.  The interpretation is effective July 1, 2003to variable interest entities in which the Company has assessed the impact ofadopting this Interpretation.  Theadoption of this standard did not have a material impact on the financialposition, results of operations or cash flow of Boyds.

 

7

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In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure.”  This statement amends SFAS No. 123 “Accountingfor Stock-Based Compensation,” to provide alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition,this statement amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based compensation and the effect of the methodused on reporting results.  Thedisclosure provisions of this standard are effective for fiscal years endedafter December 15, 2002 and have been incorporated into these condensedconsolidated financial statements and accompanying notes (see Note 7).

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities.”  This statement amends and clarifiesfinancial accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts and for hedgingactivities under SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”** **In general, this statement iseffective for contracts entered into or modified after September 30, 2003, andfor hedging relationships designated after September 30, 2003.  The adoption of this statement did not havea material impact on the financial position, results of operations or cash flowof Boyds.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities andEquity.”  This statement establishesstandards for the classification and measurement in an issuer’s statement offinancial position of certain financial instruments that embody obligations forthe issuer that are required to be classified as liabilities.  This statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise shall beeffective at the beginning of the first interim period beginning after June 15,2003.  The provisions of the statementdid not have a material impact on the financial position, results of operationsor cash flow of Boyds.

 

**2.             FINANCIAL INSTRUMENTS WITHOFF-BALANCE SHEET RISK**

 

At December 31, 2003 and at March 31, 2004,Boyds had letters of credit outstanding under its bank credit agreementamounting to $3.1 million and $1.7 million, respectively.  These letters of credit represent Boyds’commitment to purchase inventory which is to be produced and/or shipped.

 

**3.             RELATED PARTY TRANSACTIONS**

 

Kohlberg, Kravis Roberts & Co., L.P.(“KKR”) is a 59% shareholder of Boyds. For the first quarter ended March 31,2003 and March 31, 2004, Boyds paid to KKR approximately $0.1 million formanagement fees and related expenses.

 

8

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**4.            ****PROPERTY AND EQUIPMENT**

 

The components of property and equipment at December 31, 2003 and March31, 2004 were, as follows:

 
|                                             |   | **December  31,  2003** |   | **March 31,  2004** |   |
|--------------------------------------------------|--------|-------------------------|--------|---------------------|--------|
|                                             |   |                    |   |                |   |
| Land and building                                |   | $                       | 18,713 |                | $      | 18,859 |   |
| Construction in progress                         |   | 1,050                   |   | 2,685               |   |
| Equipment                                        |   | 4,673                   |   | 4,735               |   |
| Software development costs                       |   | 2,372                   |   | 2,408               |   |
| Leasehold improvements                           |   | 1,924                   |   | 1,924               |   |
| Furniture and fixtures                           |   | 398                     |   | 399                 |   |
| Total                                            |   | 29,130                  |   | 31,010              |   |
| Less: accumulated depreciation and  amortization |   | (7,404                  | )      | (7,833              | )      |
| Total                                            |   | $                       | 21,726 |                | $      | 23,177 |   |

 

**5.             LONG-TERM DEBT**

 

Long-term debt is summarized as follows:

 
|                                             |   | **December  31,  2003** |   | **March 31,  2004** |   |
|--------------------------------------------------|--------|-------------------------|--------|---------------------|--------|
|                                             |   |                    |   |                |   |
| 9% Senior Subordinated Notes due May 15,  2008   |   | $                       | 34,392 |                | $      | 34,392 |   |
|                                             |   |                    |   |                |   |
| Credit Agreement:                                |   |                    |   |                |   |
| Secured Tranche A Term Loans due April 2005.     |   |                    |   |                |   |
| Interest based on LIBOR or base rate as  defined |   | 42,000                  |   | 38,500              |   |
|                                             |   |                    |   |                |   |
| Sub-Total                                        |   | 76,392                  |   | 72,892              |   |
|                                             |   |                    |   |                |   |
| Less: Current portion of long-term debt          |   | (14,000                 | )      | (10,500             | )      |
|                                             |   | $                       | 62,392 |                | $      | 62,392 |   |

 

The Senior Subordinated Notes have an optionalredemption feature exercisable by Boyds any time on or after May 15, 2003at 104.5% of face value. Each year thereafter, the rate decreases by 1.5% until2006. Interest on the Notes is payable semi-annually on May 15 andNovember 15.

 

At March 31, 2003 and 2004, the weightedaverage interest rates in effect for the Tranche A Term Loan were 2.125% and1.747%, respectively.  In addition, theTranche A Term Loan has predetermined annual payments through April 2005.

 

9

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The Credit Agreement contains certaincovenants, including the requirement of a minimum interest coverage ratio asdefined in the agreement and substantial restrictions as to dividends anddistributions. Boyds is in compliance with all applicable covenants as of March31, 2004. The Company believes that it will also be in compliance with all ofits debt covenants based on its expected future earnings. The Credit Agreementalso provides that the Term Loan and Senior secured revolving credit facilitybe collateralized by the capital stock of Boyds’ current and futuresubsidiaries. In addition, the Term Loan is subject to mandatory prepaymentwith the proceeds of certain asset sales and a portion of Boyds’ excess cashflow as defined in the Credit Agreement.

 

The scheduled maturities of the long-termdebt, including current portion of $10.5 million due in April 2004, are asfollows:

 

| 2004   |   | $      | 10,500 |   |
|--------|--------|--------|--------|--------|
| 2005   |   | 28,000 |   |
| 2006   |   | — |   |
| 2007   |   | — |   |
| 2008   |   | 34,392 |   |
|   |   | $      | 72,892 |   |

 

**6.             SEGMENTS OF THE COMPANY AND RELATEDINFORMATION**

 

The Company operates in two segments whichconsist of the Company’s wholesale gift business and the Company’s retailgift/entertainment business.  Thesesegments are evaluated regularly by the Company’s Chief Executive Officer indeciding how to assess performance and allocate resources.  Prior to the retail operations becoming asignificant portion of the Company’s performance, the Company had only onereportable segment. As a result, the Company has reclassified the prior year’ssingle segment information to be consistent with the current period’spresentation.

 

The Company’s wholesale business designs,imports, and distributes resin figurines and plush animals via a global networkof independent retailers and distributors.  The Company’s retail operation sells resin figurines, plush animals anda unique entertainment experience directly to the end consumer at itsGettysburg, Pennsylvania flagship location. A second retail store is expected to be opened in Pigeon Forge,Tennessee in December of 2004.

 

10

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|                   |   | **For the  Three Months Ended, March 31** |    |
|------------------------|--------|-------------------------------------------|---------|
|                   |   | **2003**                                  |    | **2004** |   |
|                   |   | **Wholesale**                             |    | **Retail** |   | **Consolidated** |   | **Wholesale** |   | **Retail** |   | **Consolidated** |   |
| Sales                  |   | $                                         | 32,916  |   | $ | 2,185 |   | $ | 35,101 |   | $ | 24,268 |   | $ | 2,069 |   | $ | 26,337 |   |
| Gross Profit           |   | 20,622                                    |    | 1,731 |   | 22,353 |   | 14,357 |   | 1,526 |   | 15,883 |   |
| SG&A               |   | 6,781                                     |    | 1,469 |   | 8,250 |   | 8,066 |   | 1,860 |   | 9,926 |   |
| Income from Operations |   | 13,841                                    |    | 262 |   | 14,103 |   | 6,291 |   | (334 | ) | 5,957 |   |
|                   |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Total Assets           |   | $                                         | 225,568 |   | 15,507 |   | $ | 241,075 |   | $ | 202,111 |   | 20,249 |   | $ | 222,360 |   |
|                        |        |                                           |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**7.             STOCK-BASED COMPENSATION**

 

At March 31, 2004, Boyds has variousstock-based employee compensation plans. The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issued toEmployees*”*, and relatedInterpretations.  Under this method,compensation cost is the excess, if any, of the quoted market price of thestock at the grant date or other measurement date over the amount an employeemust pay to acquire the stock.  Nostock-based employee compensation cost is reflected in net income, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.  The following table illustrates the effecton net income and earnings per share if Boyds had applied the fair valuerecognition method of accounting provisions of FASB Statement No. 123,“Accounting for Stock-Based Compensation”, to stock-based employee compensation.

 
|                                                                                                                                          |   | **Quarter  Ended  March 31** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                                          |   | **2003**                     |   | **2004** |   |
|                                                                                                                                          |   |                         |   |   |   |
| Net income, as reported                                                                                                                       |   | $                            | 7,975  |   | $ | 2,795 |   |
|                                                                                                                                          |   |                         |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | 572                          |   | 557 |   |
|                                                                                                                                          |   |                         |   |   |   |
| Pro forma net income                                                                                                                          |   | $                            | 7,403  |   | $ | 2,238 |   |
|                                                                                                                                          |   |                         |   |   |   |
| Earnings per share:                                                                                                                           |   |                         |   |   |   |
| Basic—as reported                                                                                                                        |   | $                            | 0.13   |   | $ | 0.05 |   |
| Basic—pro forma                                                                                                                          |   | $                            | 0.13   |   | $ | 0.04 |   |
|                                                                                                                                          |   |                         |   |   |   |
| Diluted—as reported                                                                                                                      |   | $                            | 0.13   |   | $ | 0.05 |   |
| Diluted—pro forma                                                                                                                        |   | $                            | 0.13   |   | $ | 0.04 |   |

 

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**8.             PROVISION FOR INCOME TAXES**

 

For federal income tax purposes, Boyds haselected to treat the Recapitalization and Stock Purchase that occurred in April1998 as an asset acquisition by making an Internal Revenue Code Section 338(h)(10) election.  As a result, there isa difference between the financial reporting and tax basis of Boyds’assets.  The difference creates deductiblegoodwill for income tax purposes, and a deferred tax asset for financialreporting purposes.  The deductiblegoodwill is amortized over a period of fifteen years.  The Company will need to generate approximately $400 million oftaxable income over the next 30 years to fully realize the federal net deferredtax assets.  In addition, the Companywill need to generate approximately $20 million of taxable income in each ofthe next 10 years to fully realize the state net deferred tax assets.

 

**9.             CONTINGENCIES**

 

Boyds is involved in various legalproceedings, claims and governmental audits in the ordinary course of business.In the opinion of management, the ultimate disposition of these matters willnot have a material adverse effect on the financial position, results ofoperations and cash flows of Boyds.

 

**10.          EARNINGS PER SHARE**

 

The following is a reconciliation of thenumerators and denominators of the basic and diluted earnings per sharecomputations for the net income available to common stockholders:

 

 
|                                                                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                               |   | **2003**                           |   | **2004** |   |
|                                                                               |   |                               |   |   |   |
| Numerator for basic and diluted earnings  per share:                               |   |                               |   |   |   |
| Net income                                                                         |   | $                                  | 7,975  |   | $ | 2,795 |   |
| Denominator:                                                                       |   |                               |   |   |   |
| Denominator for basic earnings per share -  weighted average shares                |   | 59,111                             |   | 59,004 |   |
| Effect of dilutive securities:                                                     |   |                               |   |   |   |
| Effect of shares issuable under stock  option plans based on treasury stock method |   | 59                                 |   | — |   |
| Denominator for diluted earnings per share  - weighted average shares              |   | 59,170                             |   | 59,004 |   |
|                                                                               |   |                               |   |   |   |
| EPS - Basic                                                                        |   | $                                  | 0.13   |   | $ | 0.05 |   |
|                                                                               |   |                               |   |   |   |
| EPS - Diluted                                                                      |   | $                                  | 0.13   |   | $ | 0.05 |   |

 

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**11.          SUBSEQUENT EVENTS**

 

On April 7, 2004 the Company announced theretirement of the Company’s Chief Operating Officer.  In the second quarter, the Company will incur a charge ofapproximately $0.4 million in relation to the retirement.

 

On April 21, 2004, the Company paid theremaining balance of $10.5 million on its scheduled bank debt payment.  This payment was partially funded by using$9.0 million of the Company’s revolving credit facility, with the remainder of$1.5 million coming from excess cash provided from operating activities.

 

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

 

**GENERAL**

 

The Company operates in two segments which consist of the Company’swholesale gift business and the Company’s retail gift/entertainmentbusiness.  Boyds is a leading designer,importer and distributor of branded, high-quality, hand crafted collectiblesand other specialty giftware products. Boyds sells its products through an extensive network of approximately14,000 accounts comprised of independent gift and collectibles retailers,premier department stores, selected catalogue retailers and other electronicand retail channels. This network of retailers is being serviced by a nationalsales force that was created in 2002. In September 2002, the Boyds Bear Countryä store opened in Gettysburg, Pennsylvania.   The Company has purchased land in Pigeon Forge, Tennessee tobegin construction on its second retail location.  This store is expected to open in December of 2004.  The Company has entered into a Letter ofIntent for a lease on land in Myrtle Beach, South Carolina for its third retaillocation.  In the future, the Companyplans to open two stores per year beginning in 2005.

 

Boyds’ sales consist of plush animals, resin figurines, and otherproducts. Other products include home décor, stationary, accessories andcollectors club sales, which are generated from annual dues collected directlyfrom consumers who become members of Boyds’ collectors club, *The LoyalOrder of Friends of Boyds*, which began in July 1996 andcurrently has approximately 35,000 paying members, and related accessories.

 

Boyds licenses its productdesigns to other companies for products including home textiles, infant clothingand wallpaper. Boyds believes such licensing, in addition to providing royaltyincome, helps to increase consumer awareness of Boyds’ designs and brand image.Boyds reports royalty income in net sales.

 

Boyds exhibits its products at selectednational and regional tradeshows where orders are taken by Boyds’ employees.Boyds operates almost exclusively out of a leased office/distribution facilityand owned retail store in the general vicinity of Gettysburg, Pennsylvania.Boyds also leases warehouse space in Dunkeswell, United Kingdom, and Dordrecht,The Netherlands.

 

**SEGMENTS**

 

The Company operates in two segments which consist of the Company’swholesale gift business and the Company’s retail gift/entertainmentbusiness.  These segments are evaluatedregularly by the Company’s Chief Executive Officer in deciding how to assessperformance and allocate resources.  Prior to the retail operations becoming a significant portion of theCompany’s performance, the Company had only one reportable segment. As a result,the Company has reclassified the prior year’s single segment information to beconsistent with the current period’s presentation.

 

The Company’s wholesale businessdesigns, imports, and distributes resin figurines and plush animals via aglobal network of independent retailers and distributors. The Company’s retailoperation sells resin

 

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figurines, plush animals and aunique entertainment experience directly to the end consumer currently at itsGettysburg, Pennsylvania flagship location. The Company plans for one store to be added in 2004 and then twoadditional stores per year beginning in 2005.

 

**CRITICALACCOUNTING POLICIES**

 

Preparing the financial statements in conformity with accountingprinciples generally accepted in the United States of America requires thatmanagement make estimates and assumptions that affect the amounts reported inthe financial statements and accompanying notes.  Predicting future events is inherently an imprecise activity andas such requires the use of judgment. Actual results may vary from estimates in amounts that may be materialto the financial statements. Management believes that the estimates andassumptions used in connection with the amounts reported in Boyds’ financialstatements and related disclosures are reasonable and made in good faith.

 

The most significant accountingestimates inherent in the preparation of Boyds’ financial statements includeestimates related to the valuation of the deferred tax assets, determining theultimate collectability of accounts receivable and the realizable value ofinventory.    The process of determiningestimates is based on several factors, including historical experience, currentand anticipated economic conditions and customer profiles. Boyds continuallyreevaluates these key factors and makes adjustments to estimates whereappropriate. The following are Boyds’ critical accounting policies, some ofwhich require the application of significant estimates and assumptions.

 

•                  Sales revenue, net of returns and discounts,is recognized upon shipment of the items, when title passes to the customer, orcompletion of a retail sale. The most significant financial statement lineitem, net sales, represents transactions consistent with Boyds’ primarybusiness focus and meets the criteria of Staff Accounting Bulletin No. 101,including the transfer of title, probable collectability, identified customerand no recourse.

 

•                  As of March 31, 2004, the Company has netdeferred tax assets of approximately $164 million or approximately 75% of totalassets. Deferred income taxes arise because of differences in the treatment ofincome and expense items for financial reporting and income tax purposes.  The recovery of deferred income tax assetsis contingent upon applicable tax laws and management’s assessment of futureoperating results.  In situations whichmanagement believes the probability of benefiting from deferred tax assets isless likely than not, a valuation allowance is established for the amount thatis less likely than not to be utilized. The Company will need to generate approximately $400 million of taxableincome over the next 30 years to fully realize the federal net deferred taxassets.  In addition, the Company willneed to generate approximately $20 million of taxable income in each of thenext 10 years to fully realize the state net deferred tax assets.

 

•                  Accounts receivable are presented atestimated net realizable value. Boyds uses estimates in determining thecollectability of its accounts receivable and must rely on its evaluation ofhistorical bad debts, customer credit ratings, current economic trends andchanges in customer payment terms to arrive at appropriate reserves.

 

•                  Inventories are stated at the lower of costor market. Cost is determined under the first-in, first-out method ofaccounting. Boyds records adjustments to the value of this inventory insituations where it appears that Boyds will not be able to recover the cost ofthe product.  This lower of cost ormarket analysis is based on Boyds’ estimate of forecasted demand by customer byproduct.  A decrease in product demanddue to changing customer tastes, consumer buying patterns or loss of shelfspace to competitors could significantly impact Boyds’ evaluation of its excessand obsolete inventories.

 

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•                  Under the requirements of SFAS No.142,“Goodwill and Other Intangible Assets”, and SFAS No.144, “Accounting for theImpairment or Disposal of Long-Lived Assets”, Boyds assesses the potentialimpairment of identifiable intangibles, long-lived assets and acquired goodwillwhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable.  In performingthis evaluation, the Company evaluates current and future economic and businesstrends to develop business forecasts of future performance and related cashflows. Such estimates require the use of judgment and numerous subjectiveassumptions. Based on Boyds’ evaluation as of January 1, 2004, there was noimpairment of goodwill, identifiable intangibles or long-lived assets.

 

•                  Boyds has various stock-based employeecompensation plans. The Company accounts for those plans under the recognitionand measurement principles of APB Opinion No. 25, “Accounting for Stock Issuedto Employees”, and related Interpretations. Under this method, compensationcost is the excess, if any, of the quoted market price of the stock at thegrant date or other measurement date over the amount an employee must pay toacquire the stock. No stock-based employee compensation cost is reflected innet income, as all options granted under those plans had an exercise priceequal to the market value of the underlying common stock on the date of grant.

 

**FACTORSWHICH AFFECT BOYDS’ RESULTS OF OPERATIONS**

 

***Seasonality***

 

Boyds receives orders throughout the year andgenerally ships merchandise out on a first-in, first-out basis. In anticipationof the holiday season, 60% of orders are placed between May and October. Theremaining 40% of orders are placed between November and April. Boyds does nothave the significant seasonal variation in its orders that it believes isexperienced by many other giftware and collectibles companies. Boyds does notbuild a large receivables balance relative to sales because it typically doesnot offer its customers long payment terms or dating programs.

 

***Foreign Exchange***

 

The dollar value of Boyds’ assets locatedabroad is not significant. Boyds’ sales are primarily denominated in UnitedStates dollars and, as a result, are not subject to changes in exchange rates.

 

Boydsgenerally pays for its products in United States dollars. However, Boyds’ costof such products fluctuates with the value of the Chinese renminbi becauseBoyds imports most of its products from manufacturers in China. Boyds’ costscould be adversely affected on a short-term basis if the Chinese renminbiappreciates significantly relative to the United States dollar. Conversely, itscosts would be favorably affected on a short-term basis if the Chinese renminbidepreciates significantly relative to the United States dollar. While Boydsdoes not do so now, in the future, Boyds may, from time to time, enter intoforeign exchange contracts or prepay inventory purchases as a partial hedge againstcurrency fluctuations. Differences between the amounts of such contracts andcosts of specific material purchases are included in inventory and cost ofsales. Boyds intends to manage foreign exchange risks to the extentappropriate.

 

Boyds has growing sales operations based inEurope and Canada, but at this time Boyds does not expect any significantimpact due to fluctuations in the Euro , the British Pound or the Canadiandollar.

 

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**RESULTSOF OPERATIONS**

 

Net sales consist of wholesale and retail sales ofour products, net of sales discounts, product returns and allowances,collectors club sales generated from Boyds’ collectors club and royalty incomefrom licenses held by Boyds.  Wholesalesales are primarily made on a purchase order basis.  Revenue associated with sales is recognized when title transfersto the customer, or upon completion of a retail transaction.

 

Cost of goods sold consists of product costs,freight and warehousing costs. Selling, general and administrative expensesinclude overhead, selling and marketing costs, administration and professionalfees.

 

The following table sets forth the components ofnet income as a percentage of net sales for the periods indicated:

 
|                                          |   | **Quarter  Ended  March 31,** |   |
|-----------------------------------------------|--------|-------------------------------|--------|
|                                          |   | **2003**                      |   | **2004** |   |
|                                          |   |                          |   |   |   |
| Net sales                                     |   | 100.0                         | %      | 100.0 | % |
| Gross profit                                  |   | 63.7                          | %      | 60.3 | % |
| Selling, general and administrative  expenses |   | 23.5                          | %      | 37.7 | % |
| Income from operations                        |   | 40.2                          | %      | 22.6 | % |
| Other income/(expenses), net                  |   | 0.0                           | %      | -0.2 | % |
| Interest expense                              |   | 4.3                           | %      | 4.2 | % |
| Provision for income taxes                    |   | 13.2                          | %      | 7.6 | % |
| Net income                                    |   | 22.7                          | %      | 10.6 | % |

 

***Executive Summary***

 

In the first quarter of 2004,the Company’s net sales decline was primarily attributed to the wholesalesegment, and was consistent with the trend that was experienced in 2003.  The Company believes that results associatedwith several of its product and sales interventions in the wholesale businessthat were implemented during the first quarter of 2004 will begin to translateinto sales during the second and third quarters.  As an initial indication of the success of these interventionsthe Company’s bookings (cancelable orders) have seen a dramatic slowing in thenegative trend from a negative 25% to a negative 3-5%.  The efforts that have driven this improvementinclude our focus on giftability, such as our new Razz-beariesTM andBears & FriendsTM lines, as well as the early success of ourNASCAR licensed plush collection, which ships to stores in May.  We are also working to focus our salesefforts on higher-traffic channels, and have made key progress to thisend.  The Company’s retail storeexperienced a decline in net sales of 5% due to a decline in customer trafficassociated with the Company’s choice to move promotional events to months withhigher traffic and to inclement weather. The first quarter amounts to only 13% of annual retail sales and it isanticipated that this shortfall will be overcome by the end of the year.

 

During the quarter the Company’snet income decreased by $5.2 million to $2.8 million.  This decrease was caused by the reduction in sales, increasedSG&A costs surrounding the national sales force and management overheadcosts in the retail segment.  Inaddition to the sales initiatives that the Company put into place in the fourthquarter of 2003, the Company is working to find additional efficiencies in itsSG&A operating model that would result in additional cost savings.

 

***Three Months Ended March 31, 2004 vs. ThreeMonths Ended March 31, 2003***

## * *

Net sales decreased $8.8 million, or 25%, to $26.3million in the first quarter of 2004 from $35.1 million for the first quarterof 2003.  Sales of Boyds’ plush productsdecreased $7.6 million, or 35%, resin product sales decreased $1.2 million, or13%, and other product sales increased $0.1 million, or 2%.  As a percentage

 

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of net sales for the quarter,plush products represented 54%, resin products represented 31%, and otherproducts represented 15%.

 

Wholesale net sales declined $8.7 million in thequarter, or 26%, to $24.2 million in 2004 from $32.9 million in 2003.  Retail net sales declined $0.1 million to$2.1 million in 2004 from $2.2 million in 2003.  Wholesale revenues continued to decline at the same trendexperienced in late 2003.   Asignificant portion of this decline can be attributed to the slowing sales inthe Company’s core fashion family plush product line.  Sales in this product line are suffering from the overalldeclining sales in collectible stores and the slowness with which the Companywas able to attract new collectors.

 

Gross profit decreased $6.5 million, or 29%, to $15.9 million in thefirst quarter of 2004 from $22.4 million for the first quarter of 2003.  Gross profit as a percentage of net salesdecreased to 60% for the quarter from 64% for the same period in 2003.  The dollar and the percentage decrease canbe attributed to the decrease in sales, an increase in the charge forcapitalization of inventory, and an increase in the transportation costs ofshipments.  Wholesale gross profitdecreased by $6.3 million, or 30%, to $14.4 million in 2004 from $20.7 millionin 2003.  Retail gross profit decreasedby $0.2 million, or 12%, to $1.5 million in 2004 from $1.7 million in 2003.

 

SG&A expense increased $1.6 million, or 19%, to $9.9 million in thefirst quarter of 2004 from $8.3 million for the first quarter of 2003.  SG&A as a percent of net sales increasedto 38% for the quarter from 24% for the same period in 2003.  The dollar and percentage increases inSG&A expenses were primarily a result of fully staffing the national salesforce, a reduction in the benefit received from the reversal of bad debtexpense, and management overhead costs in the retail segment.

 

Income from operations declined $8.1 million, or58%, to $6.0 million in the first quarter of 2004 from $14.1 million for thefirst quarter of 2003.  Income fromoperations as a percentage of net sales declined to 23% for the quarter from40% for the same period in 2003.  Thedollar decline and the decline in the percentage of net sales were primarilyattributable to the decline in sales, operational costs of the national salesforce and management overhead costs in the retail segment.

 

Total interest expense declined $0.4 million, or 27%, to $1.1 millionin the first quarter of 2004 from $1.5 million for the first quarter of2003.  Total interest expense as apercentage of net sales remained flat at 4% for the quarter as compared to thesame period in 2003.  The dollar declinewas due to the reduction of debt from the use of excess cash.

 

Provision for income taxes decreased $2.6 million, or 57%, to $2.0million in the first quarter of 2004 from $4.6 million for the first quarter of2003.   The dollar decline was due todecreased sales and increased operational costs associated with the nationalsales force and management overhead costs in the retail segment. These werepartially offset by a settlement notice from the State of Pennsylvania receivedin the first quarter of 2003 regarding a franchise tax benefit of approximately$0.9 million relating to the tax year 2000. The effective tax rate for thequarters ended March 31, 2003 and 2004 was 39.6% and 41.0%, respectively.

 

Net income declined $5.2 million, or 65%, to $2.8million in the first quarter of 2004 from $8.0 million for the first quarter of2003.  Net income as a percent of salesdecreased to 11% for the quarter from 23% for the same period in 2003.  The dollar decline and the decline in thepercentage of net sales were due primarily to the decline in sales, theincreased costs associated with the national sales force, and increasedmanagement overhead costs in the retail segment.

 

***Liquidity and Capital Resources***

 

Boyds’ primary sources of liquidity are cash flow from operations andborrowings under its credit agreement, which includes a revolving creditfacility. Boyds’ primary uses of cash are to fund working capital

 

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requirements and to servicedebt. Cash balances remained constant at $4.2 million in the first three monthsof 2004 as compared to the balances at December 31, 2003.

 

***Operating Activities***

 

Cash provided by operating activities decreased $6.4 million, or 54%,to $5.4 million in the first three months of 2004 from $11.8 million for the firstthree months of 2003. The cash flow decrease was primarily attributable to thedecrease in sales and the additional costs associated with the national salesforce.

 

***Investing Activities***

 

 Capital and investmentexpenditures totaled $1.9 million in the first three months of 2004 as comparedto $0.5 million in the first three months of 2003. This increase inexpenditures was a result of construction costs of $1.6 million on the BoydsBear CountryTM store in Pigeon Forge, Tennessee.

 

***Financing Activities***

 

In connection with the recapitalization in 1998, Boyds issued 9% SeniorSubordinated Notes due 2008 in an amount of $165.0 million and entered into acredit agreement providing for a $325.0 million senior secured term loan,consisting of tranche A and tranche B, and a senior secured revolving creditfacility providing for borrowings up to $40.0 million. As of March 31, 2004,Boyds has repaid $130.6 million of the notes, leaving a balance outstanding of$34.4 million. Boyds has repaid $286.5 million of the term loans under thecredit agreement, leaving a balance outstanding of $38.5 million as of March31, 2004. Boyds has reduced its total debt by $24.8 million in the past twelvemonths.

 

On April 21, 2004, the Company paid $10.5million of the remaining balance of the Tranche A Term Loan. This payment waspartially funded by using $9.0 million of the Company’s revolving creditfacility, with the remainder of $1.5 million coming from excess cash providedfrom operating activities.

 

Therevolving credit facility provides loans in an aggregate amount of up to $40.0million.  Boyds had no borrowingsoutstanding under the revolving credit facility as of March 31, 2004.  The revolving credit facility will beavailable to fund the working capital needs of Boyds.  Boyds utilized $9.0 million of the revolving credit facility tomake its scheduled bank debt payment in April 2004.  Borrowings under the credit agreement bear interest at a rate perannum equal to a margin over either a base rate or LIBOR, at Boyds’ option. Therevolving credit facility commitment will terminate on April 21, 2005.Effective April 21, 2000, the tranche A term loan is being amortized over sixyears. The credit agreement contains customary covenants and events of default,including substantial restrictions on Boyds’ ability to declare dividends ormake distributions. Boyds is in compliance with all applicable covenants as ofMarch 31, 2004 and the Company believes that based on its future earnings itwill also be in compliance with all of its debt covenants. The term loans aresubject to mandatory prepayment with the proceeds of certain asset sales and aportion of Boyds’ excess cash flow, as defined in the credit agreement.

 

On February 17, 2000, Boyds announced that its Board of Directors hadapproved the repurchase of 3.0 million shares of the Company’s common stock. Asof March 31, 2004, Boyds had repurchased 344,730 shares of common stockpursuant to the Stock Repurchase Program for an aggregate amount ofapproximately $2 million. These repurchases were financed out of operating cashflow. Any future repurchases under the Stock Repurchase Program are expected tobe financed similarly or by utilizing borrowings under the revolving creditfacility. Boyds plans to make such purchases from time to time in the openmarket or in private transactions.

 

On July 27, 2000, Boyds announced that its Board ofDirectors had approved a repurchase program for its outstanding 9% Series BSenior Subordinated Notes due 2008. As of March 31, 2004, Boyds had repurchased$64.6 million of its notes pursuant to the Bond Repurchase Program. Theserepurchases were

 

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financed out of operating cashflow. Any future repurchases under the Bond Repurchase Program are expected tobe financed similarly or by utilizing borrowings under the revolving creditfacility. Boyds plans to make such purchases from time to time in the openmarket or in private transactions.

 

Management believes that cash flow from operations and availabilityunder the revolving credit facility will provide adequate funds for Boyds’foreseeable working capital needs, planned capital expenditures, debt serviceobligations, the Stock Repurchase Program and the Bond Repurchase Program. Anyfuture acquisitions, joint ventures or other similar transactions may requireadditional capital and there can be no assurance that any such capital will beavailable to Boyds on acceptable terms, or at all. Boyds’ ability to fund itsworking capital needs, planned capital expenditures and scheduled debtpayments, to refinance indebtedness and to comply with all of the financialcovenants under its debt agreements depends on its future operating performanceand cash flow, which in turn are subject to prevailing economic conditions andto financial, business and other factors, some of which are beyond Boyds’control.  The Company is activelyworking to refinance its existing debt and plans to have a new debt structurein place by December 31, 2004.

 

**RISK FACTORS WHICH MAY AFFECT FUTURE PERFORMANCE**

** **

*Dependence on two independent buyingagencies. *Substantiallyall of the products that Boyds sells are purchased through two independentbuying agencies. One buying agency is located in Hong Kong, and the otherbuying agency is located in the United States. These two buying agencies, whichcontract with a total of 19 independent manufacturers, account forapproximately 90% of Boyds’ total imports. These two buying agencies alsoperform a number of functions for Boyds, including collaborating in Boyds’product design and development process. As a result, Boyds is substantiallydependent on these buying agencies and the manufacturers with which theycontract. Boyds does not have long-term contracts with either of its primarybuying agencies. Boyds believes that the loss of either of its primary buyingagencies would (1) have a material adverse effect on its financial conditionand results of operations, (2) cause disruptions in its orders, (3) affect thequality of its products, and (4) possibly require it to select alternativemanufacturers.

 

*Potential economic and political risks ofChina. *All ofBoyds’ significant manufacturers are located in China. Although Boyds hasidentified alternate manufacturers which could meet its quality and reliabilitystandards at similar costs in China and in other countries, the loss of any oneor more of its manufacturers could have a material adverse effect on itsbusiness.  Because Boyds reliesprimarily on Chinese manufacturers, it is subject to the following risks thatcould restrict its manufacturers’ ability to make its products or increase itsmanufacturing costs: (1) economic and political instability in China; (2)transportation

 

delays; (3) restrictive actions by theChinese government; (4) the laws and policies of the United States affectingimportation of goods, including duties, quotas and taxes; (5) Chinese trade andtax laws.  In addition, Boyds’ businesscould be adversely affected if the Chinese renminbi appreciates significantlyrelative to the United States dollar due to the cost of its productsfluctuating with the value of the Chinese renminbi.

 

*Potential adverse trade regulations andrestrictions.* Boyds does not own or operate any manufacturing facilities. Instead,Boyds imports substantially all of its retail products from independent foreignmanufacturers, primarily in China. As a result, substantially all of itsproducts are subject to United States Customs Service duties and regulations.These regulations include requirements that Boyds disclose informationregarding the country of origin on its products, such as “Handmade in China.”Within its discretion, the United States Customs Service may also set newregulations regarding the amount of duty to be paid, the value of merchandise tobe reported or other customs regulations relating to Boyds’ imported products.Failure to comply with these regulations may result in the imposition ofadditional duties or penalties or forfeiture of merchandise.

 

The countriesin which Boyds’ products are manufactured may impose new quotas, duties,tariffs or other charges or restrictions. This could adversely affect Boyds’financial condition, results of operations or its ability to continue to importproducts at current or increased levels. In particular, Boyds’ costs couldincrease,

 

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or the mix of countries fromwhich Boyds imports its products may be changed, if the Generalized System ofPreferences program is not renewed or extended each year. The GeneralizedSystem of Preferences program allows selected products of beneficiary countriesto enter the United States duty free. In addition, if countries that arecurrently accorded “Most Favored Nation” status by the United States, such asChina, cease to have such status, Boyds could be adversely affected because thecost of importing from such countries may increase. Boyds cannot predict whatregulatory changes may occur or the type or amount of any financial impactthese changes may have on it in the future.

 

*Changing consumer tastes. *The demand forBoyds’ products may be quickly affected by changing consumer tastes andinterests. Boyds’ results of operations depend substantially upon its abilityto continue to conceive, design, source and market new pieces and uponcontinuing market acceptance of its existing and future product lines. If Boydsfails or is significantly delayed in introducing new pieces to its existingproduct lines or creating new product line concepts or if its new products donot meet with market acceptance, its results of operations may be impaired. Anumber of companies who participate in the giftware and collectibles industriesare part of large, diversified companies that have greater financial resourcesthan Boyds, offer a wider range of products and may be less affected bychanging consumer tastes.

 

*Potential infringement of Boyds’ intellectualproperty.* Boyds believes that its trademarks and other proprietary rights arematerial to its success and competitive position. Accordingly, Boyds devotesresources to the establishment and protection of its intellectual property on aworldwide basis. The actions Boyds takes to establish and protect itstrademarks and other proprietary rights may not be adequate to protect itsintellectual property or to prevent imitation of its products by others.Moreover, while Boyds has not experienced any proprietary license infringementsor legal actions that have had a material impact on its financial condition orresults of operations, other persons have, and will likely in the future,assert rights in, or ownership of, its trademarks and other proprietary rights.Boyds may not be able to successfully resolve such conflicts. In addition, thelaws of foreign countries may not always protect intellectual property to thesame extent as do the laws of the United States.

 

*Required debt payments.*Boyds has significantdebt on its balance sheet. If the Company does not refinance its existing debtand/or does not generate sufficient cash flows, the Company may have difficultymaking its required debt payments in the future.

 

***EFFECTS OF RECENTLY ISSUED ACCOUNTINGSTANDARDS***

 

InNovember 2002, the FASB issued Interpretation No. 45, “Guarantors Accountingand Disclosure Requirements for Guarantees.” The disclosure requirements are effective for financial statementsissued after December 15, 2002, and the recognition/measurement requirementsare effective on a prospective basis for guarantees issued or modified afterDecember 31, 2003.  The adoption of thisstatement did not have a material impact on the financial position, results ofoperations or cash flow of Boyds.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities.”  The Interpretationclarifies the application of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements,” to certain entities in which the equity investors do nothave the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties.  The Interpretation applies immediately tovariable interest entities created after January 31, 2003, or in which theCompany obtains an interest after that date. The interpretation is effective July 1, 2003 to variable interestentities in which the Company has assessed the impact of adopting thisInterpretation.  The adoption of thisstandard did not have a material impact on the financial position, results ofoperations or cash flow of Boyds.

 

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In December 2002, the FASB issuedSFAS No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure.”  This statement amends SFASNo. 123 “Accounting for Stock-Based Compensation,” to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  In addition, this statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reporting results.  The disclosure provisions of this standardare effective for fiscal years ended after December 15, 2002 and have beenincorporated into these condensed consolidated financial statements andaccompanying notes (see Note 7).

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.”  This statement amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts and for hedging activities under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.”  In general, this statement is effective forcontracts entered into or modified after September 30, 2003, and for hedgingrelationships designated after September 30, 2003.  The adoption of this statement did not have a material impact onthe financial position, results of operations or cash flow of Boyds.

 

In May 2003,the FASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity.”  This statement establishes standards for the classification andmeasurement in an issuer’s statement of financial position of certain financialinstruments that embody obligations for the issuer that are required to beclassified as liabilities.  This statementis effective for financial instruments entered into or modified after May 31,2003, and otherwise shall be effective at the beginning of the first interimperiod beginning after June 15, 2003. The provisions of the statement did not have a material impact on thefinancial position, results of operations or cash flow of Boyds.

 

**RELATED PARTY TRANSACTIONS**

 

Kohlberg, Kravis Roberts & Co., L.P. (“KKR”) is a 59% shareholderof Boyds. For the first quarter ended March 31, 2003 and March 31, 2004, Boydspaid to KKR approximately $0.1 million for management fees and relatedexpenses.

 

***FORWARD LOOKING STATEMENTS***

 

Some of the matters discussed in this report include forward-lookingstatements.  Statements that arepredictive in nature, that depend upon or refer to future events or conditionsor that include words such as “expects,” “anticipates,” “intends,” “plans,”“believes,” “estimates” and similar expressions are forward-looking statements.

 

The forward-looking statements in this report are based on a number ofassumptions and estimates, which are inherently subject to significantuncertainties and contingencies, many of which are beyond the control of Boyds,and reflect future business decisions that are subject to change. A variety offactors could cause actual results to differ materially from those anticipatedin Boyds’ forward-looking statements, including: the effects of economicconditions; the inability to grow Boyds’ business as planned; the loss ofeither of Boyds’ two independent buying agencies or any of its manufacturingsources; economic or political instability in the countries with which Boydsdoes business; changes to, or the imposition of, new regulations, duties, taxesor tariffs associated with the import or export of goods from or to the countrieswith which Boyds does business; and other risk factors that are discussed inthis report and, from time to time, in other Securities and Exchange Commissionreports and filings. One or more of the factors discussed above may causeactual results to differ materially from those expressed in or implied by thestatements in this report.

 

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Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date of such statements.Boyds undertakes no obligation to publicly release the results of any revisionsto these forward-looking statements that may be made to reflect events orcircumstances after the date of this report, or the date of such statements, asthe case may be, or to reflect the occurrence of unanticipated events.

 

**Item 3****.****                                  ****Quantitative and Qualitative Disclosures About Market Risk.**

 

Boyds faces minimal interest rate risk exposure in relation to itsoutstanding debt of $72.9 million at March 31, 2004. Of this amount, $38.5million under the Credit Agreement is subject to interest rate fluctuations. Ahypothetical 1% change in interest rates applied to the fair value of debtwould not have a material impact on earnings or cash flows of the Company.

 

Boyds faces currency risk exposure that arises from translating theresults of its European and Canadian operations that are denominated in thelocal currency of the Euro, the British Pound and the Canadian dollar, to theU.S. dollar. The currency risk exposure is not material as the operations ofthe European and Canadian subsidiaries do not have a material impact on theCompany’s earnings.

 

Boyds also faces foreign exchange risks that arise from paying inUnited States Dollars for products that are manufactured in China. While itdoes not do so now, in the future Boyds may, from time to time, enter intoforeign exchange contracts or prepay inventory purchases as a partial hedgeagainst currency fluctuations. Differences between the amounts of such contractsand costs of specific material purchases are included in inventory and costs ofsales. Boyds intends to manage foreign exchange risks to the extentappropriate.

 

**Item 4****.****                                  ****Controls and Procedures**

 

Boyds maintains disclosure controls andprocedures designed to ensure that it is able to collect the information it isrequired to disclose in the reports it files with the Securities and ExchangeCommission (“SEC”), and to process, summarize and disclose this informationwithin the time periods specified in the rules of the SEC. Boyds carried out anevaluation of its disclosure controls and procedures, under the supervision andwith the participation of the Chief Executive and Chief Financial Officers, asof a date within 90 days of the filing date of this report, and based on suchevaluation, Boyds’ Chief Executive and Chief Financial Officers believe thatthese disclosure controls and procedures are effective to ensure that Boyds isable to collect, process and disclose the information it is required to disclosein the reports it files with the SEC within the required time periods.

 

There havebeen no significant changes in Boyds’ internal controls or in other factorsthat could significantly affect these controls, subsequent to the date Boyds’Chief Executive and Chief Financial Officers completed their evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

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**PART II**

**OTHER INFORMATION**

 

**Item 1. Legal Proceedings****.**

 

Boyds isinvolved in various legal proceedings, claims and governmental audits in theordinary course of business. In the opinion of management, the ultimatedisposition of these proceedings, claims and audits will not have a materialadverse effect on the financial position, results of operations, and cash flowsof Boyds.

 

**Item 2. Changes in Securities****and Use of Proceeds—None**

 

**Item 3. Defaults Upon Senior****Securities—None**

 

**Item 4. Submission of Matters****to a Vote of SecurityHolders—None**

 

**Item 5.  Other Information**

 

**Item 6.  Exhibits and****Reports on Form 8-K**

 

(a) Exhibits – See Index toExhibits

 

(b) Reports on Form 8-K – None

 

 

#### **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 theundersigned thereunto duly authorized.

 

Date:   May 14, 2004

 
|   |   |   | The Boyds Collection, Ltd. |     |
|--------|--------|--------|----------------------------|----------|
|   |   |   |                       |     |   |   |
|   |   |   |                       |     |   |   |
|   |   |   |                       | By:      | /s/ Jan L. Murley |   |
|   |   |   |                       | Name:    | Jan L. Murley |   |
|   |   |   |                       | Title:   | Chief Executive Officer |   |
|   |   |   |                       |     |   |   |
|   |   |   |                       |     |   |   |
|   |   |   |                       | By:      | /s/ Joseph E. Macharsky |   |
|   |   |   |                       | Name:    | Joseph E. Macharsky |   |
|   |   |   |                       | *Title:* | *Chief Financial Officer* |   |

 

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Index to Exhibits

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|  3.1        |   | Amended and  Restated Articles of Incorporation of Boyds (incorporated by reference from  Exhibit 3.1 of Amendment No. 1 to Boyds’ Registration Statement on Form S-1,  filed on February 8, 1999, File No. 333-69535).                                                                                                                                                                                                                                                                                                                    |
| * 3.2*      |   | *Amended and Restated Bylaws  of Boyds (incorporated by reference from Exhibit 3.2 of Amendment No. 1 to  Boyds’ Registration Statement on Form S-1, filed on February 8, 1999, File  No. 333-69535)*                                                                                                                                                                                                                                                                                                                                      |
| * 4.1*      |   | *Indenture, dated as of April  21, 1998 between Boyds and The Bank of New York, as trustee (incorporated by  reference from Exhibit 4.3 of Amendment No. 1 to Boyds’ Registration  Statement on Form S-1, filed on February 8, 1999, File No. 333-69535).*                                                                                                                                                                                                                                                                                 |
|  4.2        |   | Form of 9%  Senior Subordinated Note due 2008 (included in Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|  4.3        |   | Form of 9%  Series B Senior Subordinated Note due 2008 (included in Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1             |   | Credit  Agreement, dated as of April 21, 1998, among Boyds, the several lenders from  time to time parties thereto, DLJ Capital Funding, Inc., The Fuji Bank,  Limited, New York Branch, and Fleet National Bank (incorporated by reference  from Exhibit 10.1 of Amendment No. 3 to Boyds’ Registration Statement on Form  S-1, filed on February 23, 1999, File No. 333-69535).                                                                                                                                                          |
| 10.2             |   | Forms of  Notes evidencing loans under the Credit Agreement (included in Exhibit 10.1).                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.3             |   | 1998 Option  Plan for Key Employees of Boyds (incorporated by reference from Exhibit 10.3  of Amendment No. 1 to Boyds’ Registration Statement on Form S-1, filed on  February 8, 1999, File No. 333-69535).                                                                                                                                                                                                                                                                                                                               |
| 10.4             |   | 1999 Option  Plan for Key Employees of Boyds (incorporated by reference from Exhibit 4.3  of Boyds’ Registration Statement on Form S-8, filed on January 18, 2002, File  No. 333-77022).                                                                                                                                                                                                                                                                                                                                                   |
| 10.5             |   | 2000 Option  Plan for Key Employees of Boyds (incorporated by reference from Exhibit 4.4  of Boyds’ Registration Statement on Form S-8, filed on January 18, 2002, File  No. 333-77022).                                                                                                                                                                                                                                                                                                                                                   |
| 10.6             |   | 2001 Option  Plan for Key Employees of Boyds (incorporated by reference from Exhibit 4.5  of Boyds’ Registration Statement on Form S-8, filed on January 18, 2002, File  No. 333-77022).                                                                                                                                                                                                                                                                                                                                                   |
| 10.7             |   | Lease Agreement  for Boyds’ McSherrystown, Pennsylvania facility (incorporated by reference  from Exhibit 10.4 of Amendment No. 3 to Boyds’ Registration Statement on Form  S-1, filed on February 23, 1999, File No. 333- 69535).                                                                                                                                                                                                                                                                                                    |
| 10.8             |   | Employment  Agreement dated January 28, 2000 between Jean-Andre Rougeot and Boyds  (incorporated by reference from Exhibit 10.8 of Boyds’ Annual Report on Form  10-K, filed on March 28, 2002, File No. 001-14843).                                                                                                                                                                                                                                                                                                                       |
| 10.9             |   | Form of  Employment Agreement dated October 21, 2003 between Jan L. Murley and Boyds  (incorporated by reference from Exhibit 10.9 of Boyds’ Annual Report on Form  10-K, filed on March 29, 2004, File No. 001-14843).                                                                                                                                                                                                                                                                                                                    |
| 31.1             |   | Certification  of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) *                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *31.2*           |   | *Certification of Chief  Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) **                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *32.1*           |   | *Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. (This certification is being  furnished in accordance with the Sarbanes-Oxley Act of 2002 and Commission  Release No. 34-47551 and shall not be deemed “filed” with the Commission for  purposes of Section 18 of the Exchange Act, or otherwise subject to the  liability of that section, and shall not be deemed to be incorporated by  reference into any filing under the* |

 

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|   |   | *Securities Act of the  Exchange Act, except to the extent that the Registrant specifically  incorporates it by reference.)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *32.2* |   | *Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. (This certification is being  furnished in accordance with the Sarbanes-Oxley Act of 2002 and Commission  Release No. 34-47551 and shall not be deemed “filed” with the Commission for  purposes of Section 18 of the Exchange Act, or otherwise subject to the  liability of that section, and shall not be deemed to be incorporated by  reference into any filing under the Securities Act of the Exchange Act,  except to the extent that the Registrant specifically incorporates it by  reference.)** |

 

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*                 Filedherewith

 

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