**UnitedStates Securities and Exchange Commission**

**Washington, D.C.20549**

 

**FORM 10-Q**

 

|                                                                                     | **(Mark One)**                                                                                                                                                    |                                                                                                 |
|------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|
|                                                                                     |                                                                                                                                                              |                                                                                                 |
|                                                                                     |                                                                                                                                                              | ý**QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |   |
|                                                                                     |                                                                                                                                                              |                                                                                                 |   |
|                                                                                     | **For the Quarterly Period Ended March 31, 2003**                                                                                                                 |                                                                                                 |
|                                                                                     |                                                                                                                                                              |                                                                                                 |   |
|                                                                                     | **OR**                                                                                                                                                            |                                                                                                 |
|                                                                                     |                                                                                                                                                              |                                                                                                 |   |
|                                                                                     |                                                                                                                                                              | **o****TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**  |   |
|                                                                                     |                                                                                                                                                              |                                                                                                 |
|                                                                                     | **For the Transition period from             to            ** |                                                                                                 |
|                                                                                     |                                                                                                                                                              |                                                                                                 |
|                                                                                     | **Commission  File Number:  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 whether the Registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

Yes   ý  No   o

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate:

 

| **Common Stock,  par value $.0001 per share** |   | 59,111,452                       |
|-----------------------------------------------|--------|----------------------------------|
| (Class)                                       |   | (Outstanding  as of May 5, 2003) |

 

 

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|        | **THE BOYDS COLLECTION, LTD.**                                                                           |
|-------------|----------------------------------------------------------------------------------------------------------|
|        |                                                                                                     |
|        | **TABLE OF  CONTENTS**                                                                                   |
|        |                                                                                                     |
|        |                                                                                                     |
| PART I.     | FINANCIAL INFORMATION                                                                                    |
|        |
| **Item 1.** | **Financial Statements:**                                                                                |
|        |
|        | Condensed Consolidated Balance Sheets as of  December 31, 2002 and March 31, 2003                        |
|        |
|        | Condensed Consolidated Statements of Income  for the Three Months Ended March 31, 2002 and 2003          |
|        |                                                                                                     |
|        | Condensed Consolidated Statement of  Stockholders’ Equity for the Three Months Ended March 31, 2003 |
|        |                                                                                                     |
|        | Condensed Consolidated Statements of Cash  Flows for the Three Months Ended March 31, 2002 and 2003      |
|        |                                                                                                     |
|        | 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                                                                                               |
|        |
|        | Certifications                                                                                           |
|        |
|        | Index to Exhibits                                                                                        |

 

----

 

**PARTI**

**FINANCIAL INFORMATION**

** **

**Item 1****.        FinancialStatements.**

 

**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**As of December 31, 2002 (Audited)and March 31, 2003 (Unaudited)**

 
|                                                                                                                                      |   | **December 31,  2002** |       | **March 31,  2003** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|---------------------|------------|
|                                                                                                                                      |   | **(in thousands)**     |       |
| **ASSETS**                                                                                                                                |   |                   | ** ** |                | ** ** |
|                                                                                                                                      |   |                   | ** ** |                | ** ** |
| **CURRENT ASSETS:**                                                                                                                       |   |                   |       |                |       |
| Cash and cash equivalents                                                                                                                 |   | $                      | 5,875      |                | $          | 11,220 |   |
| Accounts receivable, less allowances  of  $2,992 at Dec 31, 2002, and $2,176  at  March 31, 2003                                |   | 10,489                 |       | 15,156              |       |
| Inventory - primarily finished goods, less  allowance for obsolete inventory of $5,240 at Dec 31, 2002, and $3,619 at March 31, 2003 |   | 9,224                  |       | 9,798               |       |
| Inventory in transit                                                                                                                      |   | 3,166                  |       | 614                 |       |
| Other current assets                                                                                                                      |   | 1,026                  |       | 808                 |       |
| Income taxes receivable                                                                                                                   |   | 3,216                  |       | 1,703               |       |
| Deferred income taxes                                                                                                                     |   | 21,047                 |       | 21,047              |       |
| Total current assets                                                                                                                      |   | 54,043                 |       | 60,346              |       |
|                                                                                                                                      |   |                   |       |                |       |
| **PROPERTY AND EQUIPMENT -  NET **(Note 4)                                                                                           |   | 18,666                 |       | 18,616              |       |
|                                                                                                                                      |   |                   |       |                |       |
| **OTHER ASSETS:**                                                                                                                         |   |                   |       |                |       |
| Deferred debt issuance costs                                                                                                              |   | 1,693                  |       | 1,575               |       |
| Deferred tax asset                                                                                                                        |   | 162,262                |       | 157,831             |       |
| Other assets                                                                                                                              |   | 2,689                  |       | 2,707               |       |
| Total other assets                                                                                                                        |   | 166,644                |       | 162,113             |       |
| **TOTAL ASSETS**                                                                                                                          |   | $                      | 239,353    |                | $          | 241,075 |   |
|                                                                                                                                      |   |                   |       |                |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                            |   |                   |       |                |       |
|                                                                                                                                      |   |                   |       |                |       |
| **CURRENT LIABILITIES:**                                                                                                                  |   |                   |       |                |       |
| Accounts payable                                                                                                                          |   | $                      | 2,569      |                | $          | 1,400 |   |
| Accrued expenses                                                                                                                          |   | 4,340                  |       | 4,264               |       |
| Interest payable                                                                                                                          |   | 829                    |       | 1,895               |       |
| Current portion of long-term debt (Note 5)                                                                                                |   | 6,000                  |       | 0                   |       |
| Total current liabilities                                                                                                                 |   | 13,738                 |       | 7,559               |       |
|                                                                                                                                      |   |                   |       |                |       |
| **LONG-TERM DEBT**(Note 5)                                                                                                                |   | 97,689                 |       | 97,689              |       |
|                                                                                                                                      |   |                   |       |                |       |
| **COMMITMENTS AND  CONTINGENCIES** (Notes 2 and 8)                                                                                        |   |                   |       |                |       |
|                                                                                                                                      |   |                   |       |                |       |
| **OTHER LIABILITIES**                                                                                                                     |   | 126                    |       | 34                  |       |
|                                                                                                                                      |   |                   |       |                |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                            |   |                   |       |                |       |
|                                                                                                                                      |   |                   |       |                |       |
| Common stock (61,838 shares issued at Dec  31, 20002, and March 31, 2003, respectively) and paid-in capital in excess of  par             |   | (41,221                | )          | (41,221             | )          |
| Other comprehensive income:                                                                                                               |   |                   |       |                |       |
| Accumulated other comprehensive loss                                                                                                      |   | (50                    | )          | (32                 | )          |
| Retained earnings                                                                                                                         |   | 196,010                |       | 203,985             |       |
| Less: Treasury shares at cost (2,727 at Dec  31, 2002, and March 31, 2003, respectively)                                                  |   | (26,939                | )          | (26,939             | )          |
| Total stockholders’ equity                                                                                                           |   | 127,800                |       | 135,793             |       |
|                                                                                                                                      |   |                   |       |                |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                      |   | $                      | 239,353    |                | $          | 241,075 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME**

**For the Three Months  Ended March 31, 2002 and 2003**

**(Unaudited)**

 
|                                                |   | **Three Months Ended  March 31,**            |       |
|-----------------------------------------------------|--------|----------------------------------------------|------------|
|                                                |   | **2002**                                     |       | **2003** |   |
|                                                |   | **(in thousands, except per share amounts)** |       |
|                                                |   |                                         | ** ** |   | ** ** |
| **NET SALES**                                       |   | $                                            | 40,479     |   | $ | 35,101 |   |
| **COST OF GOODS SOLD**                              |   | 14,130                                       |       | 12,748 |   |
| **GROSS PROFIT**                                    |   | 26,349                                       |       | 22,353 |   |
| **SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES**   |   | 5,257                                        |       | 8,250 |   |
| **INCOME FROM OPERATIONS**                          |   | 21,092                                       |       | 14,103 |   |
| **OTHER INCOME/(EXPENSE)**                          |   | (21                                          | )          | 42 |   |
| **INTEREST EXPENSE:**                               |   |                                         |       |   |   |
| Interest expense                                    |   | 1,754                                        |       | 1,411 |   |
| Amortization of deferred debt issuance  costs       |   | 138                                          |       | 118 |   |
| **TOTAL INTEREST EXPENSE**                          |   | 1,892                                        |       | 1,529 |   |
|                                                |   |                                         |       |   |   |
| **INCOME BEFORE PROVISION  FOR INCOME TAXES**       |   | 19,179                                       |       | 12,616 |   |
| **PROVISION FOR INCOME TAXES**(Note 7)              |   | 7,885                                        |       | 4,641 |   |
| **NET INCOME**                                      |   | $                                            | 11,294     |   | $ | 7,975 |   |
|                                                |   |                                         |       |   |   |
| **EARNINGS PER SHARE:**                             |   |                                         |       |   |   |
| Basic and Dilutive Earnings Per Share - Net  Income |   | $                                            | 0.19       |   | $ | 0.13 |   |

 

See notes to condensed consolidated financialstatements.

 

4

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**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED STATEMENTOF STOCKHOLDERS’ EQUITY**

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

**(Unaudited)**

 
|                                |   |                |   |                                                     |   |                |    |                                                 |    |                   |   |                             |   |                                  |    |
|-------------------------------------|--------|---------------------|--------|----------------------------------------------------------|--------|---------------------|---------|------------------------------------------------------|---------|------------------------|--------|----------------------------------|--------|---------------------------------------|---------|
|                                |   | **Common Stock**    |   | **Common Stock  and Paid-in  Capital in  Excess of Par** |   | **Treasury  Stock** |    | **Accumulated  Other  Comprehensive  Income/(Loss)** |    | **Retained  Earnings** |   | **Other  Comprehensive  Income** |   | **Total  Stockholders’  Equity** |    |
| **Shares  Issued And  Outstanding** |   | **Treasury  Stock** |
|                                |   | **(in thousands)**  |   |
|                                |   |                |   |                                                     |   |                |    |                                                 |    |                   |   |                             |   |                                  |    |   |   |
| **BALANCE, JANUARY 1, 2003**        |   | 61,838              |   | 2,727                                                    |   | $                   | (41,221 | )                                                    | $       | (26,939                | )      | $                                | (50    | )                                     | $       | 196,010 |   |   |   | $ | 127,800 |   |
| Other comprehensive income:         |   |                |   |                                                     |   |                |    |                                                 |    |                   |   |                             |   |                                  |    |   |   |
| Foreign currency translation        |   | —              |   | —                                                   |   | —              |    | —                                               |    | 18                     |   | —                           |   | $                                     | 18      |   | 18 |   |
| Net income                          |   | —              |   | —                                                   |   | —              |    | —                                               |    | .                      |   | 7,975                            |   | 7,975                                 |    | 7,975 |   |
| Comprehensive income                |   | —              |   | —                                                   |   | —              |    | —                                               |    | 18                     |   | —                           |   | $                                     | 7,993   |   | — |   |
|                                |   |                |   |                                                     |   |                |    |                                                 |    |                   |   |                             |   |                                  |    |   |   |
| **BALANCE, March 31, 2003**         |   | 61,838              |   | 2,727                                                    |   | $                   | (41,221 | )                                                    | (26,939 | )                      | $      | (32                              | )      | $                                     | 203,985 |   |   |   | $ | 135,793 |   |
|                                     |        |                     |        |                                                          |        |                     |         |                                                      |         |                        |        |                                  |        |                                       |         |  |  |  |  |  |  |  |  |

 

See notes to condensed consolidatedfinancial statements.

 

5

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**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**For the Three Months Ended March31, 2002 and 2003**

**(Unaudited)**

 
|                                                                               |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                               |   | **2002**                          |   | **2003** |   |
|                                                                               |   | **(in thousands)**                |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                         |   |                              |   |   |   |
| Net income                                                                         |   | $                                 | 11,294 |   | $ | 7,975 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                              |   |   |   |
| Depreciation                                                                       |   | 413                               |   | 535 |   |
| Amortization and write off of deferred debt  issuance costs                        |   | 138                               |   | 118 |   |
| Deferred taxes                                                                     |   | 4,432                             |   | 4,431 |   |
| Asset impairment charge                                                            |   | 254                               |   | — |   |
| Changes in assets and liabilities:                                                 |   |                              |   |   |   |
| Accounts receivable - net                                                          |   | (2,649                            | )      | (4,667 | ) |
| Inventory - net                                                                    |   | 124                               |   | (574 | ) |
| Inventory in transit                                                               |   | 1,651                             |   | 2,552 |   |
| Other current assets                                                               |   | 200                               |   | 218 |   |
| Other assets                                                                       |   | (16                               | )      | (18 | ) |
| Accounts payable                                                                   |   | (1,446                            | )      | (1,169 | ) |
| Accrued taxes/Income taxes receivable                                              |   | 3,417                             |   | 1,513 |   |
| Accrued expenses                                                                   |   | (778                              | )      | (76 | ) |
| Interest payable                                                                   |   | 1,047                             |   | 1,066 |   |
| Other liabilities                                                                  |   | (17                               | )      | (92 | ) |
| Net cash provided by operating activities                                          |   | 18,064                            |   | 11,812 |   |
|                                                                               |   |                              |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                         |   |                              |   |   |   |
| Purchase of property and equipment                                                 |   | (1,971                            | )      | (485 | ) |
| Net cash used in investing activities                                              |   | (1,971                            | )      | (485 | ) |
|                                                                               |   |                              |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                         |   |                              |   |   |   |
| Repayment of debt                                                                  |   | (11,500                           | )      | (6,000 | ) |
| Net cash used in financing activities                                              |   | (11,500                           | )      | (6,000 | ) |
|                                                                               |   |                              |   |   |   |
| Effect of exchange rate changes on cash                                            |   | 26                                |   | 18 |   |
|                                                                               |   |                              |   |   |   |
| **NET INCREASE IN CASH AND  CASH EQUIVALENTS**                                     |   | 4,619                             |   | 5,345 |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                                |   | 815                               |   | 5,875 |   |
| **CASH AND CASH EQUIVALENTS,  END OF PERIOD**                                      |   | $                                 | 5,434  |   | $ | 11,220 |   |
| **CASH PAID DURING THE  PERIOD FOR INTEREST**                                      |   | $                                 | 707    |   | $ | 344 |   |
| **CASH PAID(RECEIVED) DURING  THE PERIOD FOR INCOME TAXES**                        |   | $                                 | 52     |   | $ | (1,304 | ) |

 

See notes to condensed consolidated financialstatements.

 

6

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**THE BOYDS COLLECTION, LTD.**

#### **NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Amounts inthousands, except share and per share amounts)**

**(Unaudited)**

 

 

 

**1.             INTERIM FINANCIALSTATEMENTS**

 

The BoydsCollection, Ltd. (“Boyds” or “Company”) is primarily a wholesaler and importerof resin figurines and plush animals that are distributed to retail operationsprimarily throughout the United States. In September 2002, Boyds Bear Countryä store opened in Gettysburg, Pennsylvania. This retail store is beingused to generate income and expand the brand awareness and image of Boyds.  Substantially all of the Company’s productsare sourced from foreign manufacturers in China through buying agencies.

 

Thecondensed consolidated balance sheet, as of March 31, 2003, the condensedconsolidated statements of income for the three months ended March 31, 2002 and2003, the condensed consolidated statement of stockholders’ equity for thethree months ended March 31, 2003 and the condensed consolidatedstatements of cash flows for the three months ended March 31, 2002 and 2003 areunaudited.  In the opinion ofmanagement, all adjustments, consisting only of normal recurring adjustments,necessary for a fair presentation of such interim financial statements havebeen included.  The results ofoperations for the three months ended March 31, 2003 are not necessarilyindicative of the results to be expected for the full year.  These financial statements should be read inconjunction with the financial statements and notes included in Boyds’ AnnualReport on Form 10-K filed with the Securities and Exchange Commission on March28, 2003.

 

In April 2002, the FASB issued SFAS No. 145(“SFAS 145”), “Rescission of FASB Statements No. 4, 44, and 64, Amendment ofFASB Statement No. 13, and Technical Corrections.”  This statement is effective for fiscal years beginning after May15, 2002.  SFAS 145 requires, amongother things, eliminating the extraordinary item treatment of debtextinguishments used as part of the Boyds’ debt management strategy. Boydsadopted this statement as of January 1, 2003 and the adoption did not havean impact on the financial statements.

 

In June 2002, the FASB issued SFAS No. 146(“SFAS 146”), “Accounting for Costs Associated with Exit or DisposalActivities.”  This statement requiresrecording costs associated with exit or disposal activities at their fairvalues when a liability has been incurred. Under previous guidance, certain exit costs were accrued uponmanagement’s commitment to an exit plan, which is generally before an actualliability has been incurred.  Adoptionof this statement was effective as of January 1, 2003.  The adoption of this pronouncement did not have animpact on the financial position, results of operations or cash flow of Boyds.

 

7

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**2.             FINANCIALINSTRUMENTS WITH OFF-BALANCE SHEET RISK**

 

At December31, 2002 and at March 31, 2003, Boyds had letters of credit outstanding underits bank credit agreement amounting to $5.1 million and $3.4 million,respectively.  These letters of creditrepresent Boyds’ commitment to purchase inventory, which is to be producedand/or shipped.

 

**3.             RELATED PARTYTRANSACTIONS**

 

Kohlberg,Kravis Roberts & Co. L.P. (“KKR”) represents a 59% shareholder of Boyds.Boyds paid to KKR approximately $0.1 million for management fees, recruitmentfees and related expenses for each of the first quarters ended March 31, 2002,and 2003.

 

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

 

The components of property and equipment atDecember 31, 2002 and March 31, 2003 were, as follows:

 
|                                             |   | **December 31,  2002** |   | **March 31,  2003** |   |
|--------------------------------------------------|--------|------------------------|--------|---------------------|--------|
|                                             |   |                   |   |                |   |
| Land and building                                |   | $                      | 15,232 |                | $      | 15,384 |   |
| Equipment                                        |   | 4,136                  |   | 4,462               |   |
| Software development costs                       |   | 2,372                  |   | 2,372               |   |
| Leasehold improvements                           |   | 1,924                  |   | 1,924               |   |
| Furniture and fixtures                           |   | 395                    |   | 398                 |   |
| Total                                            |   | 24,059                 |   | 24,540              |   |
| Less: accumulated depreciation and  amortization |   | (5,393                 | )      | (5,924              | )      |
| Total                                            |   | $                      | 18,666 |                | $      | 18,616 |   |

 

8

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**5.             LONG-TERM DEBT**

 

Long-termdebt is summarized as follows:

 
|                                                                                           |   | **December 31,  2002** |       | **March 31,  2003** |       |
|------------------------------------------------------------------------------------------------|--------|------------------------|------------|---------------------|------------|
|                                                                                           |   |                   | ** ** |                | ** ** |
| 9% Senior Subordinated Notes due May 15,  2008                                                 |   | $                      | 46,689     |                | $          | 46,689 |   |
|                                                                                           |   |                   |       |                |       |
| Credit Agreement:                                                                              |   |                   |       |                |       |
| Secured Tranche A Term Loans due April  2005.  Interest based on LIBOR or base rate as defined |   | 57,000                 |       | 51,000              |       |
| Secured revolving loan due April 2005.  Interest based on LIBOR or base rate as defined        |   | —                 |       | —              |       |
|                                                                                           |   |                   |       |                |       |
| Sub-Total                                                                                      |   | 103,689                |       | 97,689              |       |
|                                                                                           |   |                   |       |                |       |
| Less: Current portion of long-term debt                                                        |   | (6,000                 | )          | —              |       |
|                                                                                           |   | $                      | 97,689     |                | $          | 97,689 |   |

 

 

The Senior Subordinated Notes have an optional redemption featureexercisable by Boyds any time on or after May 15, 2003 at 104.5% of face value.Each year thereafter, the rate decreases by 1.5%. Interest on the Notes ispayable semi-annually on May 15 and November 15.

 

At March 31, 2002 and 2003, the weighted average interestrates in effect for the Tranche A Term Loan were 2.730% and 2.125%,respectively.  In addition, the TrancheA Term Loan has predetermined annual payments through April 2005.

 

The Credit Agreement contains certain covenants, including therequirement of a minimum interest coverage ratio as defined in the agreementand substantial restrictions as to dividends and distributions. Boyds is incompliance with all applicable covenants as of March 31, 2003. The agreementalso provides that the Term Loan and revolving loan commitment be secured bythe capital stock of Boyds’ current and future subsidiaries. In addition, theTerm Loan is subject to mandatory prepayment with the proceeds of certain assetsales and a portion of Boyds’ excess cash flow as defined in the CreditAgreement. Boyds has the option of selecting its own interest period at one,two, three, six, nine or twelve month periods.

 

Thescheduled maturities of the long-term debt, including current portion, are asfollows:

 
| 2003       |   | $      | — |   |
|------------|--------|--------|--------|--------|
| 2004       |   | 23,000 |   |
| 2005       |   | 28,000 |   |
| 2006       |   | — |   |
| 2007       |   | — |   |
| Thereafter |   | 46,689 |   |
|       |   | $      | 97,689 |   |

 

9

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**6.             STOCK BASEDCOMPENSATION**

 

At March 31, 2003, Boyds has variousstock-based employee compensation plans. The company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, *Accountingfor Stock Issued to Employees,* and related Interpretations.  Underthis method, compensation cost is the excess, if any, of the quoted marketprice of the stock at the grant date or other measurement date over the amountan employee must pay to acquire the stock. No stock-based employee compensation cost is reflected in netincome, as all options granted under those plans had an exercise price equal tothe market value 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 provisionsof FASB Statement No. 123, *Accounting forStock-Based Compensation,* to stock-based employee compensation.

 
|                                                                                                                                          |   | **Quarter Ended March 31** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|------------|
|                                                                                                                                          |   | **2002**                   |       | **2003** |   |
|                                                                                                                                          |   |                       | ** ** |   | ** ** |
| Net income, as reported                                                                                                                       |   | $                          | 11,294     |   | $ | 7,975 |   |
|                                                                                                                                          |   |                       |       |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | 407                        |       | 572 |   |
|                                                                                                                                          |   |                       |       |   |   |
| Pro forma net income                                                                                                                          |   | $                          | 10,887     |   | $ | 7,403 |   |
|                                                                                                                                          |   |                       |       |   |   |
| Earnings per share:                                                                                                                           |   |                       |       |   |   |
| Basic—as reported                                                                                                                        |   | $                          | 0.19       |   | $ | 0.13 |   |
| Basic—pro forma                                                                                                                          |   | $                          | 0.18       |   | $ | 0.13 |   |
|                                                                                                                                          |   |                       |       |   |   |
| Diluted—as reported                                                                                                                      |   | $                          | 0.19       |   | $ | 0.13 |   |
| Diluted—pro forma                                                                                                                        |   | $                          | 0.18       |   | $ | 0.13 |   |

 

 

**7.             PROVISION FORINCOME TAXES**

 

For federalincome tax purposes, Boyds has elected to treat the recapitalization and stockpurchase that occurred in April 1998 as an asset acquisition by making anInternal Revenue Code Section 338 (h)(10) election.  As a result, there is a difference between the financialreporting and tax basis of Boyds’ assets. The difference creates deductible goodwill for income tax purposes, anda deferred tax asset for financial reporting purposes.  The deductible goodwill is amortized over aperiod of fifteen years.  In the opinionof management, Boyds believes it is more likely than not it will havesufficient profits in the future to realize the deferred tax asset.

 

Boyds’ effective taxrate, excluding the impact of franchise taxes, has increased to 39.6% in 2003 from38.8% in 2002.  The increase in the percentage was a result of Boyds restructuring the tax treatment ofinternational operations during 2003.

 

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**8.             CONTINGENCIES**

 

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

 

**9.             EARNINGS PER SHARE**

 

Thefollowing is a reconciliation of the numerators and denominators of the basicand diluted earnings per share computations for the net income available tocommon stockholders:

 
|                                                                               |   | **Three Months Ended  31-Mar** |   |
|------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                               |   | **2002**                       |   | **2003** |   |
|                                                                               |   | **(in thousands)**             |   |
|                                                                               |   |                           |   |   |   |
| Numerator for basic and diluted earnings  per share:                               |   |                           |   |   |   |
| Net income                                                                         |   | $                              | 11,294 |   | $ | 7,975 |   |
| Denominator:                                                                       |   |                           |   |   |   |
| Denominator for basic earnings per share -  weighted average shares                |   | 59,062                         |   | 59,111 |   |
| Effect of dilutive securities:                                                     |   |                           |   |   |   |
| Effect of shares issuable under stock  option plans based on treasury stock method |   | 96                             |   | 59 |   |
| Denominator for diluted earnings per share  - weighted average shares              |   | 59,158                         |   | 59,170 |   |
|                                                                               |   |                           |   |   |   |
| EPS - Basic                                                                        |   | $                              | 0.19   |   | $ | 0.13 |   |
|                                                                               |   |                           |   |   |   |
| EPS - Diluted                                                                      |   | $                              | 0.19   |   | $ | 0.13 |   |

 

**10.**          **SUBSEQUENT EVENT**

 

On April 1,2003, Boyds purchased and retired $5.3 million of its 9% Senior SubordinatedNotes for 101.5% of face value or $5.4 million.  The notes were purchased with cash on the open market.

 

**Item 2****.        Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

##### ***GENERAL***

 

Boyds is a leading designer, importer anddistributor of branded, high-quality, hand crafted collectibles and otherspecialty giftware products.  Boydssells its products through an extensive network of approximately

 

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14,000 accounts comprised of independent giftand collectibles retailers, premier department stores, selected catalogueretailers and other electronic and retail channels. This network of retailersis being serviced by a newly created outside sales force. In September 2002,Boyds Bear Countryä store opened in Gettysburg, Pennsylvania.This retail store will be used to generate income and expand the brandawareness and image of Boyds.

 

Boyds’ sales consist of plush animals, resinfigurines, dolls, villages, home décor and other products. Other productsinclude collectors club sales, which are generated from annual dues collecteddirectly from consumers who become members of Boyds’ collectors club, *The LoyalOrder of Friends of Boyds*, which began in July 1996 andcurrently has approximately 49,000 paying members; international sales; salesfrom Boyds Bear CountryTM ; and related accessories.

 

Boyds licenses its product designs to othercompanies for products including home textiles, infant clothing and wallpaper.Boyds believes such licensing, in addition to providing royalty income, helpsto increase consumer awareness of Boyds’ designs and brand image. Boyds reportsroyalty income in net sales.

 

##### ***Boyds exhibitsits products at many national and regional tradeshows where orders are taken byBoyds’ employees. Boyds operates almost exclusively out of a leasedoffice/distribution facility and owned retail store in the general vicinity ofGettysburg, Pennsylvania.***

 

**CRITICAL ACCOUNTING POLICIES**

 

Preparing the financial statements inconformity with accounting principles generally accepted in the United Statesof America requires that management make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes.  Predicting future events is inherently animprecise activity and as such requires the use of judgment.  Actual results may vary from estimates inamounts that may be material to the financial statements. Management believesthat the estimates and assumptions used in connection with the amounts reportedin Boyds’ financial statements and related disclosures are reasonable and madein good faith.

 

The most significant accounting estimatesinherent in the preparation of Boyds’ financial statements include estimatesrelated to valuing the ultimate collectability of accounts receivable andrealizable value of inventory.  In addition,a significant amount of judgment exists in defining deferred tax valuationaccounts.  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 ofreturns and discounts, is recognized upon shipment of the items, when titlepasses to the customer, or completion of a retail sale. The most significant financial statementline item, 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.

 

•                  Accounts receivableare presented at estimated net realizable value. Boyds uses estimates in determining the collectability of its accountsreceivable and must rely on its evaluation of historical bad debts, customercredit ratings, current economic trends and changes in customer payment termsto arrive at appropriate reserves. Material differences may result in theamount and timing of earnings if actual experience differs significantly frommanagement estimates.

 

•                  Inventories are statedat the lower of cost or market. Cost is determined under the first-in,first-out method of accounting.Boyds records adjustments tothe value of this inventory in situations where it appears that Boyds will notbe able to recover the cost of the product. This lower of

 

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cost or market analysis is based on Boyds’ estimate of forecasted demandby customer by product.  A decrease inproduct demand due to changing customer tastes, consumer buying patterns orloss of shelf space to competitors could significantly impact Boyds’ evaluationof its excess and obsolete inventories.

 

•                  Under the requirements of Statement ofFinancial Accounting Standards (SFAS) Nos.142 and 144, Boyds assessed thepotential impairment of identifiable intangibles, long-lived assets andacquired goodwill whenever events or changes in circumstances indicated thatthe carrying value may not be recoverable. In performing this evaluation, the Company evaluated current and futureeconomic and business trends to develop business forecasts of futureperformance and related cash flows. Such estimates require the use of judgmentand numerous subjective assumptions. As of January 1, 2003 based on Boydsevaluation there was no impairment of goodwill, identifiable intangibles orlong-lived assets.

 

•                  Deferredincome taxes arise because of differences in the treatment of income and expenseitems for financial reporting and income tax purposes.  The recovery of deferred income tax assetsis contingent upon applicable tax laws and future taxable income. Situations inwhich management believes the probability of recovering deferred tax assets isless likely than not, a valuation allowance is established for the amount thatis less likely than not to be realized.

 

 

**FACTORS WHICH AFFECT BOYDS’ RESULTS OFOPERATIONS**

 

***Seasonality***

 

Boyds receivesorders throughout the year and generally ships merchandise out on a first-in,first-out basis. Approximately 40% of orders are taken between November andApril while approximately 60% of orders are placed between May and October inanticipation of the holiday season. Boyds does not build a large receivablesbalance relative to sales because it typically does not offer its customerslong payment terms or dating programs. Boyds does not have the significantseasonal variation in its orders that it believes is experienced by many othergiftware and collectibles companies.

 

***Foreign Exchange***

 

The dollar valueof Boyds’ assets located abroad is not significant. Boyds’ sales are primarilydenominated in United States dollars and, as a result, are not subject tochanges in exchange rates.

 

Boyds imports most of its products frommanufacturers in China. Boyds’ costs could be adversely affected on ashort-term basis if the Chinese renminbi appreciates significantly relative tothe United States dollar. Conversely, its costs would be favorably affected ona short-term basis if the Chinese renminbi depreciates significantly relativeto the United States dollar. Although Boyds generally pays for its products inUnited States dollars, the cost of such products fluctuates with the value ofthe Chinese renminbi. 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 suchcontracts and costs of specific material purchases are included in inventoryand cost of sales. Boyds intends to manage foreign exchange risks to the extentappropriate.

 

Boyds has agrowing sales operation based in Europe, but at this time Boyds does not expectany significant impact due to fluctuations in the Euro or the British Pound.

 

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**RESULTS OF OPERATIONS**

 

Net sales consist of sales of our products,net of sales discounts, product returns and allowances, collectors club salesgenerated from Boyds’ collectors club and royalty income from licenses held byBoyds.  Sales are primarily made on apurchase order basis.  Revenueassociated with sales is recognized when title transfers to the customer, orupon 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 componentsof net income as a percentage of net sales for the periods indicated:

 
|                                          |   | **Three Months  Ended  March 31,** |   |
|-----------------------------------------------|--------|------------------------------------|--------|
|                                          |   | **2002**                           |   | **2003** |   |
|                                          |   |                               |   |   |   |
| Net sales                                     |   | 100.0                              | %      | 100.0 | % |
| Gross profit                                  |   | 65.1                               | %      | 63.7 | % |
| Selling, general and administrative  expenses |   | 13.0                               | %      | 23.5 | % |
| Income from operations                        |   | 52.1                               | %      | 40.2 | % |
| Interest expense                              |   | 4.7                                | %      | 4.3 | % |
| Provision for income taxes                    |   | 19.5                               | %      | 13.2 | % |
| Net income                                    |   | 27.9                               | %      | 22.7 | % |

 

 

## ***ThreeMonths Ended March 31, 2003  vs. ThreeMonths Ended March 31, 2002***

 

*Net Sales* – Net sales declined $5.4 million,or 13.3%, to $35.1 million in the first quarter of 2003 from $40.5 million forthe first quarter of 2002.  Sales ofBoyds’ plush products decreased $2.3 million, or 9.8%, resin product salesdeclined $2.4 million, or 19.7%, other product sales declined $0.7 million, or14.5%.  As a percentage of net sales forthe quarter, plush products represented 61%, resin products represented 27%,and other products represented 12%.

 

The first quarter of 2003 was negativelyimpacted by the weak economy and the continuing struggles of the gift retail channel.  The shortfalls were partially offset by ournew direct sales force and Boyds Bear CountryTM.

 

*Gross Profit* – Gross profit declined $3.9million, or 14.8%, to $22.4 million in the first quarter of 2003 from $26.3million for the first quarter of 2002. Gross profit as a percentage of net sales decreased to 63.7% for thequarter from 65.1% for the same period in 2002.  The dollar and percentage decline was primarily attributable tothe decline in sales volume.

 

*Selling, General & Administrative Expenses (SG&A)*– SG&A increased $3.0 million, or 56.6%,to $8.3 million in the firstquarter of 2003 from $5.3 million for the first quarter of 2002.  SG&A as a percent of net sales increasedto 23.5% for the quarter from 13.0% for the same period in 2002.  The dollar increase in

 

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SG&A expenses was a result of implementing a new sales force andthe operational costs of Boyds Bear Countryä.  The percentage increase can be attributed tothe sales decline and the additional costs from the direct sales force andBoyds Bear CountryTM.

 

*Income from Operations* – Income fromoperations declined $7.0 million, or 33.2%, to $14.1 million in the firstquarter of 2003 from $21.1 million for the first quarter of 2002.  Income from operations as a percentage ofnet sales declined to 40.2% for the quarter from 52.1% for the same period in2002.  The dollar decline and thedecline in the percentage of net sales were primarily attributable to thedecline in sales volume and the additional costs from the direct sales forceand Boyds Bear CountryTM.

 

*Total Interest Expense* – Total interestexpense declined $0.4 million, or 21.1% to $1.5 million in the first quarter of2003 from $1.9 million for the first quarter of 2002.  Total interest expense as a percentage of net sales declined to4.4% for the quarter from 4.7% for the same period in 2002.  The dollar decline and the decline in thepercentage of net sales were due to the reduction of debt from excess cash anda decline in interest rates.

 

*Provision for Income Taxes* – Provision forincome taxes declined $3.3 million, or 41.8%, to $4.6 million in the firstquarter of 2003 from $7.9 million for the first quarter of 2002.   Provision for income taxes as a percentageof net sales decreased to 13.2% for the quarter from 19.5% for the same periodin 2002. The provision was positivelyimpacted in the first quarter of 2003 by a settlement notice from the Stateof  Pennsylvania regarding a franchisetax benefit of approximately $0.9 million relating to the tax year 2000.

 

*Net Income* – Net income declined $3.3 million,or 29.2%, to $8.0 million in the first quarter of 2003 from $11.3 million forthe first quarter of 2002.  Net incomeas a percent of sales decreased to 22.7% for the quarter from 27.9% for thesame period in 2002.  The dollar andpercentage declines can be attributed to the lower sales volumes and theoperating costs for the direct sales force and Boyds Bear CountryTM.

 

 

 

***Liquidityand Capital Resources***

 

Boyds’ primarysources of liquidity are cash flow from operations and borrowings under itscredit agreement, which includes a revolving credit facility. Boyds’ primaryuses of cash are to fund working capital and to service debt. Cash balancesincreased to $11.2 million in the first three months of 2003 from $5.9 millionat December 31, 2002.  The increase wasa result of the cash flows generated from wholesale operations and Boyds BearCountryTM.

 

***Operating Activities***

 

Cash provided by operating activitiesdecreased $6.3 million, or 34.8%, to $11.8 million in the first three months of2003 from $18.1 million for the first three months of 2002. The cash flowdecrease was primarily attributable to the decrease in net income.

 

***InvestingActivities***

 

Capital and investment expenditures totaled$0.5 million in the first three months of 2003 as compared to $2.0 million inthe first three months of 2002. This decrease is attributable to constructioncosts associated with Boyds Bear CountryTMincurred during 2002.  Theconstruction was completed during the fourth quarter of 2002.

 

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***FinancingActivities***

 

In connection with the recapitalization in1998, Boyds issued 9% Senior Subordinated Notes due 2008 in an amount of $165.0million and entered into a credit agreement providing for a $325.0 million senior secured term loan, consisting of trancheA and tranche B, and a senior secured revolving credit facility providing forborrowings up to $40.0 million. As of March 31, 2003, Boyds has repaid $118.3million of the notes, leaving a balance outstanding of $46.7 million.  Boyds has repaid $274.0 million of the termloans under the credit agreement, leaving a balance outstanding of $51.0million as of March 31, 2003. Boyds has reduced its total debt by $31.0 millionin the past twelve months.

 

The revolving credit facility provides loansin an aggregate amount up to $40.0 million. Boyds did not have borrowings outstanding under the revolving creditfacility as of March 31, 2003.  Thus,the unused balance under the revolving credit facility will be available tofund the working capital needs of Boyds. Borrowings under the credit agreement bear interest at a rate per annum,equal to a margin over either a base rate or LIBOR, at Boyds’ option. The revolvingcredit facility commitment will terminate on April 21, 2005. Effective April21, 2000, the tranche A term loan is amortizing over six years. The creditagreement contains customary covenants and events of default, includingsubstantial restrictions on Boyds’ ability to declare dividends or makedistributions. The term loans are subject to mandatory prepayment with theproceeds of certain asset sales and a portion of Boyds’ excess cash flow, asdefined in the credit agreement.

 

On February 17, 2000, Boyds announced thatits Board of Directors had approved the repurchase of 3.0 million shares of theCompany’s common stock. As of March 31, 2003, Boyds had repurchased 132,480shares of common stock pursuant to this stock repurchase program for an aggregateamount of approximately $1.0 million. These repurchases were financed out ofoperating cash flow. Any future repurchases under this 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 of Directors hadapproved a repurchase program for its outstanding 9% Series B SeniorSubordinated Notes due 2008. As of March 31, 2003, Boyds had repurchased $52.3million of its notes pursuant to this note repurchase program. Theserepurchases were financed out of operating cash flow. Any future repurchasesunder this program are expected to be financed similarly or by utilizingborrowings under the revolving credit facility. Boyds plans to make suchpurchases from time to time in the open market or in private transactions.

 

Management believes that cash flow fromoperations and availability under the revolving credit facility will provideadequate funds for Boyds’ foreseeable working capital needs, planned capitalexpenditures, debt service obligations, thecommon 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 operatingperformance and cash flow, which in turn are subject to prevailing economicconditions and to financial, business and other factors, some of which arebeyond Boyds’ control.

 

 

**RISK FACTORSWHICH MAY AFFECT FUTURE PERFORMANCE**

 

*Dependence on two independent buyingagencies. *Substantiallyall of the products that Boyds sells are purchased through two independent buyingagencies. One buying agency is located in Hong Kong, and the other buyingagency 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 

 

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manufacturerswith which they contract. Boyds does not have long-term contracts with eitherof its primary buying agencies. Boyds believes that the loss of either of itsprimary buying agencies would (1) have a material adverse effect on itsfinancial condition and results of operations, (2) cause disruptions in itsorders, (3) affect the quality of its products, and (4) possibly require it toselect alternative manufacturers.

 

*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 the Chinese government; (4)the laws and policies of the United States affecting importation of goods,including duties, quotas and taxes; (5) Chinese trade and tax laws.  In particular, Boyds’ business could beadversely affected if the Chinese renminbi appreciates significantly relativeto the United States dollar due to the cost of its products fluctuating withthe 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.” Withinits discretion, the United States Customs Service may also set new regulationsregarding the amount of duty to be paid, the value of merchandise to bereported 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, or the mix of countries from which Boyds imports its products may bechanged, if the Generalized System of Preferences program is not renewed orextended each year. The Generalized System of Preferences program allowsselected products of beneficiary countries to enter the United States dutyfree. In addition, if countries that are currently accorded “Most FavoredNation” status by the United States, such as China, cease to have such status,Boyds could be adversely affected. Boyds cannot predict what regulatory changesmay occur or the type or amount of any financial impact these changes may haveon 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 and offer a wider range of products and may be less affected bychanging consumer tastes.

** **

*Potential infringement of Boyds’  intellectual property.*  Boyds believes that its trademarks and otherproprietary rights are material to its success and competitive position.Accordingly, Boyds devotes resources to the establishment and protection of itsintellectual property on a worldwide basis. The actions Boyds takes toestablish and protect its trademarks and other proprietary rights may not beadequate to protect its intellectual property or to prevent imitation of itsproducts by others. Moreover, while Boyds has not experienced any proprietarylicense infringements or legal actions that have had a material impact on itsfinancial condition or results of operations, other persons have and willlikely in the future assert rights in, or

 

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ownership of,its trademarks and other proprietary rights. Boyds may not be able tosuccessfully resolve such conflicts. In addition, the laws of foreign countriesmay not always protect intellectual property to the same extent as do the lawsof the United States.

 

 

***EFFECTSOF RECENTLY ISSUED ACCOUNTING STANDARDS***

 

In April 2002, the FASB issued SFAS No. 145 (“SFAS 145”), “Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections.”  This statementis effective for fiscal years beginning after May 15, 2002.  SFAS 145 requires, among other things,eliminating the extraordinary item treatment of debt extinguishments used aspart of the Boyds’ debt management strategy. Boyds adopted this statement as ofJanuary 1, 2003 and the adoption did not have an impact on the financialstatements.

 

In June 2002, the FASB issued SFAS No. 146 (“SFAS 146”), “Accountingfor Costs Associated with Exit or Disposal Activities.”  This statement requires recording costsassociated with exit or disposal activities at their fair values when a liabilityhas been incurred.  Under previous guidance,certain exit costs were accrued upon management’s commitment to an exit plan,which is generally before an actual liability has been incurred.  Adoption of this statement was effective asof January 1, 2003.  The adoption of this pronouncement did nothave an impact on the financial position, results of operations or cash flow ofBoyds.

 

**RELATED PARTYTRANSACTIONS**

 

Kohlberg, Kravis Roberts & Co. L.P.(“KKR”) represents a 59% shareholder of Boyds. Boyds paid to KKR approximately$0.1 million for management fees, recruitment fees and related expenses foreach of the first quarters ended March 31, 2002, and 2003.

 

***FORWARDLOOKING STATEMENTS***

 

Some of the matters discussed in this reportinclude forward-looking statements. Statements that are predictive in nature, that depend upon or refer tofuture events or conditions or that include words such as “expects,”“anticipates,” “intends,” “plans,” “believes,” “estimates” and similarexpressions are forward-looking statements.

 

The forward-looking statements in this reportare based on a number of assumptions and estimates, which are inherentlysubject to significant uncertainties and contingencies, many of which arebeyond the control of Boyds, and reflect future business decisions that aresubject to change. A variety of factors could cause actual results to differmaterially from those anticipated in Boyds’ forward-looking statements,including: the effects of economic conditions; the inability to grow Boyds’business as planned; the loss of either of Boyds’ two independent buyingagencies or any of its manufacturing sources; economic or political instabilityin the countries with which Boyds does business; changes to, or the impositionof, new regulations, duties, taxes or tariffs associated with the import orexport of goods from or to the countries with which Boyds does business; andother risk factors that are discussed in this report and, from time to time, inother Securities and Exchange Commission reports and filings. One or more ofthe factors discussed above may cause actual results to differ materially fromthose expressed in or implied by the statements in this report.

 

Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the dateof such statements. Boyds undertakes no obligation to publicly release theresults of any revisions to these forward-looking statements that may be madeto reflect events or circumstances after the date of this report, or the dateof such statements, as the case may be, or to reflect the occurrence ofunanticipated events.

 

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**Item 3****.                 Quantitativeand Qualitative Disclosures About Market Risk.**

 

Boyds faces minimal interest rate riskexposure in relation to its outstanding debt of $97.7 million at March 31,2003. Of this amount, $51.0 million under the Credit Agreement is subject tointerest rate fluctuations. A hypothetical 1% change in interest rates appliedto the fair value of debt would not have a material impact on earnings or cashflows of the Company.

 

Boyds faces currency risk exposure thatarises from translating the results of its European operations which aredenominated in the local currency of the Euro and the British Pound to the U.S.dollar. The currency risk exposure is not material as the operations of theEuropean subsidiary do not have a material impact on the Company’s earnings.

 

**Item4****.                 Disclosure Controls andProcedures**

 

Boyds maintains disclosure controls and procedures designed to ensurethat it is able to collect the information it is required to disclose in thereports it files with the Securities and Exchange Commission (SEC), and toprocess, summarize and disclose this information within the time periodsspecified in the rules of the SEC. Boyds carried out an evaluation of itsdisclosure controls and procedures, under the supervision and with theparticipation of the Chief Executive and Chief Financial Officers, as of a datewithin 90 days of the filing date of this report, and based on such evaluation,Boyds’ Chief Executive and Chief Financial Officers believe that thesedisclosure controls and procedures are effective to ensure that Boyds is ableto collect, process and disclose the information it is required to disclose inthe reports it files with the SEC within the required time periods.

 

There have been no significant changes in Boyds’ internal controls orin other factors that could significantly affect these controls, subsequent tothe date Boyds’ Chief Executive and Chief Financial Officers completed theirevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

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**PART II**

**OTHER INFORMATION**

 

 

**Item 1.  Legal Proceedings.**

 

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 proceedings,claims and audits will not have a material adverse effect on the financial position,results of operations, and cash flows of Boyds.

 

**Item 2. Changes in****Securities and Use ofProceeds—None**

 

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

 

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

 

**Item 5. Other Information**

 

**Item6. Exhibits and Reports****on Form 8-K.**

 

(a) Exhibits – See Index to Exhibits

 

(b) Reports on Form 8-K - None

 

 

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#### **SIGNATURES**

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
| Date:  May 14, 2003 | The  Boyds Collection, Ltd. |
|--------------------------|-----------------------------|
|                     |
|                     | By:                         | /s/ Jean-Andre Rougeot |   |
|                     | Name:                       | Jean-Andre Rougeot |
|                     | Title:                      | Chief Executive Officer |
|                     |
|                     | By:                         | /s/ Joseph E. Macharsky |   |
|                     | Name:                       | Joseph E. Macharsky |
|                     | *Title:*                    | Chief Financial Officer |
|                          |                             |  |  |  |  |  |  |

 

 

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CERTIFICATIONPURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Jean-Andre Rougeot, Chief Executive Officer of The Boyds Collection,Ltd. (the “Company”), certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of The Boyds Collection, Ltd.;

 

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

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Company as of, and for,the periods presented in this quarterly report;

 

4.             The Company’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the Company and we have:

 

a)             Designedsuch disclosure controls and procedures to ensure that material informationrelating to the Company, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in whichthis quarterly report is being prepared;

 

b)            Evaluatedthe effectiveness of the Company’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The Company’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the Company’s auditors and the audit committee of the Company’s board ofdirectors (or persons performing the equivalent functions):

 

a)             Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Company’s ability to record, process, summarize andreport financial data and have identified for the Company’s auditors anymaterial weaknesses in internal controls; and

 

b)            Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Company’s internal controls; and

 

6.             The Company’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| /s/ Jean-Andre Rougeot  |   |
|-------------------------|--------|
| Jean-Andre Rougeot      |
| Chief Executive Officer |
| Date: May 14, 2003      |

 

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CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Joseph Macharsky, Chief Financial Officer of The Boyds Collection,Ltd. (the “Company”), certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of The Boyds Collection, Ltd.;

 

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

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Company as of, and for,the periods presented in this quarterly report;

 

4.             The Company’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the Company and we have:

 

a)             Designedsuch disclosure controls and procedures to ensure that material informationrelating to the Company, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in whichthis quarterly report is being prepared;

 

b)            Evaluatedthe effectiveness of the Company’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The Company’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the Company’s auditors and the audit committee of the Company’s board ofdirectors (or persons performing the equivalent functions):

 

a)             Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Company’s ability to record, process, summarize andreport financial data and have identified for the Company’s auditors anymaterial weaknesses in internal controls; and

 

b)            Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Company’s internal controls; and

 

6.             The Company’s othercertifying officers and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| /s/ Joseph E. Macharsky |   |
|-------------------------|--------|
| Joseph E. Macharsky     |
| Chief Financial Officer |
| Date: May 14, 2003      |

 

23

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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).                                                                                                                                                              |   |
| 99.1              |   | Certification Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. *                                                                                                                                                                                                                                                            |   |
| 99.2              |   | Certification Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. *                                                                                                                                                                                                                                                            |   |
|                   |        |                                                                                                                                                                                                                                                                                                                                                                                        |  |  |

 

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*    Filed herewith

 

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