** **

**United StatesSecurities and Exchange Commission**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

** **

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934.

 

**For the Quarterly PeriodEnded March 31, 2006**

** **

**OR**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934.

 

**For the Transition periodfrom               to            **

** **

**Commission FileNumber:  001-14843**

** **

**The Boyds Collection, Ltd.**

(Exact Name of Registrantas 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 checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes oNo x

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer See definition of “accelerated filer” in Rule 12b-2of the Exchange Act.

| Large accelerated filer o |   | Accelerated  filer o |   | Non-accelerated filer x |
|--------------------------------|--------|---------------------------|--------|------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act) Yes o No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:
| **Common Stock, par value $.0001 per share** |     | **59,054,418**                      |
|----------------------------------------------|----------|-------------------------------------|
| *(Class)*                                    | * * | *(Outstanding  as of June 1, 2006)* |

 

 

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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, 2005 and March 31,  2006                    |       |       |       |
|                           |       |                                                                                                            |       |       |       |
|                           |       | Condensed  Consolidated Statements of Operations for the  Three Months Ended March 31, 2005 and 2006       |       |       |       |
|                           |       |                                                                                                            |       |       |       |
|                           |       | Condensed  Consolidated Statement of Stockholders’ Deficit  for the Three Months Ended March 31, 2006 |       |       |       |
|                           |       |                                                                                                            |       |       |       |
|                           |       | Condensed  Consolidated Statements of Cash Flows  for the Three Months Ended March 31, 2005 and 2006       |       |       |       |
|                           |       |                                                                                                            |       |       |       |
|                           |       | 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.**                    | ** ** | **Disclosure  Controls and Procedures**                                                                         |       |       |       |
| ** **                     | ** ** | ** **                                                                                                      |       |       |       |
| PART II.                  |       | OTHER INFORMATION                                                                                               |       |       |       |
|                           |       |                                                                                                            |       |       |       |
| **Item 1.**                    | ** ** | **Legal Proceedings**                                                                                           |       |       |       |
| ** **                     | ** ** | ** **                                                                                                      |       |       |       |
| **Item 1A.**                   | ** ** | **Risk Factors  Which May Affect Future Performance**                                                      |       |       |       |
| ** **                     | ** ** | ** **                                                                                                      |       |       |       |
| **Item 2.**                    | ** ** | **Unregistered  Sales of Equity 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**                                                                                                    |       |       |       |
| ** **                     | ** ** | ** **                                                                                                      |       |       |       |
|                           |       | Signatures                                                                                                      |       |       |       |
|                           |       |                                                                                                            |       |       |       |
|                           |       | Index to Exhibits                                                                                               |       |       |       |

 

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**PART I**

**FINANCIAL INFORMATION**

**Item 1.         Financial Statements.**

**THE BOYDSCOLLECTION, LTD.(DEBTORS-IN-POSSESSION)CONDENSED CONSOLIDATED BALANCE SHEETSAs of December 31, 2005 and March 31, 2006(Unaudited)**
| ** **                                                                                                                                           | ** ** | **December 31,**   | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **                                                                                                                                           | ** ** | **2005**                | ** ** | **2006**           | ** ** |
| ** **                                                                                                                                           | ** ** | **(in thousands)** | ** ** |
| **ASSETS**                                                                                                                                           | ** ** | ** **              | ** ** | ** **         | ** ** |
| ** **                                                                                                                                           | ** ** | ** **              | ** ** | ** **         | ** ** |
| **CURRENT ASSETS:**                                                                                                                                  | ** ** | ** **              | ** ** | ** **         | ** ** |
| Cash and cash equivalents                                                                                                                            |       | $                       | 7,105      |               | $          | 7,001 |   |
| Restricted cash                                                                                                                                      |       | 1,600                   |       | 2,391              |       |
| Accounts receivable, less allowances of $1,956 at  December 31, 2005, and $2,124 at March 31, 2006                                         |       | 7,312                   |       | 6,031              |       |
| Inventory - primarily finished goods, less allowance  for obsolete inventory of $5,747 at December 31, 2005, and $6,021 at  March 31, 2006 |       | 12,292                  |       | 10,437             |       |
| Inventory in transit                                                                                                                                 |       | 1,433                   |       | 749                |       |
| Other current assets                                                                                                                                 |       | 1,082                   |       | 1,144              |       |
| Total current assets                                                                                                                                 |       | 30,824                  |       | 27,753             |       |
|                                                                                                                                                 |       |                    |       |               |       |
| **PROPERTY  AND EQUIPMENT - NET (Note 5)**                                                                                                           |       | 31,727                  |       | 31,368             |       |
|                                                                                                                                                 |       |                    |       |               |       |
| **OTHER ASSETS:**                                                                                                                                    | ** ** | ** **              | ** ** | ** **         | ** ** |
| Other assets                                                                                                                                         |       | 459                     |       | 659                |       |
| Total other assets                                                                                                                                   |       | 459                     |       | 659                |       |
| **TOTAL  ASSETS**                                                                                                                                    |       | $                       | 63,010     |               | $          | 59,780 |   |
|                                                                                                                                                 |       |                    |       |               |       |
| **LIABILITIES AND STOCKHOLDERS’  DEFICIT**                                                                                                      | ** ** | ** **              | ** ** | ** **         | ** ** |
|                                                                                                                                                 |       |                    |       |               |       |
| **CURRENT LIABILITIES NOT SUBJECT  TO COMPROMISE:**                                                                                                  | ** ** | ** **              | ** ** | ** **         | ** ** |
| Accounts payable                                                                                                                                     |       | $                       | 1,820      |               | $          | 1,103 |   |
| Accrued expenses                                                                                                                                     |       | 3,440                   |       | 4,484              |       |
| Income taxes payable                                                                                                                                 |       | 467                     |       | 521                |       |
| Liabilities not subject to compromise current  liabilities                                                                                           |       | 5,727                   |       | 6,108              |       |
|                                                                                                                                                 |       |                    |       |               |       |
| **LIABILITIES  SUBJECT TO COMPROMISE (Notes 4 and 7)**                                                                                               |       | 95,180                  |       | 95,627             |       |
| ** **                                                                                                                                           | ** ** | ** **              | ** ** | ** **         | ** ** |
| **COMMITMENTS AND CONTINGENCIES  (Notes 1, 2 and 11)**                                                                                               | ** ** | ** **              | ** ** | ** **         | ** ** |
| ** **                                                                                                                                           | ** ** | ** **              | ** ** | ** **         | ** ** |
| **STOCKHOLDERS’ DEFICIT:**                                                                                                                      | ** ** | ** **              | ** ** | ** **         | ** ** |
| Common stock (61,838 shares issued at  December 31, 2005, and March 31, 2006, respectively, and paid-in  capital in excess of par)         |       | (41,838                 | )          | (41,446            | )          |
| Accumulated other comprehensive income                                                                                                               |       | 249                     |       | 253                |       |
| Retained earnings                                                                                                                                    |       | 30,481                  |       | 26,027             |       |
| Less: Treasury shares at cost (2,783 at  December 31, 2005, and at March 31, 2006)                                                         |       | (26,789                 | )          | (26,789            | )          |
| Total stockholders’ deficit                                                                                                                     |       | (37,897                 | )          | (41,955            | )          |
|                                                                                                                                                 |       |                    |       |               |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ DEFICIT**                                                                                                |       | $                       | 63,010     |               | $          | 59,780 |   |

 

See notes to condensed consolidated financialstatements.

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**THE BOYDS COLLECTION, LTD.**

**(DEBTORS-IN-POSSESSION)**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**For the Three Months Ended March 31, 2005 and 2006**

**(Unaudited)**
| ** **                                                                                                        | ** ** | **Three Months Ended**                                      | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **March 31,**                                                    | ** ** |
| ** **                                                                                                        | ** ** | **2005**                                                              | ** ** | **2006** | ** ** |
| ** **                                                                                                        | ** ** | **(in thousands, except per share amounts)** | ** ** |
| ** **                                                                                                        | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| **NET  SALES**                                                                                                    |       | $                                                                     | 18,533     |   | $ | 14,036 |   |
| **COST OF  GOODS SOLD**                                                                                           |       | 10,131                                                                |       | 7,614 |   |
| **GROSS PROFIT**                                                                                                  |       | 8,402                                                                 |       | 6,422 |   |
| **SELLING,  GENERAL AND ADMINISTRATIVE EXPENSES**                                   | ** ** | 10,701                                                                | ** ** | 8,778 | ** ** |
| **IMPAIRMENT  OF GOODWILL (Note 6)**                                                                              |       | 2,600                                                                 |       | — |   |
| **LOSS  FROM OPERATIONS**                                                                                         |       | (4,899                                                                | )          | (2,356 | ) |
| **OTHER INCOME/(EXPENSES)**                                                                                       | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Other income/(expense)                                                                                            |       | (124                                                                  | )          | 31 |   |
| Interest expense, contractual interest was $3.2  million for the three months ended March 31, 2006 |       | (1,980                                                                | )          | (6 | ) |
| Amortization of deferred debt issuance costs                                                                      |       | (204                                                                  | )          | (359 | ) |
| Reorganization expense (Note 4)                                                                                   |       | —                                                                |       | (1,667 | ) |
| **TOTAL  OTHER INCOME/(EXPENSE)**                                                                                 |       | (2,308                                                                | )          | (2,001 | ) |
| ** **                                                                                                        | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| **LOSS  BEFORE PROVISION FOR INCOME TAXES**                                                                       |       | (7,207                                                                | )          | (4,357 | ) |
| **PROVISION  FOR INCOME TAXES (Note 10)**                                                                         |       | 70,085                                                                |       | 97 |   |
| **NET  LOSS**                                                                                                     |       | $                                                                     | (77,292    | ) | $ | (4,454 | ) |
|                                                                                                              |       |                                                                  |       |   |   |
|                                                                                                              |       |                                                                  |       |   |   |
|                                                                                                              |       |                                                                  |       |   |   |
| **LOSS PER SHARE:**                                                                                               | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Basic Earnings Per Share - Net Loss                                                                               |       | $                                                                     | (1.31      | ) | $ | (0.08 | ) |
| Diluted Earnings Per Share - Net Loss                                                                             |       | $                                                                     | (1.31      | ) | $ | (0.08 | ) |

 

See notes to condensed consolidated financial statements.

 

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**THE BOYDSCOLLECTION, LTD.(DEBTORS-IN-POSSESSION)CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICITFor the Three Months Ended March 31, 2006(Unaudited)**
| ** **                        | ** ** | **Common Stock**   | ** ** | **Common Stock** | ** ** | **Accumulated**             | ** ** | ** **        | ** ** | ** **   | ** ** | ** **   | ** ** | ** **             | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------|------------|-----------------------------|------------|-------------------|------------|--------------|------------|--------------|------------|------------------------|------------|
| ** **                        | ** ** | **Shares**              | ** ** | ** **            | ** ** | **and Paid-in**        | ** ** | **Other**         | ** ** | ** **   | ** ** | ** **   | ** ** | **Total**              | ** ** | **Other** | ** ** |
| ** **                        | ** ** | **Issued And**     | ** ** | **Treasury**          | ** ** | **Capital in**         | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                        | ** ** | **Outstanding**         | ** ** | **Stock**             | ** ** | **Excess of Par** | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Stock**    | ** ** | **Deficit**            | ** ** | **Income** | ** ** |
| ** **                        | ** ** | **(in thousands)** | ** ** |
|                              |       |                    |       |                  |       |                        |       |              |       |         |       |         |       |                   |       |   |   |
| **BALANCE, JANUARY 1, 2006** |       | 61,838                  |       | 2,783                 |       | $                           | (41,838    | )                 | $          | 249          |       | $            | 30,481     |                   | $          | (26,789 | ) | $ | (37,897 | ) |   |   |
| Issuance of common stock          |       | —                  |       | —                |       |                        |       |              |       | —       |       | —       |       |                   |       |   |   |
| Other  comprehensive income:      |       |                    |       |                  |       |                        |       |              |       |         |       |         |       |                   |       |   |   |
| Foreign currency translation      |       | —                  |       | —                |       | —                      |       | 4                 |       | —       |       | —       |       | 4                      |       | $ | 4 |   |
| Stock based compensation          |       | —                  |       | —                |       | 392                         |       | —            |       |         |       |         |       | 392                    |       |   |   |
| Net loss                          |       | —                  |       | —                |       | —                      |       | —            |       | (4,454       | )          | —       |       | (4,454                 | )          | (4,454 | ) |
| Comprehensive loss                |       | —                  |       | —                |       | —                      |       | —            |       | —       |       | —       |       | —                 |       | $ | (4,450 | ) |
|                              |       |                    |       |                  |       |                        |       |              |       |         |       |         |       |                   |       |   |   |
| **BALANCE, March 31, 2006**  |       | 61,838                  |       | 2,783                 |       | $                           | (41,446    | )                 | $          | 253          |       | $            | 26,027     |                   | (26,789    | ) | $ | (41,955 | ) |   |   |
|                                   |            |                         |            |                       |            |                             |            |                   |            |              |            |              |            |                        |            |  |  |  |  |  |  |  |  |

                                                                                                                                                                             

See notes to condensed consolidated financialstatements.

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**THE BOYDSCOLLECTION, LTD.(DEBTORS-IN-POSSESSION)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Three Months Ended March 31, 2005 and 2006(Unaudited)**
| ** **                                                                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                       | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                                       | ** ** | **2005**                         | ** ** | **2006** | ** ** |
| ** **                                                                                                                       | ** ** | **(in thousands)**          | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net loss                                                                                                                         |       | $                                | (77,292    | ) | $ | (4,454 | ) |
| Adjustments to  reconcile net loss to net cash provided by/(used in) operating activities:                                       |       |                             |       |   |   |
| Depreciation and amortization                                                                                                    |       | 577                              |       | 575 |   |
| Amortization of deferred debt issuance costs                                                                                     |       | 204                              |       | 359 |   |
| Bad debt expense                                                                                                                 |       | (129                             | )          | 322 |   |
| Stock based compensation                                                                                                         |       | —                           |       | 392 |   |
| Tax benefit from exercise of stock options                                                                                       |       | (33                              | )          | — |   |
| Deferred taxes                                                                                                                   |       | 70,500                           |       | — |   |
| Impairment of goodwill                                                                                                           |       | 2,600                            |       | — |   |
| Changes in  assets and liabilities:                                                                                              |       |                             |       |   |   |
| Accounts receivable - net                                                                                                        |       | (1,006                           | )          | 959 |   |
| Inventory - net                                                                                                                  |       | (1,863                           | )          | 1,855 |   |
| Inventory in transit                                                                                                             |       | 2,346                            |       | 684 |   |
| Other current assets                                                                                                             |       | 11                               |       | (62 | ) |
| Other assets                                                                                                                     |       | (19                              | )          | (225 | ) |
| Accounts payable                                                                                                                 |       | (1,902                           | )          | (769 | ) |
| Accrued expenses                                                                                                                 |       | (1,039                           | )          | 2,855 |   |
| Income tax payable                                                                                                               |       | (371                             | )          | 54 |   |
| Interest payable                                                                                                                 |       | 1,456                            |       | — |   |
| Net cash  provided by/ (used in) operating activities before reorganization items                                                |       | (5,960                           | )          | 2,545 |   |
| Reorganization  items - professional fees and expenses paid for services rendered in  connection with the Chapter 11 proceedings |       | —                           |       | (1,671 | ) |
| Net cash provided by/ (used in) operating activities                                                                             |       | (5,960                           | )          | 874 |   |
|                                                                                                                             |       |                             |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Increase in restricted cash                                                                                                      |       | —                           |       | (791 | ) |
| Purchase of property and equipment                                                                                               |       | (391                             | )          | (191 | ) |
| Net cash used in investing activities                                                                                            |       | (391                             | )          | (982 | ) |
|                                                                                                                             |       |                             |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net payments on credit agreement, “Revolver”                                                                           |       | (12,750                          | )          | — |   |
| Payment on credit agreement, “Term Loan”                                                                               |       | (28,000                          | )          | — |   |
| Borrowings from credit agreement, “New Term Loan”                                                                      |       | 45,000                           |       | — |   |
| Net Borrowings from credit agreement, “New Revolver”                                                                   |       | 8,200                            |       | — |   |
| Deferred debt issuance costs                                                                                                     |       | (3,627                           | )          | — |   |
| Exercise of stock options                                                                                                        |       | 51                               |       | — |   |
| Net cash provided by financing activities                                                                                        |       | 8,874                            |       | — |   |
|                                                                                                                             |       |                             |       |   |   |
| Effect of exchange rate changes on cash                                                                                          |       | 280                              |       | 4 |   |
|                                                                                                                             |       |                             |       |   |   |
| **NET  INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS**                                                                        |       | 2,803                            |       | (104 | ) |
| **CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**                                                                              |       | 354                              |       | 7,105 |   |
| **CASH  AND CASH EQUIVALENTS, END OF PERIOD**                                                                                    |       | $                                | 3,157      |   | $ | 7,001 |   |
| **CASH  PAID DURING THE PERIOD FOR INTEREST**                                                                                    |       | $                                | 524        |   | $ | 6 |   |
| **CASH PAID DURING THE PERIOD FOR  INCOME TAXES**                                                                                |       | $                                | 35         |   | $ | 36 |   |

 

See notes to condensed consolidated financialstatements.

6

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**THE BOYDS COLLECTION, LTD.(DEBTORS-IN-POSSESSION)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****Forthe Three Months Ended March 31, 2005 and 2006****(Amounts in thousands, except share and pershare amounts)(Unaudited)**

**1.             INTERIM FINANCIAL STATEMENTS**

The Boyds Collection,Ltd. (“Boyds” or the “Company”) operates in two segments, which consist of theCompany’s wholesale gift/collectible business and the Company’s retailgift/entertainment business. In September 2002, Boyds Bear Countryästore opened in Gettysburg, Pennsylvania. In November 2004, the Companyopened its second retail store in Pigeon Forge, Tennessee. These retail storesare being used to generate income and expand the brand awareness and image ofBoyds. Substantially all of the Company’s products are sourced from foreignmanufacturers in China through buying agencies.

The condensedconsolidated balance sheet as of December 31, 2005 and March 31,2006, the condensed consolidated statements of operations for the three monthsended March 31, 2005 and 2006, the condensed consolidated statement ofstockholders’ equity for the three months ended March 31, 2006 and thecondensed consolidated statements of cash flows for the three months ended March 31,2005 and 2006 are unaudited. In the opinion of management, all adjustments,necessary for a fair presentation of such interim financial statements havebeen included. The results of operations for the three months ended March 31,2006 are not necessarily indicative of the results to be expected for the fullyear. These financial statements should be read in conjunction with thefinancial statements and notes included in Boyds’ Annual Report for the yearended December 31, 2005 on Form 10-K filed with the Securitiesand Exchange Commission.

The Company has filed forreorganization under Chapter 11 of the United States Bankruptcy Code. Theaccompanying financial statements do not purport to reflect or provide for theconsequences of the bankruptcy proceedings. In particular, such financialstatements do not purport to show (a) as to assets, their realizable valueon a liquidation basis or their availability to satisfy liabilities; (b) asto pre-petition liabilities, the amounts that may allowed for claims orcontingencies, or the status of priority thereof; (c) as to shareholderaccounts, the effect of any changes that may be made in the capitalization ofthe Company; or (d) as to operations, the effect of any changes that maybe made in its business.

**Chapter 11 Bankruptcy Proceedings**

On October 3, 2005, in connection with potentialdefaults on our senior secured credit agreement, we entered into a waiver agreement with our lenders. Thiswaiver agreement provided for, among other things, the lenders’ forbearancefrom exercising contractual remedies under our credit agreement on account ofexisting defaults through October 16, 2005.

On October 16, 2005, we and certain of oursubsidiaries filed voluntary petitions for reorganization under Chapter 11of the United States Bankruptcy Code (the “Bankruptcy Code”), in the UnitedStates Bankruptcy Court for the District of Maryland (the “Court”) (Case Nos. 05-43793;05-43805; 05-43802; 

7

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05-43833; 05-43838;05-43863; 05-43816; 05-43848; and 05-43857). We haverequested joint administration of the cases under the caption “The BoydsCollection, Ltd., Case No. 05-43793.  We will continue to operate our businesses as “debtorsin possession” (“DIP”) under the jurisdiction of the Court, under Courtprotection from creditors and claimants and in accordance with the applicableprovisions of the Bankruptcy Code and orders of the Court.

Sincethe bankruptcy filing, all orders allowing us to conduct normal businessactivities, including the approval of our DIP financing, have been entered bythe Court. While we are in bankruptcy proceedings, all transactions not in theordinary course of our business require the prior approval of the Court.

On October 16,2005, pursuant to authorization from the Court, we entered into an $8 millionDIP credit facility. This DIP facility consists of an $8 million revolverfacility which includes access for $3.5 million worth of commercial letters ofcredit. The letters of credit are required to be fully cash collateralized. TheDIP facility limits the amount of capital expenditures during its term to$250,000. As of March 31, 2006, the Company has not borrowed any amountsagainst the DIP credit facility.

As aconsequence of our bankruptcy filing, pending litigation against us isgenerally stayed, and no party may take any action to collect its pre-petitionclaims except pursuant to order of the Court. February 14, 2006, was thedeadline for claimants to file claims arising prior to our bankruptcy filing. Differencesbetween claim amounts identified by us and claims filed by claimants will beinvestigated and resolved in connection with our claims resolution process, andonly holders of claims that are ultimately allowed for purposes of ourbankruptcy will be entitled to distributions. Since the settlement of terms ofallowed claims are subject to a confirmed plan of reorganization, the ultimatedistribution with respect to the allowed claims is not presently ascertainable.

On March 14,2006, we filed with the Court our Plan of Reorganization, which wassubsequently amended (as amended, the “Plan”) and Disclosure Statement, whichwas subsequently amended (as amended, the “Disclosure Statement”). The Plan andthe Disclosure Statement set forth the terms of the proposed settlement betweenBoyds, our secured creditors, the Official Committee of Unsecured Creditors,and our stockholders. The Disclosure Statement also includes a description ofthe events that led up to our bankruptcy filing and the actions we have takento improve our financial situation while in bankruptcy.

ThePlan has been approved by the necessary constituencies and remains subject toapproval by the Court.     We cannotprovide any assurance that any plan of reorganization ultimately confirmed bythe Bankruptcy Court will be consistent with the terms of the Plan andDisclosure Statement.

Ifconfirmed, the Plan will provide us with significant relief from pre-filingclaims. The Plan details how the claims of each class of creditors and interestholders will be treated.   The followingis a summary of the Plan:

·              Holdersof senior secured claims will receive (in exchange of approximately $57.7million in claims): senior secured promissory notes in the aggregate principalamount of $30.0 million, to be due in five years following the effective dateof the Plan, which we expect will occur in June 2006, and common stockrepresenting approximately 48.5% of our common stock outstanding after the  effective date of the Plan (the “New CommonStock”).

·              Eachqualifying noteholder (a holder of our Senior Subordinated Notes that hascontinuously held beneficial interests therein for more than 18 monthsimmediately prior to our bankruptcy filing through the effective date of thePlan) shall receive cash in the amount of 22.0% of the allowed amount of itsnote claim, to be paid, if at all, on the date of a Future Transaction; plusits pro rata share of 5.0% of the New Common Stock, plus its pro rata share of50.0% of the reallocated shares which are the shares of our

8

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commonstock representing the difference between: (i) 5% of the New Common Stock;and (ii) the aggregate pro rata share of New Common Stock allocable toqualifying noteholders. A “Future Transaction” is a transaction in which we,subject to certain exceptions, (a) merge or consolidate with anotherperson or entity or (b) acquire  any assets, properties, rights orequity interests, in each case occurring within 36 months of the effective dateof the Plan so long as the transaction is not a acquisition (i) of assets,properties or rights or assumption of liabilities in the ordinary course of ourbusiness (i.e., accounts payable, receivables, inventory, product, storeleases, store equipment and any other similar acquisitions or assumptions ofliabilities); (ii) an acquisition that has aggregate consideration of $10million or less that is not an acquisition of a toy collectible business; or (iii) anacquisition that does not meet certain revenue or EBITDA thresholds.

·              Eachnon-qualifying holder (those holders of our Senior Subordinated Notes that arenot qualifying noteholders) shall receive cash in the amount of 24.0% of theallowed amount of its claim to be paid, if at all, on the date upon which aFuture Transaction is consummated.

·              Ifthe non-qualifying holders  vote toreject the Plan, then each such holder shall receive cash in the amount of 2.0% of the allowed amount of theirnotes, to be paid, if at all, on the date upon which a Future Transaction isconsummated.

·              Eachholder of an allowed general unsecured claim or claims will receive cash equalto 28% of its allowed claim or claims, if the class of such holders accepts thePlan.

·              Ifthe class of holders of general unsecured claims vote to reject the Plan, theneach such holder shall receive cash in the amount of 4% of the allowed amountof such claim to be paid on the earlier of: (a) the date upon which a Future Transaction is consummated; or (b) thefirst business day that is at least 18 months after the effective date of thePlan.

·              Securedclaims other than senior secured claims will be treated either as agreed by the parties or in a manner thatreinstates the secured claim or provides for payment to the creditor equal tothe value of such creditor’s collateral. Each holder of an allowed priorityclaim (other than a tax priority claim) shall receive, on account of and infull and complete settlement, release and discharge of such allowed priorityclaim, (a) cash equal to the amount of such claim or (b) such othertreatment as to which the we  and suchholder shall have agreed upon in writing in an amount sufficient to render suchclaim  not “impaired” under section 1124of the Bankruptcy Code, to be paid on the latest of (a) the effective dateof the Plan (or as soon thereafter as is reasonably practicable), (b) fivebusiness days after the final allowance of such claim, or (c) the date on which the we and the holder ofsuch claim  otherwise agree.

·              Allowedpriority tax claims will either be paid, at our sole option , (a) on thelatter of (i) the effective date of the Plan (or as soon thereafter as isreasonably practicable), (ii) five business days after the allowancethereof; (b) beginning the first anniversary following the effective dateof the Plan, cash payments to be made in equal annual installments, with thefinal installment being payable no later than the sixth anniversary of the dateof the assessment of such allowed priority tax claim, in an aggregate amountequal to such claim, together with interest on the unpaid balance of such claimcalculated from the effective date of the Plan through the date of payment; or (c) suchother treatment agreed to by us and the holder of such claim.

·              Eachholder of 200 or more shares of our common stock will receive its pro ratashare of 46.5% of our post bankruptcy equity.

·              Eachholder of less than 200 shares of our common stock will receive $0.15 pershare.

9

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We arealso negotiating with one of our senior lenders to provide a new $11.0 millionrevolver with a $4.0 million seasonal over-advance option that supports lettersof credit and would provide us with access to additional capital to fundpost-reorganization operations. There can be no assurance that thesenegotiations will be successful.

There can be no assurancethat the Plan, or any other plan of reorganization, will be confirmed by theCourt or implemented successfully.

Followingthe effective date of our plan of reorganization, we expect to have fewer than300 holders of record of our common stock. Consequently, we intend to apply fortermination of the registration of our common stock under the Exchange Act of1934, as amended, which would substantially reduce the information required tobe furnished by us to our stockholders and we would be no longer required anddo not intend to file reports with the SEC.  Certain provisions of the Exchange Act wouldno longer be applicable to us such as the short-swing profit recoveryprovisions of Section 16(b) of the Exchange Act, the requirement offurnishing a proxy statement in connection with stockholders’ meetings, and therelated requirement of an annual report to stockholders.

**Going Concern**

Boydsis currently operating under Chapter 11 of the U.S. Bankruptcy Code andcontinuation of Boyds as a going concern is contingent upon, among otherthings, Boyds ability to (i) comply with the terms and conditions of itsDIP financing; (ii) obtain confirmation of a plan of reorganization underthe U.S. Bankruptcy Code; (iii) return to profitability; (iv) generatesufficient cash flows from operations; and (v) obtain financing sources tomeet Boyds future obligations. These matters create substantial doubt aboutBoyds ability to continue as a going concern. The condensed quarterly financialstatements do not reflect any adjustments relating to the recoverability andclassification of recorded asset amounts or the amounts and classifications ofliabilities that might result from the outcome of these uncertainties. Additionally,a plan of reorganization could materially change amounts reported in thecondensed consolidated financial statements, which do no give effect to alladjustments of the carrying value of assets and liabilities that are necessaryas a consequence of reorganization under Chapter 11 bankruptcy.

The Company recorded a netloss of $4.5 million for the three months ended March 31, 2006. The lossreflects the continued difficultieswithin the Company’s specialty retail sector, the length of time it has takento transform to more national/giftable retailers, and the seasonal nature ofthe Company’s retail segment and $1.7 million in reorganization expensesassociated with the Chapter 11 proceedings.

For the three months ended March 31,2006 the Company had cash provided by operating activities of $0.9 million. Therecan be no assurance that the Company will have positive cash flows in thefuture.

**RecentlyIssued Accounting Standards**

In December of2004, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123R, *Share-BasedPayment* . SFAS No. 123R addresses the accounting forshare-based payments to employees, including grants of employee stock options.Under the new standard, companies will no longer be able to account forshare-based compensation transactions using the intrinsic method in accordancewith APB Opinion No. 25, *Accounting for StockIssued to Employees.*Instead, companies are required to account forsuch transactions using a fair-value method and recognize the related expenseassociated with share-based payments in the condensed consolidated statement ofoperations. In April 2005, the Securities and Exchange Commission (“SEC”)delayed the effective date for SFAS No. 123R until the first quarter offiscal 2006, and allows, but does not require, companies to restate the fullfiscal year of 2005 or retroactive restatement to earlier periods to

10

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reflect the impact ofexpensing share-based payments under SFAS No. 123R. SFAS No. 123Rbecame effective for the Company on January 1, 2006. The adoption of SFAS No. 123Rand its effects are described in Note 9 — Stock Based Compensation.

In November of2004, the FASB issued SFAS No. 151, *Inventory Costs-anAmendment of ARB No. 43 .*SFAS No. 151 amends the guidancein Accounting Research Bulletin (“ARB”) No 43, Chapter 4, *InventoryPricing,* to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage). SFASNo. 151 requires that these items be recognized as current-period chargesregardless of whether they meet the criterion of “so abnormal.” Inaddition,  SFAS No. 151 requiresthat allocation of fixed production overhead to the costs of conversion bebased on the normal capacity of production facilities. The provisions of SFAS No. 151are effective for inventory costs incurred during fiscal years beginning after June 15,2005. The Company adopted SFAS 151 effective January 1, 2006. However, theadoption of SFAS No. 151 did not have an impact on the Company’s financialstatements as the Company’s accounting policies were already in conformancewith the key aspects of SFAS No. 151.

**2.             FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK**

At December 31, 2005and at March 31, 2006, Boyds had letters of credit outstanding under abank credit agreement amounting to $1.6 million and $2.4 million, respectively.These letters of credit represent Boyds’ commitment to purchase inventory thatis to be produced and/or shipped. In accordance with the DIP, letters of creditare required to be fully cash collateralized at all times. At December 31,2005 and March 31, 2006 these amounts have been recorded as restrictedcash.

**3.             RELATED PARTY TRANSACTIONS**

Kohlberg Kravis Roberts &Co. L.P. (“KKR”) represented a 39% stockholder of Boyds at the end of December 31,2005 and March 31, 2006. In 2005, KKR waived all management fees

On October 16, 2005, the Company entered into aSecurities Purchase Agreement (the “Agreement”), with KKR Fund 1996 L.P. (“KKR”),D.E. Shaw Laminar Portfolios, L.L.C. (the “Buyer”). Pursuant to the Agreement,on October 16, 2005, KKR sold to the Buyer 11,795,725, approximately 20%shares of the Company’s common stock.

D.E. Shaw LaminarPortfolios, L.L.C. (“D.E. Shaw”) represents a 20% stockholder of Boyds and is amajority holder of senior secured debt, approximately $60 million, at the endof December 31, 2005 and March 31, 2006.

**4.             LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET**

**Liabilities Subject to Compromise**

Under Chapter 11 of the U.S. Bankruptcy Code, certainclaims against Boyds in existence prior to the filing of the petitions forrelief under the federal bankruptcy laws are stayed while Boyds continues

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businessoperations as debtor-in-possession. These estimated claims are reflected in theDecember 31, 2005 and March 31, 2006 Condensed Consolidated BalanceSheet as Liabilities Subject to Compromise and are summarized in the tablebelow. Such claims remain subject to future adjustments. Adjustments may resultfrom actions of the bankruptcy court, negotiations, rejection or acceptance ofexecutory contracts, determination of value of any collateral securing claims,proofs of claim or other events.

Boyds has received approval from the bankruptcy courtto pay or otherwise honor certain of its pre-petition obligations, including (i) certainpre-petition wages, salaries and other compensation; (ii) employee medicaland similar benefits; (iii) reimbursable employee expenses; (iv) insurancepremiums; (v) shipping and warehousing charges. Accordingly, thesepre-petition items have been excluded from Liabilities Subject to Compromise asof December 31, 2005 and March 31, 2006.

The liabilities subject to compromise consisted of thefollowing items:

|                                                         | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                              | ** ** | **2005**              | ** ** | **2006**           | ** ** |
| ** **                                              | ** ** | **(in thousands)**    | ** ** |
|                                                    |       |                  |       |               |       |
| Account  payable(a)                                     |       | $4,485                |       | $4,433             |       |
| Accrued interest  payable(b)(c)                         |       | 2,522                 |       | 2,522              |       |
| Other  miscellaneous liabilities                        |       | 447                   |       | 587                |       |
|                                                    |       |                  |       |               |       |
| Secured term  loan due 2008(c)                          |       | 45,000                |       | 45,000             |       |
| Secured  revolving credit facility due 2008(c)          |       | 11,500                |       | 11,500             |       |
| 9% senior  subordinated notes due 2008(c)               |       | 34,392                |       | 34,392             |       |
|                                                    |       | 90,892                |       | 90,892             |       |
| Unamortized debt  issuance costs                        |       | (3,166                | )          | (2,807             | )          |
| Total long term  debt obligations subject to compromise |       | 87,726                |       | 88,085             |       |
|                                                    |       |                  |       |               |       |
| Total liabilities  subject to compromise                |       | $95,180               |       | $95,627            |       |

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(a)          In accordance with the Company’s first day bankruptcy court motion,Boyds settled certain accounts payable liabilities subject to compromise sincethe initial filing of Chapter 11 as noted above.

(b)  Accrued interest payable represents allunpaid interest payable on debt subject to compromise at October 16, 2005.

(c)  While operating during the Chapter 11bankruptcy proceedings, Boyds has ceased recording interest on its secured termloan due 2008, secured revolving credit facility due 2008 and 9% seniorsubordinated notes due 2008. The amount of contractual interest expense notrecorded was approximately $2.7 million and $5.9 million at December 31,2005 and March 31, 2006, respectively.

**Reorganization Items, net**

Reorganization items, net are presented separately in the CondensedConsolidated Operations and represent items of expense that are realized orincurred by Boyds because it is in reorganization under Chapter 11 of the U.S.Bankruptcy Code.

Reorganization items, net consisted of the following items:

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|                               | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **March 31,**               | ** ** |
| ** **                    | ** ** | **2005**                         | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **(in thousands)**          | ** ** |
|                          |       |                             |       |   |   |
| Professional  fees(a)         |       | $                                | 0          |   | $ | 1,535 |   |
| Employee  retention costs(b)  |       | 0                                |       | 132 |   |
|                          |       |                             |       |   |   |
| Total reorganization  expense |       | $                                | 0          |   | $ | 1,667 |   |

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(a)          Professional fees represent services provided by debtor and creditorprofessionals directly related to Boyds reorganization proceedings.

(b)         Employee retention costs represent costs for certain key employees as approved by the bankruptcycourt

**5.            ****PROPERTY AND EQUIPMENT**

The components of property and equipment at December 31, 2005 and March 31,2006 were, as follows:

|                                 | ** ** | **December 31,**   | ** ** | **March 31,** | ** ** |
|---------------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **                      | ** ** | **2005**                | ** ** | **2006**           | ** ** |
| ** **                      | ** ** | **(in thousands)** | ** ** |
| Land                            |       | $                       | 3,570      |               | 3,570      |   |
| Building                        |       | 28,729                  |       | 28,735             |       |
| Equipment                       |       | 5,606                   |       | 5,787              |       |
| Software  development costs     |       | 2,479                   |       | 2,488              |       |
| Leasehold  improvements         |       | 1,957                   |       | 1,957              |       |
| Furniture and fixtures          |       | 1,097                   |       | 1,097              |       |
| Total                           |       | 43,438                  |       | 43,634             |       |
| Less:  accumulated depreciation |       | (11,711                 | )          | (12,265            | )          |
| Total                           |       | $                       | 31,727     |               | $          | 31,369 |   |
|                                 |            |                         |            |                    |            |  |  |

 

**6.        GOODWILL**

 In July 2001, the FASB issued SFAS No. 142,*Goodwill and Other Intangible Assets*,which was effective January 1, 2002 (SFAS No. 142). SFASNo.142 requires, among other things, the discontinuance of goodwill   amortization.  The Company stopped amortizing its goodwill asof January 1, 2002. The Company tests for impairment by comparing the fairvalue of the reporting unit with the carrying value of that unit. Fair valuewas determined based on the discounted cash flow method. As a result of theCompany’s impairment test completed in the first quarter of 2005, the Companyrecorded an impairment loss of $2.6 million to reduce the carrying value ofgoodwill to zero. The impairment was caused by a continued decline in wholesalesales and results.

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**7.      DEBT OBLIGATIONS**

Debt obligations are summarizedas follows:

|                                                                             | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                  | ** ** | **2005**              | ** ** | **2006**           | ** ** |
| ** **                                                                  | ** ** | ** **            | ** ** | ** **         | ** ** |
| 9% Senior  Subordinated Notes due May 15, 2008 (the “Notes”) |       | $                     | 34,392     |               | $          | 34,392 |   |
|                                                                        |       |                  |       |               |       |
| Credit Agreement:                                                           |       |                  |       |               |       |
| Secured Term  Loan due February 2008                                   |       |                  |       |               |       |
| Interest based on LIBOR or base rate as defined                             |       | 45,000                |       | 45,000             |       |
| Secured  revolving credit facility due February 2008                   |       |                  |       |               |       |
| Interest based on LIBOR or base rate as defined                             |       | 11,500                |       | 11,500             |       |
|                                                                        |       |                  |       |               |       |
| Sub-total                                                                   |       | 90,892                |       | 90,892             |       |
|                                                                        |       |                  |       |               |       |
| Less: Amounts  subject to compromise (Note 4)                               |       | (90,892               | )          | (90,892            | )          |
|                                                                        |       |                  |       |               |       |
|                                                                        |       | $                     | —     |               | $          | — |   |

 

The Notes had an optional redemption featureexercisable by Boyds any time on or after May 15, 2003. Interest on theNotes is payable semiannually on May 15 and November 15.

The credit agreementcontains a Revolving Loan Facility up to $20 million and a Term Loan of $45million. The credit agreement has an interest rate of either a base rate, whichis the higher of the prime lending rate or 0.50% above the federal fundseffective rate, plus 9.50% or LIBOR plus 11.00%. The lower of these rates at December 31,2005 and March 31,2006 was 13.128% and 16.79%, respectively. The Companyincurred approximately $3.6 million of deferred costs associated with thistransaction. The credit agreement requires no scheduled principal paymentsuntil the entire outstanding amount of debt is required to be repaid atmaturity in February, 2008. There are certain prepayment penalties for amountspaid on the Term Loan and Revolver prior to maturity.

The credit agreement containedcustomary covenants, including covenants that restrict the Company’s ability toincur additional indebtedness, make capital expenditures, pay dividends on andredeem capital stock, make other restricted payments, make investments, sellits assets and enter into consolidations, mergers and transfers of all or substantiallyall of its asset. The credit agreement also requires the Company to maintainspecified financial ratios. On October 3, 2005, in connection withpotential defaults on its senior secured credit agreement, we entered into awaiver agreement with our lenders. This waiver agreement provided for, amongother things, the lenders’ forbearance from exercising contractual remediesunder our credit agreement on account of existing defaults through October 16,2005. On October 16, 2005, the Company filed for bankruptcy. (See Note 1)

Based on the defaultsthat have occurred under the credit agreement and notes, all the foregoingamounts have been deemed to be due and payable (See Note 4).

On October 16,2005, pursuant to authorization from the bankruptcy court, Boyds entered into a$8 million DIP credit facility. This DIP facility consists of a $8 millionrevolver facility which includes access for $3.5 million worth of commercialletters of credit. The letters of credit are required to be fully cash collateralized.The DIP facility limits the amount of capital expenditures during its term to$250,000. As of March 31, 2006, Boyds has not borrowed any amounts againstthe DIP credit facility.

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**8.             SEGMENTS OF THE COMPANY AND RELATED INFORMATION**

TheCompany operates in two segments which consist of the Company’s wholesalegift/collectible business and the Company’s retail gift/entertainment business.These segments are evaluated regularly by the Company’s Chief Executive Officerin deciding how to assess performance and allocate resources. Prior to theretail operations becoming a significant portion of the Company’s performance,the Company had only one reportable segment.

TheCompany’s wholesale business designs, imports, and distributes resin figurines,plush animals, and other specialty giftware products via a global network ofindependent and national retailers and distributors.  The Company’s retail operation sells resinfigurines, plush animals, specialty giftware products and provides a uniqueinteractive entertainment experience directly to the end consumer at itsGettysburg, Pennsylvania flagship location and its Pigeon Forge, Tennesseelocation.
| ** **                     | ** ** | **For the Three Months Ended, March 31,** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                                                | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **Wholesale**                                                           | ** ** | **Retail** | ** ** | **Consolidated** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| Sales                          |       | $                                                                       | 15,274     |   | $ | 3,259 |   | $ | 18,533 |   | $ | 11,665 |   | $ | 2,371 |   | $ | 14,036 |   |
| Gross Profit                   |       | 6,133                                                                   |       | 2,269 |   | 8,402 |   | 4,149 |   | 2,273 |   | 6,422 |   |
| SG&A                       |       | 7,535                                                                   |       | 3,166 |   | 10,701 |   | 6,412 |   | 2,366 |   | 8,778 |   |
| Impairment of  Goodwill        |       | 2,600                                                                   |       | — |   | 2,600 |   | — |   | — |   | — |   |
|                           |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Loss from  Operations          |       | $                                                                       | (4,002     | ) | $ | (897 | ) | $ | (4,899 | ) | $ | (2,263 | ) | $ | (93 | ) | $ | (2,356 | ) |
|                           |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Total Assets                   |       | $                                                                       | 203,341    |   | $ | 37,120 |   | $ | 162,410 |   | $ | 27,198 |   | $ | 32,582 |   | $ | 59,780 |   |
| Capital Expenditures           |       | 57                                                                      |       | 334 |   | 391 |   | 186 |   | 5 |   | 191 |   |
| Depreciation and  amortization |       | 211                                                                     |       | 366 |   | 577 |   | 150 |   | 425 |   | 575 |   |

 

**9.             STOCK-BASED COMPENSATION**

***Adoption of SFAS No. 123(R)***

OnJanuary 1, 2006, the Company adopted SFAS No. 123(R) whichrequires companies to expense the fair value of employee stock options andother forms of stock-based employee compensation in the financial statementsover the period that an employee provides service in exchange for the award.Under SFAS 123(R), the Company measures compensation cost related to stockoptions based on the grant-date fair value of the award using the Black-Scholesoption-pricing model and recognizes it ratably, less estimated forfeitures,over the vesting term of the award.

Usingthe modified prospective application of SFAS No. 123(R), the Companyrecorded $0.4 million of compensation expense for the three months ended March 31,2006 which was included in selling, general and administrative expenses in theCompany’s condensed consolidated statement of operations. The Company does notcurrently recognize a tax benefit resulting from compensation costs expensed inthe financial statements because the Company provides a valuation allowanceagainst the deferred tax asset resulting from this type of temporary differencesince it expects that it will not have sufficient future taxable income torealize such benefit. Accordingly, the adoption of SFAS No. 123(R) hashad no impact on income tax expense reported in the financial statements.

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Priorto January 1, 2006, the Company had accounted for stock-based employeecompensation using the intrinsic value method of expense recognition prescribedby Accounting Principle Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB No. 25”), and related interpretations, which waspermitted as an alternative to the fair value recognition provisions of FASBStatement of Financial Accounting Standards No. 123 “Accounting forStock-Based Compensation” (“SFAS No. 123”). The Company applied thedisclosure only provisions of SFAS No. 123 and made pro forma disclosureas if the fair value of stock options had been expensed under the accountingprescribed by SFAS No. 123. Under the intrinsic value method of accountingof APB No. 25, compensation expense was not recognized when stock optionswere granted with an exercise price greater than or equal to the fair marketvalue of the Company’s common stock on the date of the grant.

The following table illustrates the pro forma effect on the net lossand net loss per share for the three months ended March 31, 2005 if theCompany had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation.

|                                                                                                                                                     | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                          | ** ** | **March 31, 2005**     | ** ** |
| ** **                                                                                                                                          | ** ** | ** **                       | ** ** |
| Net  income/(loss), as reported                                                                                                                     |       | $                                | (77,292    | ) |
|                                                                                                                                                |       |                             |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects  |       | 407                              |       |
|                                                                                                                                                |       |                             |       |
| Pro forma net  income/(loss)                                                                                                                        |       | $                                | (77,699    | ) |
|                                                                                                                                                |       |                             |       |
| Earnings per share:                                                                                                                                 |       |                             |       |
| Basic—as reported                                                                                                                              |       | $                                | (1.31      | ) |
| Basic—pro forma                                                                                                                                |       | $                                | (1.31      | ) |
|                                                                                                                                                |       |                             |       |
| Diluted—as reported                                                                                                                            |       | $                                | (1.31      | ) |
| Diluted—pro  forma                                                                                                                             |       | $                                | (1.31      | ) |

 

***Stock Option Plan***—Boyds has granted stock options under various incentivestock option plans (the “Plans”) which provide for the granting to certainemployees and directors of options to acquire Boyds’ common stock. The optionprices of stock which may be purchased under the Plans are not less than thefair value of common stock on the dates of the grants.

Outstanding options issued to employees vest andbecome exercisable over a five-year period from the date of grant. Theoutstanding options expire ten years from the date of grant or upon an employee’sretirement or termination from Boyds, and are contingent upon continuedemployment during the applicable five-year period.

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Boyds has reserved a total of 7,075,102 sharesfor issuance under the Plans, of which 1,721,777 shares remain reserved at March 31,2006 for future issuances. The following table summarizes information aboutfixed stock options at March 31, 2006: 

|                         | ** ** | ** **         | ** ** | **Options Outstanding** | ** ** |
|-------------------------|------------|--------------------|------------|------------------------------|------------|
| ** **              | ** ** | **Options**        | ** ** | ** **                   | ** ** | **Exercise Price Per Share** | ** ** |
| ** **              | ** ** | **Available**      | ** ** | **Number of**           | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **              | ** ** | **for Grant** | ** ** | **Shares**                   | ** ** | **Range** | ** ** | **Average** | ** ** |
|                    |       |               |       |                         |       |   |   |   |   |
| January 1,  2005   |       | 2,845,156          |       | 4,014,883                    |       | $ | 2.49 - $18.00 |   | $ | 5.95 |   |
|                    |       |               |       |                         |       |   |   |   |   |
| Shares reserved         |       | 500,000            |       |                         |       |   |   |   |   |
| Options granted         |       | (2,196,250         | )          | 2,196,250                    |       | $ | 1.73 - $2.50 |   | $ | 2.07 |   |
| Options  exercised      |       | 3,931              |       | (3,931                       | )          | $ | 4.45 |   | $ | 4.45 |   |
| Options  forfeited      |       | 450,440            |       | (450,440                     | )          | $ | 2.06 - $9.31 |   | $ | 3.75 |   |
|                    |       |               |       |                         |       |   |   |   |   |
| December 31,  2005 |       | 1,603,277          |       | 5,756,762                    |       | $ | 1.73 - $18.00 |   | $ | 4.65 |   |
|                    |       |               |       |                         |       |   |   |   |   |
| Shares reserved         |       | —             |       | —                       |       |   |   |   |   |
| Options granted         |       | —             |       | —                       |       | — |   | $ | 0.00 |   |
| Options  exercised      |       | —             |       | —                       |       | — |   | $ | 0.00 |   |
| Options  forfeited      |       | 118,500            |       | (118,500                     | )          | $ | 2.06 - $13.88 |   | $ | 4.75 |   |
|                    |       |               |       |                         |       |   |   |   |   |
| March 31, 2006     |       | 1,721,777          |       | 5,638,262                    |       | $ | 1.73 - $18.00 |   | $ | 4.64 |   |

 

The following table summarizesinformation about stock options outstanding at March 31, 2006:

|                 | ** ** | ** **      | ** ** | **Weighted**            | ** ** | **Options**           | ** ** | **Weighted**            | ** ** | **Weighted**            | ** ** |
|-----------------|------------|-----------------|------------|-------------------------|------------|-----------------------|------------|-------------------------|------------|-------------------------|------------|
| **Exercise**    | ** ** | **Options**     | ** ** | **Average**             | ** ** | **Exercisable**       | ** ** | **Average**             | ** ** | **Average**             | ** ** |
| **Price**       | ** ** | **Outstanding** | ** ** | **Exercise Price** | ** ** | **& Vested** | ** ** | **Exercise Price** | ** ** | **Remaining Life** | ** ** |
|            |       |            |       |                    |       |                  |       |                    |       |                    |       |
| $1.73 to $2.43  |       | 1,887,500       |       | $                       | 2.06       |                  | 105,000    |                    | $          | 2.06                    |       | 9.2 |   |
|            |       |            |       |                    |       |                  |       |                    |       |                    |       |
| $2.49 to $6.25  |       | 2,049,262       |       | $                       | 4.61       |                  | 1,323,347  |                    | $          | 4.76                    |       | 6.6 |   |
|            |       |            |       |                    |       |                  |       |                    |       |                    |       |
| $6.50 to $18.00 |       | 1,701,500       |       | $                       | 7.55       |                  | 1,451,000  |                    | $          | 7.63                    |       | 5.3 |   |

 

The fair value ofeach option award is estimated on the date of grant using the Black-Scholesoption valuation model that uses the assumptions noted in the following table:

|                                           | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **March 31,**               | ** ** |
| ** **                                | ** ** | **2005**                         | ** ** | **2006** | ** ** |
|                                      |       |                             |       |   |   |
| Weighted average  risk free interest rate |       | 4.0                              | %          | 5.1 | % |
| Volatility                                |       | 68.8                             | %          | 101.8 | % |
| Dividend yield                            |       | 0.0                              | %          | 0.0 | % |
| Expected life in years                    |       | 6.5                              |       | 6.5 |   |

 

The expected life of options granted wasestimated using the historical exercise behavior of employees.

The expected voiatility was based on historical volatility for aperiod equal to the stock options’ expected lives.

The risk-free rate is based on the U.S. Treasury yield curve in effectat the time of grant,

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As of March 31, 2006, there was $4.4 million of total unrecognizedcompensation cost related to nonvested share-based compensation awards granted under the stock option plans. Thatcost is presently scheduled to be recognized over a weighted average period of7.1 years.

**10.          PROVISION FOR INCOME TAXES**

As of March 31, 2006, the Company has a $179.4 million valuationallowance against its deferred tax assets, consisting of tax carryforwards thatwill begin to expire in 2023 until the end of 2033. The recovery of thedeferred income tax assets is contingent upon applicable tax laws and theCompany’s ability to generate taxable income. This valuation allowance resultsfrom estimates by management of future taxable income in each of the federal,state, and foreign tax jurisdictions during the carry forward period and theconclusion by management that it is no longer more likely than not that thisamount of deferred tax assets will be realized under the criteria of SFAS No. 109,Accounting for Income Taxes. For the three months ended March 31, 2006,the Company recorded tax expense of $0.1 million.

**11.          COMMITMENTS & CONTINGENCIES**

Boyds is involved invarious legal proceedings, claims and governmental audits in the ordinarycourse of business. In the opinion of management, the ultimate disposition ofthese matters will not have a material adverse effect on the financialposition, results of operations or cash flows of Boyds.

On October 3,2005, in connection with potential defaults on its senior secured creditagreement, we entered into a waiver agreement with our lenders. Thiswaiver agreement provided for, among other things, the lenders’ forbearancefrom exercising contractual remedies under our credit agreement on account ofexisting defaults through October 16, 2005.

On October 7, 2005, The Company receivednotification from the New York Stock Exchange (“NYSE”) dated October 7,2005, that it determined that trading of the Company’s common stock (tickersymbol FOB) would be suspended prior to the opening on Monday, October 10, 2005. This decision wasreached in view of the fact that the Company was not in compliance with theNYSE’s newly increased continued listing standards. The Company was considered “belowcriteria” by the NYSE because the Company’s average market capitalization wasless than $75 million over a  30trading-day period and its shareholders’ equity was less than $75 million andthe average closing price of the security was less than $1.00 over aconsecutive 30 trading-day period. In addition, the NYSE noted the Company’sabnormally low selling price, which closed at $0.45 on October 6, 2005.

Boyd’s common stock is currently being quoted under the ticker symbol “BOYD.PK”on the Pink Sheets Electronic Quotation Service maintained by the Pink SheetsLLC and on the OTC Bulletin Board.

On October 16,2005, we and certain of our subsidiaries filed voluntary petitions forreorganization under chapter 11 of the United States Bankruptcy Code (the “BankruptcyCode”), in the United States Bankruptcy Court for the District of Maryland (the “Court”) (CaseNos. 05-43793; 05-43805; 05-43802; 05-43833; 05-43838;05-43863; 05-43816; 05-43848; and 05-43857). We  have requested joint administration of thecases under the caption “The Boyds Collection, Ltd., Case No. 05-43793. We will continue will continue tooperate our  businesses as “debtors inpossession” under the jurisdiction of the Court and in accordance with theapplicable provisions of the Bankruptcy Code and orders of the Court  (See Note 1 — Chapter 11 BankruptcyProceedings).

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Boyds also hassignificant licensing agreements with *NASCAR*, *Coca-Cola*, *M&Ms*, and *Crayola*.  The Company’s*NASCAR* license includes the top tendrivers. Pursuant to this arrangement, Boyds has the ability to use the *NASCAR* logo or driver names, likeness, and numbers. Boydspays a royalty based on sales of these products to the various licensors.

On January 17, 2006, theCompany filed for bankruptcy in the Dutch court for its Dutch subsidiary. Thecourt approved the filing and appointed a Trustee to close down the operations,

**12.          EARNINGS PER SHARE**

The following is a reconciliation of the numeratorsand denominators of the basic and diluted earnings per share computations forthe net income/(loss) available to common stockholders:
| ** **                                                            | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** |
| ** **                                                            | ** ** | **2005**                         | ** ** | **2006** | ** ** |
| ** **                                                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Numerator for basic and  diluted earnings per share:                  |       |                             |       |   |   |
| Net loss                                                              |       | $                                | (77,292    | ) | $ | (4,454 | ) |
| Denominator for  diluted earnings per share - weighted average shares |       | 59,087                           |       | 59,054 |   |
|                                                                  |       |                             |       |   |   |
| EPS - Basic                                                           |       | $                                | (1.31      | ) | $ | (0.08 | ) |
|                                                                  |       |                             |       |   |   |
| EPS - Diluted                                                         |       | $                                | (1.31      | ) | $ | (0.08 | ) |

 

For the three months ended March 31,2006 and March 31, 2005, options to purchase 3,558,533 and 5,673,379shares,respectively, were outstanding but not included in the computation ofdilutive earning per share because the effect would have been anti-dilutive.

Following the effective dateof our plan or reorganization, we expect to issue new common stock to replacethe existing stock. Due to this new stock issuance there may be an impact tothe Company’s EPS.

**13.****                               SUBSEQUENTEVENTS**

On May 25, 2006, theCompany announced that Jan Murley, Chief Executive Officer was leaving theCompany effective on the earlier to occur of (i) the effective date of theCompany’s plan of reorganization and (ii) June 30, 2006. The Companywill incur approximately $0.5 million in expenses associated with thisdeparture.

The Company also announcedthe appointment of Robert Coccoluto as Chief Executive Officer, Peter Frost asChief Operating Officer and Michael A. Prager as President.

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

The followingdiscussion should be read in conjunction with the financial information andrelated notes included elsewhere in this report.

**Chapter 11 Bankruptcy Proceedings**

On October 3,2005, in connection with potential defaults on our senior secured creditagreement, we entered into a waiver agreement with our lenders. This waiveragreement provided for, among other things, the lenders’ forbearance from exercisingcontractual remedies under our credit agreement on account of existing defaultsthrough October 16, 2005.

On October 16, 2005, we and certain of oursubsidiaries filed voluntary petitions for reorganization under Chapter 11 ofthe United States Bankruptcy Code (the “Bankruptcy Code”), in the United StatesBankruptcy Court for the District of Maryland (the “Court”) (Case Nos. 05-43793;05-43805; 05-43802; 05-43833; 05-43838; 05-43863;05-43816; 05-43848; and 05-43857). We have requested jointadministration of the cases under the caption “The Boyds Collection, Ltd., CaseNo. 05-43793.  We willcontinue to operate our businesses as “debtors in possession” (“DIP”) under thejurisdiction of the Court, under Court protection from creditors and claimantsand in accordance with the applicable provisions of the Bankruptcy Code andorders of the Court.

Since the bankruptcy filing,all orders allowing us to conduct normal business activities, including theapproval of our DIP financing, have been entered by the Court. While we are inbankruptcy proceedings, all transactions not in the ordinary course of ourbusiness require the prior approval of the Court.

On October 16, 2005, pursuant toauthorization from the Court, we entered into an $8 million DIP credit facility.This DIP facility consists of an $8 million revolver facility which includesaccess for $3.5 million worth of commercial letters of credit. The letters ofcredit are required to be fully cash collateralized. The DIP facility limitsthe amount of capital expenditures during its term to $250,000.

As a consequence of our bankruptcy filing,pending litigation against us is generally stayed, and no party may take anyaction to collect its pre-petition claims except pursuant to order of the Court.February 14, 2006, was the deadline for claimants to file claims arisingprior to our bankruptcy filing. Differences between claim amounts identified byus and claims filed by claimants will be investigated and resolved inconnection with our claims resolution process, and only holders of claims thatare ultimately allowed for purposes of our bankruptcy will be entitled todistributions. Since the settlement of terms of allowed claims are subject to aconfirmed plan of reorganization, the ultimate distribution with respect to theallowed claims is not presently ascertainable.

On March 14, 2006, we filed with the Courtour Plan of Reorganization, which was subsequently amended (as amended, the “Plan”)and Disclosure Statement, which was subsequently amended (as amended, the “DisclosureStatement”). The Plan and the Disclosure Statement set forth the terms of theproposed settlement between Boyds, our secured creditors, the OfficialCommittee of Unsecured Creditors, and our stockholders. The DisclosureStatement also includes a description of the events that led up to ourbankruptcy filing and the actions we have taken to improve our financialsituation while in bankruptcy.

The Plan has been approved by the necessaryconstituencies and remains subject to approval by the Court. We cannot provideany assurance that any plan of reorganization ultimately confirmed by theBankruptcy Court will be consistent with the terms of the Plan and DisclosureStatement.

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If confirmed, the Plan will provide us with significantrelief from pre-filing claims. The Plan details how the claims of each class ofcreditors and interest holders will be treated.   The following is a summary of the Plan:

·              Holdersof senior secured claims will receive (in exchange of approximately $57.7million in claims): senior secured promissory notes in the aggregate principalamount of $30.0 million, to be due in five years following the effective dateof the Plan, which we expect will occur in June 2006, and common stockrepresenting approximately 48.5% of our common stock outstanding after the  effective date of the Plan (the “New CommonStock”).

·              Eachqualifying noteholder (a holder of our Senior Subordinated Notes that hascontinuously held beneficial interests therein for more than 18 monthsimmediately prior to our bankruptcy filing through the effective date of thePlan) shall receive cash in the amount of 22.0% of the allowed amount of itsnote claim, to be paid, if at all, on the date of a Future Transaction; plusits pro rata share of 5.0% of the New Common Stock, plus its pro rata share of50.0% of the reallocated shares which are the shares of our common stockrepresenting the difference between: (i) 5% of the New Common Stock; and (ii) theaggregate pro rata share of New Common Stock allocable to qualifyingnoteholders. A “Future Transaction” is a transaction in which we, subject tocertain exceptions, (a) merge or consolidate with another person or entityor (b) acquire  any assets, properties, rights or equity interests,in each case occurring within 36 months of the effective date of the Plan solong as the transaction is not a acquisition (i) of assets, properties orrights or assumption of liabilities in the ordinary course of our business(i.e., accounts payable, receivables, inventory, product, store leases, storeequipment and any other similar acquisitions or assumptions of liabilities); (ii) anacquisition that has aggregate consideration of $10 million or less that is notan acquisition of a toy collectible business; or (iii) an acquisition thatdoes not meet certain revenue or EBITDA thresholds.

·              Eachnon-qualifying holder (those holders of our Senior Subordinated Notes that arenot qualifying noteholders) shall receive cash in the amount of 24.0% of theallowed amount of its claim to be paid, if at all, on the date upon which aFuture Transaction is consummated.

·              Ifthe non-qualifying holders  vote toreject the Plan, then each such holder shall receive cash in the amount of 2.0% of the allowed amount of theirnotes, to be paid, if at all, on the date upon which a Future Transaction isconsummated.

·              Eachholder of an allowed general unsecured claim or claims will receive cash equalto 28% of its allowed claim or claims, if the class of such holders accepts thePlan.

·              Ifthe class of holders of general unsecured claims vote to reject the Plan, theneach such holder shall receive cash in the amount of 4% of the allowed amountof such claim to be paid on the earlier of: (a) the date upon which a Future Transaction is consummated; or (b) thefirst business day that is at least 18 months after the effective date of thePlan.

·              Securedclaims other than senior secured claims will be treated either as agreed by the parties or in a manner thatreinstates the secured claim or provides for payment to the creditor equal tothe value of such creditor’s collateral. Each holder of an allowed priorityclaim (other than a tax priority claim) shall receive, on account of and infull and complete settlement, release and discharge of such allowed priorityclaim, (a) cash equal to the amount of such claim or (b) such othertreatment as to which the we  and suchholder shall have agreed upon in writing in an amount sufficient to render suchclaim  not “impaired” under section 1124of the Bankruptcy Code, to be paid on the latest of (a) the effective dateof the Plan (or as soon thereafter as is reasonably practicable), (b) fivebusiness days after the final allowance of such claim, or (c) the date on which the we and the holder ofsuch claim  otherwise agree.

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·              Allowedpriority tax claims will either be paid, at our sole option , (a) on thelatter of (i) the effective date of the Plan (or as soon thereafter as isreasonably practicable), (ii) five business days after the allowancethereof; (b) beginning the first anniversary following the effective dateof the Plan, cash payments to be made in equal annual installments, with thefinal installment being payable no later than the sixth anniversary of the dateof the assessment of such allowed priority tax claim, in an aggregate amountequal to such claim, together with interest on the unpaid balance of such claimcalculated from the effective date of the Plan through the date of payment; or (c) suchother treatment agreed to by us and the holder of such claim.

·              Eachholder of 200 or more shares of our common stock will receive its pro ratashare of 46.5% of our post bankruptcy equity.

·              Eachholder of less than 200 shares of our common stock will receive $0.15 pershare.

We are also negotiating with one of our seniorlenders to provide a new $11.0 million revolver with a $4.0 million seasonalover-advance option that supports letters of credit and would provide us withaccess to additional capital to fund post-reorganization operations. There canbe no assurance that these negotiations will be successful.

There can be no assurance that the Plan, or anyother plan of reorganization, will be confirmed by the Court or implementedsuccessfully.

Following the effective date ofour plan of reorganization, we expect to have fewer than 300 holders of recordof our common stock. Consequently, we intend to apply for termination of theregistration of our common stock under the Exchange Act of 1934, as amended,which would substantially reduce the information required to be furnished by usto our stockholders and we would be no longer required and do not intend tofile reports with the SEC.  Certainprovisions of the Exchange Act would no longer be applicable to us such as theshort-swing profit recovery provisions of Section 16(b) of theExchange Act, the requirement of furnishing a proxy statement in connectionwith stockholders’ meetings, and the related requirement of an annual report tostockholders.

On January 17, 2006, the Company filed forbankruptcy in the Dutch court for its Dutch subsidiary. The court approved thefiling and appointed a Trustee to close down the operations.

##### **GENERAL**

Boyds is a domestic designer, importer anddistributor of branded, high-quality, handcrafted collectibles and otherspecialty giftware products. Boyds sells its products primarily through anextensive network of approximately 11,000 store locations comprised ofindependent gift and collectibles retailers, premier department stores,selected catalogue retailers and other electronic and retail channels. Boydsalso sells its products directly to consumers through its two retail stores *Boyds Bear Country**ä**- Gettysburg* and *Boyds Bear Country**ä**- Pigeon Forge.*

Boyds’ salesconsist of plush animals, resin figurines, and other products. Other productsinclude collectors club sales, home décor, stationery, accessories, retail foodoperations and its interactive concepts. Collectors club sales are generatedfrom annual dues collected directly from members of Boyds’ collectors club, *The Loyal Order of Friends of Boyds*, which began in July 1996and currently has approximately 20,000 paying members, as well as from the saleof related accessories.

Boyds also hasseveral licensing agreements for its branded product. The more significantagreements include NASCAR ®, Coke ®,M&M’S ® BrandCharacters, and Crayola ®. Boydsbegan delivering Coke ®,M&M’S ®, andCrayola ® Boydsproducts to its retail stores in late 2005.

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Boyds licenses itsproduct designs to other companies for products including home textiles, infantclothing and wallpaper. Boyds believes such licensing, in addition to providingroyalty income, helps to increase consumer awareness of Boyds’ designs andbrand image. Boyds reports royalty income in net sales.

Boyds exhibits its products at select national and regional tradeshowswhere orders are taken by Boyds’ employees. Boyds operates almost exclusivelyout of a leased office/distribution facility, owns one retail store in thegeneral vicinity of Gettysburg, Pennsylvania, and owns a second retail store inPigeon Forge, Tennessee. Boyds also leases warehouse space in Dunkeswell,United Kingdom.  The Company had alsoleased space in Dordrecht, The Netherlands. The lease was terminated as aresult of the bankruptcy filing on January 17, 2006 in the Dutch courts.

##### **SEGMENTS**

The Company operates intwo segments which consist of the Company’s wholesale gift/collectible businessand the Company’s retail gift/entertainment business. These segments areevaluated regularly by the Company’s Chief Executive Officer in deciding how toassess performance and allocate resources.  Prior to the retail operations becoming asignificant portion of the Company’s performance, the Company had only onereportable segment.

The Company’swholesale business designs, imports, and distributes resin figurines, plushanimals and other specialty giftware products via a global network ofindependent retailers and distributors. The Company’s retail operation sellsresin figurines, plush animals, other specialty giftware products and providesa unique interactive entertainment experience, directly to the end consumercurrently at its Gettysburg, Pennsylvania flagship location and Pigeon Forge,Tennessee location.

**CRITICAL ACCOUNTING POLICIES**

Preparing the Company’sfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires that management makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Predicting future events is inherently animprecise activity and as such requires the use of judgment. Actual results mayvary from estimates in amounts that may be material to the financialstatements. Management believes that the estimates and assumptions used inconnection with the amounts reported in Boyds’ financial statements and relateddisclosures are reasonable and made in good faith.

The financialstatements have been prepared on a “going concern” basis in accordance withAICPA Statement of Position 90-7, Financial Reporting by Entities inReorganization Under the Bankruptcy Code, and do not include possible impactsarising in respects of the Cases. The condensed financial statements includedelsewhere in this Report do not include certain adjustments relating to therecoverability and classification of recorded asset amounts or the amount andclassification of liabilities or the effect on existing stockholders’ equitythat may result from any plans, arrangements or other actions arising from theCases, or the possible inability of the Company to continue in existence. Adjustmentsnecessitated by such plans, arrangements or other actions could materiallychange the condensed financial statements included elsewhere in this Report.

The mostsignificant accounting estimates inherent in the preparation of Boyds’financial statements include estimates related to the valuation of the deferredtax assets, determining the ultimate collectability of accounts receivable andthe realizable value of inventory.   Theprocess of

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determining estimatesis based on several factors, including historical experience, current andanticipated 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.

·                  On January 1, 2006, the Company adoptedSFAS No. 123(R) which requires companies to expense the fair value ofemployee stock options and other forms of stock-based employee compensation inthe financial statements over the period that an employee provides service inexchange for the award. Under SFAS 123(R), the Company measures compensationcost related to stock options based on the grant-date fair value of the awardusing the Black-Scholes option-pricing model and recognizes it ratably, lessestimated forfeitures, over the vesting term of the award.

·                  For the wholesale business, Boyds records saleswhen persuasive evidence of an arrangement exists, the price is fixed ordeterminable, items are shipped and the collectibility of the resultingreceivable is reasonably assured. For the retail business, Boyds recognizessales upon customer receipt of the merchandise. The most significant financialstatement line item, net sales, represents transactions consistent with Boyds’primary business focus and meets the criteria of Staff Accounting Bulletin No. 104,including the transfer of title, reasonable collectibility, and identifiedcustomer.

·                  As of June 30,2005, the Company set up a valuation allowance for the remaining amount of itsdeferred tax assets, consisting of tax carryforwards that will begin to expirein 2023. For the three months ended March 31, 2006, the Company recordedtax expense of $0.1 million   Thisvaluation allowance results from estimates by management of future taxableincome in each of the federal, state, and foreign tax jurisdictions during thecarry forward period and the conclusion by management that it is no longer morelikely than not that this amount of deferred tax assets will be realized underthe criteria of SFAS No. 109, “Accounting for Income Taxes”.

·                  Accounts receivable are presented at estimatednet realizable value. Boyds uses estimates in determining the collectabilityof its accounts receivable and must rely on its evaluation of historical baddebts, customer credit ratings, current economic trends and changes in customerpayment terms to arrive at appropriate reserves.

·                  Inventories are stated at the lower of cost ormarket. Cost is determined under the first-in, first-out method of accounting.Boyds records adjustments to the value of inventory in situations where itappears that Boyds will not be able to recover the cost of the product. Thislower of cost or market analysis is based on Boyds’ estimate of forecasteddemand by customer by product. A decrease in product demand due to changingcustomer tastes, consumer buying patterns or loss of shelf space to competitorscould significantly impact Boyds’ evaluation of its excess and obsoleteinventories.

·                  Under therequirements of Statement of Financial Accounting Standards (“SFAS”) Nos.142 “Goodwilland Other Intangible Assets”, and 144 “Accounting for the Impairment andDisposal of Long-Lived Assets”, Boyds assesses the potential impairment ofidentifiable intangibles and acquired goodwill on an annual basis or wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable, and assesses potential impairment of long lived assets wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable. In performing these evaluations, the Company evaluates current andfuture economic and business trends to develop business forecasts of futureperformance and related cash flows. Such estimates require the use of judgmentand numerous subjective assumptions. As a result of the Company’s impairmenttest completed in the first quarter of 2005, the Company recorded an impairment loss of$2.6 million to reduce the carrying value of goodwill to zero. The impairmentwas caused by a continued decline in wholesale sales and results.

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**FACTORS WHICH AFFECT BOYDS’ RESULTSOF OPERATIONS**

***Seasonality***

Boyds recognizesrevenues throughout the year and generally ships merchandise on a first-in,first-out basis. Approximately 58% of revenues are recorded between May andOctober in anticipation of the holiday season while approximately 42% ofrevenues are recorded between November and April. Boyds does not have thesignificant seasonal variation in its wholesale revenues that it believes isexperienced by many other giftware, collectibles or retail companies.

***Foreign Exchange***

The dollar value ofBoyds’ assets abroad is not significant. Boyds’ sales are primarily denominatedin United States dollars and, as a result, are not subject to changes inexchange rates.

Boyds imports most ofits products from manufacturers in China. Boyds’ costs could be adverselyaffected on a short-term basis if the Chinese renminbi appreciates significantlyrelative to the United States dollar. Conversely, its costs would be favorablyaffected on a short-term basis if the Chinese renminbi depreciatessignificantly relative to the United States dollar. Although Boyds generallypays for its products in United States dollars, the cost of such productsfluctuates with the value of the Chinese renminbi. In the future, Boyds may,from time to time, enter into foreign exchange contracts or prepay inventorypurchases as a partial hedge against currency fluctuations. Differences betweenthe amounts of such contracts and costs of specific material purchases areincluded in inventory and cost of sales. Boyds’ policy is to not capitalize anygains or losses associated with foreign currency transactions or foreignexchange contracts. Boyds intends to manage foreign exchange risks to theextent appropriate.

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

**RESULTS OF OPERATIONS**

Netsales consist of sales of our products, net of sales discounts, product returnsand allowances, retail sales from the *Boyds Bear Country**TM* retailstores, collectors club sales generated from members of Boyds’ collectors cluband royalty income from licenses held by Boyds. Wholesale sales are primarilymade on a purchase order basis. Revenue associated with sales is recognizedwhen products are shipped to the customer or upon the completion of a retailtransaction.

Boyds’gross profit margins may not be comparable to the gross profit margins ofcertain other entities due to the classification of certain costs. Boydsincludes items such as purchasing and receiving costs, internal transfer costs,and the costs of its distribution network in cost of goods sold. Boyds includesits inspection costs in selling, general and administrative (“SG&A”)expenses. Other entities may classify their expenses differently.

In accordance with Emerging Issues Task Force (“EITF”) No. 00-10,“Accounting for Shipping and Handling Fees and Costs”, Boyds records amountsbilled to customers related to shipping and handling as revenue and allexpenses related to shipping and handling as cost of goods sold.

Otherincome consists of interest income and exchange rate gain/loss.

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The followingtable sets forth the components of net loss as a percentage of net sales forthe period indicated:

|                                               | ** ** | **Three Months** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **Ended**             | ** ** |
| ** **                                    | ** ** | **March 31,**    | ** ** |
| ** **                                    | ** ** | **2005**              | ** ** | **2006** | ** ** |
|                                          |       |                  |       |   |   |
| Net sales                                     |       | 100.0                 | %          | 100.0 | % |
| Gross profit                                  |       | 45.3                  | %          | 45.8 | % |
| Selling, general  and administrative expenses |       | 57.7                  | %          | 62.5 | % |
| Impairment of  assets                         |       | 14.0                  | %          | 0.0 | % |
| Loss from operations                          |       | (26.4                 | )%         | (16.7 | )% |
| Other income  (expenses), net                 |       | (0.7                  | )%         | 0.2 | % |
| Interest expense                              |       | 11.8                  | %          | 2.6 | % |
| Reorganization  expenses                      |       | 0.0                   | %          | 11.9 | % |
| Provision for  income taxes                   |       | 378.2                 | %          | 0.7 | % |
| Net loss                                      |       | (417.1                | )%         | (31.7 | )% |

 

***Executive**Overview***

In the first quarter of 2006, the Company’s net sales decreased by 24%compared to the same period in 2005, which can primarily be continued softnessin the core independent retailer channel, the shift of Easter to April, and theoperational decision to close the retail stores during slower days in the firstquarter. The decrease in wholesale net sales was attributable to a 33% declinein wholesale bookings (cancelable orders) in the first quarter of the yearcompared to the same period in 2005. Weakness across the Specialty Gift Retailsector of the Company’s account base and reduced sales to a number of Boyds’larger legacy accounts were the contributors to these reduced bookings.

## TheCompany’s net loss for the first quarter decreased $72.8 million to a loss of$4.5 million as compared to $77.3 million for the same period in 2005. Thisdecrease can be attributed to the significant increase in the Company’sallowance for its deferred tax asset and the write off of its goodwill thatoccurred in the three months ended March 31, 2005.

Cash provided by operating activities in the first three months of 2006was $0.9 million compared to $5.9 million in cash used in operations in theyear-ago period. In the first three months of 2006 the Company investingactivities included $0.2 million of cash in property and equipment compared to$0.4 million in the year-ago period and $2.4 million due to therequirement that the letters of credit be cash collateralized. In the first three months of 2005, theCompany had a net increase of approximately $12.5 million of debt.

## ***ThreeMonths Ended March 31, 2006 vs. Three Months Ended March 31, 2005***

*Net Sales*— Net sales decreased$4.5 million, to $14.0 million in the first quarter of 2006 from $18.5 millionfor the same quarter in 2005. Sales of Boyds’ plush products decreased $3.4million, or 28%, resin product sales increased $1.0 million, or 163%, and otherproduct sales decreased $2.1 million, or 38%. As a percentage of net sales forthe first quarter, plush represented 65%, resin products represented 12%, andother products represented 23%.

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Wholesale net sales in the first quarter of 2006declined $3.6 million, or 24%, to $11.6 million from $15.3 million for the samequarter in 2005. Thedecrease in wholesale net sales was attributable to a 33% decline in wholesalebookings (cancelable orders) in the first quarter of the year compared to thesame period in 2005. Weakness across the Specialty Gift Retail sector of theCompany’s account base and reduced sales to a number of Boyds’ larger legacyaccounts were the contributors to these reduced bookings.

Retail net sales decreased $0.9 million, or 27%,to $2.4 million in the first quarter of 2006 from $3.3 million in the firstquarter of 2005. Same store retail net sales decreased by $0.9 million, or 27%,to $2.4 million in the first quarter from $3.3 million for the first quarter of2006. This decrease in overall retail sales can be attributed to reducedvisitor traffic due to Easter falling in the second quarter and due to theoperational decision to close the stores on days of slower traffic.

*Gross profit* - Gross profitdecreased $2.0 million, or 24%, to $6.4 million in the first quarter of 2006from $8.4 million for the first quarter of 2005. Gross profit as a percentageof net sales increased to 45.8% for the first quarter of 2006 as compared to45.3% for the same period in 2005. The dollar decline was primarilyattributable to reduced sales, an increased product mix shift to lower marginproduct, a $0.3 million increase which relates to a credit in capitalizedinventory from 2005 and a $0.2 million increase in royalty expenses due to increasedsales in this category, these were partially offset by a obsolete inventoryallowance that was $1.6 million lower than in 2005. Wholesale gross profitdecreased by $2.0 million, or 32%, to $4.1 million in the first quarter of 2006from $6.1 million in the first quarter of 2005. Retail gross profit was flat at$2.3 million in the first quarter of 2006 as compared to the first quarter of2005.

*Selling, General &Administrative Expenses (“SG&A”)*- SG&A expenses decreased $1.9 million, or18%, to $8.8 million in the first quarter of 2006 from $10.7 million for thefirst quarter of 2005. SG&A as a percent of net sales increased to 63% forthe first quarter from 58% for the same period in 2005. The dollar decrease inSG&A expenses was a result of $0.9 million in lower wage costs stemmingfrom our continued cost saving initiatives and $0.5 million in professionalfees, $0.5 million in reduced advertising expenses stemming fromrationalization of the spending in the retail segment, $0.3 million in reducedreal estate taxes paid due to timing, these costs were partially offset by anincrease of $0.5 million in bad debt expense.

*Impairment of Goodwill Assets*— The Company recordeda goodwill impairment charge of $2.6 million for the first quarter of 2005. Thischarge was attributed to the goodwill impairment testing as prescribed by SFAS142, Goodwill and Other Intangibles due to the wholesale segment’s operatingperformance.

*Loss from operations* - Loss from operationsdecreased $2.5 million to a loss of $2.4 million in the first quarter of 2006from a loss of $4.9 million in the first quarter of 2005. Loss from operationsas a percentage of net sales improved to a negative 14% in the first quarter of2006 from a negative 26% in the first quarter of 2005.

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*Interest expense* - Interest expensedecreased to $0.4 million for the first quarter of 2006 as compared to $2.2million for the first quarter of 2005. Interest expense on outstanding debtdecreased for the first quarter of 2006 by $2.0 million. This decrease is duethe Company ceasing to record interest expense on the Company’s outstandingdebt during the Chapter 11 bankruptcy proceedings. Additionally, theamortization expense associated with the deferred financing costs haveincreased by $0.2 million as a result of capitalized costs associated with theNew Credit Agreement.

*Reorganization items -*Reorganization items of$1.7 million represent expense items that are realized or incurred by Boydsbecause it is in reorganization under Chapter 11 of the U.S. Bankruptcy Code.

*Income tax expense -* Income tax expensedecreased $70.0 million to $0.1 million in the first quarter of 2006 ascompared to $70.1 million for the first quarter of 2005.

*Net loss—* Net loss decreased$72.8 million to a loss of $4.5 million in the first quarter of 2006 from a$77.3 million loss for the first quarter of 2005.

*Liquidityand Capital Resources*

Boyds’ primary source ofliquidity is borrowings under its DIP credit facility. Boyds’ primary uses ofcash are to fund working capital requirements. Cash balances increased $0.7million in the first three months of 2006 as compared to the balances at December 2005.

*Operating Activities*

Cash provided by operating activities increased $6.8million, to a $0.9 million in the first three months of 2006 from a negative$5.9 million for the first three months of 2005. The change in cash flow wasprimarily attributable to the continued decrease in sales and inventory whichwas partially offset by increases in accrued expenses. Due to the seasonality ofour retail business, operating results for the three months ended March 31,2006 are not necessarily indicative of operating results for the entire year. Therecan be no assurance that the Company will have positive cash flows in thefuture.

*Investing Activities*

 Capital andinvestment expenditures totaled $0.2 million in the first three months of 2006as compared to $0.4 million in the first three months of 2005. This decrease inexpenditures was the result of the capital covenant restrictions containedwithin the DIP facility.  In the firstthree months, the Company utilized $2.4 million in cash to collateralize itsletter of credit due to requirements in the DIP credit facility.

*Financing Activities*

**As discussed in Note 1 to the accompanying condensed consolidatedfinancial statements, Boyds is operating as a debtor—in-possession underChapter 11 of the U.S. Bankruptcy Code. As a result of the uncertaintysurrounding Boyds current circumstances, it is difficult to predict Boydsactual liquidity needs and sources at this time. However, based upon currentand anticipated levels of operations during the continuation of the bankruptcyproceedings, Boyds believes that its liquidity and capital resources will besufficient to maintain its normal operations at current levels. Boyds access toadditional financing while in the Chapter 11 bankruptcy process may be limited.**

On October 16,2005, pursuant to authorization from the Court, we entered into an $8 millionDIP credit facility. This DIP facility consists of an $8 million revolverfacility which includes access for $3.5

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million worth ofcommercial letters of credit. The letters of credit are required to be fullycash collateralized. The DIP facility limits the amount of capital expendituresduring its term to $250,000. As of March 31, 2006, the Company has notborrowed any amounts against the DIP credit facility.

As a consequence of our bankruptcy filing,pending litigation against us is generally stayed, and no party may take anyaction to collect its pre-petition claims except pursuant to order of the Court.February 14, 2006, was the deadline for claimants to file claims arisingprior to our bankruptcy filing. Differences between claim amounts identified byus and claims filed by claimants will be investigated and resolved inconnection with our claims resolution process, and only holders of claims thatare ultimately allowed for purposes of our bankruptcy will be entitled todistributions. Since the settlement of terms of allowed claims are subject to aconfirmed plan of reorganization, the ultimate distribution with respect to theallowed claims is not presently ascertainable.

The Company relieson the DIP credit facility to provide adequate funds for Boyds’ foreseeableworking capital needs, planned capital expenditures, debt service obligations, a stock repurchase program and a bond repurchaseprogram.

We arealso negotiating with one of our senior lenders to provide a new $11.0 millionrevolver with a $4.0 million seasonal over-advance option that supports lettersof credit and would provide us with access to additional capital to fundpost-reorganization operations. There can be no assurance that thesenegotiations will be successful.

Any futureacquisitions, joint ventures or other similar transactions may requireadditional capital and there can be no assurance that any such capital will beavailable to Boyds on acceptable terms, or at all. Boyds’ ability to fund itsworking capital needs, planned capital expenditures and scheduled debtpayments, to refinance indebtedness and to comply with all of the financialcovenants under its debt agreements depends on its future operating performanceand cash flow, which in turn are subject to prevailing economic conditions andto financial, business and other factors, some of which are beyond Boyds’control.

***EFFECTSOF RECENTLY ISSUED ACCOUNTING STANDARDS***

In December of 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123R, *Share-BasedPayment*. SFAS No. 123R addresses the accounting for share-basedpayments to employees, including grants of employee stock options. Under thenew standard, companies will no longer be able to account for share-basedcompensation transactions using the intrinsic method in accordance with APBOpinion No. 25, *Accounting for StockIssued to Employees.*Instead, companies are required to account forsuch transactions using a fair-value method and recognize the related expenseassociated with share-based payments in the condensed consolidated statement ofoperations. In April 2005, the Securities and Exchange Commission (“SEC”)delayed the effective date for SFAS No. 123R until the first quarter offiscal 2006, and allows, but does not require, companies to restate the fullfiscal year of 2005 or retroactive restatement to earlier periods to reflectthe impact of expensing share-based payments under SFAS No. 123R.. SFAS No. 123Rbecame effective for the Company on January 1, 2006. The adoption of SFAS No. 123Rand its effects are described in Note 9 — Stock Based Compensation.

In November of2004, the FASB issued SFAS No. 151, *Inventory Costs-anAmendment of ARB No. 43.*SFAS No. 151 amends the guidancein Accounting Research Bulletin (“ARB”) No 43, Chapter 4,

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*Inventory Pricing,* to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage). SFAS No. 151 requires that theseitems be recognized as current-period charges regardless of whether they meetthe criterion of “so abnormal.” In addition, SFAS No. 151 requires thatallocation of fixed production overhead to the costs of conversion be based onthe normal capacity of production facilities. The provisions of SFAS No. 151are effective for inventory costs incurred during fiscal years beginning after June 15,2005. The Company adopted SFAS 151 effective January 1, 2006. However, theadoption of SFAS No. 151 did not have an impact on the Company’s financialstatements as the Company’s accounting policies were already in conformancewith the key aspects of SFAS No. 151.

**RELATED PARTY TRANSACTIONS**

Kohlberg Kravis Roberts &Co. L.P. (“KKR”) represented a 39% stockholder of Boyds at the end of December 31,2005 and March 31, 2006. In 2005, KKR waived all management fees.

On October 16, 2005,the Company entered into a Securities Purchase Agreement (the “Agreement”),with KKR Fund 1996 L.P. (“KKR”), D.E. Shaw Laminar Portfolios, L.L.C. (the “Buyer”).Pursuant to the Agreement, on October 16, 2005, KKR sold to the Buyer11,795,725, approximately 20% shares of the Company’s common stock.

D.E. Shaw LaminarPortfolios, L.L.C. (“D.E. Shaw”) represents a 20% stockholder of Boyds and is amajority holder of senior secured debt, approximately $60 million, at the endof December 31, 2005 and March 31, 2006.

***FORWARDLOOKING STATEMENTS***

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

The forward-lookingstatements in this report are based on a number of assumptions and estimates,which are inherently subject to significant uncertainties and contingencies,many of which are beyond the control of Boyds, and reflect future businessdecisions that are subject to change. A variety of factors could cause actualresults to differ materially from those anticipated in Boyds’ forward-lookingstatements, including:  the inability tomeet the financial covenant tests under the New Credit Agreement; the inabilityto grow Boyds’ business as planned; the loss of either of Boyds’ twoindependent buying agencies or any of its manufacturing sources; economic orpolitical instability in the countries with which Boyds does business; changesto, or the imposition of, new regulations, duties, taxes or tariffs associatedwith the import or export of goods from or to the countries with which Boydsdoes business; and other risk factors that are discussed in this report and,from time to time, in other Securities and Exchange Commission reports andfilings. One or more of the factors discussed above may cause actual results todiffer materially from those expressed in or implied by the statements in thisreport.

Readers arecautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date of such statements. Boydsundertakes no obligation to publicly release the results of any revisions tothese forward-looking statements that may be made to reflect events or

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circumstancesafter the date of this report, or the date of such statements, as the case maybe, or to reflect the occurrence of unanticipated events.

**Item 3.                           Quantitative and QualitativeDisclosures About Market Risk.**

While operatingduring the Chapter 11 bankruptcy proceedings, Boyds faces no interest rate riskexposure in relation to its outstanding debt obligations of $90.9 million.Boyds has also ceased recording interest on its debt obligations during theChapter 11 proceedings.

Boyds facescurrency risk exposure that arises from translating the results of its Europeanand Canadian operations that are denominated in the local currency of the Euro,the British Pound and the Canadian dollar, to the U.S. dollar. The currencyrisk exposure is not material as the operations of the European and Canadiansubsidiaries do not have a material impact on the Company’s earnings.

Boyds also facesforeign exchange risks that arise from paying in United States Dollars forproducts that are manufactured in China. Recently, the Chinese governmentrevalued its currency, the renminbi, ending its link to the U.S. dollar. Whilethis is a significant change for China, the anticipated near term impacts tothe Company are believed to be minimal. While it does not do so now, in thefuture Boyds may, from time to time, enter into foreign exchange contracts orprepay inventory purchases as a partial hedge against currency fluctuations.Differences between the amounts of such contracts and costs of specificmaterial purchases are included in inventory and costs of sales. Boyds intendsto manage foreign exchange risks to the extent appropriate.

**Item 4.           Disclosure Controls and Procedures**

Boyds maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission (“SEC”), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Boyds carried out an evaluation of its disclosure controls and procedures, under the supervision and with the participation of the Chief Executive and Chief Financial Officers, as of March 31, 2006, and based on such evaluation, Boyds’ Chief Executive and Chief Financial Officers believe that these disclosure controls and procedures are effective to ensure that Boyds is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.

There have been no significant changes in Boyds’ internal controls or in other factors that could significantly affect these controls, subsequent to the date Boyds’ Chief Executive and Chief Financial Officers completed their evaluation.

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**PART IIOTHER INFORMATION**

**Item 1. LegalProceedings.**

On October 16,2005, the Company and certain of its subsidiaries (collectively, the “Debtors”)filed voluntary petitions for reorganization under chapter 11 of the BankruptcyCode, in the Bankruptcy Court. In connection with the bankruptcy filings, theCompany entered into a six month DIP financing agreement with DE Shaw LaminarPartners and Bank of America LLC which provides for revolving loans in theamount of $8 million with $3.5 million in collateralized letters of credit.

Management has assessed theliquidity position of the Company and its subsidiaries as a result of thebankruptcy filing and available DIP financing and believes that the Company andits subsidiaries will be able to fund their post-petition obligations until aplan of reorganization is finalized or another transaction is effected.

The Company is involved invarious legal proceedings, claims and governmental audits in the ordinarycourse of business. In the opinion of management, the ultimate disposition ofthese proceedings, claims and audits will not have a material adverse effect onthe financial position, results of operations, and cash flows of the Company.

**Item 1A.  Risk Factors Which May Affect FuturePerformance**

*Prolongedcontinuation of the Chapter 11 case may harm the Debtors’ business.*Theprolonged continuation of the Chapter 11 Cases could adversely affect theDebtors’ businesses and operations. So long as the Chapter 11 Cases continue,senior management of the Debtors will be required to spend a significant amountof time and effort dealing with the Debtors’ reorganization instead of focusingexclusively on business operations. Prolonged continuation of the Chapter 11Cases will also make it more difficult to attract and retain management andother key personnel necessary to the success and growth of the Debtors’businesses. In addition, the longer the Chapter 11 Cases continue, the morelikely it is that the Debtors’ customers, suppliers, distributors and agentswill lose confidence in the Debtors’ ability to successfully reorganize theirbusinesses and seek to establish alternative commercial relationships.Furthermore, so long as the Chapter 11 Cases continue, the Debtors will berequired to incur substantial costs for professional fees and other expensesassociated with the proceedings. The prolonged continuation of the Chapter 11Cases may also require the Debtors to seek additional financing, either as partof the DIP credit facility or otherwise, in order to service their debt andother obligations. It may not be possible for the Debtors to obtain additionalfinancing during the pendency of the Chapter 11 Cases on commercially favorableterms or at all. If the Debtors were to require additional financing during theChapter 11 Cases and were unable to obtain the financing on favorable terms orat all, the Debtors’ chances of successfully reorganizing their businesses maybe seriously jeopardized.

*TheDebtors may not be able to obtain confirmation of the plan.*The Debtors may not receive the requisite acceptances to confirm the Plan. Evenif the requisite acceptances of the Plan are received, the Bankruptcy Court maynot confirm the Plan. A dissenting holder of a claim against or equity interestin Boyds may challenge the balloting procedures and results as not being incompliance with the Bankruptcy Code. Even if the Bankruptcy Court determinedthat the balloting procedures and results were appropriate, the Bankruptcy Courtcould still decline to confirm the Plan if it found that any of the statutoryrequirements for confirmation had not been met, including that the terms of thePlan are fair and equitable to non-accepting Classes. Section 1129 of theBankruptcy Code sets forth the requirements for confirmation and requires,among other things, a finding by the Bankruptcy Court that 

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(i) the Plan “doesnot unfairly discriminate” and is “fair and equitable” with respect to anynon-accepting Classes, (ii) confirmation of the Plan is not likely to befollowed by a liquidation or a need for further financial reorganization and (iii) thevalue of distributions to non-accepting Holders of Claims within a particular Class underthe Plan will not be less than the value of distributions such Holders wouldreceive if the Debtors were liquidated under chapter 7 of the Bankruptcy Code.The Bankruptcy Court may determine that the Plan does not satisfy one or moreof these requirements, in which case it would not be confirmable by the BankruptcyCourt.

If the Plan is notconfirmed by the Bankruptcy Court, it is unclear whether the Debtors will beable to reorganize their businesses and what, if any, distributions holders ofclaims against or equity interests in Boyds ultimately would receive withrespect to their claims or equity interests. If an alternative reorganizationcould not be agreed upon, it is possible that the Debtors would have toliquidate their assets, in which case it is likely that holders of claims wouldreceive substantially less favorable treatment than they would receive underthe Plan.

 *The Change of Control Produced by the Restructuring of the Debtors mayResult in Limited use of Deferred Tax Assets.*As further discussedin the Disclosure Statement, the issuance under the Plan of common stock in areorganized Boyds, along with the cancellation of existing equity intereststhrough the Plan, is expected to cause an ownership change to occur withrespect to the reorganized Debtors as of the effective date of the Plan. As aresult, Section 382 of the Internal Revenue Code (“IRC”) may apply tolimit reorganized Boyd’s use of its consolidated net operating losses after theeffective date. Additionally, the reorganized Debtors’ ability to use anyremaining capital loss carryforwards and tax credits may be limited. The annuallimitation imposed by the particular provision of Section 382 of the IRCthat reorganized Boyds expects to apply to its ownership change generallyequals the product of (i) the fair market value of the net equity value ofreorganized Boyd’s stock at the time of the ownership change, taking intoaccount the increase in value of the corporation as a result of the surrenderor cancellation of creditor’s claims in the transaction (rather than the valuewithout taking into account such increases, as is the case under the general rule fornon-bankruptcy ownership changes) multiplied by (ii) the long-termtax-exempt rate in effect for the month in which the ownership change occurs.The long-term tax-exempt rate is published monthly by the IRS and is intendedto reflect current interest rates on long-term tax-exempt debt obligations.Accordingly, under this rule the Section 382 limitation wouldgenerally reflect the increase in the value of reorganized Boyd’s stock resultingfrom the conversion of debt to equity in the proceeding. Section 383 ofthe IRC applies a similar limitation to a capital loss carryforward and taxcredits. Although it is impossible to predict with absolute certainty the netequity value of Reorganized Boyds immediately after the exchanges contemplatedby the Plan, reorganized Boyd’s use of its net operating losses and otherdeferred assets is expected to be substantially limited after those exchanges.

*FinancialCondition and Liquidity***.****As discussed in Note 1 tothe accompanying condensed consolidated financial statements, Boyds isoperating as a debtors—in-possession under Chapter 11 of the U.S. BankruptcyCode. As a result of the uncertainty surrounding Boyds current circumstances,it is difficult to predict Boyds actual liquidity needs and sources at thistime. However, based upon current and anticipated levels of operations duringthe continuation of the bankruptcy proceedings, Boyds believes that itsliquidity and capital resources will be sufficient to maintain its normaloperations at current levels. Boyds access to additional financing while in theChapter 11 bankruptcy process may be limited.**

*Delistingfrom the New York Stock Exchange*. On October 10, 2005,the Company’s common stock was delisted from the New York Stock Exchange. Ourcommon stock is quoted on the New York Stock Exchange Over-the-Counter (OTC)bulletin board quotation service. This has reduced the market and liquidity ofthe Company’s common stock and consequently the ability of the Company’sstockholders and broker/dealers to purchase and sell our shares in an orderlymanner or at all. The volume of trading in the Company’s stock has continued todecline since our bankruptcy filing. Trading in the Company’s common stockthrough market makers and quotation on the OTC Bulletin Board

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entails other risks. Duein part to the decreased trading price of the Company’s common stock andreduced analyst coverage, the trading price of the Company’s common stock maychange quickly, and market makers may not be able to execute trades as quicklyas they could when the common stock was listed on the New York Stock Exchange. Althoughtrading continues, the Company expects that trading in its common stock maycease once a plan of reorganization is approved and a record date for approval of the plan is established.

*Ourability to continue as a “going concern” is uncertain.*Theaccompanying condensed consolidated financial statements have been preparedassuming that the Company will continue to operate as a going concern whichcontemplates continuity of operations, timely payment for services bycustomers, control of operating costs and expenses and the realization of assetsales and liquidation of liabilities and commitments. The bankruptcy filing andrelated circumstances, including our default on all pre-petition debt, thelosses from operations, as well as current economic conditions, raisesubstantial doubts about our ability to continue as a going concern. Theappropriateness of reporting on a going concern basis is dependent upon, amongother things, the availability of sufficient capital to meet expenses,confirmation of a plan of reorganization, future profitable operations,customer and employee retention and the ability to generate sufficient cashfrom operations and financing sources to meet the Company’s obligations as theybecome due. The Company has assumed all of the foregoing. Should some or all ofthe Company’s assumptions prove to be unfounded or prove to be untrue in thefuture, the Company’s results of operations and financial condition will beadversely affected and the Company’s ability to continue as a going concernwill be doubtful.

*Financial position impacted by changing distribution channels.*TheCompany’s historic distribution channels, mainly independent retailers, haveseen significant declines in traffic for several years. Consumers have migratedto larger, more convenient retailers, which provide for a full array ofproducts and services. If the Company is unable to migrate it salesdistribution to channels which mirror consumers buying tendencies,then its revenues could be significantly impacted.

*Financial Position impacted by changing consumer tastes.*Thedemand for Boyds’ products may be quickly affected by changing consumer tastesand interests. Boyds’ results of operations depend substantially upon itsability to 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.

*Dependenceon two independent buying agencies.*Substantially all of theproducts 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 manufacturers with which theycontract. Boyds does not have long-term contracts with either of its primarybuying agencies. Boyds believes that the loss of either of its primary buyingagencies would (1) have a material adverse affect on its financialcondition and results of operations, (2) cause disruptions in its orders, (3) affectthe quality of its products, and (4) possibly require it to selectalternative manufacturers. In 2004, the Company began contracting its plushbuying with three additional buying groups in an effort to mitigate this risk.

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*Potentialeconomic and political risks of China.*All of Boyds’significant manufacturers are located in China. Although Boyds has identifiedalternate manufacturers which could meet its quality and reliability standardsat similar costs in China and in other countries, the loss of any one or moreof its manufacturers could have a material adverse effect on its business. BecauseBoyds relies primarily on Chinese manufacturers, it is subject to the followingrisks that could restrict its manufacturers’ ability to make its products orincrease its manufacturing costs: (1) economic and political instabilityin China; (2) transportation delays; (3) restrictive actions by theChinese government; (4) the laws and policies of the United Statesaffecting importation of goods, including duties, quotas and taxes; (5) Chinesetrade and tax laws. In particular, Boyds’ business could be adversely affectedif the Chinese renminbi appreciates significantly relative to the United Statesdollar due to the cost of its products fluctuating with the value of theChinese renminbi. Recently, the Chinese government revalued its currency, therenminbi, ending its link to the U.S. dollar. While this is a significantchange for China, the anticipated near term impacts to the Company are believedto be minimal.

*Potentialadverse trade regulations and restrictions.*Boyds does notown or operate any manufacturing facilities. Instead, Boyds importssubstantially 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. Theseregulations include requirements that Boyds disclose information regarding thecountry of origin on its products, such as “Handmade in China.” Within itsdiscretion, 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.

*Potentialforeign restrictions or additional costs.*The countries inwhich Boyds’ products are manufactured may impose new quotas, duties, tariffsor other charges or restrictions. This could adversely affect Boyds’ financialcondition, results of operations or its ability to continue to import productsat current or increased levels. In particular, Boyds’ costs could increase, orthe mix of countries from which Boyds imports its products may be changed, ifthe Generalized System of Preferences program is not renewed or extended eachyear. The Generalized System of Preferences program allows selected products ofbeneficiary countries to enter the United States duty free. In addition, ifcountries that are currently accorded “Most Favored Nation” status by theUnited States, such as China, cease to have such status, Boyds could beadversely affected. Boyds cannot predict what regulatory changes may occur orthe type or amount of any financial impact these changes may have on it in thefuture.

 *Potential infringement ofBoyds’ intellectual property.*Boyds believes that its trademarks andother proprietary 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 ownership of, its trademarks andother proprietary rights. Boyds may not be able to successfully resolve suchconflicts. In addition, the laws of foreign countries may not always protectintellectual property to the same extent as do the laws of the United States.

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds—None**

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**Item3. Defaults Upon Senior Securities**

As of October 16, 2005, the Company was not in compliance with oneor more of the financial covenants contained in the New Credit Agreement.  Such noncompliance constitutes an “event ofdefault” under the New Credit Agreement. The Company received a waiver of suchevents of default from the lenders under the New Credit Agreement through October 15,2005. On October 16, 2005, Company and certain of its subsidiaries filedvoluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code,in the United States Bankruptcy Court for the District of Maryland.

**Item4. Submission of Matters to a Vote of Security Holders—None**

**Item5. Other Information**

**Item 6. Exhibits**

(a) Exhibits — See Index to Exhibits

#### **SIGNATURES**

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

Date:       June 8, 2006
|     |   |   |   | The Boyds Collection, Ltd. |
|----------|--------|--------|--------|----------------------------|
|     |   |   |   |                       |
|     |   |   |   |                       |
|     |   |   |   | By:                        |   | /s/ Jan L. Murley |
|     |   |   |   | Name:                      |   | Jan L. Murley |
|     |   |   |   | Title:                     |   | Chief Executive Officer |
|     |   |   |   |                       |   |   |
|     |   |   |   |                       |   |   |
|     |   |   |   | By:                        |   | /s/ Joseph E. Macharsky |
|     |   |   |   | Name:                      |   | Joseph E. Macharsky |
| * * |   |   |   | Title:                     | * * | Chief Financial Officer |

* *

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Index to Exhibits

|      | **Exhibit  No.** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Description** | ** ** | ** ** |
|------|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|
| 31.1 |             | Certification of Chief  Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2 |             | Certification of Chief  Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1 |             | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This  certification is being furnished in accordance with the Sarbanes-Oxley Act of  2002 and Commission Release No. 34-47551 and shall not be deemed  “filed” with the Commission for purposes of Section 18 of the Exchange  Act, or otherwise subject to the liability of that section, and shall not be  deemed to be incorporated by reference into any filing under the Securities  Act of the Exchange Act, except to the extent that the Registrant  specifically incorporates it by reference.)* |
| 32.2 |             | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This  certification is being furnished in accordance with the Sarbanes-Oxley Act of  2002 and Commission Release No. 34-47551 and shall not be deemed  “filed” with the Commission for purposes of Section 18 of the Exchange  Act, or otherwise subject to the liability of that section, and shall not be  deemed to be incorporated by reference into any filing under the Securities  Act of the Exchange Act, except to the extent that the Registrant  specifically incorporates it by reference.)* |
| 99.1 |             | Debtors Second Amended  Joint Plan of Reorganization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 99.2 |             | Disclosure Statement for Debtors’ Second Amended  Joint Plan of Reorganization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

*    Filed herewith

 

37

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