**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

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

 

### **For the Quarterly PeriodEnded June 30, 2005**

### ** **

**OR**

 

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

 

### **For the Transition periodfrom         to        **

### ** **

**Commission File Number:  001-14843**

 

**THE BOYDS COLLECTION, LTD.**

(Exact Name of Registrant as Specified in its Charter)

 
| **Maryland**                                                                   | ** ** | **52-1418730**                       |
|--------------------------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation or  Organization)                |       | (I.R.S. Employer Identification No.) |
|                                                                           |       |                                 |
| **350 South Street, McSherrystown,  Pennsylvania, Attn.: Joseph E. Macharsky** | ** ** | **17344**                            |
| (Address of Principal Executive Offices)                                       |       | (Zip Code)                           |

 

**(717) 633-9898**

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

 

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** |   | **59,008,133**                         |
|----------------------------------------------|--------|----------------------------------------|
| (Class)                                      |   | (Outstanding as of July 25, 2005) |

 

 

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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, 2004 and June 30, 2005                   |   |
|          |                                                                                                         |   |
|          | Condensed Consolidated  Statements of Income for the Three and Six Months Ended June 30, 2004  and 2005 |   |
|          |                                                                                                         |   |
|          | Condensed Consolidated  Statement of Stockholders’ Equity for the Six Months Ended June 30, 2005   |   |
|          |                                                                                                         |   |
|          | Condensed Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2005        |   |
|          |                                                                                                         |   |
|          | 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 2.**   | **Changes in Securities and  Use of Proceeds**                                                               |   |
|          |                                                                                                         |   |
| **Item 3.**   | **Defaults Upon Senior  Securities**                                                                         |   |
|          |                                                                                                         |   |
| **Item 4.**   | **Submission of Matters to a  Vote of Security Holders**                                                     |   |
|          |                                                                                                         |   |
| **Item 5.**   | **Other Information**                                                                                        |   |
|          |                                                                                                         |   |
| **Item 6.**   | **Exhibits**                                                                                                 |   |
|          |                                                                                                         |   |
|          | Signatures                                                                                                   |   |
|          |                                                                                                         |   |
|          | Index to Exhibits                                                                                            |   |

 

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**PART I**

**FINANCIALINFORMATION**

 

**Item 1.****                                  ****Financial Statements.**

 

**THE BOYDS COLLECTION, LTD.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**As of December 31, 2004 and June 30,2005**

**Unaudited**

 
| ** **                                                                                                                                          | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                          | ** ** | **2004**              | ** ** | **2005**          | ** ** |
| ** **                                                                                                                                          | ** ** | **(in thousands)**    | ** ** |
| **ASSETS**                                                                                                                                          | ** ** | ** **            | ** ** | ** **        | ** ** |
| ** **                                                                                                                                          | ** ** | ** **            | ** ** | ** **        | ** ** |
| **CURRENT ASSETS:**                                                                                                                                 |       |                  |       |              |       |
| Cash and cash equivalents                                                                                                                           |       | $                     | 354        |              | $          | 2,579 |   |
| Accounts receivable, less allowances of $2,390 at December 31,  2004, and $1,861 at June 30, 2005                                         |       | 8,581                 |       | 8,327             |       |
| Inventory - primarily finished goods, less allowance  for obsolete inventory of $2,719 at December 31, 2004, and $5,094 at June 30,  2005 |       | 13,462                |       | 15,671            |       |
| Inventory in transit                                                                                                                                |       | 2,666                 |       | 301               |       |
| Other current assets                                                                                                                                |       | 854                   |       | 1,107             |       |
| Deferred income taxes (Note 9)                                                                                                                      |       | 19,485                |       | —            |       |
| Total current assets                                                                                                                                |       | 45,402                |       | 27,985            |       |
|                                                                                                                                                |       |                  |       |              |       |
| **PROPERTY AND EQUIPMENT - NET**(Note  4)                                                                                                           |       | 35,081                |       | 34,679            |       |
|                                                                                                                                                |       |                  |       |              |       |
| **OTHER ASSETS:**                                                                                                                                   |       |                  |       |              |       |
| Deferred debt issuance costs                                                                                                                        |       | 645                   |       | 3,842             |       |
| Deferred tax asset (Note 9)                                                                                                                         |       | 145,435               |       | —            |       |
| Other assets                                                                                                                                        |       | 2,997                 |       | 429               |       |
| Total other assets                                                                                                                                  |       | 149,077               |       | 4,271             |       |
| **TOTAL ASSETS**                                                                                                                                    |       | $                     | 229,560    |              | $          | 66,935 |   |
|                                                                                                                                                |       |                  |       |              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                       |       |                  |       |              |       |
|                                                                                                                                                |       |                  |       |              |       |
| **CURRENT LIABILITIES:**                                                                                                                            |       |                  |       |              |       |
| Accounts payable                                                                                                                                    |       | $                     | 4,420      |              | $          | 4,873 |   |
| Accrued expenses                                                                                                                                    |       | 5,708                 |       | 3,961             |       |
| Income taxes payable                                                                                                                                |       | 474                   |       | 490               |       |
| Interest payable                                                                                                                                    |       | 570                   |       | 1,554             |       |
| Total current liabilities                                                                                                                           |       | 11,172                |       | 10,878            |       |
|                                                                                                                                                |       |                  |       |              |       |
| **LONG-TERM DEBT**(Note 6)                                                                                                                          |       | 75,142                |       | 90,892            |       |
|                                                                                                                                                |       |                  |       |              |       |
| **COMMITMENTS AND CONTINGENCIES**(Notes  2 and 10)                                                                                                  |       |                  |       |              |       |
|                                                                                                                                                |       |                  |       |              |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                      |       |                  |       |              |       |
| Common stock (61,838 shares issued at December 31,  2004, and June 30, 2005, respectively) and paid-in capital in excess of  par          |       | (41,221               | )          | (41,254           | )          |
| Other comprehensive income:                                                                                                                         |       |                  |       |              |       |
| Accumulated other comprehensive loss                                                                                                                |       | (407                  | )          | 142               |       |
| Retained earnings                                                                                                                                   |       | 212,312               |       | 33,664            |       |
| Less: Treasury shares at cost (2,834 at December 31,  2004, and 2,830 at June 30, 2005)                                                   |       | (27,438               | )          | (27,387           | )          |
| Total stockholders’ equity                                                                                                                     |       | 143,246               |       | (34,835           | )          |
|                                                                                                                                                |       |                  |       |              |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                 |       | $                     | 229,560    |              | $          | 66,935 |   |

 

See notes tocondensed consolidated financial statements.

 

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**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**For the Three and Six Months Ended June 30, 2004 and2005**

**(Unaudited)**

 
| ** **                                          | ** ** | **Three Months Ended**                        | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **June 30,**                             | ** ** | **June 30,**    | ** ** |
| ** **                                          | ** ** | **2004**                                      | ** ** | **2005**             | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(in thousands, except per share  amounts)** | ** ** |
|                                                |       |                                          |       |                 |       |   |   |   |   |
| **NET SALES**                                       |       | $                                             | 22,626     |                 | $          | 17,111 |   | $ | 48,963 |   | $ | 35,644 |   |
| **COST OF GOODS SOLD**                              |       | 8,728                                         |       | 9,193                |       | 19,182 |   | 19,323 |   |
| **GROSS PROFIT**                                    |       | 13,898                                        |       | 7,918                |       | 29,781 |   | 16,321 |   |
| **SELLING, GENERAL AND ADMINISTRATIVE EXPENSES**    |       | 11,765                                        |       | 10,086               |       | 21,691 |   | 20,788 |   |
| **IMPAIRMENT OF GOODWILL (Note 5)**                 |       | —                                        |       | —               |       | — |   | 2,600 |   |
| **INCOME/(LOSS) FROM OPERATIONS**                   |       | 2,133                                         |       | (2,168               | )          | 8,090 |   | (7,067 | ) |
| **OTHER EXPENSE**                                   |       | (17                                           | )          | (480                 | )          | (96 | ) | (605 | ) |
| **INTEREST EXPENSE:**                               |       |                                          |       |                 |       |   |   |   |   |
| Interest expense                                    |       | 1,008                                         |       | 2,991                |       | 2,022 |   | 4,972 |   |
| Amortization of deferred debt issuance costs        |       | 86                                            |       | 353                  |       | 165 |   | 555 |   |
| **TOTAL INTEREST EXPENSE**                          |       | 1,094                                         |       | 3,344                |       | 2,187 |   | 5,527 |   |
|                                                |       |                                          |       |                 |       |   |   |   |   |
| **INCOME/(LOSS) BEFORE PROVISION FOR INCOME TAXES** |       | 1,022                                         |       | (5,992               | )          | 5,807 |   | (13,199 | ) |
| **PROVISION FOR INCOME TAXES (Note 9)**             |       | 495                                           |       | 95,364               |       | 2,486 |   | 165,449 |   |
| **NET INCOME/(LOSS)**                               |       | $                                             | 527        |                 | $          | (101,356 | ) | $ | 3,321 |   | $ | (178,648 | ) |
|                                                |       |                                          |       |                 |       |   |   |   |   |
| **EARNINGS/(LOSS) PER SHARE:**                      |       |                                          |       |                 |       |   |   |   |   |
| Basic Earnings Per Share - Net Income/(Loss)        |       | $                                             | 0.01       |                 | $          | (1.72 | ) | $ | 0.06 |   | $ | (3.03 | ) |
| Dilutive Earnings Per Share - Net Income/(Loss)     |       | $                                             | 0.01       |                 | $          | (1.72 | ) | $ | 0.06 |   | $ | (3.02 | ) |

 

 

Seenotes to condensed consolidated financial statements.

 

4

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**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY**

**For the Six Months Ended June 30,2005**

**(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/(Loss)** | ** ** | **Earnings** | ** ** | **Stock**    | ** ** | **Equity**             | ** ** | **Income** | ** ** |
| ** **                                                |       | **(in thousands)** |       |
|                                                      |       |               |       |             |       |              |       |              |       |         |       |         |       |                   |       |   |   |
| **BALANCE, JANUARY 1, 2005**                         |       | 61,838             |       | 2,834            |       | $                 | (41,221    | )                 | $          | (407         | )          | $            | 212,312    |                   | $          | (27,438 | ) | $ | 143,246 |   |   |   |
| Issuance of common stock                                  |       |               |       | (4               | )          | (33               | )          |              |       |         |       | 51           |       | 18                     |       |   |   |
| Other comprehensive income: Foreign currency  translation |       | —             |       | —           |       | —            |       | 549               |       | —       |       | —       |       | 549                    |       | $ | 549 |   |
| Net loss                                                  |       | —             |       | —           |       | —            |       | —            |       | (178,648     | )          | —       |       | (178,648               | )          | (178,648 | ) |
| Comprehensive loss                                        |       | —             |       | —           |       | —            |       | —            |       | —       |       | —       |       | —                 |       | $ | (178,099 | ) |
|                                                      |       |               |       |             |       |              |       |              |       |         |       |         |       |                   |       |   |   |
| **BALANCE, June 30, 2005**                           |       | 61,838             |       | 2,830            |       | $                 | (41,254    | )                 | $          | 142          |       | $            | 33,664     |                   | (27,387    | ) | $ | (34,835 | ) |   |   |
|                                                           |            |                    |            |                  |            |                   |            |                   |            |              |            |              |            |                        |            |  |  |  |  |  |  |  |  |

 

See notes to condensed consolidated financialstatements.

 

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**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Six Months Ended June 30, 2004 and 2005**

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                          | ** ** | **June 30,**    | ** ** |
| ** **                                                                                          | ** ** | **2004**             | ** ** | **2005** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands)**   | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                           |       |                 |       |   |   |
| Net income/(loss)                                                                                   |       | $                    | 3,321      |   | $ | (178,648 | ) |
| Adjustments to reconcile net income/(loss) to net  cash provided by/(used in) operating activities: |       |                 |       |   |   |
| Depreciation and amortization                                                                       |       | 944                  |       | 1,241 |   |
| Amortization and write off of deferred debt issuance  costs                                         |       | 165                  |       | 556 |   |
| Loss on sale of equipment                                                                           |       | (3                   | )          | — |   |
| Deferred taxes                                                                                      |       | 2,388                |       | 164,920 |   |
| Impairment of goodwill                                                                              |       | —               |       | 2,600 |   |
| Changes in assets and liabilities:                                                                  |       |                 |       |   |   |
| Accounts receivable - net                                                                           |       | (4,607               | )          | 254 |   |
| Inventory - net                                                                                     |       | (2,839               | )          | (2,209 | ) |
| Inventory in transit                                                                                |       | 3,303                |       | 2,365 |   |
| Other current assets                                                                                |       | (209                 | )          | (253 | ) |
| Other assets                                                                                        |       | (14                  | )          | (63 | ) |
| Accounts payable                                                                                    |       | 1,090                |       | 453 |   |
| Accrued expenses                                                                                    |       | 297                  |       | (1,747 | ) |
| Accrued taxes/Income taxes receivable                                                               |       | 1,042                |       | 16 |   |
| Interest payable                                                                                    |       | (25                  | )          | 984 |   |
| Net cash provided by/ (used in) operating activities                                                |       | 4,853                |       | (9,531 | ) |
|                                                                                                |       |                 |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                           |       |                 |       |   |   |
| Purchase of property and equipment                                                                  |       | (4,310               | )          | (808 | ) |
| Net cash used in investing activities                                                               |       | (4,310               | )          | (808 | ) |
|                                                                                                |       |                 |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                           |       |                 |       |   |   |
| Net Borrowings/(Payments) on credit agreement, “Revolver”                                 |       | 10,000               |       | (12,750 | ) |
| Payment on credit agreement, “Term Loan”                                                  |       | (14,000              | )          | (28,000 | ) |
| Borrowings from credit agreement, “New Term Loan”                                         |       | —               |       | 45,000 |   |
| Net Borrowings from credit agreement, “New Revolver”                                      |       | —               |       | 11,500 |   |
| Deferred debt issuance costs                                                                        |       | —               |       | (3,753 | ) |
| Exercise of stock options                                                                           |       | —               |       | 51 |   |
| Tax benefit from exercise of stock options                                                          |       | —               |       | (33 | ) |
| Net cash (used in)/ provided by financing activities                                                |       | (4,000               | )          | 12,015 |   |
|                                                                                                |       |                 |       |   |   |
| Effect of exchange rate changes on cash                                                             |       | 23                   |       | 549 |   |
|                                                                                                |       |                 |       |   |   |
| **NET INCREASE/(DECREASE) IN CASH AND CASH  EQUIVALENTS**                                           |       | (3,434               | )          | 2,225 |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD**                                                  |       | 4,173                |       | 354 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                                        |       | $                    | 739        |   | $ | 2,579 |   |
| **CASH PAID DURING THE PERIOD FOR INTEREST**                                                        |       | $                    | 2,047      |   | $ | 3,988 |   |
| **CASH PAID/(RECEIVED) DURING THE PERIOD FOR  INCOME TAXES**                                        |       | $                    | (969       | ) | $ | 528 |   |

 

See notes to condensed consolidated financialstatements.

 

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**THE BOYDS COLLECTION, LTD.**

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

**(Amounts in thousands, except share and per shareamounts)**

**(Unaudited)**

 

**1.****                                      INTERIMFINANCIAL STATEMENTS**

 

The Boyds Collection, Ltd. (“Boyds” or the “Company”)operates in two segments, which consist of the Company’s wholesalegift/collectible business and the Company’s retail gift/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 stores are being used to generateincome and expand the brand awareness and image of Boyds.  Substantially all of the Company’s productsare sourced from foreign manufacturers in China through buying agencies.

 

The condensed consolidated balance sheet as of June 30,2005, the condensed consolidated statements of income for the three and six monthsended June 30, 2004 and 2005, the condensed consolidated statement ofstockholders’ equity for the six months ended June 30, 2005 and thecondensed consolidated statements of cash flows for the six months ended June 30,2004 and 2005 are unaudited.  In theopinion of management, all adjustments, necessary for a fair presentation ofsuch interim financial statements have been included.  The results of operations for the six monthsended June 30, 2005 are not necessarily indicative of the results to beexpected for the full year.  Thesefinancial statements should be read in conjunction with the financialstatements and notes included in Boyds’ Annual Report on Form 10-K filedwith the Securities and Exchange Commission on March 30, 2005.

 

The Company recorded anunaudited consolidated net loss of $178.6 million for the six months ended June 30,2005.  The loss reflects the continueddifficulties within the Company’s specialty retail sector, the length of timeit has taken to transform to more national/giftable retailers, and the seasonalnature of the Company’s retail segment. As discussed elsewhere in this Form 10Q, our financial results forthe six month period ending June 30, 2005 included three non-cash chargesamounting to $168.8 million associated with an increased valuation allowancefor the Company’s deferred tax assets and the impairment of the Company’sgoodwill.  See Notes 5 and 9 in the Notesto the Consolidated Financial Statements in this Form 10Q.

 

In the six months ended June 30,2005, the Company used $9.5 million in cash to operate its businesses.   The use of this cash was a result ofdecreased sales as compared to the same period in the prior year, theseasonality of the Company’s retail segment, and increased interest costsassociated with the Company’s New Credit Agreement.  There can be no assurance that the Companywill have positive cash flows in the future.

 

Based on the Company’scurrent financial performance, management believes that there is a significantlikelihood that the Company will not be in compliance with one or more of thefinancial covenants contained in the New Credit Agreement as of the end of thethird and fourth quarters of 2005.  Suchnoncompliance would constitute an “event of default” under the New CreditAgreement, providing the lenders holding more than 55% of the sum of the loansthereunder with the ability either to require the entire outstanding amount ofdebt and accrued interest to be repaid immediately or to increase the rate ofinterest payable by 2.0% per annum.  Inaddition, to the extent that an event of

 

7

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default under the New Credit Agreement occurs and iscontinuing, the Company would be unable to access remaining availability underthe New Revolver.

 

In December of 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting 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 will be required to accountfor such transactions using a fair-value method and recognize the relatedexpense associated with share-based payments in the consolidated statement ofoperations. In April 2005, the Securities and Exchange Commission (“SEC”) delayedthe effective date for SFAS No. 123R until the first quarter of fiscal2006, and allows, but does not require, companies to restate the full fiscalyear of 2005 or retroactive restatement to earlier periods to reflect theimpact of expensing share-based payments under SFAS No. 123R. The Companyhas not yet determined which fair-value method and transitional provision itwill follow. The Company is currently assessing the impact that SFAS No. 123Rwill have on the financial position, results of operations and cash flows ofBoyds.

 

In March 2005, the SECissued Staff Accounting Bulletin No. (“SAB”) 107 regarding the Staff’sinterpretation of Share-Based Payments. This interpretation provides the Staff’s view regarding interactionsbetween SFAS No. 123R and certain SEC rules and regulations andprovides interpretations of the valuation of share-based payments for publiccompanies.  The interpretive guidance isintended to assist companies in applying the provisions of SFAS No. 123Rand investors and users of the financial statements in analyzing theinformation provided.  The Company willadopt SAB 107 in connection with its adoption of SFAS No. 123R.

 

In November of 2004,the FASB issued SFAS No. 151, *Inventory Costs-anAmendment of ARB No. 43 .* SFAS No. 151 amends the guidance inAccounting 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).  SFAS No. 151 requires that these itemsbe recognized as current-period charges regardless of whether they meet thecriterion 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 adoption of SFAS No. 151 is not expected to have a materialimpact on the financial position, results of operations or cash flow of Boyds.

 

In December 2004, theFASB issued SFAS No. 153, *Exchange of NonmonetaryAssets* – An Amendment of APB Opinion No. 29, *Accounting for Nonmonetary Transactions*.  SFAS No. 153 eliminates the exceptionfrom fair value measurement from nonmonetary exchanges of similar productiveassets in paragraph 21(b) of APB Opinion No. 29 and replaces it withan exception for exchanges that do not have commericial substance.  SFAS No. 153 is effective for periodsbeginning after June 15, 2005.  Theadoption of this Statement is not expected to have a material impact on thefinancial position, results of operations or cash flow of Boyds.

 

In May 2005, the FASB issued SFAS No. 154*, AccountingChanges and Error Corrections -*a replacement of APB Opinion No. 20and FASB Statement No. 3. SFAS No. 154 requires retrospectiveapplication to prior periods financial statements for changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. SFAS No. 154 also requiresthat retrospective application of a change in accounting principle be limitedto the direct effects of the change. Indirect effects of a change in accountingprinciple should be recognized in the period of the accounting change. SFAS No. 154further requires a change in depreciation, amortization or depletion method forlong-live, non-financial assets to be accounted for as a change in accountingestimate effected by a change in accounting principle. SFAS No. 154 is

 

8

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effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.   Theadoption of this Statement is not expected to have a material impact on thefinancial position, results of operations or cash flow of Boyds.

 

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

 

At December 31, 2004 and at June 30, 2005,Boyds had letters of credit outstanding under its credit agreement amounting to$4.6 million and $3.5 million, respectively. These letters of credit represent Boyds’ commitment to purchaseinventory which is to be produced and/or shipped.

 

**3.****                                      RELATEDPARTY TRANSACTIONS**

 

Kohlberg, Kravis Roberts & Co. L.P. and itsaffiliates (collectively, “KKR”) is a 59% shareholder of Boyds. For the threeand six months ended June 30, 2004, Boyds paid to KKR approximately $0.1million and $0.2 million, respectively, for management fees and relatedexpenses. KKR has waived all management fees for 2005. Any related expensesincurred by KKR in 2005 will be paid by Boyds.

 

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

 

The components of property and equipment at December 31,2004 and June 30, 2005 were, as follows:

 
| ** **                                      | ** ** | **December 31,** | ** ** | **June 30** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2004**              | ** ** | **2005**         | ** ** |
| ** **                                      | ** ** | **(in thousands)**    | ** ** |
| Land                                            |       | $                     | 3,570      |             | $          | 3,570 |   |
| Building                                        |       | 28,346                |       | 28,675           |       |
| Construction in progress                        |       | 1,449                 |       | 1,734            |       |
| Equipment                                       |       | 5,407                 |       | 5,539            |       |
| Software development costs                      |       | 2,479                 |       | 2,479            |       |
| Leasehold improvements                          |       | 1,944                 |       | 1,953            |       |
| Furniture and fixtures                          |       | 1,076                 |       | 1,097            |       |
| Total                                           |       | 44,271                |       | 45,047           |       |
| Less: accumulated depreciation and amortization |       | (9,190                | )          | (10,368          | )          |
| Total                                           |       | $                     | 35,081     |             | $          | 34,679 |   |

 

**5.****                                      GOODWILLASSETS**

 

In July 2001, the FASBissued SFAS No. 142, *Goodwill and OtherIntangible Assets*, which was effective January 1, 2002 (SFAS No. 142).SFAS No.142 requires, among other things, the discontinuance of goodwill   amortization.   The Company stopped amortizing its goodwillas of January 1, 2002.  The Companytested for impairment by comparing the fair value of the reporting unit withthe carrying value of that unit.  Fairvalue was determined based on the discounted cash flow method.  As a result of the Company’s impairment testcompleted in the first quarter of 2005, the Company recorded an impairment lossof $2.6 million to reduce the carrying value of goodwill to zero.  The impairment was caused by a continueddecline in wholesale sales and results.  Goodwillis included within other assets as of December 31, 2004.

 

9

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**6.****                                      LONG-TERMDEBT**

 

Long-term debt is summarized as follows:

 
| ** **                                                                                                                                | ** ** | **December 31,** | ** ** | **June 30** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                                                                                                                | ** ** | **2004**              | ** ** | **2005**         | ** ** |
| ** **                                                                                                                                | ** ** | **(in thousands)**    | ** ** |
| Credit Agreement:                                                                                                                         |       |                  |       |             |       |
| Secured Tranche A Term Loan due April 2005 (the  “Term Loan”)  Interest based on LIBOR or base rate as defined             |       | $                     | 28,000     |             | $          | — |   |
| Secured revolving credit facility due April 2005  (the “Revolver”)  Interest based on LIBOR or base rate as defined        |       | 12,750                |       | —           |       |
|                                                                                                                                      |       |                  |       |             |       |
| New Credit Agreement:                                                                                                                     |       |                  |       |             |       |
| Secured Term Loan due February 2008 (the “New  Term Loan”)  Interest based on LIBOR or base rate as defined                |       | —                |       | 45,000           |       |
| Secured revolving credit facility due February 2008  (the “New Revolver”)  Interest based on LIBOR or base rate as defined |       | —                |       | 11,500           |       |
|                                                                                                                                      |       |                  |       |             |       |
| 9% Senior Subordinated Notes due May 15, 2008                                                                                        |       | 34,392                |       | 34,392           |       |
|                                                                                                                                      |       |                  |       |             |       |
|                                                                                                                                      |       | $                     | 75,142     |             | $          | 90,892 |   |

 

On February 23, 2005,the Company entered into a new $45 million credit agreement, the “New CreditAgreement” and used the proceeds to extinguish the Credit Agreement includingthe Term Loan of $28 million and the outstanding Revolver of $12.75 million.

 

The New Credit Agreementcontains a revolving credit facility “the New Revolver” with capacity of up to$20 million and a New Term Loan of $45 million. The New Credit Agreement has aninterest rate of either a base rate, which is the higher of the prime lendingrate or 0.50% above the federal funds effective rate, plus 9.50% or LIBOR plus11.00%.  The Company incurredapproximately $3.8 million of deferred financing costs associated with thistransaction. The New 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 New Term Loan and New Revolver prior to maturity.

 

At December 31, 2004and June 30, 2005, the weighted average interest rates in effect for theTerm Loan and New Term Loan were 1.75% and 14.27%, respectively. At December 31,2004 and June 30, 2005, the weighted average interest rate in effect forthe Revolver and New Revolver were 3.38% and 15.25%, respectively.

 

The New Credit Agreementcontains financial covenants, tested quarterly, of minimum consolidatedadjusted EBITDA (as defined in the New Credit Agreement), maximum seniorleverage and maximum total leverage.  Atthe end of the third and fourth quarters of 2005, Boyds must maintain (i) aconsolidated senior leverage ratio of not greater than 2.5 to 1, (ii) amaximum leverage ratio of not greater than 4.5 to 1 and (iii) a minimumconsolidated adjusted EBITDA of not less than $17 million. The New CreditAgreement also contains customary covenants, including covenants that restrictthe Company’s ability to incur additional indebtedness, make capitalexpenditures, pay dividends on and redeem capital stock, make other restrictedpayments, make investments, sell its assets and enter into consolidations,mergers and transfers of all or substantially all of its assets.

 

10

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The Senior SubordinatedNotes (the “Notes”) have an optional redemption feature exercisable by Boydsany time on or after May 15, 2005 at 101.5% of face value. Each yearthereafter, the rate decreases by 1.5%. Interest on the Notes is payablesemiannually on May 15 and November 15.

 

The scheduled maturities of the Company’s long-termdebt are as follows:

 
| 2005   |   | $      | — |   |
|--------|--------|--------|--------|--------|
| 2006   |   | — |   |
| 2007   |   | — |   |
| 2008   |   | 90,892 |   |
|   |   | $      | 90,892 |   |

 

**7.****                                      SEGMENTSOF THE COMPANY AND RELATED INFORMATION**

 

The Company operates in two segments which consist ofthe Company’s wholesale gift/collectible business and the Company’s retailgift/entertainment business.  Thesesegments are evaluated regularly by the Company’s Chief Executive Officer indeciding how to assess performance and allocate resources.  Prior to the retail operations becoming asignificant portion of the Company’s performance, the Company had only onereportable segment.

 

The Company’s wholesale business designs, imports, anddistributes resin figurines, plush animals, and other specialty giftwareproducts via a global network of independent and national retailers anddistributors.   The Company’s retailoperation sells resin figurines, plush animals, specialty giftware products andprovides a unique interactive entertainment experience directly to the endconsumer at its Gettysburg, Pennsylvania flagship location and its PigeonForge, Tennessee location.

 

11

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| ** **                    | ** ** | **For the Three Months Ended, June 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                      | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **Wholesale**                                 | ** ** | **Retail** | ** ** | **Consolidated** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| Sales                         |       | $                                             | 19,044     |   | $ | 3,582 |   | $ | 22,626 |   | $ | 11,641 |   | $ | 5,470 |   | $ | 17,111 |   |
| Gross Profit                  |       | 11,169                                        |       | 2,729 |   | 13,898 |   | 4,050 |   | 3,868 |   | $ | 7,918 |   |
| SG&A                      |       | 9,684                                         |       | 2,081 |   | 11,765 |   | 6,740 |   | 3,346 |   | $ | 10,086 |   |
| Income/(Loss) from Operations |       | $                                             | 1,485      |   | $ | 648 |   | $ | 2,133 |   | $ | (2,690 | ) | $ | 522 |   | $ | (2,168 | ) |

 
| ** **                           | ** ** | **For the Six Months Ended, June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                    | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **Wholesale**                               | ** ** | **Retail** | ** ** | **Consolidated** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| Sales                                |       | $                                           | 43,312     |   | $ | 5,651 |   | $ | 48,963 |   | $ | 26,916 |   | $ | 8,728 |   | $ | 35,644 |   |
| Gross Profit                         |       | 25,526                                      |       | 4,255 |   | 29,781 |   | 10,184 |   | 6,137 |   | 16,321 |   |
| SG&A                             |       | 17,750                                      |       | 3,941 |   | 21,691 |   | 14,277 |   | 6,511 |   | 20,788 |   |
| Impairment of Goodwill               |       | —                                      |       | — |   | — |   | 2,600 |   | — |   | 2,600 |   |
| Income/(Loss) from Operations        |       | $                                           | 7,776      |   | $ | 314 |   | $ | 8,090 |   | $ | (6,693 | ) | $ | (374 | ) | $ | (7,067 | ) |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total Assets                         |       | $                                           | 203,341    |   | $ | 20,320 |   | $ | 223,661 |   | $ | 60,404 |   | $ | 6,531 |   | $ | 66,935 |   |
| Capital Expenditures                 |       | 169                                         |       | 4,141 |   | 4,310 |   | 194 |   | 614 |   | 808 |   |
| Depreciation & Amortization |       | 536                                         |       | 408 |   | 944 |   | 440 |   | 801 |   | 1,241 |   |

 

**8.****                                      STOCK-BASEDCOMPENSATION**

 

At June 30, 2005, Boyds had various stock-basedemployee compensation plans.  The Companymeasures compensation expense for its stock-based employee compensation plans usingthe intrinsic value method. Boyds has adopted the disclosure only provision ofSFAS No. 148 *“Accounting for Stock-Based Compensation –Transition and Disclosure”* (“SFAS No. 148”), an amendment ofSFAS No. 123; therefore no compensation expense was recognized for theCompany’s stock option plans. Had compensation expense for the Company’s stockoption plans been determined based on the fair value at the grant date forawards under the Company’s stock plan, consistent with the methodologyprescribed under SFAS No. 148, the Company’s net income/(loss) and netincome/(loss) per common share would have approximated the pro forma amountsindicated below:

 

12

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| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                                    | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                                                                                    | ** ** | **2004**               | ** ** | **2005**             | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                                                                    | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income/(loss), as reported                                                                                                                |       | $                      | 527        |                 | $          | (101,356 | ) | $ | 3,321 |   | $ | (178,648 | ) |
|                                                                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | 582                    |       | 510                  |       | 968 |   | 917 |   |
|                                                                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Pro forma net income/(loss)                                                                                                                   |       | $                      | (55        | )                    | $          | (101,866 | ) | $ | 2,353 |   | $ | (179,565 | ) |
|                                                                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Earnings per share:                                                                                                                           |       |                   |       |                 |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       | $                      | 0.01       |                 | $          | (1.72 | ) | $ | 0.06 |   | $ | (3.03 | ) |
| Basic—pro forma                                                                                                                          |       | $                      | (0.00      | )                    | $          | (1.73 | ) | $ | 0.04 |   | $ | (3.04 | ) |
|                                                                                                                                          |       |                   |       |                 |       |   |   |   |   |
| Diluted—as reported                                                                                                                      |       | $                      | 0.01       |                 | $          | (1.72 | ) | $ | 0.06 |   | $ | (3.02 | ) |
| Diluted—pro forma                                                                                                                        |       | $                      | (0.00      | )                    | $          | (1.73 | ) | $ | 0.04 |   | $ | (3.04 | ) |

 

***Stock Option Plan***—Boyds has granted stock optionsunder various incentive stock option plans (the “Plans”) which provide for thegranting to certain employees and directors of options to acquire Boyds’ commonstock. The option prices of stock which may be purchased under the Plans arenot less than the fair value of common stock on the dates of the grants.

 

Outstandingoptions issued to employees vest and become exercisable over a five-year periodfrom the date of grant. The outstanding options expire ten years from the dateof grant or upon an employee’s retirement or termination from Boyds, and arecontingent upon continued employment during the applicable five-year period.

 

Boydshas reserved a total of 5,579,033 shares for issuance under the Plans, of which740,805 shares remain reserved at June 30, 2005 for future issuances. Inthe first six months of 2005, the Company granted 2,196,250 as part of itsongoing annual key employee option grant program.  The following table summarizes informationabout fixed stock options at June 30, 2005:

 

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| ** **             | ** ** | ** **    | ** ** | **Options Outstanding** | ** ** |
|------------------------|------------|---------------|------------|-------------------------|------------|
| ** **             | ** ** | **Options**   | ** ** | ** **              | ** ** | **Exercise Price Per Share** | ** ** |
| ** **             | ** ** | **Available** | ** ** | **Number of**           | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **             | ** ** | **for Grant** | ** ** | **Shares**              | ** ** | **Range** | ** ** | **Average** | ** ** |
|                   |       |          |       |                    |       |   |   |   |   |
| January 1, 2004   |       | 1,650,939     |       | 3,709,100               |       | $4.45 - $18.00 |   | $ | 6.43 |   |
|                   |       |          |       |                    |       |   |   |   |   |
| Shares reserved        |       | 1,500,000     |       |                    |       |   |   |   |   |
| Options granted        |       | (501,144      | )          | 501,144                 |       | $2.49 - $4.22 |   | $ | 2.85 |   |
| Options exercised      |       |          |       |                    |       |   |   |   |   |
| Options forfeited      |       | 195,361       |       | (195,361                | )          | $4.31 - $10.60 |   | $ | 7.11 |   |
|                   |       |          |       |                    |       |   |   |   |   |
| December 31, 2004 |       | 2,845,156     |       | 4,014,883               |       | $2.49 - $18.00 |   | $ | 5.95 |   |
|                   |       |          |       |                    |       |   |   |   |   |
| 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      |       | 87,968        |       | (87,968                 | )          | $2.06 - $9.31 |   | $ | 5.49 |   |
|                   |       |          |       |                    |       |   |   |   |   |
| June 30, 2005     |       | 740,805       |       | 6,119,234               |       | $1.73 - $18.00 |   | $ | 4.57 |   |

 

Thefollowing table summarizes information about stock options outstanding at June 30,2005:

 
| ** **      | ** ** | ** **      | ** ** | ** **      | ** ** | **Weighted**       | ** ** |
|-----------------|------------|-----------------|------------|-----------------|------------|--------------------|------------|
| **Exercise**    | ** ** | **Options**     | ** ** | **Options**     | ** ** | **Average**        | ** ** |
| **Price**       | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** | **Remaining Life** | ** ** |
|            |       |            |       |            |       |               |       |
| $1.73 to $1.73  |       | 10,000          |       | 0               |       | 10.0               |       |
|            |       |            |       |            |       |               |       |
| $2.06 to $2.06  |       | 2,101,250       |       | 105,000         |       | 9.9                |       |
|            |       |            |       |            |       |               |       |
| $2.36 to $18.00 |       | 4,007,984       |       | 2,542,340       |       | 6.8                |       |

 

**9.****                                      PROVISIONFOR INCOME TAXES**

 

As of June 30, 2005, the Company has a $171.6million valuation allowance against its deferred tax assets, consisting of taxcarryforwards that will begin to expire in 2023 until the end of 2033.  The recovery of the deferred income taxassets is contingent upon applicable tax laws and realization of these deferredtax assets. For the six months ended June 30, 2005, the Company recordedtax expense of $165.4 million as a result of recording a $166.2 million additionalvaluation allowance against its deferred tax assets.  This valuation allowance results from estimatesby management of future taxable income in each of the federal, state, andforeign tax jurisdictions during the carry forward period and the conclusion bymanagement that it is no longer more likely than not that this amount ofdeferred tax assets will be realized under the criteria of SFAS No. 109,Accounting for Income Taxes.

 

14

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**10.****                               CONTINGENCIES**

 

Boyds is involved in various legal proceedings, claimsand governmental audits in the ordinary course of business. In the opinion ofmanagement, the ultimate disposition of these matters will not have a materialadverse effect on the financial position, results of operations or cash flowsof Boyds.

 

**11.****                               EARNINGSPER 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** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                         | ** ** | **2004**               | ** ** | **2005**             | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                               |       |                   |       |                 |       |   |   |   |   |
| Numerator for basic and diluted earnings per share:                                |       |                   |       |                 |       |   |   |   |   |
| Net income/(loss)                                                                  |       | $                      | 527        |                 | $          | (101,356 | ) | $ | 3,321 |   | $ | (178,648 | ) |
| Denominator:                                                                       |       |                   |       |                 |       |   |   |   |   |
| Denominator for basic earnings per share - weighted  average shares                |       | 59,004                 |       | 59,008               |       | 59,004 |   | 59,007 |   |
| Effect of dilutive securities:                                                     |       |                   |       |                 |       |   |   |   |   |
| Effect of shares issuable under stock option plans  based on treasury stock method |       | 5                      |       | 13                   |       | 6 |   | 86 |   |
| Denominator for diluted earnings per share -  weighted average shares              |       | 59,009                 |       | 59,021               |       | 59,010 |   | 59,093 |   |
|                                                                               |       |                   |       |                 |       |   |   |   |   |
|                                                                               |       |                   |       |                 |       |   |   |   |   |
| EPS - Basic                                                                        |       | $                      | 0.01       |                 | $          | (1.72 | ) | $ | 0.06 |   | $ | (3.03 | ) |
|                                                                               |       |                   |       |                 |       |   |   |   |   |
| EPS - Diluted                                                                      |       | $                      | 0.01       |                 | $          | (1.72 | ) | $ | 0.06 |   | $ | (3.02 | ) |

 

**12.****                               SUBSEQUENTEVENTS**

 

During July 2005, theCompany received a $1.5 million settlement for a copyright infringement case.

 

In an effort to ensure thatour cost structure is appropriate with the revenue of the Company, the Company haseliminated a number of positions, including, Senior Vice President ofOperations and Vice President of Retail. The Company will incur approximately $0.6 million in expenses associatedwith these departures.

 

15

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

 

Thefollowing discussion should be read in conjunction with the financialinformation and related notes included elsewhere in this report.

 

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

##### *** ***

Boyds is a leading domestic designer, importer anddistributor of branded, high-quality, handcrafted collectibles and other specialtygiftware products. Boyds sells its products primarily through an extensivenetwork of approximately 14,000 accounts comprised of independent gift andcollectibles retailers, premier department stores, selected catalogue retailersand other electronic and retail channels. Boyds also sells its productsdirectly to consumers through its two retail stores *Boyds BearCountry**ä**- Gettysburg* and *Boyds Bear Country**ä**- Pigeon Forge.*The Company has signed an option for a lease in MyrtleBeach, South Carolina.

 

Boyds’sales consist of plush animals, resin figurines, and other products. Otherproducts include collectors club sales, home décor, stationary, accessories,retail food operations and its interactive concepts.  Collectors club sales are generated from annualdues 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 has severallicensing agreements for its branded product. The more significant agreements would include NASCAR ®, Coke ®, M&M’S ® Brand Characters, and Crayola ®.  Boyds expectsto begin delivering Coke ®,M&M’S ®, andCrayola ® Boydsproducts to stores in late 2005.

 

Boydslicenses its product designs to other companies for products including hometextiles, infant clothing and wallpaper. Boyds believes such licensing, inaddition to providing royalty income, helps to increase consumer awareness ofBoyds’ designs and brand image. Boyds reports royalty income in net sales.

 

##### ***Boydsexhibits its products at select national and regional tradeshows where ordersare taken by Boyds’ employees. Boyds operates almost exclusively out of aleased office/distribution facility, owns one retail store in the generalvicinity of Gettysburg, Pennsylvania, and owns a second retail store in PigeonForge, Tennessee. Boyds also leases warehouse space in Dunkeswell, UnitedKingdom, and Dordrecht, The Netherlands.***

##### *** ***

##### ***SEGMENTS***

##### *** ***

TheCompany operates in two segments which consist of the Company’s wholesalegift/collectible business and the Company’s retail gift/entertainmentbusiness.  These segments are evaluatedregularly by the Company’s Chief Executive Officer in deciding how to assessperformance and allocate resources.  Prior to the retail operations becoming a significant portion of theCompany’s performance, the Company had only one reportable segment.

 

TheCompany’s wholesale business designs, imports, and distributes resin figurines,plush animals 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.  The Company hassigned an option for a lease in Myrtle Beach, South Carolina.

 

16

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**CRITICAL ACCOUNTINGPOLICIES**

** **

Preparingthe Company’s financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires that managementmake estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Predicting future events is inherently an imprecise activity and as suchrequires the use of judgment.  Actualresults may vary from estimates in amounts that may be material to thefinancial statements. Management believes that the estimates and assumptionsused in connection with the amounts reported in Boyds’ financial statements andrelated disclosures are reasonable and made in good faith.

 

Themost significant 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 determining estimates is based on several factors, includinghistorical experience, current and anticipated economic conditions and customerprofiles. Boyds continually reevaluates these key factors and makes adjustmentsto estimates where appropriate.  The followingare Boyds’ critical accounting policies, some of which require the applicationof significant estimates and assumptions.

 

•                  For the wholesale business, Boydsrecords sales when persuasive evidence of an arrangement exists, the price isfixed or determinable, items are shipped and the collectibility of theresulting receivable is reasonably assured. For the retail business, Boyds recognizes sales upon customer receipt ofthe merchandise. The most significant financial statement line item, net sales,represents transactions consistent with Boyds’ primary business focus and meetsthe criteria of Staff Accounting Bulletin No. 101, including the transferof title, probable collectibility, identified customer and no resource.

 

•                  As of June 30, 2005, the Companyset up a valuation allowance for the remaining amount of its deferred tax assets,consisting of tax carryforwards that will begin to expire in 2023 until the endof 2033.  The recovery of the deferredincome tax assets is contingent upon applicable tax laws and realization ofthese deferred tax assets.  For the sixmonths ended June 30, 2005, the Company recorded tax expense of $165.4million as a result of recording a $166.2 million additional valuationallowance against its deferred tax assets. This valuation allowance results from estimates by management of futuretaxable income in each of the federal, state, and foreign tax jurisdictionsduring the carry forward period and the conclusion by management that it is nolonger more likely than not that this amount of deferred tax assets will berealized under the criteria of SFAS No. 109, “Accounting for Income Taxes”.

 

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

 

•                    Inventoriesare stated at the lower of cost or market. Cost is determined under thefirst-in, first-out method of accounting. Boyds records adjustments to thevalue of inventory in situations where it appears that Boyds will not be ableto recover the cost of the product.  Thislower of cost or market analysis is based on Boyds’ estimate of forecasteddemand by customer by product.  Adecrease in product demand due to changing customer tastes, consumer buyingpatterns or loss of shelf space to competitors could significantly impact Boyds’evaluation of its excess and obsolete inventories.

 

•                  Under the requirements of SFASNo.142, “Goodwill and Other Intangible Assets”, and SFAS No.144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, the Company tested

 

17

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for impairment by comparing the fair value of thereporting unit with the carrying value of that unit.  Fair value was determined based on thediscounted cash flow method.  As a resultof the Company’s impairment test completed in the first quarter of 2005, theCompany recorded an impairment loss of $2.6 million to reduce the carryingvalue of goodwill to zero.  Theimpairment was caused by a continued decline in wholesale sales and results.

 

•                  Boyds has various stock-basedemployee compensation plans. The Company accounts for those plans under therecognition and measurement principles of APB Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related Interpretations. Under this method,compensation cost is the excess, if any, of the quoted market price of thestock at the grant date or other measurement date over the amount an employeemust pay to acquire the stock. No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had an exerciseprice equal to the market value of the underlying common stock on the date ofgrant.

 

**FACTORSWHICH AFFECT BOYDS’ RESULTS OF OPERATIONS**

 

***Seasonality***

 

Boyds recognizes revenues throughout the year andgenerally ships merchandise on a first-in, first-out basis. Approximately 45%of revenues are recorded during the first and second quarters whileapproximately 55% of revenues are recorded during the third and fourth quartersin anticipation of the holiday season. Boyds does not have the significant seasonalvariation in its wholesale revenues that it believes is experienced by manyother giftware, collectibles.   TheCompany has seasonal variations in its retail revenues that are typical inother retail businesses.

 

***Foreign Exchange***

 

The dollar value of Boyds’ assets abroad is notsignificant. Boyds’ sales are primarily denominated in United States dollarsand, as a result, are not subject to changes in exchange rates.

 

Boyds imports most of its products frommanufacturers in China. Boyds’ costs could be adversely affected on ashort-term basis if the Chinese renminbi appreciates significantly relative tothe United States dollar. Conversely, its costs would be favorably affected ona short-term basis if the Chinese renminbi depreciates significantly relativeto the United States dollar. Although Boyds generally pays for its products inUnited States dollars, the cost of such products fluctuates with the value ofthe Chinese renminbi. In the future, Boyds may, from time to time, enter intoforeign exchange contracts or prepay inventory purchases as a partial hedgeagainst currency fluctuations. Differences between the amounts of suchcontracts and costs of specific material purchases are included in inventoryand cost of sales. Boyds’ policy is to not capitalize any gains or lossesassociated with foreign currency transactions or foreign exchange contracts.Boyds intends to manage foreign exchange risks to the extent appropriate.

 

Boydshas growing sales operations based in Europe and Canada, but at this time Boydsdoes not expect any significant impact due to fluctuations in the Euro, theBritish Pound or the Canadian dollar.

 

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**RESULTS OF OPERATIONS**

** **

Net salesconsist of sales of our products, net of sales discounts, product returns andallowances, retail sales from the *Boyds Bear CountryTM*retail stores, collectors club sales generated from members of Boyds’collectors club and royalty income from licenses held by Boyds. Wholesale salesare primarily made on a purchase order basis. Revenue associated with sales isrecognized when products are shipped to the customer or upon the completion ofa retail transaction.

 

Boyds’ gross profit margins may not be comparable tothe gross profit margins of certain other entities due to the classification ofcertain costs.  Boyds includes items suchas purchasing and receiving costs, internal transfer costs, and the costs ofits distribution network in cost of goods sold. Boyds includes its inspection costs in selling, general andadministrative (“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”, Boydsrecords amounts billed to customers related to shipping and handling as revenueand all expenses related to shipping and handling as cost of goods sold.

 

Other income consists of interest income andexchange rate gain/loss.

 

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

 
| ** **                                   | ** ** | **Three Months**  | ** ** | **Six Months**    | ** ** |
|----------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                   | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                                   | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                   | ** ** | **2004**          | ** ** | **2005**          | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                         |       |              |       |              |       |   |   |   |   |
| Net sales                                    |       | 100.0             | %          | 100.0             | %          | 100.0 | % | 100.0 | % |
| Gross profit                                 |       | 61.4              | %          | 46.3              | %          | 60.8 | % | 45.8 | % |
| Selling, general and administrative expenses |       | 52.0              | %          | 58.9              | %          | 44.3 | % | 58.3 | % |
| Impairment of assets                         |       | 0.0               | %          | 0.0               | %          | 0.0 | % | 7.3 | % |
| Income/(loss) from operations                |       | 9.4               | %          | (12.6             | )%         | 16.5 | % | (19.8 | )% |
| Other income (expenses), net                 |       | (0.1              | )%         | (2.8              | )%         | (0.1 | )% | (1.7 | )% |
| Interest expense                             |       | 4.8               | %          | 19.5              | %          | 4.5 | % | 15.5 | % |
| Provision for income taxes                   |       | 2.2               | %          | 557.3             | %          | 5.1 | % | 464.2 | % |
| Net income/(loss)                            |       | 2.3               | %          | (592.2            | )%         | 6.8 | % | (501.2 | )% |

 

## ***ExecutiveOverview***

## * *

In the second quarter of 2005, the Company’s netsales decreased by 24%, which can primarily be attributed to the wholesalesegment’s decrease of 39% partially offset by an increase of 50% in the retailsegment.  The decrease inwholesale net sales was attributable to a 35% decline in wholesale bookings(cancelable orders) in the second quarter of the year compared to the sameperiod in 2004.  Weakness across theSpecialty Gift Retail sector of the Company’s account base and reduced sales toa number of Boyds’ larger legacy accounts were the contributors to thesereduced bookings. Retail net saleswere positively impacted by the addition of the Company’s second store inPigeon Forge, Tennessee.

 

## *TheCompany’s net profit for the second quarter decreased by $101.9 million to aloss of $101.4 million as compared to the same period in 2004.  This decrease can be attributed to asignificant increase in the Company’s allowance for its deferred tax assets, continuedlower sales, and an increase in the inventory obsolescence reserve, all ofwhich were partially offset by the Company’s ongoing cost savings initiatives.*

 

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Cash used for operating activities in the first sixmonths of 2005 was approximately $9.5 million compared to $4.9 million in cashprovided by operations in the year-ago period. In the six months of 2005, the Company had a net increase ofapproximately $15.8 million of debt and invested approximately $0.8 million ofcash in property and equipment.  In thesix months of 2004, the Company had net repayments of approximately $4.0million of debt and invested approximately $4.3 million of cash, of which $3.5million related to the building of *Boyds Bear CountryTM*-PigeonForge.

 

## ***Three Months Ended June 30, 2005 vs. Three Months Ended June 30,2004***

## * *

*Net Sales—* Net sales decreased $5.5 million, to $17.1million in the second quarter of 2005 from $22.6 million for the same quarterin 2004.  Sales of Boyds’ plush productsdecreased $3.4 million, or 26%, resin product sales decreased $2.4 million, or41%, and other product sales increased $0.3 million, or 8%.  As a percentage of net sales for the second quarter,plush represented 55%, resin products represented 21%, and other productsrepresented 24%.

 

Wholesale net sales in the second quarter of 2005 declined$7.4 million, or 39%, to $11.6 million from $19.0 million for the same quarterin 2004.  This decrease wasattributable to a 35% decline in wholesale bookings (cancelable orders) in the secondquarter of 2005 compared to the same period in 2004.  Weakness across the Specialty Gift Retail sectorof the Company’s account base and reduced sales to a number of Boyds’ largerlegacy accounts were the contributors of these reduced bookings.

 

Retail net sales increased $1.9 million, or 53%, to$5.5 million in the second quarter of 2005 from $3.6 million in the secondquarter of 2004. Same store retail net sales decreased by $0.5 million, or 14%,to $3.1 million in the second quarter from $3.6 million for the second quarterof 2004. This decline can be attributed to reduced tourist traffic inGettysburg.

 

*Gross profit* - Gross profit decreased $6.0 million, or 43%,to $7.9 million in the second quarter of 2005 from $13.9 million for the secondquarter of 2004.  Gross profit as apercentage of net sales decreased to 46.3% for the second quarter of 2005 ascompared to 61.4% for the same period in 2004. The dollar decline was primarily attributable to reduced sales, an incrementalcharge of $1.1 million increase in the Company’s inventory obsolescenceallowance, and an increased product mix shift to lower margin product.  Wholesale gross profit decreased by $7.1million, or 64%, to $4.0 million in the second quarter of 2005 from $11.1million in the second quarter of 2004. Retail gross profit increased by $1.1 million, to $3.9 million in the secondquarter of 2005 from $2.8 million in the second quarter of 2004.

 

*Selling, General &Administrative Expenses (“SG&A”)*- SG&A expenses decreased $1.7 million, or 14%, to $10.1 million inthe second quarter of 2005 from $11.8 million for the second quarter of2004.  SG&A as a percent of net salesincreased to 59% for the second quarter from 52% for the same period in2004.  The dollar decrease in SG&Aexpenses was a result of $1.8 million in lower wage costs stemming from ourcost saving initiatives and $0.3 million in lower professional/consulting fees,which were partially offset by $0.6 million in call center expenses.

 

*Income from operations* - Income from operations declined $4.3million to a loss of $2.2 million in the second quarter of 2005 from an incomeof $2.1 million in the second quarter of 2004. Income from operations as a percentage of net sales declined to anegative 13% in the second quarter of 2005 from 9% in the second quarter of2004.

 

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*Total interest expense* - Total interest expense increased to $3.3million for the second quarter of 2005 as compared to $1.1 million for the secondquarter of 2004.  Interest expense onoutstanding debt increased for the second quarter of 2005 by $2.0 million.  This increase is due to a higher interest rateon the Company’s outstanding debt. Additionally, the amortization expense associated with the deferred financingcosts have increased by $0.3 million as a result of capitalized costs associatedwith the New Credit Agreement.

 

*Income tax expense -* Income tax expense increased $94.9 millionto $95.4 million in the second quarter of 2005 as compared to $0.5 million forthe second quarter of 2004.  Theprovision was impacted by the recording a $94.6 million valuation allowance againstthe remaining amount of its deferred tax assets.

 

*Net Loss–* Net profit decreased $101.9 million to aloss of $101.4 million in the second quarter of 2005 from a $0.5 million incomefor the second quarter of 2004. Excluding the impact of the non-cash charge consisting of the increasein the deferred tax asset valuation described above, net loss would have been $6.8million.

 

## ***Six Months Ended June 30, 2005 vs. Six Months Ended June 30,2004***

## * *

*Net Sales*— Net sales decreased $13.4 million, to $35.6million in the first six months of 2005 from $49.0 million for the same period in2004.  Sales of Boyds’ plush productsdecreased $4.7 million, or 19%, resin product sales decreased $5.7 million, or41%, and other product sales decreased $2.9 million, or 28%.  As a percentage of net sales for the first sixmonths of 2005, plush represented 56%, resin products represented 23%, andother products represented 21%.

 

Wholesale net sales in the first six months of 2005declined $16.4 million, or 38%, to $26.9 million from $43.3 million for thesame period in 2004.  The decline can beprimary attributable to a 30% decline in bookings (cancelable orders) in thefirst six months of 2005 compared to the same period in 2004. Weakness acrossthe Specialty Gift Retail sector of the Company’s account base and reducedsales to a number of Boyds’ larger legacy accounts were the contributors tothese reduced bookings.

 

Retail net sales increased $3.0 million, or 53%, to$8.7 million in the first six months of 2005 from $5.7 million for the sixmonths of 2004. Same store retail net sales decreased by $0.7 million, or 12%,to $5.0 million in the first six months from $5.7 million for the first sixmonths of 2004. This decline can be attributed to the reduced tourist trafficand poor weather in the Gettysburg area.

 

*Gross profit* - Gross profit decreased $13.5 million, or 45%,to $16.3 million in the first six months of 2005 from $29.8 million for the firstsix months of 2004.  Gross profit as apercentage of net sales decreased to 45.8% for the first six months of 2005 ascompared to 60.8% for the same period in 2004. The dollar decline was primarily attributable to reduced sales, anincremental charge of $2.6 million increase in the Company’s inventoryobsolescence allowance, and an increased product mix shift to lower marginproduct.  Wholesale gross profitdecreased by $15.3 million, or 60%, to $10.2 million in the six months of 2005from $25.5 million in the first six months of 2004.  Retail gross profit increased by $1.9million, to $6.1 million in the first six months of 2005 from $4.3 million inthe first six months of 2004.

 

*Selling, General &Administrative Expenses (“SG&A”)*- SG&A expenses decreased $0.9 million, or 4%, to $20.8 million inthe first six months of 2005 from $21.7 million for the first six months in2004.  SG&A as a percent of net salesincreased to 58% for the first six months of 2005 from 44% for the same periodin 2004.  The dollar decrease in SG&Aexpenses was a result of $2.6 million in lower wage costs stemming from ourcost saving initiatives which were partially offset by $1.1 million in cellcenter expenses.

 

*Impairment of Goodwill Assets*– The Company recorded a goodwill impairmentcharge of $2.6 million for the first six months of 2005.  The charge is attributed to the goodwillimpairment testing as prescribed by SFAS No. 142, “Goodwill and OtherIntangibles” caused by a continued decline in wholesale sales and results.

 

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*Income from operations* - Income from operations declined $15.2million to a loss of $7.1 million in the first six months of 2005 from anincome of $8.1 million for the same period of 2004.  Income from operations as a percentage of netsales declined to a negative 20% in the six months of 2005 from 17% for thesame period of 2004.

 

*Total interest expense* - Total interest expense increased to $5.5million for the first six months of 2005 as compared to $2.2 million for the sameperiod of 2004.  Interest expense onoutstanding debt increased for the first six months of 2005 by $2.9million.  This increase is due to ahigher interest rate on the Company’s outstanding debt.  Additionally, the amortization expenseassociated with the deferred financing costs have increased by $0.4 million asa result of costs associated with the New Credit Agreement.

 

*Income tax expense -* Income tax expense increased $162.9 millionto $165.4 million in the first six months of 2005 as compared to $2.5 millionfor the first six months of 2004.  Theprovision was impacted by the recording of a $166.2 million additional valuationallowance against the remaining amount of its deferred tax assets.  This valuation allowance results fromestimates 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”.

 

*Net Loss–* Net profit decreased $181.2 million to aloss of $178.6 million in the first six months of 2005 from a $3.3 millionincome for the same period of 2004. Excluding the impact of the two non-cash charges consisting of theimpairment of goodwill and the increase in the deferred tax assets valuationdescribed above, net loss would have been $9.8 million.

 

*Liquidityand Capital Resources*

 

Boyds’primary source of liquidity is borrowings under its New Credit Agreement, whichincludes the New Revolver. Boyds’ primary uses of cash are to fund workingcapital requirements.  Cash balancesincreased to $2.2 million in the first six months of 2005 as compared to thebalances at December 2004.

 

*Operating Activities*

 

Cashprovided by operating activities decreased $14.4 million, to a negative $9.5million in the first six months of 2005 from $4.9 million for the first sixmonths of 2004. The cash flow decrease was primarily attributable to thedecreases in sales and accrued expenses which was partially offset by increasesin inventory, accounts payable and interest payable.  Due to the seasonality of our retail business,operating results for the six months ended June 30, 2005 are notnecessarily indicative of operating results for the entire year.  There can be no assurance that the Company willhave positive cash flows in the future.

 

*Investing Activities*

 

Capitaland investment expenditures totaled $0.8 million in the first six months of 2005as compared to $4.3 million in the first six months of 2004. This decrease inexpenditures was the result of no additional construction costs relating to the*Boyds Bear CountryTM* – PigeonForge, Tennessee and Myrtle Beach, South Carolina locations.

 

*Financing Activities*

 

Inconnection with the recapitalization in 1998, Boyds entered into a creditagreement providing for a $325.0 million senior secured term loan, consistingof tranche A and tranche B, and a senior secured revolving credit facilityproviding for borrowings up to $40.0 million. During the first quarter, the Companyhad additional

 

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borrowings of $10.0million on the revolving credit facility. On February 23, 2005, the Company entered into a New Credit Agreementand used the proceeds to extinguish the outstanding tranche A (the “term loan”)and revolving credit facility (the “revolver”) in the amounts of $28.0 millionand $12.8 million, respectively.

 

The New Credit Agreement contains a revolving creditfacility with capacity of up to $20 million and a new term loan of $45 million.  During the first six months of 2005, theCompany utilized $11.5 million of this revolving facility.  Borrowings under the New Credit Agreementbear interest at a rate per annum, equal to a margin over either a base rate,which is the higher of the prime lending rate or 0.50% above the federal fundseffective rate, plus 9.50% or LIBOR plus 11.00%.

 

The New Credit Agreement contains financialcovenants, tested quarterly, of minimum consolidated adjusted EBITDA (asdefined in the New Credit Agreement), maximum senior leverage and maximum totalleverage.  At the end of the third andfourth quarters of 2005, Boyds must maintain (i) a consolidated seniorleverage ratio of not greater than 2.5 to 1, (ii) a maximum leverage ratioof not greater than 4.5 to 1 and (iii) a minimum consolidated adjustedEBITDA of not less than $17 million.  Additionally,the New Credit Agreement has 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 orsubstantially all of its assets.

 

Based on the Company’s current financialperformance, management believes that there is a significant likelihood thatthe Company will not be in compliance with one or more of the financialcovenants contained in the New Credit Agreement as of the end of the third andfourth quarters of 2005.  Suchnoncompliance would constitute an “event of default” under the New CreditAgreement, providing the lenders holding more than 55% of the sum of the loansthereunder with the ability either to require the entire outstanding amount ofdebt and accrued interest to be repaid immediately or to increase the rate ofinterest payable by 2.0% per annum.  Inaddition, to the extent that an event of default under the New Credit Agreementoccurs and is continuing, the Company would be unable to access remainingavailability under the New Revolver.

 

On February 17,2000, Boyds announced that its Board of Directors had approved the repurchaseof 3.0 million shares of the Company’s common stock. As of June 30, 2005,Boyds had repurchased 344,730 shares of common stock pursuant to the stock repurchaseprogram for an aggregate amount of approximately $1 million. These repurchaseswere financed out of operating cash flow. Any future repurchases under thisprogram are limited by the New Credit Agreement to an aggregate amount not toexceed $1.0 million.

 

On July 27, 2000, Boyds announced that itsBoard of Directors had approved a repurchase program for its outstanding 9% Series BSenior Subordinated Notes due 2008. As of June 30, 2005, Boyds hadrepurchased $52.3 million of its notes pursuant to this note repurchase program.These repurchases were financed out of operating cash flow and the revolvingcredit facility. No repurchases were made during the quarter.  Any future repurchases under this program areexpected to be financed similarly.  Boydsmay make such purchases from time to time in the open market or in privatetransactions.  No repurchases were madeduring the quarter.

 

TheCompany relies on the New Credit Agreement to provide adequate funds for Boyds’foreseeable working capital needs, planned capital expenditures, debt serviceobligations, the Stock Repurchase Program and the Bond Repurchase Program. Anyfuture acquisitions, joint ventures or other similar transactions may requireadditional capital and there can be no assurance that any such capital will beavailable to Boyds on acceptable terms, or at all. Boyds’ ability to fund itsworking capital needs, planned capital expenditures and scheduled debtpayments, to refinance indebtedness and to comply with all of the financialcovenants under its debt agreements depends on its future operating performanceand cash flow, which in turn are subject to prevailing economic conditions andto financial, business and other factors, some of which are beyond Boyds’control.  As noted above, there is a significantlikelihood that the Company will not be able to comply in future periods withall of the financial covenants under the New Credit Agreement.

 

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**RISK FACTORS WHICH MAY AFFECTFUTURE PERFORMANCE**

** **

*Compliance with debt agreements.*As discussed under “Liquidity and CapitalResources” above, based on the Company’s current financial performance,management believes that there is a significant likelihood that the Companywill not be in compliance with one or more of the financial covenants containedin the New Credit Agreement as of the end of the third and fourth quarters of2005.  Such noncompliance wouldconstitute an “event of default” under the New Credit Agreement, providing thelenders holding more than 55% of the sum of the loans thereunder with theability either to require the entire outstanding amount of debt and accruedinterest to be repaid immediately or to increase the rate of interest payableby 2.0% per annum.  In addition, to theextent that an event of default under the New Credit Agreement occurs and iscontinuing, the Company would be unable to access remaining availability underthe revolving credit facility.  As aresult, to the extent that such an event occurs, the Company would be requiredto obtain alternate sources of financing in a very short time period either to (i) repaythe New Credit Agreement or (ii) meet its working capital and other shortterm financing needs.  Such replacementfinancing, if available at all, would be expected to be on terms less favorableto the Company than its existing financing.

 

*Changingdistribution channels.* The Company’s historic distribution channels, mainly independentretailers, have seen significant declines in traffic for several years.  Consumers have migrated to larger, moreconvenient retailers, which provide for a full array of products andservices.  If the Company is unable tomigrate it sales distribution to channels which mirror consumers buyingtendencies, then its revenues could be significantly impacted.

* *

*Changingconsumer tastes.*  The demand for Boyds’ products may be quicklyaffected by changing consumer tastes and interests. Boyds’ results ofoperations depend substantially upon its ability to continue to conceive,design, source and market new pieces and upon continuing market acceptance ofits existing and future product lines. If Boyds fails or is significantlydelayed in introducing new pieces to its existing product lines or creating newproduct line concepts or if its new products do not meet with marketacceptance, its results of operations may be impaired. A number of companieswho participate in the giftware and collectibles industries are part of large,diversified companies that have greater financial resources than Boyds andoffer a wider range of products and may be less affected by changing consumertastes.

 

*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.

 

*Potentialeconomic and political risks of China.*  All of Boyds’ significantmanufacturers are located in China. Although Boyds has identified alternatemanufacturers which could meet its quality and reliability standards at similarcosts in China and in other countries, the loss of any one or more of itsmanufacturers could have a material adverse effect on its business.  Because Boyds relies primarily on Chinesemanufacturers, it is subject to the following risks that could restrict itsmanufacturers’ ability to make its products or increase its manufacturingcosts: (1) economic and political instability in China; (2) transportationdelays; (3) restrictive actions by the Chinese government; (4) thelaws and policies of the United States affecting importation of goods,

 

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including duties, quotas andtaxes; (5) Chinese trade and tax laws. In particular, Boyds’ business could be adversely affected if theChinese renminbi appreciates significantly relative to the United States dollardue to the cost of its products fluctuating with the value of the Chineserenminbi.  Recently, the Chinesegovernment revalued its currency, the renminbi, 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.*  Boydsdoes not own 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.These regulations include requirements that Boyds disclose information regardingthe country 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.*  Thecountries in which Boyds’ products are manufactured may impose new quotas,duties, tariffs or other charges or restrictions. This could adversely affectBoyds’ financial condition, results of operations or its ability to continue toimport products at current or increased levels. In particular, Boyds’ costscould increase, or the mix of countries from which Boyds imports its productsmay be changed, if the Generalized System of Preferences program is not renewedor extended each year. The Generalized System of Preferences program allowsselected products of beneficiary countries to enter the United States dutyfree. In addition, if countries that are currently accorded “Most FavoredNation” status by the United States, such as China, cease to have such status,Boyds could be adversely affected. Boyds cannot predict what regulatory changesmay occur or the type or amount of any financial impact these changes may haveon it in the future.

 

*Potentialinfringement of Boyds’ intellectual property.*  Boydsbelieves that its trademarks and other proprietary rights are material to itssuccess and competitive position. Accordingly, Boyds devotes resources to theestablishment and protection of its intellectual property on a worldwide basis.The actions Boyds takes to establish and protect its trademarks and otherproprietary rights may not be adequate to protect its intellectual property orto prevent imitation of its products by others. Moreover, while Boyds has notexperienced any proprietary license infringements or legal actions that havehad a material impact on its financial condition or results of operations,other persons have and will likely in the future assert rights in, or ownershipof, its trademarks and other proprietary rights. Boyds may not be able tosuccessfully resolve such conflicts. In addition, the laws of foreign countriesmay not always protect intellectual property to the same extent as do the lawsof the United States.

 

*RetailCapital Expenditures*.  When the Company progresses with its retailexpansion plans, it may need to make significant capital expenditures.  In the event that the format that the Companyhas designed or the locations that the Company has selected, and will select inthe future, become unprofitable, the Company will have to write down theinvestments made in these properties.  Inaddition, if these properties become underperforming, the Company may havedifficulty in making any future debt obligation payments.

 

*RetailProperty Leases.* The Company has entered into a property leaseassociated with a future development site in Myrtle Beach, South Carolina. Inthe event that the Company does not build its store on this location, theCompany will be required to expense the development costs that it has incurredto date.  The expenditures as of June 30,2005 are $1.6 million.

 

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***EFFECTSOF RECENTLY ISSUED ACCOUNTING STANDARDS***

 

In December of 2004, the FASB issued Statementof Financial 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 will be required to accountfor such transactions using a fair-value method and recognize the relatedexpense associated with share-based payments in the consolidated statement ofoperations. In April 2005, the Securities and Exchange Commission (“SEC”) delayedthe effective date for SFAS No. 123R until the first quarter of fiscal2006, and allows, but does not require, companies to restate the full fiscalyear of 2005 or retroactive restatement to earlier periods to reflect theimpact of expensing share-based payments under SFAS No. 123R. The Companyhas not yet determined which fair-value method and transitional provision itwill follow. The Company is currently assessing the impact that SFAS No. 123Rwill have on the financial position, results of operations and cash flows ofBoyds.

 

In March 2005, the SEC issued Staff AccountingBulletin No. (“SAB”) 107 regarding the Staff’s interpretation ofShare-Based Payments.  Thisinterpretation provides the Staff’s view regarding interactions between SFAS No. 123Rand certain SEC rules and regulations and provides interpretations of thevaluation of share-based payments for public companies.  The interpretive guidance is intended toassist companies in applying the provisions of SFAS No. 123R and investorsand users of the financial statements in analyzing the informationprovided.  The Company will adopt SAB 107in connection with its adoption of SFAS No. 123R.

 

In November of 2004, the FASB issued SFAS No. 151,*Inventory Costs-an amendment of ARB No. 43.* SFAS No. 151 amends the guidance inAccounting 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).  SFAS No. 151 requires that these itemsbe recognized as current-period charges regardless of whether they meet thecriterion 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 adoption of SFAS No. 151 is not expected to have a materialimpact on the financial position, results of operations or cash flow of Boyds.

 

In December 2004, the FASB issued SFAS No. 153,*Exchange of Nonmonetary Assets* – an amendmentof APB Opinion No. 29, *Accounting for NonmonetaryTransactions*.  SFAS No. 153eliminates the exception from fair value measurement from nonmonetary exchangesof similar productive assets in paragraph 21(b) of APB Opinion No. 29and replaces it with an exception for exchanges that do not have commericialsubstance.  SFAS No. 153 iseffective for periods beginning after June 15, 2005.  The adoption of this statement is notexpected to have a material impact on the financial position, results ofoperations or cash flow of Boyds.

 

In May 2005, the FASBissued SFAS No. 154*, Accounting Changes andError Corrections -*a replacement of APB Opinion No. 20 andFASB Statement No. 3. SFAS No. 154 requires retrospective applicationto prior periods financial statements for changes in accounting principle,unless it is impracticable to determine either the period-specific effects orthe cumulative effect of the change. SFAS No. 154 also requires thatretrospective application of a change in accounting principle be limited to thedirect effects of the change. Indirect effects of a change in accountingprinciple should be recognized in the period of the accounting change. SFAS No. 154further requires a change in depreciation, amortization or depletion method forlong-live, non-financial assets to be accounted for as a change in accountingestimate effected by a change in accounting principle. SFAS No. 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005.  The adoption of this SFAS No. 154 is not expected to have amaterial impact on the financial position, results of operations or cash flowof Boyds.

 

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**RELATED PARTY TRANSACTIONS**

** **

Kohlberg,Kravis Roberts & Co. L.P. and its affiliates (collectively, “KKR”) isa 59% shareholder of Boyds. For the three and six months ended June 30,2004, Boyds paid to KKR approximately $0.1 million and $0.2 million,respectively, for management fees and related expenses. KKR has waived allmanagement fees for 2005. Any related expenses incurred by KKR in 2005 will bepaid by Boyds.

 

***FORWARDLOOKING STATEMENTS***

 

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

 

Theforward-looking statements in this report are based on a number of assumptionsand estimates, which are inherently subject to significant uncertainties andcontingencies, many of which are beyond the control of Boyds, and reflectfuture business decisions that are subject to change. A variety of factors couldcause actual results to differ materially from those anticipated in Boyds’forward-looking statements, including:  the inability to meet the financial covenanttests under the New Credit Agreement; the inability to grow Boyds’ business asplanned; the loss of either of Boyds’ two independent buying agencies or any ofits manufacturing sources; economic or political instability in the countrieswith which Boyds does business; changes to, or the imposition of, newregulations, duties, taxes or tariffs associated with the import or export ofgoods from or to the countries with which Boyds does business; and other riskfactors that are discussed in this report and, from time to time, in otherSecurities and Exchange Commission reports and filings. One or more of thefactors discussed above may cause actual results to differ materially fromthose expressed in or implied by the statements in this report.

 

Readersare cautioned not to place undue reliance on these forward-looking statements,which speak only as of the date of such statements. Boyds undertakes noobligation to publicly release the results of any revisions to these forward-lookingstatements that may be made to reflect events or circumstances after the dateof this report, or the date of such statements, as the case may be, or toreflect the occurrence of unanticipated events.

 

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

 

Boydsfaces interest rate risk exposure in relation to its outstanding debt of $90.9million at June 30, 2005. Of this amount, $56.5 million under the New CreditAgreement is subject to interest rate fluctuations. A hypothetical 2% change ininterest rates applied to the fair value of debt would have a material impacton earnings or cash flows of the Company.

 

Boydsfaces currency risk exposure that arises from translating the results of itsEuropean and Canadian operations that are denominated in the local currency ofthe Euro, the British Pound and the Canadian dollar, to the U.S. dollar. Thecurrency risk exposure is not material as the operations of the European andCanadian subsidiaries do not have a material impact on the Company’s earnings.

 

Boydsalso faces foreign exchange risks that arise from paying in United StatesDollars for products that are manufactured in China. Recently, the Chinesegovernment revalued its currency, the renminbi, 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.  While it does not do sonow, in the future Boyds may, from time to time, enter into foreign exchangecontracts or prepay inventory purchases as a partial hedge against currencyfluctuations. Differences between the amounts of such contracts and costs ofspecific material purchases are

 

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included in inventory andcosts of sales. Boyds intends to manage foreign exchange risks to the extentappropriate.

 

**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 June 30, 2005, 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, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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**PART II**

**OTHERINFORMATION**

 

**Item 1. Legal Proceedings.**

 

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

 

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

 

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

 

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

 

**Item 5.Other Information**

 

**Item 6.Exhibits**

 

(a) Exhibits – See Index to Exhibits

 

 

#### **SIGNATURES**

#### ** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date:    August 12,  2005 |                        |
|----------------------------------------------------|-----------------------------|
|                                               | 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.)** |

* *

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*                 Filedherewith

 

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