**United States Securities and Exchange Commission**

**Washington, D.C.20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **ý**                                                                                                                                                                                | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934.**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                      |                                                                                           |
| **For the Quarterly Period Ended June 30, 2003**                                                                                                                                     |
|                                                                                                                                                                                      |                                                                                           |
| **OR**                                                                                                                                                                                    |
|                                                                                                                                                                                      |                                                                                           |
| **o**                                                                                                                                                                                     | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934.** |
|                                                                                                                                                                                      |                                                                                           |
| **For the Transition period from               to              ** |
|                                                                                                                                                                                      |
| **Commission  File Number:  001-14843**                                                                                                                                              |
|                                                                                                                                                                                      |
| **The Boyds Collection, Ltd.**                                                                                                                                                            |
| (Exact Name of Registrant as  Specified in its Charter)                                                                                                                                   |

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

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

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

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date:

 

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

 

 

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**THE BOYDS COLLECTION, LTD.**

 

**TABLE OF CONTENTS**

 
| PART I.     | FINANCIAL INFORMATION                                                                                       |
|-------------|-------------------------------------------------------------------------------------------------------------|
|        |                                                                                                        |
| **Item 1.** | **Financial Statements:**                                                                                   |
|        |                                                                                                        |
|        | Condensed Consolidated Balance Sheets as of December 31, 2002  and June 30, 2003                  |
|        |                                                                                                        |
|        | Condensed Consolidated Statements of Income for the Three and Six  Months Ended June 30, 2002 and 2003 |
|        |                                                                                                        |
|        | Condensed Consolidated Statement of  Stockholders’ Equity for the Six Months Ended June 30, 2003  |
|        |                                                                                                        |
|        | Condensed Consolidated Statements of Cash Flows for the Six Months  Ended June 30, 2002 and 2003       |
|        |                                                                                                        |
|        | Notes to Condensed Consolidated Financial Statements                                                        |
|        |                                                                                                        |
| **Item 2.** | **Management’s Discussion and Analysis of Financial Condition and  Results of Operations**             |
|        |                                                                                                        |
| **Item 3.** | **Quantitative and Qualitative Disclosures About Market Risk**                                              |
|        |                                                                                                        |
| **Item 4.** | **Controls and Procedures**                                                                                 |
|        |                                                                                                        |
| PART II.    | OTHER INFORMATION                                                                                           |
|        |                                                                                                        |
| **Item 1.** | **Legal Proceedings**                                                                                       |
|        |                                                                                                        |
| **Item 2.** | **Changes in Securities and Use of Proceeds**                                                               |
|        |                                                                                                        |
| **Item 3.** | **Defaults Upon Senior Securities**                                                                         |
|        |                                                                                                        |
| **Item 4.** | **Submission of Matters to a Vote of Security Holders**                                                     |
|        |                                                                                                        |
| **Item 5.** | **Other Information**                                                                                       |
|        |                                                                                                        |
| **Item 6.** | **Exhibits and Reports on Form 8-K**                                                                        |
|        |                                                                                                        |
|        | Signatures                                                                                                  |
|        |                                                                                                        |
|        | Index to Exhibits                                                                                           |

 

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**PARTI.****FINANCIAL INFORMATION**

 

**Item1.    Financial Statements.**

 

**THE BOYDS COLLECTION, LTD.**

**CONDENSEDCONSOLIDATED BALANCE SHEETSAs of December 31, 2002 (Audited) and June 30, 2003 (Unaudited)**

 
|                                                                                                                                      |   | **December 31,  2002** |       | **June 30,  2003** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|--------------------|------------|
|                                                                                                                                      |   | **(in thousands)**     | ** ** |
| **ASSETS**                                                                                                                                |   |                   | ** ** |               | ** ** |
|                                                                                                                                      |   |                   | ** ** |               | ** ** |
| **CURRENT ASSETS:**                                                                                                                       |   |                   |       |               |       |
| Cash and cash equivalents                                                                                                                 |   | $                      | 5,875      |               | $          | 8,211 |   |
| Accounts receivable, less allowances of  $2,992 at Dec 31, 2002, and $2,495 at  June 30, 2003                                   |   | 10,489                 |       | 12,599             |       |
| Inventory - primarily finished goods, less  allowance for obsolete inventory of $5,240 at Dec 31, 2002, and $3,935 at  June 30, 2003 |   | 9,224                  |       | 12,329             |       |
| Inventory in transit                                                                                                                      |   | 3,166                  |       | 1,092              |       |
| Other current assets                                                                                                                      |   | 1,026                  |       | 971                |       |
| Income taxes receivable                                                                                                                   |   | 3,216                  |       | 4,448              |       |
| Deferred income taxes                                                                                                                     |   | 21,047                 |       | 21,047             |       |
| Total current assets                                                                                                                      |   | 54,043                 |       | 60,697             |       |
|                                                                                                                                      |   |                   |       |               |       |
| **PROPERTY AND EQUIPMENT -  NET **(Note 4)                                                                                           |   | 18,666                 |       | 18,335             |       |
|                                                                                                                                      |   |                   |       |               |       |
| **OTHER ASSETS:**                                                                                                                         |   |                   |       |               |       |
| Deferred debt issuance costs                                                                                                              |   | 1,693                  |       | 1,341              |       |
| Deferred tax asset                                                                                                                        |   | 162,262                |       | 153,399            |       |
| Other assets                                                                                                                              |   | 2,689                  |       | 2,709              |       |
| Total other assets                                                                                                                        |   | 166,644                |       | 157,449            |       |
|                                                                                                                                      |   |                   |       |               |       |
| **TOTAL ASSETS**                                                                                                                          |   | $                      | 239,353    |               | $          | 236,481 |   |
|                                                                                                                                      |   |                   |       |               |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                            |   |                   |       |               |       |
|                                                                                                                                      |   |                   |       |               |       |
| **CURRENT LIABILITIES:**                                                                                                                  |   |                   |       |               |       |
| Accounts payable                                                                                                                          |   | $                      | 2,569      |               | $          | 1,214 |   |
| Accrued expenses                                                                                                                          |   | 4,340                  |       | 4,157              |       |
| Interest payable                                                                                                                          |   | 829                    |       | 739                |       |
| Current portion of long-term debt (Note 5)                                                                                                |   | 6,000                  |       | 23,000             |       |
| Total current liabilities                                                                                                                 |   | 13,738                 |       | 29,110             |       |
|                                                                                                                                      |   |                   |       |               |       |
| **LONG-TERM DEBT**(Note 5)                                                                                                                |   | 97,689                 |       | 69,392             |       |
|                                                                                                                                      |   |                   |       |               |       |
| **COMMITMENTS AND CONTINGENCIES** (Notes 2 and 8)                                                                                         |   |                   |       |               |       |
|                                                                                                                                      |   |                   |       |               |       |
| **OTHER LIABILITIES**                                                                                                                     |   | 126                    |       | 34                 |       |
|                                                                                                                                      |   |                   |       |               |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                            |   |                   |       |               |       |
| Common stock (61,838 shares issued at Dec 31,  2002, and June 30, 2003, respectively) and paid-in capital in excess of  par          |   | (41,221                | )     | (41,221            | )     |
| Other comprehensive income:                                                                                                               |   |                   |       |               |       |
| Accumulated other comprehensive loss                                                                                                      |   | (50                    | )          | (58                | )          |
| Retained earnings                                                                                                                         |   | 196,010                |       | 206,163            |       |
| Less: Treasury shares at cost (2,727 at Dec 31,  2002, and June 30, 2003, respectively)                                              |   | (26,939                | )          | (26,939            | )          |
| Total stockholders’ equity                                                                                                           |   | 127,800                |       | 137,945            |       |
|                                                                                                                                      |   |                   |       |               |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                      |   | $                      | 239,353    |               | $          | 236,481 |   |

 

Seenotes to condensed consolidated financial statements.

 

3

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**THE BOYDS COLLECTION, LTD.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**For the Three Months and the Six Months  Ended June 30, 2002 and 2003**

**(Unaudited)**

 
|                                                |   | **Three Months Ended  June 30,**        |   | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------|--------|----------------------------------------------|--------|-------------------------------------|--------|
|                                                |   | **2002**                                     |   | **2003**                            |   | **2002** |   | **2003** |   |
|                                                |   | **(in thousands, except per share amounts)** |   |
|                                                |   |                                         |   |                                |   |   |   |   |   |
| **NET SALES**                                       |   | $                                            | 24,343 |                                | $      | 24,465 |   | $ | 64,822 |   | $ | 59,567 |   |
| **COST OF GOODS SOLD**                              |   | 9,158                                        |   | 8,621                               |   | 23,287 |   | 21,370 |   |
| **GROSS PROFIT**                                    |   | 15,185                                       |   | 15,844                              |   | 41,535 |   | 38,197 |   |
| **SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES**   |   | 6,101                                        |   | 10,409                              |   | 11,358 |   | 18,658 |   |
| **INCOME FROM OPERATIONS**                          |   | 9,084                                        |   | 5,435                               |   | 30,177 |   | 19,539 |   |
| **OTHER INCOME/(EXPENSE)**                          |   | 73                                           |   | (68                                 | )      | 51 |   | (27 | ) |
| **INTEREST EXPENSE:**                               |   |                                         |   |                                |   |   |   |   |   |
| Interest expense                                    |   | 1,589                                        |   | 1,249                               |   | 3,344 |   | 2,660 |   |
| Amortization of deferred debt issuance costs        |   | 124                                          |   | 234                                 |   | 262 |   | 352 |   |
| **TOTAL INTEREST EXPENSE**                          |   | 1,713                                        |   | 1,483                               |   | 3,606 |   | 3,012 |   |
|                                                |   |                                         |   |                                |   |   |   |   |   |
| **INCOME BEFORE PROVISION FOR  INCOME TAXES**       |   | 7,444                                        |   | 3,884                               |   | 26,622 |   | 16,500 |   |
| **PROVISION FOR INCOME TAXES**(Note 7)              |   | 3,304                                        |   | 1,706                               |   | 11,188 |   | 6,347 |   |
|                                                |   |                                         |   |                                |   |   |   |   |   |
| **NET INCOME**                                      |   | $                                            | 4,140  |                                | $      | 2,178 |   | $ | 15,434 |   | $ | 10,153 |   |
|                                                |   |                                         |   |                                |   |   |   |   |   |
| **EARNINGS PER SHARE:**                             |   |                                         |   |                                |   |   |   |   |   |
| Basic and Dilutive Earnings Per Share - Net  Income |   | $                                            | 0.07   |                                | $      | 0.04 |   | $ | 0.26 |   | $ | 0.17 |   |

 

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, 2003

(Unaudited)

 
|                                |   | **Common Stock**    |   | **Common Stock  and Paid-in  Capital in  Excess of Par** |   | **Treasury  Stock** |    | **Accumulated  Other  Comprehensive  Income/(Loss)** |    | **Retained  Earnings** |   | **Other  Comprehensive  Income** |   | **Total  Stockholders’  Equity** |    |
|-------------------------------------|--------|---------------------|--------|----------------------------------------------------------|--------|---------------------|---------|------------------------------------------------------|---------|------------------------|--------|----------------------------------|--------|---------------------------------------|---------|
| **Shares  Issued And  Outstanding** |   | **Treasury  Stock** |
|                                |   | **(in thousands)**  |   |
|                                |   |                |   |                                                     |   |                |    |                                                 |    |                   |   |                             |   |                                  |    |   |   |
| **BALANCE, JANUARY 1, 2003**   |   | 61,838              |   | 2,727                                                    |   | $                   | (41,221 | )                                                    | $       | (26,939                | )      | $                                | (50    | )                                     | $       | 196,010 |   |   |   | $ | 127,800 |   |
| Other comprehensive income:         |   |                |   |                                                     |   |                |    |                                                 |    |                   |   |                             |   |                                  |    |   |   |
| Foreign currency translation        |   | —              |   | —                                                   |   | —              |    | —                                               |    | (8                     | )      | —                           |   | $                                     | (8      | ) | (8 | ) |
| Net income                          |   | —              |   | —                                                   |   | —              |    | —                                               |    | .                      |   | 10,153                           |   | 10,153                                |    | 10,153 |   |
| Comprehensive income                |   | —              |   | —                                                   |   | —              |    | —                                               |    | (8                     | )      | —                           |   | $                                     | 10,145  |   | — |   |
|                                |   |                |   |                                                     |   |                |    |                                                 |    |                   |   |                             |   |                                  |    |   |   |
| **BALANCE, June 30, 2003**     |   | 61,838              |   | 2,727                                                    |   | $                   | (41,221 | )                                                    | (26,939 | )                      | $      | (58                              | )      | $                                     | 206,163 |   |   |   | $ | 137,945 |   |
|                                     |        |                     |        |                                                          |        |                     |         |                                                      |         |                        |        |                                  |        |                                       |         |  |  |  |  |  |  |  |  |

 

Seenotes to condensed consolidated financial statements.

 

5

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**THE BOYDS COLLECTION, LTD.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Six Months EndedJune 30, 2002 and 2003**

**(Unaudited)**

 
|                                                                               |   | **Six Months Ended  June 30,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                               |   | **2002**                            |   | **2003** |   |
|                                                                               |   | **(in thousands)**                  |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                         |   |                                |   |   |   |
| Net income                                                                         |   | $                                   | 15,434 |   | $ | 10,153 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                                |   |   |   |
| Depreciation                                                                       |   | 828                                 |   | 1,096 |   |
| Amortization and write off of deferred debt  issuance costs                        |   | 263                                 |   | 352 |   |
| Deferred taxes                                                                     |   | 8,864                               |   | 8,863 |   |
| Asset impairment charge                                                            |   | 254                                 |   | — |   |
| Changes in assets and liabilities:                                                 |   |                                |   |   |   |
| Accounts receivable - net                                                          |   | (138                                | )      | (2,110 | ) |
| Inventory - net                                                                    |   | (952                                | )      | (3,105 | ) |
| Inventory in transit                                                               |   | 1,166                               |   | 2,074 |   |
| Other current assets                                                               |   | (244                                | )      | 55 |   |
| Other assets                                                                       |   | (16                                 | )      | (20 | ) |
| Accounts payable                                                                   |   | (1,187                              | )      | (1,355 | ) |
| Accrued taxes/Income taxes receivable                                              |   | 3,558                               |   | (1,232 | ) |
| Accrued expenses                                                                   |   | (875                                | )      | (183 | ) |
| Interest payable                                                                   |   | (113                                | )      | (90 | ) |
| Other liabilities                                                                  |   | (17                                 | )      | (92 | ) |
| Net cash provided by operating activities                                          |   | 26,825                              |   | 14,406 |   |
|                                                                               |   |                                |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                         |   |                                |   |   |   |
| Loss on sale of equipment                                                          |   | —                              |   | (2 | ) |
| Purchase of property and equipment                                                 |   | (6,335                              | )      | (763 | ) |
| Net cash used in investing activities                                              |   | (6,335                              | )      | (765 | ) |
|                                                                               |   |                                |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                         |   |                                |   |   |   |
| Repayment of debt                                                                  |   | (20,500                             | )      | (11,297 | ) |
| Repurchase of common stock                                                         |   | 3                                   |   | — |   |
| Net cash used in financing activities                                              |   | (20,497                             | )      | (11,297 | ) |
|                                                                               |   |                                |   |   |   |
| Effect of exchange rate changes on cash                                            |   | (4                                  | )      | (8 | ) |
|                                                                               |   |                                |   |   |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                     |   | (11                                 | )      | 2,336 |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                                |   | 815                                 |   | 5,875 |   |
| **CASH AND CASH EQUIVALENTS, END  OF PERIOD**                                      |   | $                                   | 804    |   | $ | 8,211 |   |
| **CASH PAID DURING THE PERIOD FOR  INTEREST**                                      |   | $                                   | 3,457  |   | $ | 2,749 |   |
| **CASH PAID(RECEIVED) DURING THE  PERIOD FOR INCOME TAXES**                        |   | $                                   | (1,233 | ) | $ | (1,284 | ) |

 

Seenotes to condensed consolidated financial statements.

 

6

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**THE BOYDS COLLECTION, LTD.**

#### **NOTES TO CONDENSEDCONSOLIDATED** FINANCIAL STATEMENTS

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

**(Unaudited)**

 

**1.****             INTERIM FINANCIALSTATEMENTS**

 

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

 

Thecondensed consolidated balance sheet, as of June 30, 2003, the condensedconsolidated statements of income for the six and three months endedJune 30, 2002 and 2003, the condensed consolidated statement ofstockholders’ equity for the six months ended June 30, 2003 and thecondensed consolidated statements of cash flows for the six months endedJune 30, 2002 and 2003 are unaudited. In the opinion of management, all adjustments, consisting only of normalrecurring adjustments, necessary for a fair presentation of such interimfinancial statements have been included. The results of operations for the six and three months endedJune 30, 2003 are not necessarily indicative of the results to be expectedfor the full year.  These financialstatements should be read in conjunction with the financial statements andnotes included in Boyds’ Annual Report on Form 10-K filed with the Securitiesand Exchange Commission on March 28, 2003.

 

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

 

In June 2002,the FASB issued SFAS No. 146 (“SFAS 146”), “Accounting for Costs Associatedwith Exit or Disposal Activities.”  Thisstatement requires recording costs associated with exit or disposal activitiesat their fair values when a liability has been incurred.  Under previous guidance, certain exit costswere accrued upon management’s commitment to an exit plan, which is generallybefore an actual liability has been incurred. Adoption of this statement was effective as of January 1,2003.  The adoption of thispronouncement did not have an impact on the financial position, results ofoperations or cash flow of Boyds.

 

InNovember 2002, the FASB issued Interpretation No. 45, “GuarantorsAccounting and Disclosure Requirements for Guarantees.”  The disclosure requirements are effectivefor financial statements issued after December 15, 2002, and therecognition/measurement requirements are effective on a prospective basis forguarantees issued or modified after December 31, 2002.  The 

 

7

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adoption of this statement is notexpected to have a material impact on the financial position, results ofoperations or cash flow of Boyds.

 

In December 2002, the FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure.”  This statement amends SFASNo. 123 to provide alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employee compensation.  In addition, this statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based compensation and the effect of the method used on reportingresults.  The disclosure provisions ofthis standard are effective for fiscal years ended after December 15, 2002and have been incorporated into these condensed consolidated financialstatements and accompanying notes (see Note 6).

 

In April 2003, the FASB issued Statement No. 149,“Amendment of Statement 133 on Derivative Instruments and HedgingActivities.”  This statement amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities**.**”** **Ingeneral, this statement is effective for contracts entered into or modifiedafter June 30, 2003, and for hedging relationships designated after June 30,2003.  The adoption of this statement isnot expected to have a material impact on the financial position, results ofoperations or cash flow of Boyds.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  This statement establishes standards for howan issuer classifies and measures in its statement of financial positioncertain financial instruments that embody obligations for the issuer that arerequired to be classified as liabilities. This statement is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise shall be effective at thebeginning of the first interim period beginning after June 15, 2003.  The provisions of the statement are notexpected to have a material impact on the financial position, results ofoperations or cash flow of Boyds.

 

**2.****             FINANCIAL INSTRUMENTSWITH OFF-BALANCE SHEET RISK**

 

AtDecember 31, 2002 and at June 30, 2003, Boyds had letters of credit outstandingunder its bank credit agreement amounting to $5.1 million and $4.8 million,respectively.  These letters of creditrepresent Boyds’ commitment to purchase inventory, which is to be producedand/or shipped.

 

**3.****             RELATED PARTYTRANSACTIONS**

 

Kohlberg,Kravis Roberts & Co. L.P. (“KKR”) represents a 59% shareholder of Boyds.For the second quarter and six months ended June 30, 2002 andJune 30, 2003, Boyds paid to KKR approximately $0.1 million and $0.2million for management fees and related expenses.

 

8

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**4.****             PROPERTYAND EQUIPMENT**

 

The componentsof property and equipment at December 31, 2002 and June 30, 2003were, as follows:

 
|                                            |   | **December 31,  2002** |   | **June 30,  2003** |   |
|-------------------------------------------------|--------|-----------------------------|--------|-------------------------|--------|
|                                            |   |                        |   |                    |   |
| Land and building                               |   | $                           | 15,232 |                    | $      | 15,632 |   |
| Equipment                                       |   | 4,136                       |   | 4,500                   |   |
| Software development costs                      |   | 2,372                       |   | 2,372                   |   |
| Leasehold improvements                          |   | 1,924                       |   | 1,924                   |   |
| Furniture and fixtures                          |   | 395                         |   | 399                     |   |
| Total                                           |   | 24,059                      |   | 24,827                  |   |
| Less: accumulated depreciation and amortization |   | (5,393                      | )      | (6,492                  | )      |
| Total                                           |   | $                           | 18,666 |                    | $      | 18,335 |   |

 

**5.****             LONG-TERM DEBT**

 

Long-termdebt is summarized as follows:

 
|                                                                                               |   | **December 31,  2002** |       | **June 30,  2003** |       |
|----------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|-------------------------|------------|
|                                                                                               |   |                        | ** ** |                    | ** ** |
| 9% Senior Subordinated Notes due May 15,  2008                                                |   | $                           | 46,689     |                    | $          | 41,392 |   |
|                                                                                               |   |                        |       |                    |       |
| Credit Agreement:                                                                                  |   |                        |       |                    |       |
| Secured Tranche A Term Loans due April 2005.  Interest based on LIBOR or base rate as defined |   | 57,000                      |       | 51,000                  |       |
| Secured revolving loan due April 2005.  Interest based on LIBOR or base rate as defined       |   | —                      |       | —                  |       |
|                                                                                               |   |                        |       |                    |       |
| Sub-Total                                                                                          |   | 103,689                     |       | 92,392                  |       |
|                                                                                               |   |                        |       |                    |       |
| Less: Current portion of long-term debt                                                            |   | (6,000                      | )          | (23,000                 | )          |
|                                                                                               |   | $                           | 97,689     |                    | $          | 69,392 |   |

 

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

 

At June 30, 2002 and 2003, the weighted average interest rates ineffect for the Tranche A Term Loan were 2.543% and 1.853%, respectively.  In addition, the Tranche A Term Loan haspredetermined annual payments through April 2005.

 

The Credit Agreement contains certain covenants, including therequirement of a minimum interest coverage ratio as defined in the agreementand substantial restrictions as to dividends and 

 

9

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distributions. Boyds is in compliance with all applicable covenants asof June 30, 2003. The agreement also provides that the Term Loan andrevolving loan commitment be secured by the capital stock of Boyds’ current andfuture subsidiaries. In addition, the Term Loan is subject to mandatoryprepayment with the proceeds of certain asset sales and a portion of Boyds’excess cash flow as defined in the Credit Agreement. Boyds has the option ofselecting its own interest period at one, two, three, six, nine or twelve monthperiods.

 

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

 
| 2003       |   | $      | — |   |
|------------|--------|--------|--------|--------|
| 2004       |   | 23,000 |   |
| 2005       |   | 28,000 |   |
| 2006       |   | — |   |
| 2007       |   | — |   |
| Thereafter |   | 41,392 |   |
|       |   | $      | 92,392 |   |

 

**6.****             STOCK BASEDCOMPENSATION**

 

AtJune 30, 2003, Boyds has various stock-based employee compensationplans.  The Company accounts for thoseplans under the recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations.  Under thismethod, compensation cost is the excess, if any, of the quoted market price ofthe stock at the grant date or other measurement date over the amount anemployee must pay to acquire the stock. No stock-based employee compensation cost is reflected in net income, asall options granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.  The following table illustrates the effecton net income and earnings per share if Boyds had applied the fair valuerecognition method of accounting provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*,to stock-based employee compensation.

 
|                                                                                                                                          |   | **Quarter Ended June 30** |       | **Six Months Ended June 30** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|-----------------------------------|------------|
|                                                                                                                                          |   | **2002**                       |       | **2003**                          |       | **2002** |   | **2003** |   |
|                                                                                                                                          |   |                           | ** ** |                              | ** ** |   | ** ** |   | ** ** |
| Net income, as reported                                                                                                                       |   | $                              | 4,140      |                              | $          | 2,178 |   | $ | 15,434 |   | $ | 10,165 |   |
|                                                                                                                                          |   |                           |       |                              |       |   |   |   |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | 431                            |       | 588                               |       | 431 |   | 588 |   |
|                                                                                                                                          |   |                           |       |                              |       |   |   |   |   |
| Pro forma net income                                                                                                                          |   | $                              | 3,709      |                              | $          | 1,590 |   | $ | 15,003 |   | $ | 9,577 |   |
|                                                                                                                                          |   |                           |       |                              |       |   |   |   |   |
| Earnings per share:                                                                                                                           |   |                           |       |                              |       |   |   |   |   |
| Basic—as reported                                                                                                                        |   | $                              | 0.07       |                              | $          | 0.04 |   | $ | 0.26 |   | $ | 0.17 |   |
| Basic—pro forma                                                                                                                          |   | $                              | 0.06       |                              | $          | 0.03 |   | $ | 0.25 |   | $ | 0.16 |   |
|                                                                                                                                          |   |                           |       |                              |       |   |   |   |   |
| Diluted—as reported                                                                                                                      |   | $                              | 0.07       |                              | $          | 0.04 |   | $ | 0.26 |   | $ | 0.17 |   |
| Diluted—pro forma                                                                                                                        |   | $                              | 0.06       |                              | $          | 0.03 |   | $ | 0.25 |   | $ | 0.16 |   |

 

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**7.****             PROVISION FOR INCOMETAXES**

 

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

 

Boyds’ effective taxrate, excluding the impact of franchise taxes, has increased to 40.6% in 2003from 38.8% in 2002.  The increase in thepercentage was a result ofBoydsrestructuring the tax treatment of international operations during 2003.

 

**8.****             CONTINGENCIES**

 

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

 

**9.****             EARNINGS PER SHARE**

 

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

 
|                                                                               |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|------------------------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                                                               |   | **2002**                              |   | **2003**                            |   | **2002** |   | **2003** |   |
|                                                                               |   | **(in thousands)**                    |   | **(in thousands)**                  |   |
|                                                                               |   |                                  |   |                                |   |   |   |   |   |
| Numerator for basic and diluted earnings per  share:                               |   |                                  |   |                                |   |   |   |   |   |
| Net income                                                                         |   | $                                     | 4,140  |                                | $      | 2,178 |   | $ | 15,434 |   | $ | 10,153 |   |
| Denominator:                                                                       |   |                                  |   |                                |   |   |   |   |   |
| Denominator for basic earnings per share -  weighted average shares                |   | 59,065                                |   | 59,111                              |   | 59,063 |   | 59,111 |   |
| Effect of dilutive securities:                                                     |   |                                  |   |                                |   |   |   |   |   |
| Effect of shares issuable under stock option  plans based on treasury stock method |   | 145                                   |   | 33                                  |   | 122 |   | 55 |   |
| Denominator for diluted earnings per share -  weighted average shares              |   | 59,210                                |   | 59,144                              |   | 59,185 |   | 59,166 |   |
|                                                                               |   |                                  |   |                                |   |   |   |   |   |
| EPS - Basic                                                                        |   | $                                     | 0.07   |                                | $      | 0.04 |   | $ | 0.26 |   | $ | 0.17 |   |
|                                                                               |   |                                  |   |                                |   |   |   |   |   |
| EPS - Diluted                                                                      |   | $                                     | 0.07   |                                | $      | 0.04 |   | $ | 0.26 |   | $ | 0.17 |   |

 

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**10.****         ****SUBSEQUENTEVENT**

 

OnJuly 25, 2003, Boyds purchased and retired $7.0 million of its 9% SeniorSubordinated Notes for 104.5% of face value or $7.3 million by exercising theredemption feature in accordance with the agreement.  The Company used cash from operations to retire the notes.

 

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

 

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

##### *** ***

Boyds is a leading designer,importer and distributor of branded, high-quality, hand crafted collectiblesand other specialty giftware products. Boyds sells its products through an extensive network of approximately14,000 accounts comprised of independent gift and collectibles retailers,premier department stores, selected catalogue retailers and other electronicand retail channels. This network of retailers is being serviced by a newlycreated outside sales force. In September 2002, Boyds Bear Countryä store opened in Gettysburg, Pennsylvania. This retail store will beused to generate income and expand the brand awareness and image of Boyds.

 

Boyds’ sales consist of plushanimals, resin figurines, and other products. Other products include dolls,villages, home décor, collectors club sales, which are generated from annualdues collected directly from consumers who become members of Boyds’ collectorsclub, *TheLoyal Order of Friends of Boyds*, which began in July 1996 andcurrently has approximately 30,000 paying members, and related accessories.

 

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

 

##### ***Boyds exhibits its products at many national and regional tradeshowswhere orders are taken by Boyds’ employees. Boyds operates almost exclusivelyout of a leased office/distribution facility and owned retail store in thegeneral vicinity of Gettysburg, Pennsylvania.***

##### *** ***

**CRITICAL ACCOUNTING POLICIES**

** **

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

 

The most significant accounting estimates inherent in the preparationof Boyds’ financial statements include estimates related to valuing theultimate collectability of accounts receivable and realizable value ofinventory.  In addition, a significantamount of judgment exists in defining deferred tax valuation accounts.  The process of determining estimates isbased on several factors, including historical experience, current andanticipated economic conditions and customer profiles. Boyds continuallyreevaluates these key factors and makes adjustments to estimates whereappropriate. The following are Boyds’ critical accounting policies, some ofwhich require the application of significant estimates and assumptions.

 

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

 

•                  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. Materialdifferences may result in the amount and timing of earnings if actualexperience differs significantly from management estimates.

 

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

 

•                  Under the requirements of Statement ofFinancial Accounting Standards (SFAS) Nos.142 and 144, Boyds assessed the potentialimpairment of identifiable intangibles, long-lived assets and acquired goodwillwhenever events or changes in circumstances indicated that the carrying valuemay not be recoverable.  In performingthis evaluation, the Company evaluated current and future economic and businesstrends to develop business forecasts of future performance and related cashflows. Such estimates require the use of judgment and numerous subjectiveassumptions. As of January 1, 2003 based on Boyds evaluation there was noimpairment of goodwill, identifiable intangibles or long-lived assets.

 

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

 

**FACTORS WHICH AFFECT BOYDS’ RESULTS OFOPERATIONS**

 

***Seasonality***

 

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

 

***Foreign Exchange***

 

The dollarvalue of Boyds’ assets located abroad is not significant. Boyds’ sales areprimarily denominated in United States dollars and, as a result, are notsubject to changes in exchange rates.

 

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Boyds generally pays for itsproducts in United States dollars. However, Boyds’ cost of such productsfluctuates with the value of the Chinese renminbi because Boyds imports most ofits products from manufacturers in China. Boyds’ costs could be adverselyaffected on a short-term basis if the Chinese renminbi appreciatessignificantly relative to the United States dollar. Conversely, its costs wouldbe favorably affected on a short-term basis if the Chinese renminbi depreciatessignificantly relative to the United States dollar. While Boyds does not now doso, 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 included in inventory and cost of sales. Boydsintends to manage foreign exchange risks to the extent appropriate.

 

Boyds has a growing sales operation based in Europe, but at this timeBoyds does not expect any significant impact due to fluctuations in the Euro orthe British Pound.

 

**RESULTSOF OPERATIONS**

** **

Net sales consistof sales of our products, net of sales discounts, product returns andallowances, collectors club sales generated from Boyds’ collectors club androyalty income from licenses held by Boyds. Sales are primarily made on a purchase order basis.  Revenue associated with sales is recognizedwhen title transfers to the customer, or upon completion of a retailtransaction.

 

Cost of goods soldconsists of product costs, freight and warehousing costs. Selling, general andadministrative expenses include overhead, selling and marketing costs,administration and professional fees.

 

The followingtable sets forth the components of net income as a percentage of net sales forthe periods indicated:

 
|                                         |   | **Quarter  Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|--------------------------------------|--------|
|                                         |   | **2002**                          |   | **2003**                             |   | **2002** |   | **2003** |   |
|                                         |   |                              |   |                                 |   |   |   |   |   |
| Net sales                                    |   | 100.0                             | %      | 100.0                                | %      | 100.0 | % | 100.0 | % |
| Gross profit                                 |   | 62.4                              | %      | 64.8                                 | %      | 64.1 | % | 64.1 | % |
| Selling, general and administrative expenses |   | 25.1                              | %      | 42.5                                 | %      | 17.5 | % | 31.3 | % |
| Income from operations                       |   | 37.3                              | %      | 22.2                                 | %      | 46.6 | % | 32.8 | % |
| Interest expense                             |   | 7.0                               | %      | 6.1                                  | %      | 5.6 | % | 5.1 | % |
| Provision for income taxes                   |   | 13.6                              | %      | 7.0                                  | %      | 17.2 | % | 10.7 | % |
| Net income                                   |   | 17.0                              | %      | 8.9                                  | %      | 23.8 | % | 17.0 | % |

 

## ***Three Months Ended June 30,2003  vs. Three Months EndedJune 30, 2002***

## * *

*Net Sales* – Netsales increased $0.2 million, or 0.8%, to $24.5 million in the second quarterof 2003 from $24.3 million for the second quarter of 2002.  Sales of Boyds’ plush products decreased$2.8 million, or 18.4%, resin product sales increased $2.5 million, or 43.8%,other product sales increased $0.4 million, or 

 

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11.4%.  As a percentage of net sales for thequarter, plush products represented 50%, resin products represented 34%, andother products represented 16%.   Thesecond quarter of 2003 was positively impacted by several of our new resingiftable lines as well as the traffic at Boyds Bear Countryä, our retail store in Gettysburg, Pennsylvania, but was negatively impacted bythe weak economy.

 

*Gross Profit* – Gross profit increased $0.7million, or 4.6%, to $15.9 million in the second quarter of 2003 from $15.2million for the second quarter of 2002. Gross profit as a percentage of net sales increased to 64.8% for thequarter from 62.4% for the same period in 2002.  The dollar increase can be attributed to the increase in salesand the percentage increase was a result of higher product margins at Boyds Bear Countryä.

 

*Selling, General & Administrative Expenses (SG&A)*– SG&A increased $4.3 million, or 70.5%, to $10.4 million in the secondquarter of 2003 from $6.1 million for the second quarter of 2002.  SG&A as a percent of net sales increasedto 42.6% for the quarter from 25.1% for the same period in 2002.  The dollar and percentage increases inSG&A expenses was a result of the new direct sales force and theoperational costs of Boyds Bear Countryä.

 

*Income from Operations* – Income fromoperations declined $3.7 million, or 40.7%, to $5.4 million in the secondquarter of 2003 from $9.1 million for the second quarter of 2002.  Income from operations as a percentage ofnet sales declined to 22.2% for the quarter from 37.3% for the same period in2002.  The dollar decline and thedecline in the percentage of net sales were primarily attributable to theadditional costs from the direct sales force.

 

*Total Interest Expense* – Total interestexpense declined $0.2 million, or 11.8% to $1.5 million in the second quarterof 2003 from $1.7 million for the second quarter of 2002.  Total interest expense as a percentage ofnet sales declined to 6.1% for the quarter from 7.0% for the same period in2002.  The dollar decline and thedecline in the percentage of net sales were due to the reduction of debt fromexcess cash and a decline in interest rates.

 

*Provision for Income Taxes* – Provision forincome taxes declined $1.6 million, or 48.5%, to $1.7 million in the secondquarter of 2003 from $3.3 million for the second quarter of 2002.   Provision for income taxes as a percentageof net sales decreased to 7.0% for the quarter from 13.6% for the same periodin 2002. The dollar decline andthe decline in the percentage of net sales were due to the decrease in taxableincome.

 

*Net Income* – Net income declined $1.9 million,or 46.3%, to $2.2 million in the second quarter of 2003 from $4.1 million forthe second quarter of 2002.  Net incomeas a percent of sales decreased to 8.9% for the quarter from 17.0% for the sameperiod in 2002.  The dollar decline andthe decline in the percentage of net sales were due to the increased costsassociated with the direct sales force.

 

## ***Six Months Ended June 30,2003  vs. Six Months Ended June 30,2002***

## * *

*Net Sales* – Netsales decreased $5.3 million, or 8.1%, to $59.6 million in the first six monthsof 2003 from $64.8 million for the first six months of 2002.  Sales of Boyds’ plush products decreased $4.9million, or 12.7%, resin product sales increased $0.3 million, or 1.6%, otherproduct sales declined $0.6 million, or 7.2%. As a percentage of net sales for the first six months, plush productsrepresented 57%, resin products represented 30%, and other products represented13%.  The first six months of 2003 werenegatively impacted by the weak economy and the continuing struggles of thegift retail channel.  The shortfallswere partially offset by our new direct sales force, Boyds Bear Countryäand our new giftable resin products.

 

*Gross Profit* – Gross profit decreased $3.3million, or 8.0%, to $38.2 million in the first six months of 2003 from $41.5million for the first six months of 2002. Gross profit as a percentage of net sales remained flat at 64.1% for thefirst six months of 2003 and 2002.  Thedollar decline was primarily attributable to the decline in sales volume.

 

15

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*Selling, General & Administrative Expenses (SG&A)*– SG&A increased $7.3 million, or 64.0%, to $18.7 million in the first sixmonths of 2003 from $11.4 million for the first six months of 2002.  SG&A as a percent of net sales increasedto 31.3% for the first six months from 17.5% for the same period in 2002.  The dollar increase in SG&A expenses wasa result of the new sales force and the operational costs of Boyds Bear Countryä.  The percentage increase can be attributed tothe sales decline and the additional costs from the direct sales force andBoyds Bear Countryä.

 

*Income from Operations* – Income fromoperations declined $10.6 million, or 35.1%, to $19.6 million in the first sixmonths of 2003 from $30.2 million for the first six months of 2002.  Income from operations as a percentage ofnet sales declined to 32.8% for the first six months from 46.6% for the sameperiod in 2002.  The dollar decline andthe decline in the percentage of net sales were primarily attributable to thedecline in sales volume and the additional costs associated with the directsales force.

 

*Total Interest Expense* – Total interestexpense declined $0.6 million, or 16.7% to $3.0 million in the first six monthsof 2003 from $3.6 million for the first six months of 2002.  Total interest expense as a percentage of netsales declined to 5.1% for the first six months from 5.6% for the same periodin 2002.  The dollar decline and thedecline in the percentage of net sales were due to the reduction of debt fromexcess cash and a decline in interest rates.

 

*Provision for Income Taxes* – Provision forincome taxes declined $4.9 million, or 43.8%, to $6.3 million in the first sixmonths of 2003 from $11.2 million for the first six months of 2002.   Provision for income taxes as a percentageof net sales decreased to 10.7% for the first six months from 17.3% for thesame period in 2002. The provision waspositively impacted in the first quarter of 2003 by a settlement notice fromthe State of Pennsylvania regarding a franchise tax benefit of approximately$0.9 million relating to the tax year 2000.

 

*Net Income* – Net income declined $5.2 million,or 33.8%, to $10.2 million in the first six months of 2003 from $15.4 millionfor the first six months of 2002.  Netincome as a percent of sales decreased to 17.1% for the first six months from23.8% for the same period in 2002.  Thedollar and percentage declines can be attributed to the lower sales volumes andthe operating costs for the direct sales force.

 

***Liquidityand Capital Resources***

 

Boyds’ primary sources of liquidity are cash flow from operations andborrowings under its credit agreement, which includes a revolving creditfacility. Boyds’ primary uses of cash are to fund working capital requirementsand to service debt. Cash balances increased to $8.2 million in the first six monthsof 2003 from $5.9 million at December 31, 2002.  The increase in cash was largely a result of the cash flowsgenerated by operations offset by debt repayments.

 

***Operating Activities***

 

Cash provided by operating activities decreased $12.4 million, or 46.3%,to $14.4 million in the first six months of 2003 from $26.8 million for thefirst six months of 2002. The cash flow decrease was primarily attributable tothe decrease in sales and the new costs of the direct sales force.

 

***Investing Activities***

 

 Capital and investmentexpenditures totaled $0.8 million in the first six months of 2003 as comparedto $6.3 million in the first six months of 2002. This decrease is attributableto construction costs associated with Boyds Bear Countryäincurred during 2002. The construction was completed during the fourthquarter of 2002.

 

16

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***Financing Activities***

 

In connection with therecapitalization in 1998, Boyds issued 9% Senior Subordinated Notes due 2008 inan amount of $165.0 million and entered into a credit agreement providing for a$325.0 million senior secured term loan, consisting of tranche A and tranche B,and a senior secured revolving credit facility providing for borrowings up to$40.0 million. As of June 30, 2003, Boyds has repaid $123.6 million of thenotes, leaving a balance outstanding of $41.4 million. Boyds has repaid $274.0million of the term loans under the credit agreement, leaving a balanceoutstanding of $51.0 million as of June 30, 2003. Boyds has reduced itstotal debt by $27.3 million in the past twelve months.

 

OnJuly 25, 2003, Boyds purchased and retired $7.0 million of its 9% SeniorSubordinated Notes for 104.5% of face value or $7.3 million by exercising theredemption feature in accordance with the agreement. The company used cash fromoperations to retire the notes.

 

The revolving credit facility provides loans in an aggregate amount ofup to $40.0 million.  Boyds had noborrowings outstanding under the revolving credit facility as of June 30,2003.  Thus, the unused balance underthe revolving credit facility will be available to fund the working capitalneeds of Boyds.  Borrowings under thecredit agreement bear interest at a rate per annum, equal to a margin overeither a base rate or LIBOR, at Boyds’ option. The revolving credit facilitycommitment will terminate on April 21, 2005. Effective April 21,2000, the tranche A term loan is being amortized over six years. The creditagreement contains customary covenants and events of default, includingsubstantial restrictions on Boyds’ ability to declare dividends or makedistributions. The term loans are subject to mandatory prepayment with theproceeds of certain asset sales and a portion of Boyds’ excess cash flow, asdefined in the credit agreement.

 

On February 17, 2000, Boyds announcedthat its Board of Directors had approved the repurchase of 3.0 million sharesof the Company’s common stock. As of June 30, 2003, Boyds had repurchased132,480 shares of common stock pursuant to the Stock Repurchase Program for anaggregate amount of approximately $1.0 million. These repurchases were financedout of operating cash flow. Any future repurchases under the Stock RepurchaseProgram are expected to be financed similarly or by utilizing borrowings underthe revolving credit facility. Boyds plans to make such purchases from time totime in the open market or in private transactions.

 

On July 27, 2000,Boyds announced that its Board of Directors had approved a repurchase programfor its outstanding 9% Series B Senior Subordinated Notes due 2008. As ofJune 30, 2003, Boyds had repurchased $57.6 million of its notes pursuantto the Bond Repurchase Program. These repurchases were financed out ofoperating cash flow. Any future repurchases under the Bond Repurchase Programare expected to be financed similarly or by utilizing borrowings under therevolving credit facility. Boyds plans to make such purchases from time to timein the open market or in private transactions.

 

Management believes that cashflow from operations and availability under the revolving credit facility willprovide adequate funds for Boyds’ foreseeable working capital needs, plannedcapital expenditures, debt service obligations, the Stock Repurchase Programand the Bond Repurchase Program. Any future acquisitions, joint ventures orother similar transactions may require additional capital and there can be noassurance that any such capital will be available to Boyds on acceptable terms,or at all. Boyds’ ability to fund its working capital needs, planned capitalexpenditures and scheduled debt payments, to refinance indebtedness and tocomply with all of the financial covenants under its debt agreements depends onits future operating performance and cash flow, which in turn are subject toprevailing economic conditions and to financial, business and other factors,some of which are beyond Boyds’ control.

 

**RISK FACTORS WHICH MAY AFFECT FUTURE PERFORMANCE**

** **

*Dependence on two independent buyingagencies. *Substantiallyall of the products that Boyds sells

 

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are purchasedthrough two independent buying agencies. One buying agency is located in HongKong, and the other buying agency is located in the United States. These twobuying agencies, which contract with a total of 19 independent manufacturers,account for approximately 90% of Boyds’ total imports. These two buyingagencies also perform a number of functions for Boyds, including collaboratingin Boyds’ product design and development process. As a result, Boyds issubstantially dependent on these buying agencies and the manufacturers withwhich they contract. Boyds does not have long-term contracts with either of itsprimary buying agencies. Boyds believes that the loss of either of its primarybuying agencies would (1) have a material adverse effect on its financialcondition and results of operations, (2) cause disruptions in its orders, (3)affect the quality of its products, and (4) possibly require it to selectalternative manufacturers.

 

*Potential economic and political risks ofChina. *All ofBoyds’ significant manufacturers are located in China. Although Boyds hasidentified alternate manufacturers which could meet its quality and reliabilitystandards at similar costs in China and in other countries, the loss of any oneor more of its manufacturers could have a material adverse effect on itsbusiness.  Because Boyds reliesprimarily on Chinese manufacturers, it is subject to the following risks thatcould restrict its manufacturers’ ability to make its products or increase itsmanufacturing costs: (1) economic and political instability in China; (2)transportation delays; (3) restrictive actions by the Chinese government; (4)the laws and policies of the United States affecting importation of goods,including duties, quotas and taxes; (5) Chinese trade and tax laws.  In particular, Boyds’ business could beadversely affected if the Chinese renminbi appreciates significantly relativeto the United States dollar due to the cost of its products fluctuating withthe value of the Chinese renminbi.

 

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

 

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

 

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

 

*Potential infringement of Boyds’  intellectual property.*  Boyds believes that its trademarks and otherproprietary rights are material to its success and competitive position.Accordingly, Boyds devotes resources 

 

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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, orownership of, its trademarks and other proprietary rights. Boyds may not beable to successfully resolve such conflicts. In addition, the laws of foreigncountries may not always protect intellectual property to the same extent as dothe laws of the United States.

 

***EFFECTSOF RECENTLY ISSUED ACCOUNTING STANDARDS***

 

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

 

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

 

In November 2002, the FASB issuedInterpretation No. 45, “Guarantors Accounting and Disclosure Requirements forGuarantees.”  The disclosurerequirements are effective for financial statements issued afterDecember 15, 2002, and the recognition/measurement requirements areeffective on a prospective basis for guarantees issued or modified afterDecember 31, 2002.  The adoption ofthis statement is not expected to have a material impact on the financialposition, results of operations or cash flow of Boyds.

 

In December 2002, the FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation –Transition andDisclosure.”  This statement amends SFASNo. 123 to provide alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation.  In addition, thisstatement amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based compensation and the effect of the methodused on reporting results.  Thedisclosure provisions of this standard are effective for fiscal years endedafter December 15, 2002 and have been incorporated into these condensedconsolidated financial statements and accompanying notes (see Note 6).

 

In April 2003, the FASB issued Statement No. 149,“Amendment of Statement 133 on Derivative Instruments and HedgingActivities.”  This statement amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities**.**”** **Ingeneral, this statement is effective for contracts entered into or modifiedafter June 30, 2003, and for hedging relationships designated afterJune 30, 2003.  The adoption ofthis statement is not expected to have a material impact on the financialposition, results of operations or cash flow of Boyds.

 

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InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  This statement establishes standards for howan issuer classifies and measures in its statement of financial positioncertain financial instruments that embody obligations for the issuer that arerequired to be classified as liabilities. This statement is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise shall be effective at thebeginning of the first interim period beginning after June 15, 2003.  The provisions of the statement are notexpected to have a material impact on the financial position, results ofoperations or cash flow of Boyds.

 

**RELATEDPARTY TRANSACTIONS**

** **

Kohlberg, Kravis Roberts & Co. L.P.(“KKR”) represents a 59% shareholder of Boyds. For the second quarter and sixmonths ended June 30, 2002 and June 30, 2003, Boyds paid to KKRapproximately $0.1 million and $0.2 million for management fees and relatedexpenses.

 

***FORWARDLOOKING STATEMENTS***

 

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

 

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

 

Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date of such statements. Boyds undertakes no obligation to publiclyrelease the results of any revisions to these forward-looking statements thatmay be made to reflect events or circumstances after the date of this report,or the date of such statements, as the case may be, or to reflect theoccurrence of unanticipated events.

 

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

 

Boyds faces minimal interestrate risk exposure in relation to its outstanding debt of $92.4 million atJune 30, 2003. Of this amount, $51.0 million under the Credit Agreement issubject to interest rate fluctuations. A hypothetical 1% change in interestrates applied to the fair value of debt would not have a material impact onearnings or cash flows of the Company.

 

Boyds faces currency riskexposure that arises from translating the results of its European operationswhich are denominated in the local currency of the Euro and the British Poundto the U.S. dollar. The currency risk exposure is not material as theoperations of the European subsidiary do not have a material impact on theCompany’s earnings.

 

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Boyds also faces foreignexchange risks that arise from paying in United States Dollars for productsthat are manufactured in China. While it does not do so now, in the futureBoyds may, from time to time, enter into foreign exchange contracts or prepayinventory purchases as a partial hedge against currency fluctuations.Differences between the amounts of such contracts and costs of specificmaterial purchases are included in inventory and costs of sales. Boyds intendsto manage foreign exchange risks to the extent appropriate.

 

**Item4.            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 a date within 90 days of the filing date of this report, 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.

 

 

**PART II**

**OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

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

 

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

 

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

 

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

 

**Item 5. Other Information**

 

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

 

(a) Exhibits – See Index toExhibits

 

(b) Reports on Form 8-K - None

 

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#### **SIGNATURES**

#### ** **

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

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

 

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Index to Exhibits

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                  |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
|  3.1        |   | Amended and Restated Articles of  Incorporation of Boyds (incorporated by reference from Exhibit 3.1 of  Amendment No. 1 to Boyds’ Registration Statement on Form S-1, filed on  February 8, 1999, File No. 333-69535).                                                                                                                                                                |
| * 3.2*      |   | *Amended and Restated Bylaws of  Boyds (incorporated by reference from Exhibit 3.2 of Amendment No. 1 to  Boyds’ Registration Statement on Form S-1, filed on February 8, 1999,  File No. 333-69535)*                                                                                                                                                                                  |
| * 4.1*      |   | *Indenture, dated as of  April 21, 1998 between Boyds and The Bank of New York, as trustee  (incorporated by reference from Exhibit 4.3 of Amendment No. 1 to Boyds’  Registration Statement on Form S-1, filed on February 8, 1999, File No.  333-69535).*                                                                                                                       |
|  4.2        |   | Form of 9% Senior Subordinated Note due  2008 (included in Exhibit 4.1)                                                                                                                                                                                                                                                                                                                          |
|  4.3        |   | Form of 9% Series B Senior Subordinated  Note due 2008 (included in Exhibit 4.1)                                                                                                                                                                                                                                                                                                                 |
| 10.1             |   | Credit Agreement, dated as of  April 21, 1998, among Boyds, the several lenders from time to time  parties thereto, DLJ Capital Funding, Inc., The Fuji Bank, Limited, New York  Branch, and Fleet National Bank (incorporated by reference from Exhibit 10.1  of Amendment No. 3 to Boyds’ Registration Statement on Form S-1, filed on  February 23, 1999, File No. 333-69535). |
| 10.2             |   | Forms of Notes evidencing loans under the  Credit Agreement (included in Exhibit 10.1).                                                                                                                                                                                                                                                                                                          |
| 10.3             |   | 1998 Option Plan for Key Employees of Boyds  (incorporated by reference from Exhibit 10.3 of Amendment No. 1 to Boyds’  Registration Statement on Form S-1, filed on February 8, 1999, File No.  333-69535).                                                                                                                                                                           |
| 10.4             |   | 1999 Option Plan for Key Employees of Boyds  (incorporated by reference from Exhibit 4.3 of Boyds’ Registration Statement  on Form S-8, filed on January 18, 2002, File No. 333-77022).                                                                                                                                                                                                |
| 10.5             |   | 2000 Option Plan for Key Employees of Boyds  (incorporated by reference from Exhibit 4.4 of Boyds’ Registration Statement  on Form S-8, filed on January 18, 2002, File No. 333-77022).                                                                                                                                                                                                |
| 10.6             |   | 2001 Option Plan for Key Employees of Boyds  (incorporated by reference from Exhibit 4.5 of Boyds’ Registration Statement  on Form S-8, filed on January 18, 2002, File No. 333-77022).                                                                                                                                                                                                |
| 10.7             |   | Lease Agreement for Boyds’ McSherrystown,  Pennsylvania facility (incorporated by reference from Exhibit 10.4 of  Amendment No. 3 to Boyds’ Registration Statement on Form S-1, filed on  February 23, 1999, File No. 333- 69535).                                                                                                                                                |
| 10.8             |   | Employment Agreement dated January 28,  2000 between Jean-Andre Rougeot and Boyds (incorporated by reference from  Exhibit 10.8 of Boyds’ Annual Report on Form 10-K, filed on March 28,  2002, File No. 001-14843).                                                                                                                                                              |
| 31.1             |   | Certification Pursuant to 15 U.S.C. Section  7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                                       |
| 31.2             |   | Certification Pursuant to 15 U.S.C. Section  7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                                       |
| 32.1             |   | Certification Pursuant to 18 U.S.C. Section  1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                                       |
| 32.2             |   | Certification Pursuant to 18 U.S.C. Section  1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                                       |

 

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*    Filed herewith

 

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