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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 001-14843
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THE BOYDS COLLECTION, LTD.
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 52-1418730
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
350 SOUTH STREET, MCSHERRYSTOWN, PENNSYLVANIA 17344
(Address of principal executive Office) (Zip Code)
(717) 633-9898
(Registrant's Telephone Number, Including Area Code)
------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
---------------- ON WHICH REGISTERED
--------------------
Common Stock, par value $.0001 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether Boyds (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates
(assuming solely for the purpose of this calculation that directors and officers
are affiliates) of Boyds, as of March 10, 2000 was approximately $88,706,378.
As of March 10, 2000, the number of shares of Boyds Common Stock outstanding
was 59,172,040.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Form 10-K is incorporated from the registrant's Proxy Statement for
its 2000 Annual Meeting of Stockholders.
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TABLE OF CONTENTS
PAGE
--------
PART I
Item 1. Description of Business..................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 6
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................. 8
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 14
Item 8. Financial Statements........................................ 17
Item 9. Changes in And Disagreements With Accountants on Accounting
and
Financial Disclosure...................................... 33
PART III
Item 10. Directors And Executive Officers............................ 33
Item 11. Executive Compensation...................................... 33
Item 12. Security Ownership of Certain Beneficial Owners And
Management................................................ 33
Item 13. Certain Relationships And Related Transactions.............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules And Reports on Form
8-K....................................................... 34
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Boyds is a leading designer, importer and distributor of high-quality,
hand-crafted collectibles and other specialty giftware products.
HISTORY
Boyds was founded in 1979 by Gary and Justina Lowenthal as a small antique
business in Boyds, Maryland. By 1984, Boyds had begun to reproduce and sell
miniature houses, duck decoys and merino wool teddy bears to selected retail
outlets. In 1984, Boyds also introduced its first major plush product, a unique,
fully-jointed wool teddy bear named MATTHEW-TM-, and the GNOMES HOMES-TM-, a
small collection of hand-sculpted miniature cast resin houses. Boyds relocated
from Maryland to southern Pennsylvania in 1987 and its product line was expanded
to include other plush animals and related accessories including miniature
clothes, furniture and ornaments. Boyds began distributing its plush animal
lines to department stores and gift retailers, opting against selling to mass
merchandisers, major discount stores and toy chains. In 1993, Boyds began
selling cast resin figurines with the introduction of its BEARSTONES line.
BUSINESS SEGMENTS
Boyds has determined that it operates in one segment, collectibles. In
addition, less than 2% of total revenue is derived from customers outside the
United States and almost all long lived assets are located in the United States.
No customer represents more than 10% of total revenue.
PRODUCT LINES
Since 1982, Boyds' product lines have expanded from plush bears to include
other plush animals such as hares, moose and cats, resin figurines, porcelain
dolls and boxes and related clothing and accessories, as described below.
RESIN FIGURINES
Boyds' resin figurine category currently consists of three main collections,
BEARSTONES, FOLKSTONES and DOLLSTONES, and two sub-collections, SHOEBOX
BEARS-TM- and WEE FOLKSTONES. Together, these categories include over 380 styles
of finely detailed, hand-painted miniature cast resin bears, other animals and
people.
Boyds introduced the BEARSTONES in 1993 with ten different styles. Since its
introduction, Boyds has expanded the offerings to include additional figurines,
resin jewelry, ornaments, waterballs, SHOEBOX BEARS-TM-, votive holders,
ceramics, picture frames, wooden clocks, ceramic cookie jars and mugs.
The FOLKSTONES line of products, introduced in 1994, includes
non-traditional, whimsical figurines of traditional folk art themes, other
figurines, jewelry, ornaments, waterballs, WEE FOLKSTONES and votive holders.
The DOLLSTONES line of products, introduced in 1995, is based on nostalgic
themes and includes figurines of children depicted with animals, waterballs,
votive holders and musicals. In the fall of 1997, Boyds introduced limited
edition porcelain dolls within the DOLLSTONES product category, which Boyds
continues to expand.
Pieces in the resin figurine category are generally priced between $9 and
$60 at retail. Each figurine is inscribed with Boyds' distinctive symbol of
authenticity, a hidden bear paw, and a bottom stamp indicating the name, edition
and piece number. Many figurines contain famous quotes which help the customers
1
identify with the piece. The items are packaged individually with a certificate
of authenticity describing the product.
PLUSH ANIMALS
Boyds began selling its plush animals in 1982 and its plush animal category
consists of both dressed and non-dressed animals, most of which are fully
jointed with sewn-in joints for arms, legs and heads. Today the plush animal
category has grown to encompass over 410 different items ranging from 2 1/2"
miniatures to 21" large animals.
Boyds' non-dressed plush animal lines include the BEARS IN THE ATTIC, the
ARTISAN SERIES-TM-, THE MOHAIR BEARS, T. F. WUZZIES, J.B. BEAN & ASSOCIATES, the
ARCHIVE COLLECTION and ANGELS AND FRIENDS-TM- ornaments. The largest
revenue-generating line in this plush category is Boyds' J.B. BEAN & ASSOCIATES,
featuring fully-jointed bears, hares, moose, lambs and other animals.
Introduced in 1992, the popularity of Boyds' T.J.'S BEST DRESSED line,
characterized by fully jointed bears, cats, moose and other animals dressed in
stylish, hand-sewn outfits, has helped create additional brand awareness for
Boyds.
Retail prices for the plush animals generally range from $4 to $95. Animals
in the plush animal category are made of various materials with outer coverings
ranging from acrylic plush to custom-dyed chenille and wool and interiors filled
with plastic pellets for the beanbag animals and 100% acrylic fiberfill for the
other animals.
OTHER PRODUCTS
In addition to Boyds resin figurine and plush animal lines, Boyds sells over
150 additional items which generally generate margins comparable to its resin
figurine and plush animal lines. The majority of the revenues generated by these
products are from the sale of Boyds' BEAR NECESSITIES line that includes
miniature furniture, wooden accessories, glasses, cast iron products and resin
accessories. Various printed and promotional materials are sold to support Boyds
product lines. Boyds also sells products to its collectors club members (FRIENDS
OF BOYDS).
NEW PRODUCT INTRODUCTIONS
Boyds continually evaluates new product ideas and regularly introduces new
product lines that maintain Boyds' whimsical and "Folksy with Attitude" themes.
For fiscal 1999, Boyds concentrated on further expanding its core resin figurine
and plush animal product lines and expanding the porcelain dolls. Boyds also
introduced the following new lines:
- UPTOWN BEARS, upscale dressed bears
- PURRSTONES, a new line of resin figurines
- BABYBOYDS, plush animals targeted for the children's market
PRODUCT DESIGN AND DEVELOPMENT
Boyds' in-house creative design team consists of nine full-time, design
professionals and senior management. Once a design has been created, Boyds,
together with its buying agencies, works with outside artists and sculptors,
primarily in the People's Republic of China, who are responsible for creating a
prototype and refining the product's appearance for review by Boyds. Boyds also
works with its buying agencies and manufacturers in order to ensure the product
can be produced at an acceptable cost per unit, without compromising quality,
given a certain level of production.
2
BOYDS INTELLECTUAL PROPERTY
TRADEMARKS. Boyds has obtained 16 U.S. trademark registrations for
trademarks and logos related to its resin figurines and plush animals. These
registrations allow Boyds to use on an exclusive basis these trademarks and
logos in the United States in connection with its products. If Boyds continues
to use such trademarks and logos and makes timely filings with, and pays all
required fees to, the U.S. Patent and Trademark Office, its trademark
registrations can exist in perpetuity. Boyds also has common-law trademark
rights to the extent it uses unregistered names and logos on its various
products. The strength and scope of these rights is determined by the geographic
extent and duration of their use. Additionally, to the extent that the packaging
and overall visual impact of Boyds' products is inherently distinctive or has
acquired distinctiveness through sales in the marketplace, Boyds has proprietary
rights in such "trade dress" of its products.
COPYRIGHTS. Boyds has secured more than 300 copyright registrations for its
products with the U.S. Copyright Office. Boyds may enforce these rights in U.S.
courts with regard to infringements occurring in the United States and also, to
varying extents, in foreign jurisdictions with regard to infringements occurring
outside the United States. In addition, Boyds has copyrights in the original
expression contained in other products that it has created, whether or not those
copyrights have been registered. In all events, Boyds' copyright in its products
is limited in scope to the original, creative expression embodied in them and
does not extend to elements drawn from public sources or to functional elements.
For all products created by or on behalf of Boyds since its founding date, the
U.S. copyright currently runs for a term of 95 years from the date of their
creation.
Notwithstanding Boyds' proprietary rights in its intellectual property,
Boyds remains subject to both infringement of its intellectual property and
claims of infringement by other parties. However, Boyds protects its
intellectual property rights, both through policing any potential infringement
by third parties and registering such rights, when appropriate, with applicable
government authorities.
SOURCING OF BOYDS PRODUCTS
Boyds coordinates its production and cooperative development efforts
primarily through two buying agencies with whom it has established long-term
business relationships. These buying agencies perform a number of functions for
Boyds, including collaborating in its product design and development process,
identifying suitable manufacturers for its products and supervising its
manufacturers to assure the proper quality and timing of Boyds' orders.
Boyds does not own or operate any manufacturing facilities and imports most
of its products from manufacturers in the Pacific Rim, primarily The People's
Republic of China. Boyds' ability to import products and thereby satisfy
customer orders is affected by the availability of, and demand for, quality
production capacity abroad. Boyds competes with other importers of collectibles
for the limited number of foreign manufacturing sources which can produce
detailed, high-quality products at affordable prices. Boyds is subject to the
following risks inherent in foreign manufacturing: the laws and policies of the
United States affecting the importation of goods (including duties, quotas and
taxes); restrictive actions by foreign governments; fluctuations in currency
exchange rates; nationalizations; and foreign trade and tax laws.
Substantially all of Boyds' products are subject to customs duties and
regulations pertaining to the importation of goods, including requirements for
the marking of certain information regarding the country of origin on Boyds'
products. The United States and the countries in which Boyds' products are
manufactured may, from time to time, impose new quotas, duties, tariffs or other
charges or restrictions, or adjust presently prevailing quotas, duty or tariff
levels, which could adversely affect Boyds' financial condition or results of
operations or its ability to continue to import products at current or increased
levels. Boyds cannot predict what regulatory changes may occur or the type or
amount of any possible financial impact on Boyds in the future.
3
Although Boyds believes that the loss of either of its two primary buying
agencies would have a short-term material adverse effect on its financial
condition and results of operations, it believes that alternative buying
agencies would be available in the long-term and such alternative buying
agencies would be able to work directly with Boyds' manufacturers.
Boyds domestic products are shipped by ocean freight to the United States
and then by truck to Boyds' 209,000 square-foot distribution center in
McSherrystown, Pennsylvania. Boyds ships the majority of its products to its
nationwide retailer network via United Parcel Service.
BOYDS DISTRIBUTION NETWORK AND CUSTOMERS
Boyds' has a large national distribution network, which includes
approximately 19,000 independent retail gift and collectibles accounts, high-end
department stores and selected catalogue retailers, representing approximately
25,000 individual retail outlets. Boyds' resin figurine product line is sold
through a network of authorized dealers consisting of approximately 8,000
accounts, selected primarily from Boyds' plush-only dealers. The top ten
accounts comprised approximately 15% of net product sales during fiscal 1999.
To build dealer trust and loyalty and minimize dealer turnover, Boyds does
not sell to mass merchandisers or discount chains other than an occasional
disposal of obsolescent merchandise, which Boyds estimates to be less than 1% of
net sales.
Boyds believes it has very low annual customer account turnover among its
resin dealers and normal turnover for its other dealers. Turnover among
non-resin dealers occurs primarily in small accounts, which become inactive due
to ownership changes, poor credit or lack of commitment to Boyds' products.
Accounts which became inactive in fiscal 1999 represented approximately 4% of
Boyds' fiscal 1998 net sales. Boyds generally does not offer dating terms or
volume discounts.
SALES & MARKETING OF BOYDS' PRODUCTS
Boyds sends catalogues and promotional mailings to all retailers twice a
year for its spring and fall product offerings. Boyds generates its order volume
through its team of telemarketers and internal sales personnel, catalogue
mailings to its retailers and from trade show sales. Boyds leases showroom space
in Atlanta, Chicago, Dallas, Denver, Los Angeles and New York. Approximately 40%
of orders are taken between November and April, while approximately 60% of
orders are placed between May and October in anticipation of the holiday season.
Each major segment of Boyds' account base, including resin figurine dealers,
department stores, catalogue retailers and general accounts, is managed by a
different group of sales professionals. Boyds' showrooms are staffed with
full-time employees.
All Boyds sales personnel are paid an annual base salary and a
performance-based bonus.
COMPETITION WITH PRODUCERS OF COLLECTIBLE, GIFTWARE AND HOME DECORATIVE PRODUCTS
Boyds competes generally for the disposable income of consumers and, in
particular, with other producers of fine quality collectibles, specialty
giftware and home decorative accessory products. The collectibles area, in
particular, is affected by changing consumer tastes and interests. The giftware
and collectibles industries are highly competitive, with a large number of both
large and small participants. Boyds' competitors distribute their products
through independent gift retailers, department stores, mass merchandisers and
catalogue retailers or through direct response marketing. Boyds believes the
principal elements of competition in the giftware and collectibles industries
are product design and quality, product and brand name loyalty, product display
and price. Boyds believes its competitive position is enhanced by a variety of
factors, including the innovativeness, quality and enduring themes of Boyds'
products, its reputation among retailers and consumers, its in-house design
expertise, its sourcing and marketing
4
capabilities and the pricing of its products. Some of Boyds competitors,
however, are part of large, diversified companies having greater financial
resources and a wider range of products than Boyds. In addition, this industry
is subject to intense competition from small and large companies, each having
the ability to create unique, appealing products at relatively low entry cost.
CURRENT EMPLOYEES AND HIRING PROGRAM
Boyds currently employs a total of 271 full time individuals, 244 of whom
are located in McSherrystown, Pennsylvania. All of these employees are
non-union. Boyds also uses contract labor to work at the various trade shows
around the nation.
To better manage the anticipated growth in Boyds' product lines, Boyds
embarked on a hiring program in fiscal 1999 to supplement its existing staff
with individuals having specialized design, marketing and operational skills.
ITEM 2. PROPERTIES
SHOWROOMS, WAREHOUSING, DISTRIBUTION AND FACILITIES
Boyds leases approximately 209,000 square feet of distribution and warehouse
space in McSherrystown, Pennsylvania. Boyds' existing distribution center
includes two loading docks, two automated conveyor systems and 180,000 square
feet of storage area. Boyds' lease expires in 2009. Boyds completed the building
of an additional 54,000 square feet of warehouse space during fiscal 1999.
Attached to the warehouse area is Boyds' 24,000 square-foot corporate
headquarters which is subject to the same lease provisions. Boyds also leases
office space for its H.C. Accents business in Illinois and showroom space in
Atlanta, Chicago, Dallas, Denver, Los Angeles and New York. Management
anticipates that its current facilities should be adequate for Boyds' planned
growth needs for the next several years, and vacant land is available on-site
for additional expansion should it be necessary.
DEVELOPMENT AND UPGRADES OF BOYDS' MANAGEMENT INFORMATION SYSTEMS
Boyds' management information systems have been developed through the
modification of off-the-shelf software programs to serve Boyds' current needs.
Boyds has recently upgraded its computer systems to aid in the management of
Boyds' automated warehouse system. Future upgrades will include a system to
assist the telemarketers with their accounts, enhancement of the website to
permit business to business transactions and other improvements. Boyds believes
that its internal information systems are Year 2000 compliant. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance".
WEBSITE
Boyds launched its official company website on November 15, 1999 at
WWW.BOYDSCOLLECTIBLES.COM. In mid-December the site was expanded to provide
pages addressing the specific needs of Boyds' 135,000 member collectors club,
"The Loyal Order of the Friends of Boyds", and permit interested collectors to
sign-up for club membership online. By mid-2000 the site will be further
expanded to permit Boyds' dealers to place their orders, review order status,
check their accounts, etc. via a "business-to-business" link.
ITEM 3. LEGAL PROCEEDINGS
On March 28, 2000 Boyds settled an outstanding lawsuit related to a claim
for royalties. In complete and final resolution of the suit, Boyds has agreed to
a settlement of the claim resulting in a $3.1 million after tax charge.
5
In addition, Boyds is involved in various legal proceedings, claims and
governmental audits in the ordinary course of business. In the opinion of Boyds'
management, the ultimate disposition of these proceedings, claims and audits
will not have a material adverse effect on the financial position or results of
operations of Boyds.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since Boyds' initial public offering of 16,000,000 shares of its Common
Stock on March 4, 1999, Boyds' Common Stock has been listed on the New York
Stock Exchange ("NYSE") under the symbol "FOB". To date, the NYSE has been the
principal market for the exchange of the freely tradable shares of Boyds' Common
Stock. Between March 5, 1999 and December 31, 1999, the high and low sales
prices for a share of Boyds' Common Stock on the NYSE were, as follows:
QUARTER ENDED HIGH LOW
- ------------- -------- --------
March 31, 1999.............................................. $18.6250 $16.0000
June 30, 1999............................................... $18.6875 $11.6875
September 30, 1999.......................................... $17.5000 $12.0000
December 31, 1999........................................... $14.0625 $ 6.5000
Boyds has not paid cash dividends for the two most recent fiscal years and
anticipates that it will continue to retain its earnings to finance the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. As of March 10, 2000, the
approximate number of stockholders of record of Boyds' common stock was
59,172,040.
6
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL SUMMARY
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATIONS
Net sales........................................ $70,147 $98,365 $129,841 $ 197,806 $210,205
Gross profit..................................... 45,926 65,343 86,563 133,954 137,876
Selling, general and administrative expenses..... 4,332 6,314 8,528 14,446 16,506
------- ------- -------- --------- --------
Income from operations........................... 41,625 59,416 79,206 120,788 117,877
Interest expense................................. 89 187 242 29,618 23,877
------- ------- -------- --------- --------
Income before extraordinary items................ 42,114 60,097 79,130 66,278 60,110
Extraordinary items.............................. -- -- -- -- 7,008
------- ------- -------- --------- --------
Net income....................................... 42,114 60,097 79,130 66,278 53,102
======= ======= ======== ========= ========
Pro forma provision for income taxes............. 17,455 25,045 33,152 34,732 34,280
======= ======= ======== ========= ========
Pro forma net income (1)......................... 24,659 35,052 45,978 53,553 53,102
======= ======= ======== ========= ========
COMMON STOCK DATA
Pro forma net income per share:
- Basic........................................ $ 0.16 $ 0.22 $ 0.29 $ 0.64 $ 0.89
- Diluted...................................... $ 0.16 $ 0.22 $ 0.29 $ 0.63 $ 0.89
Book value per share............................. $ 0.01 $ 0.01 $ 0.03 $ (1.89) $ 0.32
Weighted average shares and equivalents
outstanding
- Basic........................................ 157,672 157,672 157,672 84,142 59,495
- Diluted...................................... 157,672 157,672 157,672 84,485 59,797
Pro Forma Data, as adjusted for the
recapitalization and the initial public
offering (2):
Net income before extraordinary item........... $ 55,060 $ 62,259
Interest expense............................... 26,740 20,598
Basic earnings per common share................ $ .90 $ 1.02
Diluted earnings per common share.............. .89 1.01
FINANCIAL POSITION
Cash and cash equivalents........................ 4,279 6,083 11,210 11,606 11,501
Working capital.................................. 17,663 19,333 34,608 33,868 38,369
Total assets..................................... 19,943 22,582 38,936 298,410 282,185
Total debt....................................... 17,700 19,300 30,000 443,000 251,000
Total stockholders' equity (deficit)............. 915 1,191 5,272 (158,766) 19,362
OTHER DATA
Gross profit margin.............................. 65.5% 66.4% 66.7% 67.7% 65.6%
Operating income margin.......................... 59.3% 60.4% 61.0% 61.1% 56.1%
Depreciation and amortization.................... $ 131 $ 221 $ 254 $ 2,260 $ 6,303
Capital expenditures............................. 545 269 367 1,247 2,763
- --------------------------
(1) Prior to the recapitalization on April 21, 1998, Boyds operated as an
S Corporation for federal and state income tax purposes. As a result, Boyds'
taxable earnings were taxed directly to its then-existing stockholders.
After the recapitalization, Boyds became subject to federal and state income
taxes. The pro forma provision for income taxes, pro forma net income and
pro forma net income per share assume that Boyds was subject to federal and
state income taxes and was taxed as a C Corporation at the effective tax
rates that would have applied for all periods.
(2) Pro forma data, as adjusted for the recapitalization and the initial public
offering for 1998 gives effect to the initial public offering and the
recapitalization and related transactions as if such transactions were
consummated on January 1, 1998 and for 1999 gives effect to the initial
public offering as if it were consummated on January 1, 1999. Pro forma
basic and diluted earnings per common share, as adjusted for the
recapitalization and the offering is calculated based on weighted average
basic and diluted shares outstanding of 61,375 and 61,718, respectively, as
of December 31, 1998 and 61,092 and 61,394, respectively, as of
December 31, 1999.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Boyds has grown significantly to become a leading domestic designer,
importer and distributor of branded, high-quality, hand-crafted collectibles and
other specialty giftware products. Boyds sells its products through an extensive
network of approximately 19,000 accounts comprised of independent gift and
collectibles retailers, premier department stores, selected catalogue retailers
and other electronic and retail channels.
Boyds' products include resin figurines, including porcelain dolls, plush
animals and other. The following table sets forth Boyds' resin figurine, plush
animal and other sales and their percentage of Boyds' net sales:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS) (PERCENT OF NET SALES)
Resin figurines................ $ 58.2 $ 84.5 $ 79.2 44.8% 42.7% 37.7%
Plush animals.................. 61.6 98.3 111.1 47.5% 49.7% 52.9%
Other.......................... 10.0 15.0 19.9 7.7% 7.6% 9.4%
------ ------ ------ ----- ----- -----
Net sales................ $129.8 $197.8 $210.2 100.0% 100.0% 100.0%
====== ====== ====== ===== ===== =====
Growth in resin figurines through fiscal 1998 was primarily driven by the
substantial growth of Boyds' three major resin figurine product lines,
BEARSTONES, FOLKSTONES and DOLLSTONES. In late 1993, Boyds introduced its
BEARSTONES product line, which was an immediate success. In early 1994, Boyds
introduced another resin figurine line known as FOLKSTONES, followed by
DOLLSTONES in late 1995. Boyds also established a network of dealers in 1994,
selected primarily from Boyds' plush-only dealers, that were authorized to carry
Boyds' resin figurine product lines. These dealers have grown in number to 8,000
accounts and accounted for approximately 69% of Boyds' net sales in fiscal 1999.
Boyds currently has a waiting list of over 8,600 retailers that have expressed
interest in becoming resin figurine dealers.
Growth in plush animals for the period from fiscal 1995 through fiscal 1999
has been largely attributable to the growth of Boyds' line of dressed animals in
the T. J'S. BEST DRESSED collection, introduced in 1992, and in other
custom-designed plush animals. Boyds began selling non-dressed plush animals in
1982 and has since introduced product collections which currently include BEARS
IN THE ATTIC-TM-, J. B. BEAN & ASSOCIATES, the ARCHIVE COLLECTION-TM- and MOHAIR
BEARS.
Boyds' resin figurine and plush animal sales accounted for 90.6% of the full
year 1999 net sales, with other product sales comprising the remainder. Included
in resin figurine, plush animal and related sales are collectors club sales
which are generated from annual dues collected directly from consumers who
become members of Boyds' collectors club, THE LOYAL ORDER OF FRIENDS OF BOYDS,
which began in July 1996 and currently has approximately 135,000 paying members.
Selling, general and administrative expenses are comprised of overhead,
selling and marketing costs, administration and professional fees. For fiscal
1999, Boyds' SG&A expenses were $16.5 million, representing 7.9% of net sales.
Unlike many of its competitors, Boyds does not utilize a network of internal or
independent commissioned sales personnel, but relies instead on an in-house team
of non-commissioned telemarketing and sales professionals. In addition, Boyds
exhibits its products at many national and regional tradeshows where orders are
taken by Boyds' employees and part-time help. Boyds operates almost exclusively
out of a leased office/distribution facility in McSherrystown, Pennsylvania
where it believes both labor and rental costs are attractive.
Boyds licenses its product designs to other companies for products including
stationery, greeting cards and home textiles. Boyds believes such licensing, in
addition to providing royalty income, helps to increase
8
consumer awareness of Boyds' designs and brand image. Boyds reports royalty
income as other operating income.
Boyds has substantial operating income margins and has experienced
significant growth in income from operations. Its income from operations has
increased from $41.6 million in fiscal 1995 to $117.9 million for fiscal 1999.
Historically, Boyds has funded its cash needs from operations and has not found
it necessary to make substantial capital investments.
RESULTS OF OPERATIONS
The following table sets forth the components of net income as a percentage
of net sales for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Net sales............................................... 100.0% 100.0% 100.0%
Gross profit............................................ 66.7% 67.7% 65.6%
Selling, general and administrative expenses............ 6.6% 7.3% 7.9%
Legal settlement........................................ 0.0% 0.0% 2.1%
Other operating income, net............................. 0.9% 0.7% 0.5%
Income from operations................................ 61.0% 61.1% 56.1%
Other income, net....................................... 0.1% 0.1% 0.2%
Expenses related to the recapitalization................ 0.0% 1.6% 0.0%
Interest expense........................................ 0.2% 15.0% 11.4%
Provision for income taxes.............................. 0.0% 11.1% 16.3%
Income before extraordinary items..................... 60.9% 33.5% 28.6%
Extraordinary items (net of $3,942 tax benefits)........ 0.0% 0.0% 3.3%
----- ----- -----
Net income............................................ 60.9% 33.5% 25.3%
===== ===== =====
The following pro forma information for 1999 gives effect to Boyds
March 10, 1999 initial public offering as if it were consummated on January 1,
1999, and for 1998 gives effect to the initial public offering and the
recapitalization and related transactions that occurred on April 21, 1998 as if
such transactions were consummated on January 1, 1998. The pro forma information
excludes the effects of the
9
extraordinary items related to the redemption premium on the bonds redeemed in
connection with the initial public offering and the write off of deferred debt
issuance costs:
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------
1998 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Historical Income from Operations....................... $120,788 $117,877
Expenses Related to the Recapitalization................ 3,248 --
Pro Forma Interest Expense.............................. 26,740 20,598
-------- --------
Pro Forma Income Before Income Taxes and Extraordinary
Items................................................. 90,800 97,279
-------- --------
Pro Forma Provision for Income Taxes.................... 35,740 35,020
-------- --------
Pro Forma Income Before Extraordinary Items............. $ 55,060 $ 62,259
======== ========
Pro Forma Basic Earnings Per Share, before Extraordinary
Items................................................. $ 0.90 $ 1.02
Weighted Average Basic Shares Outstanding............... 61,375 61,092
Pro Forma Diluted Earnings Per Share, before
Extraordinary Items................................... $ 0.89 $ 1.01
Weighted Average Diluted Shares Outstanding............. 61,718 61,394
FISCAL YEAR ENDED DECEMBER 31, 1999 VS. FISCAL YEAR ENDED DECEMBER 31, 1998
NET SALES--Net sales increased $12.4 million, or 6.3%, to $210.2 million in
the full year 1999 from $197.8 million for the full year 1998. Sales of Boyds'
plush products increased $12.8 million, or 13.0%, compared to the full year
1998; while sales of the resin products decreased $5.3 million, or 6.3%,
compared to the full year 1998. Sales of plush products represented 52.9% of the
Company's net sales of $210.2 million for the full year 1999, while sales of
resin products represented 37.7%. Continuing softness in order volume and sales
of our resin products impacted the year.
GROSS PROFIT--Gross profit increased $3.9 million, or 2.9%, to
$137.9 million in the full year 1999 from $134.0 million for the full year 1998.
Gross profit as a percent of sales decreased to 65.6% for the year from 67.7%
for 1998. The dollar increase in gross profit was primarily attributable to the
increase in sales volume. The decrease in gross profit as a percent of sales was
primarily attributable to increased freight costs, and warehousing costs arising
from higher inventory levels needed to satisfy customer demand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES--SG&A expenses increased
$2.1 million, or 14.4%, to $16.5 million in the full year 1999 from
$14.4 million for the full year 1998. SG&A expenses as a percent of sales
increased to 7.9% for the year from 7.3% for the same period in 1998. The
increase in dollars and percent of sales for the full year was primarily due to
increased wages incurred in adding additional personnel.
LEGAL SETTLEMENT--On March 28, 2000, Boyds settled an outstanding lawsuit
related to a claim for royalties. In complete and final resolution of the suit,
Boyds has agreed to a settlement of the claim, resulting in a $3.1 million after
tax charge.
INCOME FROM OPERATIONS--Income from operations decreased $2.9 million, or
2.4%, to $117.9 million in the full year 1999 from $120.8 million for the full
year 1998. The operating income margin decreased to 56.1% for the year from
61.1% for the same period in 1998. The dollar decrease in income from operations
was primarily attributable to the legal settlement reserve, which was partially
offset by the increase in net sales for the period. The decrease in operating
income margin was due to a decrease in gross profit margin, an increase in SG&A
expenses as a percent of sales for the period and the legal settlement reserve.
10
EXPENSES RELATED TO THE RECAPITALIZATION--Transaction costs of $3.2 million
for the full year 1998 were related to non-recurring bonuses paid to key
employees in connection with the recapitalization.
TOTAL INTEREST EXPENSE--Total interest expense decreased $5.7 million, or
19.4%, to $23.9 million for the full year 1999 from $29.6 million for the full
year 1998. Total interest expense as a percent of sales decreased to 11.4% for
the period from 15.0% for the same period in 1998. The decrease in total
interest expense in both dollars and as a percent of sales was due to the
application of the funds received from the initial public offering in
March 1999, which reduced the debt, further debt reduction through the
application of excess cash and reduction of interest rates due to the
deleveraging of Boyds.
INCOME TAXES--Income taxes increased $12.3 million, or 55.8%, to
$34.3 million for the full year 1999 from $22.0 million for the full year 1998.
This increase was due to the change in Boyds' tax status from an S Corporation
to a C Corporation in April 1998, partially offset by the decrease in taxable
income.
EXTRAORDINARY ITEMS--Extraordinary item of $3.8 million, net of tax, for the
redemption premium on bonds related to the early retirement of $66.0 million of
senior subordinated notes and of $3.2 million, net of tax, for the amortization
of deferred debt issuance costs related to the early paydown of $126.0 million
of other long term debt. The senior subordinated note repayment and
$82.5 million of the other long term debt repayment resulted from the use of the
proceeds of the initial public offering, which occurred in March 1999. The
remaining $43.5 million for the early paydown of the other long term debt came
from operating cash flow.
NET INCOME--Net income decreased $13.2 million, or 19.9%, to $53.1 million
for the full year 1999 from $66.3 million for the full year 1998. The net income
margin decreased to 25.3% for the full year 1999 from 33.5% for the full year
1998. The decrease in net income and net income margin was primarily due to the
legal settlement provision, and the increase in income taxes and extraordinary
items as discussed above.
PRO FORMA INTEREST EXPENSE--Pro forma interest expense for 1999 was
calculated assuming the initial public offering occurred on January 1, 1999, and
for 1998 assuming the recapitalization and the initial public offering occurred
on January 1, 1998. Pro forma interest expense decreased $6.1 million, or 23.0%,
for the full year 1999 to $20.6 million from $26.7 million for the full year
1998. Pro forma interest expense as a percent of sales decreased to 9.8% for the
full year 1999 from 13.5% for the full year 1998. The decrease in pro forma
interest in both dollars and as a percent of sales was due to the reduction of
debt from excess cash and reduction of interest rates due to the deleveraging of
Boyds.
PRO FORMA INCOME TAXES--Due to a change in the company's state tax status
the overall tax rate fell from 40.0% in 1998 to 36% in 1999.
PRO FORMA NET INCOME BEFORE EXTRAORDINARY ITEMS--Pro forma net income before
extraordinary items increased $7.2 million, or 13.1%, to $62.3 million in the
full year 1999 from $55.1 million for the full year 1998. The pro forma net
income before extraordinary items margin increased to 29.6% for the year from
27.8% for the full year 1998. The increase in pro forma net income before
extraordinary items in both dollars and as a percent of sales was primarily
attributable to the increase in net sales and the decrease in pro forma interest
expense, partially offset by the legal settlement reserve.
FISCAL YEAR ENDED DECEMBER 31, 1998 VS. FISCAL YEAR ENDED DECEMBER 31, 1997
NET SALES--Net sales increased 52.4% to $197.8 million in fiscal 1998 from
$129.8 million in fiscal 1997. Net sales of resin figurines were $84.5 million
in fiscal 1998, an increase of 45.2% as compared to resin figurine net sales of
$58.2 million in fiscal 1997. The increase in net sales of resin figurines was
primarily attributable to increased sales of BEARSTONES, FOLKSTONES and
Porcelain Dolls, which resulted from strong consumer and retailer demand, and
the introduction of CARVERS CHOICE. Net sales of plush animals were
$98.3 million in fiscal 1998, an increase of 59.6% as compared to plush animal
net sales of $61.6 million in fiscal 1997. The increase in net sales of plush
animals was primarily attributable to
11
increased sales of T. J'S. BEST DRESSED, along with sales of T. F. WUZZIES
mini-bears and MOHAIR BEARS, which were introduced in the fall of 1997.
GROSS PROFIT--Gross profit increased 54.7% to $134 million in fiscal 1998
from $86.6 million in fiscal 1997. Gross profit as a percent of sales increased
to 67.7% for fiscal 1998 from 66.7% for fiscal 1997. The increase in gross
profit was primarily attributable to the increase in sales for both the plush
animal and resin figurine categories for fiscal 1998 as compared to fiscal 1997.
SG&A--SG&A expenses increased 69.4% to $14.4 million in fiscal 1998 from
$8.5 million in fiscal 1997. SG&A expenses as a percent of net sales increased
to 7.3% in fiscal 1998 from 6.6% in fiscal 1997. The increase in SG&A expenses
was primarily attributable to increased administrative costs due to Boyds' net
sales increase during the periods. The increase in SG&A expenses as a percent of
net sales was attributable to increased wages of $750,000 incurred due to an
increased provision for Boyds' employee incentive program and an increase in
professional fees of $1.5 million.
INCOME FROM OPERATIONS--Income from operations increased 52.5% to
$120.8 million in fiscal 1998 from $79.2 million in fiscal 1997. The operating
income margin increased to 61.1% in fiscal 1998 from 61.0% in fiscal 1997. The
increase in operating income margin was due to an increase in net sales for the
period. The increase in income from operations was primarily attributable to the
increase in net sales for the period.
INTEREST EXPENSE--Interest expense increased to $29.6 million in fiscal 1998
from $0.2 million in fiscal 1997. The increase in interest expense was due to
indebtedness incurred in connection with the recapitalization.
EXPENSES RELATED TO THE RECAPITALIZATION--Transaction costs for fiscal 1998
were $3.2 million, representing 1.6% of net sales. Transaction costs consisted
of non-recurring bonuses paid to key employees in connection with the
recapitalization.
NET INCOME--Net income decreased 16.2% to $66.3 million in fiscal 1998 from
$79.1 million in fiscal 1997. The decrease in net income was attributable to
$54.6 million of additional costs in 1998 that did not occur in 1997, including:
- interest expense of $29.4 million
- income tax expense of $22.0 million due to Boyds becoming a tax paying
entity
- expenses related to the recapitalization of $3.2 million
The net income margin decreased to 33.5% in fiscal 1998 from 60.9% in fiscal
1997. The decrease in net income margin was attributable to the tax and interest
expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Boyds utilized its operating cash flow to support working
capital and ongoing capital expenditures. Cash flow from operations decreased
$13.0 million, or 15.7%, to $69.6 million for the full year 1999 from
$82.6 million for the full year 1998. The cash flow decrease was primarily
attributable to the decreases in net income, accrued taxes and interest payable,
partially offset by increases in the amortization of the deferred tax asset, the
amortization of deferred debt issuance costs, a decrease in accounts
receivable--net and an increase in accrued expenses. Net cash used in financing
activities decreased $10.5 million, or 13.6%, to $67.0 million for the full year
1999, from $77.5 million for the full year 1998. The funds, realized primarily
from the sale of Boyds' stock and from operations, were used to repay
outstanding debt, the fees and expenses related to the stock sale, and for the
repurchase of company stock.
Boyds' primary sources of liquidity are cash flow from operations and
borrowings under its credit agreement, which includes a revolving credit
facility. Boyds' primary uses of cash are to fund working capital and to service
debt.
12
In connection with the recapitalization discussed in Note 1 to the
Consolidated Financial Statements, Boyds issued 9% Senior Subordinated Notes due
2008 in an amount of $165.0 million and entered into a credit agreement
providing for a $325.0 million senior secured term loan and a senior secured
revolving credit facility providing for borrowings up to $40.0 million. On
April 12, 1999, Boyds repaid $66.0 million of the notes, leaving a balance
outstanding of $99.0 million. Boyds has repaid $173.0 million of the term loans
under the credit agreement through December 31, 1999, leaving a balance
outstanding of $152.0 million. Boyds currently has no borrowings under the
revolving credit facility. Thus, the full amount available under the revolving
credit facility will be available to fund the working capital requirements of
Boyds.
On May 28, 1999, Boyds' Board of Directors approved the repurchase of up to
3 million shares of Boyds' common stock. As of December 31, 1999, Boyds had
repurchased 2,954,200 shares of common stock pursuant to this stock repurchase
program for an aggregate amount of approximately $29.9 million. These
repurchases were financed out of operating cash flow and approximately
$4.0 million of borrowings under the revolving credit facility which were
subsequently repaid. Any future repurchases under this program are expected to
be financed similarly.
Borrowings under the credit agreement bear interest at a rate per annum,
equal to a margin over either a base rate or LIBOR, at Boyds' option. The
revolving credit facility commitment will terminate seven years after the date
of the initial funding of the credit agreement. The term loans will be amortized
over an eight-year period with no amortization in the first two years. The
credit agreement contains customary covenants and events of default, including
substantial restrictions on Boyds' ability to declare dividends or make
distributions. The term loans are subject to mandatory prepayment with the
proceeds of certain asset sales and a portion of Boyds' excess cash flow, as
defined in the credit agreement.
Boyds does not expect to incur significant capital expenditures for the
foreseeable future. Boyds does not incur significant capital expenditures due to
its sourcing arrangements with suppliers.
Management believes that cash flow from operations and availability under
the revolving loan will provide adequate funds for Boyds' foreseeable working
capital needs, planned capital expenditures and debt service obligations. Any
future acquisitions, joint ventures or other similar transactions may require
additional capital and there can be no assurance that any such capital will be
available to Boyds on acceptable terms or at all. Boyds' ability to fund its
working capital needs, planned capital expenditures and scheduled debt payments,
to refinance indebtedness and to comply with all of the financial covenants
under its debt agreements, depends on its future operating performance and cash
flow, which in turn are subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond Boyds' control.
SEASONALITY
Boyds does not have the significant seasonal variation in its orders that it
believes is experienced by many other giftware and collectibles companies. Boyds
receives orders throughout the year and generally ships merchandise out on a
first-in, first-out basis. Approximately 40% of orders are taken between
November and April while approximately 60% of orders are placed between May and
October in anticipation of the holiday season. Boyds does not build a large
receivables balance relative to sales because it typically does not offer its
customers long payment terms or dating programs.
FOREIGN EXCHANGE
The dollar value of Boyds' assets abroad is not significant. Boyds' sales
are primarily denominated in United States dollars and, as a result, are not
subject to changes in exchange rates.
Boyds imports most of its products from manufacturers in China. Boyds' costs
could be adversely affected on a short-term basis if the Chinese renminbi
appreciates significantly relative to the United States dollar. Conversely, its
costs would be favorably affected on a short-term basis if the Chinese renminbi
depreciates significantly relative to the United States dollar. Although Boyds
generally pays for its products in United States dollars, the cost of such
products fluctuates with the value of the Chinese
13
renminbi. In the future Boyds may, from time to time, enter into foreign
exchange contracts or prepay inventory purchases as a partial hedge against
currency fluctuations. Differences between the amounts of such contracts and
costs of specific material purchases are included in inventory and cost of
sales. Boyds intends to manage foreign exchange risks to the extent appropriate.
YEAR 2000 COMPLIANCE
Some of Boyds' older computer programs for internal business systems were
written using two digits rather than four to define the applicable year. As a
result, those computer programs had time-sensitive software that recognize a
date using "00" as the year 1900 rather than the year 2000. This would have
caused a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in similar normal business activities.
Prior to the end of 1999, Boyds completed the testing and replacement of its
systems so they would function properly with respect to dates in the Year 2000
and thereafter. The total costs for the incremental work required were not
significant, as all upgrades and system replacements were part of previously
planned software and hardware upgrades.
At the time of the filing of this Form 10-K, Boyds has not experienced any
material problems with any of its systems related to dates in the year 2000 and
beyond. Boyds has a project team that will continue to monitor all systems for
potential Year 2000 related issues.
INFLATION
Boyds does not believe that inflation has had a material impact on its
operations.
FORWARD LOOKING STATEMENTS
Certain statements made in this Management's Discussion and Analysis of the
Condensed Consolidated Financial Statements and in the Notes to Condensed
Consolidated Financial Statements reflect management's estimates and beliefs and
are intended to be, and are hereby identified as, "forward-looking statements"
for purposes of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such Forward-looking terminology, includes but is not
limited to words such as "may," " intend," "will," "expect," "anticipate,"
"plan," "Boyds believes," "management believes," "estimate," "continue," or
"position" or the negative thereof or other variations thereon or comparable
terminology. In particular, any statements, express or implied, concerning
future operating results or the ability to generate revenues, income or cash
flow are forward looking statements.
Although Boyds believes that the assumptions on which forward-looking
statements contained herein are reasonable, any of those assumptions could be
incorrect and the inclusion of a forward-looking statement herein should not be
regarded as a representation by Boyds that its plans and objectives will be
achieved. Therefore, Boyds cautions readers that such forward-looking statements
involve risks and uncertainties that could cause actual results to differ
materially from those currently expected by management.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements listed under heading "(a)
Consolidated Financial Statements" of Item 14 hereof, which financial statements
are incorporated herein by reference in response to this Item 8.
14
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Report................................ 16
Consolidated Balance Sheets................................. 17
Consolidated Statements of Income........................... 18
Consolidated Statements of Stockholders' Equity............. 19
Consolidated Statements of Cash Flows....................... 20
Notes to Consolidated Financial Statements.................. 21
15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Boyds Collection, Ltd. and subsidiaries
McSherrystown, Pennsylvania
We have audited the accompanying consolidated balance sheets of the Boyds
Collection, Ltd. and subsidiaries ("Boyds") as of December 31, 1998 and 1999 and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of Boyds' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Boyds at December 31, 1998 and 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
New York, New York
February 4, 2000 (except for Note 16,
as to which the date is March 28, 2000)
16
ITEM 8. FINANCIAL STATEMENTS
THE BOYDS COLLECTION, LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 11,606 $ 11,501
Accounts receivable, less allowance for doubtful accounts
of $180 and $459 in 1998 and 1999, respectively......... 24,355 23,036
Inventory--primarily finished goods, less allowance for
obsolete inventory of $0 and $625 in 1998 and 1999,
respectively............................................ 8,440 12,392
Inventory in transit...................................... 3,116 1,950
Other current assets...................................... 527 1,313
--------- ---------
Total current assets.................................... 48,044 50,192
PROPERTY AND EQUIPMENT:
Property and equipment.................................... 2,662 5,425
Less--accumulated depreciation............................ (1,143) (1,811)
--------- ---------
Total property and equipment............................ 1,519 3,614
OTHER ASSETS:
Deferred debt issuance costs.............................. 12,019 6,384
Deferred tax asset........................................ 234,403 219,595
Other assets.............................................. 2,425 2,400
--------- ---------
Total other assets...................................... 248,847 228,379
--------- ---------
TOTAL ASSETS................................................ $ 298,410 $ 282,185
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,513 $ 1,462
Accrued taxes............................................. 5,364 2,262
Accrued expenses.......................................... 1,767 5,386
Interest payable.......................................... 5,501 2,635
Deferred income........................................... 31 78
--------- ---------
Total current liabilities............................... 14,176 11,823
LONG-TERM DEBT.............................................. 443,000 251,000
COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)
STOCKHOLDERS' EQUITY (DEFICIT):
Capital stock (52,588 and 59,072 shares issued and
outstanding at December 31, 1998 and 1999, respectively)
and paid-in capital in excess of par.................... (193,043) (68,018)
Other comprehensive income:
Cumulative translation adjustments........................ -- 1
Retained earnings......................................... 34,277 87,379
--------- ---------
Total stockholders' equity (deficit).................... (158,766) 19,362
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........ $ 298,410 $ 282,185
========= =========
See notes to consolidated financial statements.
17
THE BOYDS COLLECTION, LTD.
CONSOLIDATED STATEMENTS OF INCOME
DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE)
NET SALES................................................... $129,841 $197,806 $210,205
COST OF GOODS SOLD.......................................... 43,278 63,852 72,329
-------- -------- --------
Gross profit.............................................. 86,563 133,954 137,876
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 8,528 14,446 16,506
LEGAL SETTLEMENT............................................ -- -- 4,400
OTHER OPERATING INCOME...................................... 1,171 1,280 907
-------- -------- --------
INCOME FROM OPERATIONS...................................... 79,206 120,788 117,877
-------- -------- --------
OTHER INCOME/(EXPENSE):
Interest and dividend income.............................. 414 399 390
Other income.............................................. (248) (36) --
Expenses related to the recapitalization.................. -- (3,248) --
-------- -------- --------
TOTAL OTHER INCOME/(EXPENSE)................................ 166 (2,885) 390
-------- -------- --------
INTEREST EXPENSE:
Interest expense.......................................... 242 27,764 23,092
Amortization of deferred debt issuance costs.............. -- 1,854 785
-------- -------- --------
TOTAL INTEREST EXPENSE...................................... 242 29,618 23,877
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY
ITEMS..................................................... 79,130 88,285 94,390
PROVISION FOR INCOME TAXES.................................. -- 22,007 34,280
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS........................... 79,130 66,278 60,110
EXTRAORDINARY ITEMS:
REDEMPTION PREMIUM ON BONDS (NET OF $2,138 TAX BENEFIT)... -- -- 3,802
WRITE OFF OF DEFERRED DEBT ISSUANCE COSTS (NET OF $1,804
TAX BENEFIT)............................................ -- -- 3,206
-------- -------- --------
TOTAL EXTRAORDINARY ITEMS................................... -- -- 7,008
-------- -------- --------
NET INCOME.................................................. $ 79,130 $ 66,278 $ 53,102
======== ======== ========
PRO FORMA DATA:
HISTORICAL INCOME BEFORE EXTRAORDINARY ITEMS.............. $ 79,130 $ 66,278 $ 60,110
PRO FORMA PROVISION FOR INCOME TAXES...................... 33,152 12,725 --
-------- -------- --------
PRO FORMA INCOME BEFORE EXTRAORDINARY ITEMS............... 45,978 53,553 60,110
EXTRAORDINARY ITEMS:
REDEMPTION PREMIUM ON BONDS (NET OF $2,138 TAX
BENEFIT)............................................... -- -- 3,802
WRITE OFF OF DEFERRED DEBT ISSUANCE COSTS (NET OF $1,804
TAX BENEFIT)........................................... -- -- 3,206
-------- -------- --------
TOTAL EXTRAORDINARY ITEMS................................. -- -- 7,008
-------- -------- --------
PRO FORMA NET INCOME...................................... $ 45,978 $ 53,553 $ 53,102
======== ======== ========
PRO FORMA EARNINGS PER SHARE:
Basic Earnings Per Share
Income Before Extraordinary Items....................... $ 0.29 $ 0.64 $ 1.01
Extraordinary Items:
- Redemption Premium on Bonds........................... -- -- (0.06)
- Write Off of Deferred Debt Issuance Costs............. -- -- (0.06)
-------- -------- --------
Net Income.............................................. $ 0.29 $ 0.64 $ 0.89
======== ======== ========
Diluted Earnings Per Share
Income Before Extraordinary Items....................... $ 0.29 $ 0.63 $ 1.01
Extraordinary Items:
- Redemption Premium on Bonds........................... -- -- (0.06)
- Write Off of Deferred Debt Issuance Costs............. -- -- (0.06)
-------- -------- --------
Net Income.............................................. $ 0.29 $ 0.63 $ 0.89
======== ======== ========
See notes to consolidated financial statements.
18
THE BOYDS COLLECTION, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
AND PAID-IN ACCUMULATED
CAPITAL OTHER OTHER TOTAL
NUMBER OF IN EXCESS COMPREHENSIVE RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES OF PAR INCOME EARNINGS INCOME EQUITY
---------- -------------- -------------- -------- -------------- -------------
(IN THOUSANDS)
BALANCE, DECEMBER 31,
1996...................... 157,671 $ 48 $ -- $ 1,143 -- $ 1,191
Distributions to
stockholders............ -- -- -- (75,049) -- (75,049)
Net income................ -- -- -- 79,130 $79,130 79,130
-------- --------- ----- -------- ------- ---------
BALANCE, DECEMBER 31,
1997...................... 157,671 48 -- 5,224 -- 5,272
Capital contribution from
stockholder............. -- 3,500 -- -- -- 3,500
Transfer of related
earnings to additional
paid in capital at
termination of sub-S
election................ -- 37,225 -- (37,225) -- --
Recognition of deferred
tax asset............... -- 245,854 -- -- -- 245,854
Redemption and retirement
of common stock......... (106,237) (484,809) -- -- -- (484,809)
Issuance of common stock.. 1,154 5,139 -- -- -- 5,139
Net income................ -- -- -- 66,278 $66,278 66,278
-------- --------- ----- -------- ------- ---------
BALANCE, DECEMBER 31,
1998...................... 52,588 (193,043) -- 34,277 -- (158,766)
Sale of common stock (net
of related fees and
expenses)............... 9,250 153,941 -- -- -- 153,941
Repurchase of common
stock................... (2,954) (29,944) -- -- -- (29,944)
Exercise of stock
options................. 188 837 -- -- -- 837
Tax benefit from exercise
of stock options........ -- 191 -- -- -- 191
Other comprehensive
income:
Foreign currency
translation........... -- -- 1 -- 1 1
Net income................ -- -- -- 53,102 53,102 53,102
-------
Comprehensive income...... -- -- 1 -- $53,103 --
-------- --------- ----- -------- ======= ---------
BALANCE, DECEMBER 31,
1999...................... 59,072 $ (68,018) $ 1 $87,379 $ 19,362
======== ========= ===== ======== =========
See notes to consolidated financial statements.
19
THE BOYDS COLLECTION, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 79,130 $ 66,278 $ 53,102
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 254 406 668
Amortization of deferred debt issuance costs............ -- 1,854 5,635
Amortization of deferred tax asset...................... -- 11,451 16,392
Loss on sale of equipment............................... 38 36 --
Changes in assets and liabilities:
Accounts receivable--net.............................. (9,030) (3,869) 1,319
Inventory............................................. (162) (4,008) (3,952)
Inventory in transit.................................. (2,195) 322 1,166
Other current assets.................................. 160 (298) (786)
Deferred tax assets................................... -- -- (1,584)
Other assets.......................................... -- -- 25
Accounts payable...................................... 122 702 (51)
Accrued taxes......................................... 539 3,873 (3,102)
Accrued expenses...................................... 912 1,247 3,619
Interest payable...................................... -- 5,467 (2,866)
Deferred income....................................... -- (837) 47
-------- -------- ---------
Net cash provided by operating activities........... 69,768 82,624 69,632
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (367) (1,247) (2,763)
Dividend distributions from investment in The Boyds
Collection (Hong Kong) Ltd.............................. 320 -- --
Proceeds from sales of equipment.......................... 5 -- --
Purchase of business--net of cash acquired................ -- (2,200) --
Issuance of notes receivable.............................. (250) (1,296) --
-------- -------- ---------
Net cash used in investing activities............... (292) (4,743) (2,763)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of note payable--stockholders.................... 34,000 -- --
Distributions to stockholders............................. (75,049) -- --
Repayment of note payable--stockholders................... (23,300) (30,000) --
Issuance of debt.......................................... -- 490,000 --
Repayment of debt......................................... -- (47,360) (192,000)
Recapitalization and stock repurchase (net of related fees
and expenses)........................................... -- (484,809) --
Sale of common stock (net of related fees and expenses)... -- 5,056 153,941
Exercise of stock options................................. -- -- 837
Tax benefit from exercise of stock options................ -- -- 191
Capital contribution...................................... -- 3,500 --
Deferred debt issuance cost............................... -- (13,872) --
Repurchase of common stock................................ -- -- (29,944)
-------- -------- ---------
Net cash used in financing activities............... (64,349) (77,485) (66,975)
-------- -------- ---------
Effect of exchange rate changes on cash..................... -- -- 1
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 5,127 396 (105)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 6,083 11,210 11,606
-------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 11,210 $ 11,606 $ 11,501
======== ======== =========
CASH PAID DURING THE YEAR FOR INTEREST...................... $ 227 $ 22,208 $ 25,746
======== ======== =========
CASH PAID DURING THE YEAR FOR INCOME TAXES.................. $ -- $ 7,886 $ 16,079
======== ======== =========
SUPPLEMENTAL NON-CASH ACTIVITIES:
Pro forma income taxes.................................... $ 33,152 $ 34,732 $ --
Common stock issued as part of purchase price of business
acquired................................................ -- 83 --
Forgiveness of notes receivable in exchange for net assets
acquired................................................ -- 1,469 --
See notes to consolidated financial statements.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. HISTORY, RECAPITALIZATION AND FINANCING
The Boyds Collection, Ltd., ("Boyds") is a primary wholesaler and importer
of resin figurines and plush animals that are distributed to retail operations
primarily throughout the United States. Substantially all of its products are
sourced from foreign manufacturers in China through buying agencies.
On March 5, 1998, Boyds entered into a Recapitalization and Stock Purchase
Agreement with Bear Acquisition, Inc. ("Bear"). Bear is a subsidiary of KKR 1996
Fund L.P., a limited partnership formed at the direction of Kohlberg Kravis
Roberts & Co. L.P. ("KKR"). In connection with the closing of the
Recapitalization on April 21, 1998, Boyds used approximately $490 million of
aggregate proceeds from certain financings described below (the "Financing") and
approximately $8 million of existing cash balances of Boyds to: (i) redeem (the
"Redemption") a portion of Boyds' common stock, par value $0.0001 per share,
held by the original stockholders (the "Original Stockholders") for
approximately $473 million and (ii) pay transaction fees and expenses of
approximately $25 million. In addition, Bear acquired shares of common stock
from the Original Stockholders for approximately $184 million (the "Stock
Purchase," and together with the Redemption, the "Recapitalization"). Upon
completion of the Recapitalization, Bear owned approximately 80% of the common
stock and the Original Stockholders retained approximately 20% of the common
stock.
The Financings consisted of: (i) an aggregate of approximately $325 million
of bank borrowings by Boyds under senior secured term loans (the "Term Loans")
and (ii) $165 million aggregate principal amount of senior subordinated notes
(the "Notes"). In addition, Boyds entered into a $40 million senior secured
revolving credit facility which is available for Boyds' working capital
requirements and to support trade letters of credit (the "Revolver" and,
together with the Term Loans, the "Credit Facility"). At December 31, 1999,
Boyds did not have any borrowings under the revolving credit facility.
In connection with the Recapitalization, Boyds had non-recurring transaction
related bonuses (including the related payroll taxes) of $3.2 million which was
used by certain key employees to purchase Bear common stock. These transaction
related bonuses were paid from the proceeds of capital contributions from the
Original Stockholders. Financing costs of approximately $13.8 million were
classified as deferred debt issuance costs and will be amortized using the
effective interest rate method over the lives of the related debt facilities. In
addition, Boyds incurred approximately $11.8 million of costs associated with
the Redemption, which were charged to paid-in capital in excess of par. Fees in
the amount of $6 million were paid to KKR in connection with the
Recapitalization.
On March 10, 1999, Boyds issued and sold 9,250,000 shares of common stock at
$18 per share in an initial public offering and listed its stock on the New York
Stock Exchange. The proceeds to Boyds, after deducting the underwriting discount
and attorney fees, were approximately $153.9 million. On March 12, 1999,
$82.5 million of indebtedness under the Term Loans was repaid from the proceeds.
On April 12, 1999, Boyds paid $71.9 million to the holders of its Notes. The
payment comprised $5.9 million of redemption premium and $66 million of
principal.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of Boyds and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION--Sales revenue is recognized upon shipment of the items,
when title passes to the customer.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--Boyds considers all short-term interest-bearing
investments with original maturities of three months or less to be cash
equivalents.
INVENTORIES--Inventories are stated at the lower of cost or market. Cost is
determined under the first-in, first-out method of accounting. Inventory
in-transit consists of purchases from foreign suppliers for which title has
passed to Boyds.
PROPERTY AND EQUIPMENT--Property and equipment is stated at cost. For assets
acquired prior to January 1, 1999 depreciation is computed using the declining
balance method over the estimated useful lives of the various assets. Beginning
January 1, 1999 all new assets purchased are depreciated using the straight line
method over the estimated useful lives. The estimated useful lives of furniture
and fixtures range from five to seven years and the estimated useful lives of
equipment range from three to seven years. The estimated useful lives of
leasehold improvements is the lesser of the estimated life of the improvement or
the term of the lease.
SOFTWARE DEVELOPMENT COSTS--During 1999, Boyds adopted the AICPA's Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Accordingly, certain computer software project costs
incurred during the application development stage have been capitalized and are
being amortized on a straight line basis over a period of three years. Such
costs include external direct costs of materials and services consumed in
developing internal-use software and payroll costs for employees who are
directly associated with the internal-use computer software project, and are
included in property and equipment on the consolidated balance sheet.
GOODWILL--Goodwill, which represents the cost in excess of the fair value of
net assets acquired, is amortized on a straight line basis over twenty years.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY--Boyds had a 30% investment in The
Boyds Collection (Hong Kong) Ltd. until such investment was liquidated in 1997.
This investment was accounted for under the equity method of accounting and the
amounts included in the financial statements in 1997 were not material.
DEFERRED DEBT ISSUANCE COSTS--Boyds amortizes deferred debt issuance costs
using the interest method over the life of the debt. Amortization of deferred
debt issuance costs as a result of the prepayment of the related debt is
accelerated to the date of the prepayment and is included as an extraordinary
item in the consolidated statements of income.
IMPAIRMENT ACCOUNTING--Boyds reviews the recoverability of its long-lived
and intangible assets, when events or changes in circumstances occur that
indicate that the carrying value of the assets may not be recoverable. The
measurement of possible impairment is based on Boyds' ability to recover the
carrying value of the asset from the expected future undiscounted cash flows
generated. The measurement of impairment requires management to use estimates of
expected future cash flows. If an impairment loss existed, the amount of the
loss would be recorded in the consolidated statements of income. It is possible
that future events or circumstances could cause these estimates to change.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Management considers that the carrying
amount of financial instruments, including cash, accounts receivable, accounts
payable and accrued expenses, approximates fair value. Interest on long-term
bank debt is payable at variable rates which approximates fair market value. The
fair value of the Notes, face value of $99 million, was $94 million at
December 31, 1999, and was determined based on the market price on that date as
quoted by Bloomberg.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA ADJUSTMENTS--Boyds had elected to be treated as an S Corporation
for Federal and State income tax purposes. Under this election, income is not
taxed at the corporate level, but is taxed to the stockholders at the individual
level.
On April 21, 1998, Boyds elected to change its tax status from an S
Corporation to a C Corporation. The income statement reflects a provision for
income taxes for the period Boyds was a C Corporation. The objective of the pro
forma financial information is to show what the significant effects on the
historical financial information might have been had Boyds not been treated as
an S Corporation during 1997 and the portion of 1998 prior to April 21.
INCOME TAXES--Effective April 21, 1998, Boyds accounts for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
ACCOUNTING FOR INCOME TAXES, which requires an asset and liability approach to
accounting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future, based on enacted tax laws and rates applicable to periods in which
the differences are expected to affect taxable income. Income taxes/benefit is
the tax payable/receivable for the period plus or minus the change during the
period in deferred income tax assets and liabilities.
ADVERTISING--Boyds expenses the costs of advertising as they are incurred.
Advertising expense was $0.2 million, $0.2 million and $0.5 million for the
years ended 1997, 1998 and 1999, respectively.
STOCK-BASED COMPENSATION--Boyds has adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. SFAS 123 establishes a fair value based method of
accounting for stock-based employee compensation plans; however, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Under
the fair value method, compensation cost is measured at the grant date based on
the value of the award and is recognized over the service period, which is
usually the vesting period. Under the intrinsic value based method, compensation
cost is the excess, if any, of the quoted market price of the stock at the grant
date or other measurement date over the amount an employee must pay to acquire
the stock. Boyds has elected to continue to account for its employee
compensation plans under APB Opinion No. 25 with pro forma disclosures of net
earnings and earnings per share, as if the fair value based method of accounting
defined in SFAS No. 123 had been applied.
COMPREHENSIVE INCOME--SFAS No. 130, "Reporting Comprehensive Income",
requires the display of comprehensive income in the financial statements. Boyds'
comprehensive income includes net earnings and unrealized gains and losses from
foreign currency translation. The components of Boyds' comprehensive income and
the effects on earnings for the three years ended December 31, 1999 are detailed
in the accompanying Statement of Stockholders' Equity.
SEGMENT REPORTING--SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" requires enterprises to report certain
information about products and services, activities in different geographic
areas and reliance on major customers and to disclose certain segment
information in their interim financial statements. The basis for determining an
enterprise's operating segments is the manner in which financial information is
used internally by the enterprise's chief operating decision maker. Boyds has
determined that it operates in one segment, collectibles. In addition, less than
2% of total revenue is derived from customers outside the United States and
substantially all long lived assets are located in the United States. No
customer represents more than 10% of total revenue.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES--The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS--Certain 1997 financial statement amounts have been
reclassified to conform to the 1998 and 1999 presentation.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS--During 1998, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is effective for periods beginning after June 15, 1999.
During 1999 the FASB delayed the effective date for one year to fiscal years
beginning after June 15, 2000. Boyds is currently evaluating the impact, if any,
of this statement.
3. PROPERTY AND EQUIPMENT
The components of property and equipment at December 31, 1998 and 1999 were,
as follows:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Equipment................................................... $ 997 $1,673
Software development costs.................................. -- 584
Leasehold improvements...................................... 266 1,590
Furniture and fixtures...................................... 1,399 1,578
------ ------
Total................................................. 2,662 5,425
------ ------
Less: accumulated depreciation and amortization............. (1,143) (1,811)
------ ------
$1,519 $3,614
====== ======
Depreciation expense on property and equipment was $0.3 million,
$0.4 million and $0.7 million in 1997, 1998 and 1999, respectively.
4. ACQUISITION
On November 3, 1998, Boyds acquired all of the issued and outstanding shares
of capital stock of H.C. Accents, an Illinois corporation. H.C. Accents is a
designer, importer and distributor of collectibles and other specialty giftware
products. The aggregate purchase price was approximately $4.0 million,
consisting of $2.3 million cash paid (of which $0.25 million is in escrow at
December 31, 1999), the forgiveness of notes receivable due to Boyds of
approximately $1.5 million and 18,721 shares of common stock issued valued at
$0.1 million. The purchase price was assigned to the acquired assets, primarily
inventory and accounts receivable, based on their fair market values. In
addition, Boyds has recorded goodwill of approximately $2.4 million, included in
other assets, related to the excess of the purchase price over the fair value of
assets acquired which is being amortized using the straight line method over
20 years. The results of operations and net assets acquired are not material to
Boyds. The purchase agreement requires future contingent payments through 2002
provided H.C. Accents achieves minimum levels of EBITDA. Such payments will
range from 1.0 to 1.6 times threshold H.C. Accents' EBITDA amounts, and will be
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITION (CONTINUED)
recorded as additional purchase costs if and when H.C. Accents achieves the
minimum EBITDA thresholds. No contingent payments were required for 1998 or
1999.
5. CONCENTRATION OF CREDIT RISK
Boyds maintains cash balances at several financial institutions located in
Pennsylvania. Accounts at each institution are secured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured balances aggregated
$11.2 million at December 31, 1998 and 1999.
6. LEASE COMMITMENTS
Boyds conducts its operations and warehouses inventory in a leased facility
classified as an operating lease. In May, 1996, Boyds signed an addendum to its
original lease agreement dated March 1, 1995. The addendum permits Boyds to
lease additional space, increasing the monthly payment from $13,211 to $22,735.
Effective January 1, 1998, Boyds also exercised an option to lease the remaining
space of the warehouse for an additional monthly payment of $8,717. The term of
this lease expires in December 2009. The future minimum annual lease commitments
for the facilities are, as follows:
(IN MILLIONS)
-------------
2000........................................................ $0.4
2001........................................................ 0.4
2002........................................................ 0.4
2003........................................................ 0.4
2004........................................................ 0.4
Thereafter.................................................. 1.8
----
$3.8
====
Rent expense amounted to $0.3 million, $0.5 million and $0.8 million for
1997, 1998 and 1999, respectively.
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
At December 31, 1998 and 1999, Boyds had letters of credit outstanding under
bank credit agreements amounting to $11.2 million and $7.9 million,
respectively. These letters of credit represent Boyds' commitment to purchase
inventory which is to be produced and/or shipped.
8. RELATED PARTY TRANSACTIONS AND NOTE PAYABLE--STOCKHOLDERS
Certain stockholders loaned $30 million to Boyds at December 31, 1997, at an
interest rate of 5.0%. These notes payable were repaid in 1998. Interest
amounting to $0.2 million and $0.3 million was paid to these stockholders during
1997 and 1998, respectively.
During 1998, Boyds paid fees in the amount of $6 million and $1.7 million to
KKR and a director, respectively, for consulting services in connection with the
Recapitalization which are included in transaction-related expenses charged
directly to paid-in capital in excess of par. In addition, the director was paid
$0.1 million for consulting fees which are included in expenses. KKR has also
agreed to render management, consulting and financial services to Boyds for an
annual fee of $0.4 million plus expenses. For the
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS AND NOTE PAYABLE--STOCKHOLDERS (CONTINUED)
years ended December 31, 1998 and 1999 Boyds paid to KKR approximately
$0.3 million and $0.5 million, respectively, for management fees and related
expenses.
At December 31, 1999 Boyds has $0.4 million due from a shareholder.
9. LONG-TERM DEBT
Long-term debt is summarized as follows:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
9% Senior Subordinated Notes due May 15, 2008........... $165,000 $ 99,000
Credit Agreement:
Secured Tranche A Term Loans due April 2005
Interest based on LIBOR or base rate as defined..... 88,250 88,250
Secured Tranche B Term Loans due April 2006
Interest based on LIBOR or base rate as defined..... 189,750 63,750
-------- --------
$443,000 $251,000
======== ========
At December 31, 1999, the weighted average interest rate in effect for the
Term Loans was 7.488%.
The Notes have an optional redemption feature exercisable by Boyds any time
on or after May 15, 2003. Boyds may also redeem up to 40% of the Notes with the
proceeds of one or more equity offerings at any time on or prior to May 15,
2001, and did so following the public offering on March 5, 1999. Interest on the
Notes is payable semiannually on May 15 and November 15.
The Credit Agreement contains certain covenants, including the requirement
of a minimum interest coverage ratio as defined in the agreement and substantial
restrictions as to dividends and distributions. Boyds is in compliance with all
applicable covenants as of December 31, 1999. The agreement also provides that
the Term Loans and revolving loan commitment be secured by the capital stock of
Boyds' future subsidiaries. In addition, the Term Loans are subject to mandatory
prepayment 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 of
selecting its own interest period at one, two, three, six, nine or twelve month
periods.
The scheduled maturities of the long-term debt are as follows:
2000........................................................ $ --
2001........................................................ 6.2
2002........................................................ 14.0
2003........................................................ 17.0
Thereafter.................................................. 213.8
10. PROVISION FOR INCOME TAXES
Prior to April 21, 1998, Boyds had elected to be treated as an S Corporation
for federal and state income tax purposes, therefore, there was no income tax
provision for 1997. Boyds subsequently elected to change its tax status from an
S Corporation to a C Corporation. The income statement reflects a provision
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PROVISION FOR INCOME TAXES (CONTINUED)
for income taxes for the period Boyds was a C Corporation. Pro forma income
statement data reflects pro forma income tax information as if Boyds was a C
Corporation for the entire periods presented.
Income tax expense consists of the following:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Federal:
Current................................................. $ 8,879 $18,640
Deferred................................................ 9,237 14,175
------- -------
18,116 32,815
State:
Current................................................. 1,677 832
Deferred................................................ 2,214 633
------- -------
3,891 1,465
------- -------
Total..................................................... $22,007 $34,280
======= =======
For federal income tax purposes, Boyds has elected to treat the
Recapitalization and Stock Purchase as an asset acquisition by making a
Section 338 Section (h)(10) election. As a result, there is a difference between
the financial reporting and tax basis of Boyds' assets. The difference creates
deductible goodwill for tax purposes, which creates a deferred tax asset for
financial reporting purposes. The deferred tax asset will be realized as the
goodwill is amortized over a period of fifteen years. In the opinion of
management, Boyds believes it will have sufficient profits in the future to
realize the deferred tax asset.
A reconciliation of the statutory federal income tax rate and the effective
rate of the provision for income taxes consists of the following:
DECEMBER 31,
-------------------
1998 1999
-------- --------
Statutory federal income tax rate........................... 35.0% 35.0%
State income taxes--net of federal income tax benefit....... 2.8 1.0
Tax exempt interest......................................... -- (0.1)
Permanent differences....................................... -- (0.1)
Sub-chapter S income........................................ (12.8) --
----- -----
Effective income tax rate................................... 25.0% 35.8%
===== =====
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PROVISION FOR INCOME TAXES (CONTINUED)
The tax effect of significant items comprising the Company's deferred tax
assets and liabilities are, as follows:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Deferred tax asset Goodwill........................... $234,429 $219,621
Deferred tax liability-Other.......................... (26) (26)
-------- --------
Net deferred tax asset................................ $234,403 $219,595
======== ========
11. CONTINGENCIES
Boyds settled an outstanding lawsuit related to a claim for royalties. See
Note 16.
12. STOCKHOLDERS' EQUITY
CAPITAL STOCK--As of December 31, 1998 and 1999 Boyds had 100 million shares
of capital stock (par value $0.0001), authorized and 52.6 million and
59.1 million, respectively, shares issued as common stock. The Board of
Directors is authorized to issue the unissued portion of the authorized shares
in another class or series of stock, including preferred stock.
During 1998, the Original Stockholders made capital contributions of
$3.5 million. In connection with the Recapitalization, Boyds redeemed, and
subsequently retired, 106,237,360 shares of common stock from the original
stockholders (see Note 1). Boyds issued 1,154,090 shares of common stock, of
which 18,721 shares were issued in connection with the acquisition of H. C.
Accents.
During 1999, Boyds issued and sold 9,250,000 shares of common stock at $18
per share in an initial public offering and listed its stock on the New York
Stock Exchange. On May 28, 1999 Boyds announced a common stock share repurchase
program and, as of December 31, 1999, the Company had repurchased 2,954,200
shares of its common stock.
13. EMPLOYEE BENEFIT PLANS
EMPLOYEE SAVINGS AND RETIREMENT PLAN--Boyds has a 401(K) Plan that allows
eligible employees to contribute up to $10,000 of their salary.
STOCK OPTION PLAN--On April 21, 1998, Boyds implemented an incentive stock
option plan (the "1998 Stock Option Plan") which provides for the granting to
certain employees and directors of options to acquire Boyds' common stock. The
option prices of stock which may be purchased under the incentive stock plan are
not less than the fair value of common stock on the dates of the grants.
Outstanding options issued to employees vest and become exercisable over a
five-year period from the date of grant. The outstanding options expire ten
years from the date of grant or upon an employee's retirement or termination
from Boyds, and are contingent upon continued employment during the applicable
five-year period.
On July 21, 1998, Boyds issued 44,921 options to each of its six directors.
These options vested immediately, expire 10 years from the date of grant and the
option prices of the stock which may be purchased were not less than the fair
value of common stock on the dates of the grants.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
Boyds has reserved a total of 2,246,033 shares for issuance under the 1998
Stock Option Plan, of which 822,501 remains reserved at December 31, 1999 for
future issuances. The following table summarizes information about fixed stock
options at December 31, 1999:
OPTIONS OUTSTANDING
------------------------------------
EXERCISE PRICE PER SHARE
OPTIONS ------------------------
AVAILABLE NUMBER OF WEIGHTED
FOR GRANT SHARES RANGE AVERAGE
---------- --------- ------------- --------
December 31, 1997.............................. -- -- -- --
Shares reserved................................ 2,246,033 -- -- --
Options granted................................ (1,133,124) 1,133,124 $4.45-$13.36 $ 7.10
---------- ---------
December 31, 1998.............................. 1,112,909 1,133,124 $4.45-$13.36 $ 7.10
---------- ---------
Options granted................................ (368,000) 368,000 $12.00-$18.00 $14.60
Options exercised.............................. -- (187,994) $4.45 $ 4.45
Options forfeited.............................. 77,592 (77,592) $4.45 $ 4.45
---------- ---------
December 31, 1999.............................. 822,501 1,235,538 $4.45-$18.00 $ 9.90
========== =========
ACCOUNTING FOR STOCK-BASED COMPENSATION--Boyds has elected to continue to
account for its employee stock-based compensation plans under APB Opinion
No. 25. The pro forma disclosures of net earnings and net earnings per share as
if the fair value based method of accounting defined in SFAS No. 123 had been
applied are shown below. For purposes of the pro forma disclosures, the
estimated fair value of the options is assumed to be amortized to expense over
the options' vesting period.
PRO FORMA
-----------------------------
1998 1999
------------- -------------
Net income...................................... $53.2 million $52.5 million
Diluted Earnings Per Common Share............... $ 0.63 $ 0.86
Pro forma information regarding net income and net earnings per common share
has been estimated at the date of grant using the Black-Scholes option pricing
model based on the following assumptions:
1998 1999
-------- --------
Risk free interest rate..................................... 6.1% 5.7%
Volatility.................................................. 10.0% 48.0%
Dividend yield.............................................. 0.0% 0.0%
Expected life in years...................................... 6.5 6.5
The weighted average fair value of options granted during 1998 and 1999 was
$1.3 million and $3.0 million, respectively.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
WEIGHTED
EXERCISE OPTIONS OPTIONS AVERAGE
PRICE OUTSTANDING EXERCISABLE REMAINING LIFE
- -------- ----------- ----------- --------------
$4.45.................................................... 530,633 178,000 8.4
$12.00................................................... 25,000 -- 9.8
$13.36................................................... 336,905 67,381 9.0
$13.88................................................... 18,000 -- 9.4
$14.00................................................... 230,000 -- 9.7
$14.38................................................... 30,000 -- 9.5
$18.00................................................... 65,000 -- 9.2
EARNINGS PER SHARE--In March 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE. This Statement establishes
standards for computing and presenting earnings per share ("EPS") and applies to
all entities with publicly held common stock or potential common stock. This
Statement replaces the presentation of primary EPS and fully diluted EPS with a
presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes
dilution and is computed by dividing earnings available to common stockholders
by the weighted average number of common shares outstanding for the period.
Similar to fully diluted EPS, diluted EPS reflects the potential dilution of
securities that could share in the earnings.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the income and net income
available to common stockholders:
DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Numerator for basic and diluted earnings per share:
Pro forma net income available to common
stockholders..................................... $ 45,978 $ 53,553 $ 53,102
Denominator for basic earnings per share--weighted
average shares..................................... 157,671,516 84,142,163 59,494,985
Effect of dilutive securities:
Effect of shares issuable under stock option plans
based on treasury stock method..................... -- 342,408 302,097
------------ ----------- -----------
Dilutive potential common shares..................... -- 342,408 302,097
------------ ----------- -----------
Denominator for diluted earnings per share--weighted
average shares..................................... 157,671,516 84,484,571 59,797,082
============ =========== ===========
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table shows results of operations for each of the quarters
during fiscal 1998 and 1999:
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, 1998:
Net sales......................................... $49,336 $38,394 $52,235 $57,841
Gross profit...................................... 33,585 25,533 36,032 38,804
Income from operations............................ 31,234 22,290 32,552 34,712
Net income........................................ 31,041 6,839 13,477 14,921
------- ------- ------- -------
Pro forma provision (benefit) for income taxes.... 12,845 55 -- (175)
------- ------- ------- -------
Pro forma net income.............................. $18,196 $ 6,784 $13,477 $15,096
======= ======= ======= =======
Pro forma earnings per share
--basic......................................... $ 0.12 $ 0.09 $ 0.25 $ 0.29
--diluted....................................... $ 0.12 $ 0.09 $ 0.24 $ 0.29
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, 1999:
Net sales......................................... $57,185 $43,725 $59,266 $50,029
Gross profit...................................... 38,509 28,675 39,120 31,572
Income from operations............................ 34,506 24,719 34,645 24,007
Income before extraordinary items................. 16,913 12,416 18,945 11,836
Extraordinary items:
Redemption premium on bonds..................... -- 3,802 -- --
Write off of deferred debt issuance costs....... 1,380 1,700 64 62
------- ------- ------- -------
Net income........................................ 15,533 6,914 18,881 11,774
======= ======= ======= =======
Earnings per share
Basic and diluted earnings per share
Income before extraordinary items............. $ 0.30 $ 0.20 $ 0.31 $ 0.20
Extraordinary items:
Redemption premium on bonds................. -- (0.06) -- --
Write off of deferred debt issuance costs... (0.02) (0.03) -- --
------- ------- ------- -------
Net income.................................. $ 0.28 $ 0.11 $ 0.31 $ 0.20
======= ======= ======= =======
15. PRO FORMA INFORMATION (UNAUDITED)
The following pro forma information for 1999 gives effect to the initial
public offering as if it were consummated on January 1, 1999, and for 1998 gives
effect to the initial public offering and the recapitalization and related
transactions as if such transactions were consummated on January 1, 1998. The
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. PRO FORMA INFORMATION (UNAUDITED) (CONTINUED)
pro forma information excludes the effects of the extraordinary items related to
the redemption premium on the bonds and the write off of deferred debt issuance
costs:
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------
1998 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Historical Income from Operations........................... $120,788 $117,877
Expenses Related to the Recapitalization.................... 3,248 --
Pro Forma Interest Expense.................................. 26,740 20,598
-------- --------
Pro Forma Income Before Income Taxes and Extraordinary
Items..................................................... 90,800 97,279
-------- --------
Pro Forma Provision for Income Taxes........................ 35,740 35,020
-------- --------
Pro Forma Income Before Extraordinary Items................. $ 55,060 $ 62,259
======== ========
Pro Forma Basic Earnings Per Share, before Extraordinary
Items..................................................... $ 0.90 $ 1.02
Weighted Average Basic Shares Outstanding................... 61,375 61,092
Pro Forma Diluted Earnings Per Share, before Extraordinary
Items..................................................... $ 0.89 $ 1.01
Weighted Average Diluted Shares Outstanding................. 61,718 61,394
16. SUBSEQUENT EVENTS
On February 17, 2000, Boyds announced that its Board of Directors had
approved the repurchase of an additional 3.0 million shares of the Company's
common stock. Boyds plans to make such purchases from time to time in the open
market or in private transactions.
On March 28, 2000, Boyds settled an outstanding lawsuit related to a claim
for royalties. In complete and final resolution of the suit, Boyds has agreed to
a settlement of the claim, resulting in a $3.1 million after tax charge.
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the directors and executive officers of the Company,
their terms of office, the periods during which they have served, their personal
business experience, is included in the Company's definitive Proxy Statement for
its 2000 Annual Meeting and is specifically incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Company's directors and officers
is included in the Company's definitive Proxy Statement for its 2000 Annual
Meeting and is specifically incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the beneficial ownership of the outstanding
shares of the Company's Common Stock by (i) all persons owning of record, or
beneficially to the knowledge of the Company, more than five percent of the
outstanding shares, (ii) each director and executive officer of the Company
individually, and (iii) all directors and officers of the Company as a group, is
included in the Company's definitive Proxy Statement for its 2000 Annual Meeting
and is specifically incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and transactions between the
Company and its directors, director-nominees, executive officers, and the family
members of these individuals is included in the Company's definitive Proxy
Statement for its 2000 Annual Meeting and is specifically incorporated herein by
reference.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Report................................ 18
Consolidated Balance Sheets................................. 19
Consolidated Statements of Income........................... 20
Consolidated Statement of Stockholders' Equity.............. 21
Consolidated Statement of Cash Flows........................ 22
Notes to Consolidated Financial Statements.................. 23
(A)(2) 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*
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 (incorporated
by reference from Exhibit 4.1 of Amendment No. 1 on Form
S-4, filed on June 21, 1999, File No. 333-79647).
4.3 Form of 9% Series B Senior Subordinated Note due 2008
(incorporated by reference from Exhibit 4.1 of Amendment No.
1 on Form S-4, filed on June 21, 1999, File No. 333-79647).
4.4 Registration Rights Agreement dated as of April 21, 1998,
between Boyds and Donaldson, Lufkin and Jenrette Securities
Corporation (incorporated by reference from Amendment No. 1
on Form S-4, filed June 21, 1999, File No. 333-79647).
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
(incorporated by reference from Exhibit 10.1 of Amendment
No. 1 on Form S-4, filed June 21, 1999, File No. 333-79647).
10.3 1998 Stock Option Plan (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 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).
21 List of subsidiaries (incorporated by reference from
Amendment No.1 on Form S-4, filed June 21, 1999, File No.
333-79647).
99.1 Definitive Proxy Statement of Boyds (election of directors
and appointment of auditors) (to be filed pursuant to
Regulation 14A).
- ------------------------
* Filed herewith.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
McSherrystown, State of Pennsylvania on the 24(th) day of March, 2000.
THE BOYDS COLLECTION, LTD.
By: /s/ CHRISTINE L. BELL
-----------------------------------------
Christine L. Bell
CHIEF OPERATING OFFICER AND SECRETARY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on March 24, 2000.
SIGNATURE
---------
i) Principal executive officer:
/s/ JEAN-ANDRE ROUGEOT
-------------------------------------------
Jean-Andre Rougeot
Chief Executive Officer
ii) Principal financial and accounting officer:
/s/ CHRISTINE L. BELL
-------------------------------------------
Christine L. Bell
Chief Operating Officer and Secretary
iii) Directors:
/s/ GARY M. LOWENTHAL
-------------------------------------------
Gary M. Lowenthal
Chairman of the Board
/s/ ROBERT T. COCCOLUTO
-------------------------------------------
Robert T. Coccoluto
Director
35
SIGNATURE
---------
/s/ HENRY R. KRAVIS
-------------------------------------------
Henry R. Kravis
Director
/s/ GEORGE R. ROBERTS
-------------------------------------------
George R. Roberts
Director
/s/ SCOTT M. STUART
-------------------------------------------
Scott M. Stuart
Director
/s/ MARC S. LIPSCHULTZ
-------------------------------------------
Marc S. Lipschultz
Director
/s/ TIMOTHY BRADY
-------------------------------------------
Timothy Brady
Director
36