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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, 2000
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 or (I.R.S. Employer Identification No.)
Organization)
350 SOUTH STREET, MCSHERRYSTOWN, PENNSYLVANIA 17344
(Address of Principal Executive Office) (Zip Code)
(717) 633-9898
(Registrant's Telephone Number, Including Area Code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.0001 PER SHARE NEW YORK STOCK EXCHANGE
Title of each Class Name of each Exchange on which Registered
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the Registrant (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 this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Registrant's Common Stock held by
non-affiliates (assuming solely for the purpose of this calculation that
directors and officers are affiliates) of the Registrant, based on the reported
last sale price of such stock on the New York Stock Exchange on March 9, 2001,
was approximately $103,444,163.
As of March 9, 2001, the number of shares of the Registrant's Common Stock
outstanding was 59,152,840.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the Registrant's
2001 Annual Meeting of Stockholders which is expected to be filed within
120 days following the end of the fiscal year covered by this report, are
incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Description of Business..................................... 2
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related 7
Stockholder Matters.........................................
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations...................................
Item 7A. Quantitative and Qualitative Disclosures About Market 14
Risk........................................................
Item 8. Financial Statements and Supplementary Data................. 15
Item 9. Changes in And Disagreements With Accountants on Accounting 32
and Financial Disclosure....................................
PART III
Item 10. Directors and Executive Officers............................ 32
Item 11. Executive Compensation...................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and 32
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 33
8-K.........................................................
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Boyds Collection, Ltd. ("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 3% 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, resin
houses, 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 three sub-collections, PURRSTONES,
SHOEBOX BEARS-TM- and WEE FOLKSTONES. Together, these categories include over
300 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, PURRSTONES, 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.
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
2
help the customers 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 400 different items ranging from 2 1/2"
miniatures to 40" large animals.
Boyds' non-dressed plush animal lines include the BEARS IN THE ATTIC, the
ARTISAN SERIES-TM-, THE MOHAIR BEARS, 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 the fall of 1997, Boyds introduced limited edition porcelain dolls which
Boyds continues to expand. During 1999 Boyds completed the integration of H. C.
Accents, a home decor giftware company acquired in late 1998, expanding both its
customer base and product offerings. In addition to Boyds resin figurine and
plush animal lines, Boyds sells over 300 additional items which generally
generate margins comparable to its resin figurine and plush animal lines. These
revenues are generated by products ranging from miniature furniture, wooden
accessories and glasses, through cast iron products, resin accessories and
porcelain dolls, to home decor and bearly-built villages. 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 2000, Boyds concentrated on broadening the giftability of its core
resin figurine and plush animal product lines and expanding the porcelain dolls.
Boyds also introduced the following new lines:
- BEARLY-BUILT VILLAGES, a new line of miniature houses and related
accessories
- TREASURE BOXES, a new line of miniature resin hinged boxes
PRODUCT DESIGN AND DEVELOPMENT
Boyds' creative design team works with its manufacturers, primarily in the
People's Republic of China, to create prototypes and refine 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.
3
INTELLECTUAL PROPERTY
TRADEMARKS. Boyds has obtained 16 United States 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 United States 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 600 copyright registrations for its
products with the United States Copyright Office. Boyds may enforce these rights
in United States 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 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 foreign 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.
4
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.
DISTRIBUTION NETWORK AND CUSTOMERS
Boyds has a large national distribution network, which includes
approximately 18,000 independent retail gift and collectibles accounts, high-end
department stores and selected catalogue retailers, representing approximately
24,000 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 2000.
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 2000 represented approximately 4% of
Boyds' fiscal 1999 net sales. Boyds generally does not offer dating terms or
volume discounts.
SALES & MARKETING OF PRODUCTS
Boyds sends catalogues and promotional mailings to all retailers at least
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 and Dallas. 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 component 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.
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 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.
5
EMPLOYEES
Boyds currently employs a total of 293 full time individuals, 269 of whom
are located in McSherrystown, Pennsylvania. None of these employees are
represented by labor unions. Boyds also uses contract labor to work at the
various trade shows around the nation.
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, which are in good operating condition. Boyds' lease
expires in 2009. Boyds completed the building of an additional 54,000 square
feet of leased 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 and Dallas. Management
believes that its current facilities are suitable and 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 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 launched its official company website on November 15, 1999 at
WWW.BOYDSSTUFF.COM. which, among other things, permits interested collectors to
sign-up for club membership online. On February 14, 2001, Boyds implemented its
B2B website which permits Boyds' dealers to place their orders, review order
status, check their accounts, etc. via a "business-to-business" link. Later in
2001 Boyds will complete upgrades which will include a system to assist the
telemarketers with their accounts and other improvements.
ITEM 3. LEGAL PROCEEDINGS
Boyds has received from the State of Pennsylvania an assesstment to pay
additional franchise taxes of approximately $7.0 million for 1998. Boyds firmly
believes that the assessment is without merit and intends to vigorously contest
the assessment in its entirety. In addition, Boyds is involved in various legal
proceedings, claims and governmental audits in the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters 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.
6
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. The following table shows, on a per share basis, the high and low prices
for the common stock for the periods indicated as reported on the New York Stock
Exchange:
1999 2000
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QUARTER ENDED HIGH LOW HIGH LOW
- ------------- -------- -------- -------- --------
March 31............................................. $18.6250 $16.0000 $ 7.7500 $5.9375
June 30.............................................. $18.6875 $11.6875 $11.0000 $5.6250
September 30......................................... $17.5000 $12.0000 $10.0000 $7.3750
December 31.......................................... $14.0625 $ 6.5000 $ 9.9375 $6.7500
As of March 9, 2001, the approximate number of holders of record of Boyds'
common stock was 592. Since its initial public offering in 1999, Boyds has not
paid cash dividends on its common stock, however, Boyds' may consider paying
cash dividends in the future. Boyds intends to retain its earnings to finance
the development and growth of its business. Currently Boyds is subject to
restrictions that limit its ability to declare and pay cash dividends on its
common stock under certain covenants contained in Boyds' debt agreements.
7
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL SUMMARY
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
OPERATIONS
Net sales................................. $ 98,497 $130,605 $199,069 $211,096 $184,047
Gross profit.............................. 65,475 87,327 135,217 138,767 114,066
Selling, general and administrative
expenses................................ 4,991 6,239 11,881 20,426 26,671
Income from operations.................... 60,739 81,495 123,353 118,357 87,407
Interest expense.......................... 187 286 29,687 23,947 19,503
Income before extraordinary items......... 60,097 79,130 66,278 60,110 42,007
Extraordinary items....................... -- -- -- 7,008 611
Net income................................ 60,097 79,130 66,278 53,102 41,396
COMMON STOCK DATA
Net income per share:
-- Basic................................ $ 0.38 $ 0.50 $ 0.79 $ 0.89 $ 0.70
-- Diluted.............................. $ 0.38 $ 0.50 $ 0.79 $ 0.89 $ 0.70
Book value per share...................... $ 0.01 $ 0.03 $ (1.89) $ 0.33 $ 1.04
Weighted average shares and equivalents
outstanding
-- Basic................................ 157,672 157,672 84,142 59,495 59,149
-- Diluted.............................. 157,672 157,672 84,485 59,797 59,345
FINANCIAL POSITION
Cash and cash equivalents................. 6,083 11,210 11,606 11,501 3,191
Working capital........................... 19,333 34,608 33,868 56,024 49,996
Total assets.............................. 22,582 38,936 298,410 282,185 263,313
Total debt................................ 19,300 30,000 443,000 251,000 193,407
Total stockholders' equity (deficit)...... 1,191 5,272 (158,766) 19,362 61,286
OTHER DATA
Gross profit margin....................... 66.5% 66.9% 67.9% 65.8% 62.0%
Operating income margin................... 61.7% 62.4% 62.0% 56.1% 47.5%
Depreciation and amortization............. $ 221 $ 254 $ 2,260 $ 6,303 $ 3,603
Capital expenditures...................... 269 367 1,247 2,763 2,752
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Note: Certain reclassifications have been made to the prior years' amounts to
conform to the fiscal 2000 presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the results of operations for the
three fiscal years ended December 31, 2000 has been derived from and should be
read in conjunction with the consolidated financial statements, including the
notes thereto.
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
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products through an extensive network of approximately 18,000 accounts comprised
of independent gift and collectibles retailers, premier department stores,
selected catalogue retailers and other electronic and retail channels.
Boyds' products include plush animals, resin figurines, porcelain dolls,
houses and others. The following table sets forth Boyds' plush animals, resin
figurines, dolls, houses and other sales and their percentage of Boyds' net
sales:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1998 1999 2000 1998 1999 2000
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
Plush animals................................. $ 97.9 $110.7 $ 90.5 49.2% 52.4% 49.2%
Resin figurines............................... 80.7 72.1 56.4 40.5% 34.2% 30.7%
Dolls......................................... 3.4 6.7 9.5 1.7% 3.2% 5.2%
Houses........................................ -- -- 6.1 -- -- 3.3%
Other......................................... 17.1 21.6 21.5 8.6% 10.2% 11.6%
------ ------ ------ ----- ----- -----
Net sales................................. $199.1 $211.1 $184.0 100.0% 100.0% 100.0%
====== ====== ====== ===== ===== =====
The most important ranges within the plush animal category are the dressed
animals in the T. J'S. BEST DRESSED collection, introduced in 1992, and the
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.
There are three major figurine product lines within the resin figurine
category, 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 65% of Boyds' net sales in fiscal 2000.
Boyds currently has a waiting list of over 5,700 retailers that have expressed
interest in becoming resin figurine dealers.
The porcelain doll line was launched in the fall of 1997 to a positive
response and has continued to grow, aided by the expansion of the sizes offered,
which now range from 12" to 16".
The house line was launched in January 2000 and consists of resin houses and
related "village" accessories.
Included in other 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 100,000 paying members. This category also
includes sales from H. C. Accents, a home decor company acquired by Boyds in
October, 1998, and licensing income. 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 consumer awareness of Boyds' designs and brand image. Boyds reports
royalty income as other sales.
Selling, general and administrative expenses are comprised of overhead,
selling and marketing costs, administration and professional fees. For fiscal
2000, Boyds' SG&A expenses were $26.7 million, representing 14.5% 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
9
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 has substantial operating income margins and has experienced
significant growth in income from operations. Its income from operations has
increased from $60.7 million in fiscal 1996 to $87.4 million for fiscal 2000.
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,
------------------------------------
1998 1999 2000
-------- -------- --------
Net sales................................................... 100.0% 100.0% 100.0%
Gross profit................................................ 67.9% 65.8% 62.0%
Selling, general and administrative expenses................ 5.9% 9.7% 14.5%
Other operating income, net................................. -- -- --
Income from operations.................................. 62.0% 56.1% 47.5%
Other income, net........................................... 0.1% 0.2% 0.1%
Expenses related to the recapitalization.................... 1.6% -- --
Interest expense............................................ 14.9% 11.4% 10.6%
Provision for income taxes.................................. 12.3% 16.4% 14.2%
Income before extraordinary items....................... 33.3% 28.5% 22.8%
Extraordinary items (net of tax benefits)................... -- 3.3% 0.3%
----- ----- -----
Net income.............................................. 33.3% 25.2% 22.5%
===== ===== =====
FISCAL YEAR ENDED DECEMBER 31, 2000 VS. FISCAL YEAR ENDED DECEMBER 31, 1999
NET SALES--Net sales decreased $27.1 million, or 12.8%, to $184.0 million in
2000 from $211.1 million in 1999. Sales of Boyds' plush products decreased
$20.2 million, or 18.3%, to $90.5 million in 2000 from $110.7 million in 1999;
sales of the Company's resin products decreased $15.7 million, or 21.8%, to
$56.4 million in 2000 from $72.1 million in 1999; sales of the Company's doll
products, previously included in the resin product category, increased
$2.8 million, or 41.8%, to $9.5 million in 2000 from $6.7 million in 1999; and
sales of the Company's newly introduced village products produced sales of
$6.1 million. Sales of plush products represented 49% of the Company's net sales
of $184.0 million for 2000, while sales of resin products represented 31%, doll
products represented 5% and village products represented 3%. The overall sales
shortfall resulted from the weakness in the retail marketplace that persisted
over the past year, while the increase in sales of the Company's doll products
is primarily attributable to new product introductions and expanded
distribution.
GROSS PROFIT--Gross profit decreased $24.7 million, or 17.8%, to
$114.1 million in 2000 from $138.8 million in 1999. Gross profit as a percentage
of sales decreased to 62.0% in 2000 from 65.8% in 1999. The dollar decrease in
gross profit was primarily attributable to the decrease in sales volume. The
decrease in gross profit as a percentage of sales was primarily attributable to
increased freight costs, a provision for retired inventory of approximately
$3.0 million and lower gross margins on key product lines in the first six
months of 2000.
10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES--SG&A expenses increased
$6.2 million, or 30.6%, to $26.7 million in 2000 from $20.4 million in 1999.
SG&A expenses as a percentage of sales increased to 14.5% in 2000 from 9.7% in
1999. The increase in dollars and percentage of sales is primarily attributable
to increased wages arising from the annualized impact of additional personnel,
additional marketing costs and a provision of $2.0 million for doubtful
accounts. This increase was partially offset by a provision of $4.4 million for
a legal settlement recorded in 1999.
INCOME FROM OPERATIONS--Income from operations decreased $31.0 million, or
26.1%, to $87.4 million in 2000 from $118.4 million in 1999. The operating
income margin decreased to 47.5% in 2000 from 56.1% in 1999. The decrease in
dollars and operating margin is primarily attributable to the sales shortfall,
the decrease in gross profit margin and the increase in SG&A expenses.
TOTAL INTEREST EXPENSE--Total interest expense decreased $4.4 million, or
18.6%, to $19.5 million in 2000 from $23.9 million in 1999. Total interest
expense as a percentage of sales decreased to 10.6% in 2000 from 11.3% in 1999.
The decrease in total interest expense in both dollars and as a percentage of
sales is primarily attributable to the reduction of debt through the application
of excess cash and reduction of interest rates due to the deleveraging of Boyds.
INCOME TAXES--Income taxes decreased $8.5 million, or 24.5%, to
$26.2 million in 2000 from $34.7 million in 1999. This decrease is attributable
to the decline in sales and gross margin, and the growth in SG&A expenses.
EXTRAORDINARY ITEMS--The $1.1 million charge, net of tax, relates to the
write-off of deferred debt issuance costs arising from the early paydown of long
term debt. The $0.5 million gain, net of tax, relates to the repurchase of
company bonds below par.
FISCAL YEAR ENDED DECEMBER 31, 1999 VS. FISCAL YEAR ENDED DECEMBER 31, 1998
NET SALES--Net sales increased $12.0 million, or 6.0%, to $211.1 million in
1999 from $199.1 million in 1998. Sales of Boyds' plush products increased
$12.8 million, or 13.1%, to $110.7 million in 1999 from $97.9 million in 1998;
while sales of the Company's resin products decreased $8.6 million, or 10.7%, to
$72.1 million in 1999 from $80.7 million in 1998; sales of the Company's doll
products, previously included in the resin product category, increased
$3.3 million, or 97.1%, to $6.7 million in 1999 from $3.4 million in 1998. Sales
of plush products represented 52% of the Company's net sales of $211.1 million
in 1999, while sales of resin products represented 34% and doll products
represented 3%. Continuing softness in order volume and sales of our resin
products impacted the year.
GROSS PROFIT--Gross profit increased $3.6 million, or 2.6%, to
$138.8 million in 1999 from $135.2 million in 1998. Gross profit as a percentage
of sales decreased to 65.8% in 1999 from 67.9% in 1998. The dollar increase in
gross profit is primarily attributable to the increase in sales volume. The
decrease in gross profit as a percentage of sales is 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
$8.5 million, or 71.9%, to $20.4 million in 1999 from $11.9 million in 1998.
SG&A expenses as a percentage of sales increased to 9.7% in 1999 from 5.9% in
1998. The increase in dollars and percentage of sales is primarily attributable
to increased wages incurred in adding additional personnel and a $4.4 million
provision for a legal settlement.
INCOME FROM OPERATIONS--Income from operations decreased $5.0 million, or
4.1%, to $118.4 million in 1999 from $123.4 million in 1998. The operating
income margin decreased to 56.1% in 1999 from 62.0% in 1998. The dollar decrease
in income from operations is 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 is 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 provision.
11
EXPENSES RELATED TO THE RECAPITALIZATION--Transaction costs of $3.2 million
for 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
19.3%, to $23.9 million in 1999 from $29.7 million in 1998. Total interest
expense as a percentage of sales decreased to 11.3% in 1999 from 14.9% in 1998.
The decrease in total interest expense in both dollars and as a percentage of
sales is primarily attributable 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 $10.2 million, or 41.6%, to
$34.7 million in 1999 from $24.5 million in 1998. This increase is generally
attributable to the change in Boyds' tax status from an S Corporation to a C
Corporation in April 1998.
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 write-off 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.
LIQUIDITY AND CAPITAL RESOURCES
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. Cash flow from operations decreased $18.1 million, or 26.0%, to
$51.5 million in 2000 from $69.6 million in 1999. The cash flow decrease was
primarily attributable to the decreases in net income, accrued expense and
accrued taxes, partially offset by a decrease in inventory-net. Net cash used in
financing activities decreased $9.9 million, or 14.8%, to $57.1 million in 2000,
from $67.0 million in 1999. The funds, realized primarily from net income, were
used to repay outstanding debt.
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, and has subsequently
repaid a further $16.3 million, leaving a balance outstanding of $82.7 million.
Boyds has repaid $236.8 million of the term loans under the credit agreement
through December 31, 2000, leaving a balance outstanding of $88.3 million. The
revolving credit facility provides loans in an aggregate amount of up to
$40.0 million. Boyds had borrowed $22.5 million under the revolving credit
facility at December 31, 2000. Thus, the unused balance available under the
revolving credit facility will be available to fund the working capital
requirements of Boyds.
Borrowings under the credit agreement bear interest at a rate per annum,
equal to a margin over either a base rate or LIBOR, at Boyds' option. The
revolving credit facility commitment will terminate on April 21, 2005. Effective
April 21, 2000, the Tranche A term loan is amortizing over six years and the
Tranche B term loan is amortizing over seven 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. As of December 31, 2000, the Tranche B term loan had been fully
repaid.
12
Boyds does not expect to incur significant capital expenditures for the
foreseeable future, due to its sourcing arrangements with suppliers.
Management believes that cash flow from operations and availability under
the revolving credit facility will provide adequate funds for Boyds' foreseeable
working capital needs, planned capital expenditures, debt service obligations,
the common stock repurchase program and the bond repurchase program. 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.
On May 28, 1999, Boyds' Board of Directors approved the repurchase of up to
3.0 million shares of Boyds' common stock. As of December 31, 2000, 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, thus completing
the program. 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.
On February 17, 2000, Boyds announced that its Board of Directors had
approved the repurchase of an additional 3.0 million shares of Boyds' common
stock. As of December 31, 2000, Boyds had repurchased 19,200 shares of common
stock pursuant to this stock repurchase program for an aggregate amount of
approximately $0.1 million. These repurchases were financed out of operating
cash flow. Any future repurchases under this program are expected to be financed
similarly or by utilizing borrowings under the revolving credit facility. Boyds
plans to make such purchases from time to time in the open market or in private
transactions.
On July 27, 2000 Boyds announced that its Board of Directors had approved a
repurchase program for its outstanding 9% Series B Senior Subordinated Notes due
2008. As of December 31, 2000, Boyds had repurchased $16.3 million of its notes
pursuant to this note repurchase program. These repurchases were financed out of
operating cash flow. Any future repurchases under this program are expected to
be financed similarly or by utilizing borrowings under the revolving credit
facility. Boyds plans to make such purchases from time to time in the open
market or in private transactions.
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
13
for its products in United States dollars, the cost of such products fluctuates
with the value of the Chinese 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.
RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. Boyds will adopt SFAS 133 effective January 1, 2001. Management does
not expect the adoption of SFAS 133 to have a significant impact on the
financial position, results of operations, or cash flows of Boyds.
FORWARD LOOKING STATEMENTS
Some of the matters discussed in this report include forward-looking
statements. Statements that are predictive in nature, that depend upon or refer
to future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements.
The forward-looking statements in this report are based on a number of
assumptions and estimates which are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of Boyds
and reflect future business decisions that are subject to change. A variety of
factors could cause actual results to differ materially from those anticipated
in Boyds' forward-looking statements, including: the effects of economic
conditions; the inability to grow Boyds' business as planned; the loss of either
of Boyds' two independent buying agencies or any of its manufacturing sources;
economic or political instability in the countries with which Boyds does
business; changes to, or the imposition of new, regulations, duties, taxes or
tariffs associated with the import or export of goods from or to the countries
with which Boyds does business; and other risk factors that are discussed in
this report and, from time to time, in other Securities and Exchange Commission
reports and filings. One or more of the factors discussed above may cause actual
results to differ materially from those expressed in or implied by the
statements in this report.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of such statements. Boyds undertakes
no obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date of this report, or the date of such statements, as the case may
be, or to reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company faces minimal interest rate risk exposure in relation to its
outstanding debt of $187.2 million at December 31, 2000. Of this amount
$110.8 million, under the Credit Agreement, is subject to interest rate
fluctuations. A hypothetical 10% change in interest rates applied to the fair
value of debt would not have a material impact on earnings or cash flows of the
Company.
The Company faces currency risk exposure that arises from translating the
results of its United Kingdom operations to the U.S. dollar. The currency risk
exposure is not material as the United Kingdom subsidiary operations do not have
a material impact on the Company's earnings.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
--------
Independent Auditors' Report................................ 16
Consolidated Balance Sheets................................. 17
Consolidated Statements of Income........................... 18
Consolidated Statement of Stockholders' Equity.............. 19
Consolidated Statements of Cash Flows....................... 20
Notes to Consolidated Financial Statements.................. 21
Schedule II--Valuation and Qualifying Accounts.............. 33
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, 1999 and 2000 and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 8. These financial statements and financial statement schedule are the
responsibility of Boyds' management. Our responsibility is to express an opinion
on these financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 1999 and 2000 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Deloitte & Touche LLP
Parsippany, New Jersey
February 9, 2001
16
THE BOYDS COLLECTION, LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 11,501 $ 3,191
Accounts receivable, less allowance for doubtful accounts
of $459 and $2,466 in 1999 and 2000, respectively....... 23,036 20,412
Inventory -- primarily finished goods, less allowance for
obsolete inventory of $625 and $645 in 1999 and 2000,
respectively............................................ 12,392 12,865
Inventory in transit...................................... 1,950 3,102
Other current assets...................................... 1,313 804
Income taxes receivable................................... -- 5,630
Deferred income taxes..................................... 17,655 18,672
-------- --------
Total current assets.................................... 67,847 64,676
PROPERTY AND EQUIPMENT -- NET............................... 3,614 5,635
OTHER ASSETS:
Deferred debt issuance costs.............................. 6,384 3,912
Deferred tax asset........................................ 201,940 186,371
Other assets.............................................. 2,400 2,719
-------- --------
Total other assets...................................... 210,724 193,002
-------- --------
TOTAL ASSETS................................................ $282,185 $263,313
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,462 $ 2,481
Accrued taxes............................................. 2,262 --
Accrued expenses.......................................... 5,464 4,016
Interest payable.......................................... 2,635 1,933
Current portion of long-term debt......................... -- 6,250
-------- --------
Total current liabilities............................... 11,823 14,680
LONG-TERM DEBT.............................................. 251,000 187,157
COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)
OTHER LIABILITIES........................................... -- 190
STOCKHOLDERS' EQUITY:
Common stock (61,838 shares issued at December 31, 1999
and 2000, respectively) and paid-in capital in excess of
par..................................................... (40,502) (41,133)
Other comprehensive income:
Accumulated other comprehensive income/(loss)........... 1 (7)
Retained earnings......................................... 87,379 128,775
Less: Treasury shares at cost (2,766 and 2,685 at December
31, 1999 and 2000, respectively)........................ (27,516) (26,349)
-------- --------
Total stockholders' equity............................ 19,362 61,286
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $282,185 $263,313
======== ========
See notes to consolidated financial statements.
17
THE BOYDS COLLECTION, LTD.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET SALES................................................... $199,069 $211,096 $184,047
COST OF GOODS SOLD.......................................... 63,852 72,329 69,981
-------- -------- --------
Gross profit.............................................. 135,217 138,767 114,066
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 11,881 20,426 26,671
OTHER OPERATING INCOME...................................... 17 16 12
-------- -------- --------
INCOME FROM OPERATIONS...................................... 123,353 118,357 87,407
-------- -------- --------
OTHER INCOME/(EXPENSE):
Other income.............................................. 363 390 299
Expenses related to the recapitalization.................. (3,248) -- --
-------- -------- --------
TOTAL OTHER INCOME/(EXPENSE)................................ (2,885) 390 299
-------- -------- --------
INTEREST EXPENSE:
Interest expense.......................................... 27,833 23,162 18,803
Amortization of deferred debt issuance costs.............. 1,854 785 700
-------- -------- --------
TOTAL INTEREST EXPENSE...................................... 29,687 23,947 19,503
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY
ITEMS..................................................... 90,781 94,800 68,203
PROVISION FOR INCOME TAXES.................................. 24,503 34,690 26,196
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS........................... 66,278 60,110 42,007
EXTRAORDINARY ITEMS:
REDEMPTION PREMIUM/(DISCOUNT) ON BONDS (NET OF $2,138 TAX
BENEFIT AND $294 TAX PROVISION, RESPECTIVELY) -- 3,802 (523)
WRITE OFF OF DEFERRED DEBT ISSUANCE COSTS (NET OF $1,804
AND $638 TAX BENEFITS RESPECTIVELY)..................... -- 3,206 1,134
-------- -------- --------
TOTAL EXTRAORDINARY ITEMS................................... -- 7,008 611
-------- -------- --------
NET INCOME.................................................. $ 66,278 $ 53,102 $ 41,396
======== ======== ========
EARNINGS PER SHARE:
Basic Earnings Per Share
Income Before Extraordinary Items....................... $ 0.79 $ 1.00 $ 0.71
Extraordinary Items:
-- Redemption Premium/(Discount) on Bonds............... -- (0.06) 0.01
-- Write Off of Deferred Debt Issuance Costs............ -- (0.05) (0.02)
-------- -------- --------
Net Income.............................................. $ 0.79 $ 0.89 $ 0.70
======== ======== ========
Diluted Earnings Per Share
Income Before Extraordinary Items....................... $ 0.79 $ 1.00 $ 0.71
Extraordinary Items:
-- Redemption Premium/(Discount) on Bonds............... -- (0.06) 0.01
-- Write Off of Deferred Debt Issuance Costs............ -- (0.05) (0.02)
-------- -------- --------
Net Income.............................................. $ 0.79 $ 0.89 $ 0.70
======== ======== ========
See notes to consolidated financial statements.
18
THE BOYDS COLLECTION, LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK COMMON
------------------------ STOCK ACCUMULATED
SHARES AND PAID-IN OTHER
ISSUED AND TREASURY CAPITAL IN TREASURY COMPREHENSIVE RETAINED
OUTSTANDING STOCK EXCESS OF PAR STOCK INCOME/(LOSS) EARNINGS
------------ --------- ------------- --------- --------------- ---------
(IN THOUSANDS)
BALANCE, DECEMBER 31,
1997..................... 157,671 -- $ 48 $ -- $-- $ 5,224
Capital contribution from
stockholder............ -- -- 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 -- -- --
Redemption and retirement
of common stock........ (106,237) -- (484,809) -- -- --
Issuance of common
stock.................... 1,154 -- 5,139 -- -- --
Net income............... -- -- -- -- -- 66,278
-------- ----- --------- -------- --- --------
BALANCE, DECEMBER 31,
1998..................... 52,588 -- (193,043) -- -- 34,277
Sale of common stock (net
of related fees and
expenses).............. 9,250 -- 153,941 -- -- --
Repurchase of common
stock.................. -- 2,954 -- (29,944) -- --
Exercise of stock
options.................. -- (188) (1,400) 2,237 -- --
Tax benefit from exercise
of stock options....... -- -- -- 191 -- --
Other comprehensive
income:
Foreign currency
translation............ -- -- -- -- 1 --
Net income............... -- -- -- -- -- 53,102
---
Comprehensive income..... -- -- -- -- 1 --
-------- ----- --------- -------- --- --------
BALANCE, DECEMBER 31,
1999..................... 61,838 2,766 (40,502) (27,516) 1 87,379
Issuance of common
stock.................... -- (100) (631) 1,292 -- --
Repurchase of common
stock.................. -- 19 -- (125) -- --
Other comprehensive
income:
Foreign currency
translation............ -- -- -- -- (8) --
Net income............... -- -- -- -- -- 41,396
---
Comprehensive income..... -- -- -- -- (8) --
-------- ----- --------- -------- --- --------
BALANCE, DECEMBER 31,
2000..................... 61,838 2,685 $ (41,133) $(26,349) $(7) $128,775
======== ===== ========= ======== === ========
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
--------------- -------------
(IN THOUSANDS)
BALANCE, DECEMBER 31,
1997..................... $ -- $ 5,272
Capital contribution from
stockholder............ -- 3,500
Transfer of related
earnings to additional
paid in capital at
termination of sub-S
election............... -- --
Recognition of deferred
tax asset.............. -- 245,854
Redemption and retirement
of common stock........ -- (484,809)
Issuance of common
stock.................... -- 5,139
Net income............... 66,278 66,278
------- ---------
BALANCE, DECEMBER 31,
1998..................... -- (158,766)
Sale of common stock (net
of related fees and
expenses).............. -- 153,941
Repurchase of common
stock.................. -- (29,944)
Exercise of stock
options.................. -- 837
Tax benefit from exercise
of stock options....... -- 191
Other comprehensive
income:
Foreign currency
translation............ 1 1
Net income............... 53,102 53,102
-------
Comprehensive income..... 53,103 --
------- ---------
BALANCE, DECEMBER 31,
1999..................... -- 19,362
Issuance of common
stock.................... -- 661
Repurchase of common
stock.................. -- (125)
Other comprehensive
income:
Foreign currency
translation............ (8) (8)
Net income............... 41,396 41,396
-------
Comprehensive income..... $41,388 --
======= ---------
BALANCE, DECEMBER 31,
2000..................... $ 61,286
=========
See notes to consolidated financial statements.
19
THE BOYDS COLLECTION, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
--------- --------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 66,278 $ 53,102 $ 41,396
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 406 668 1,131
Amortization and write off of deferred debt issuance
costs................................................... 1,854 5,635 2,472
Deferred taxes.......................................... 11,451 14,808 14,552
Loss on sale of equipment............................... 36 -- --
Changes in assets and liabilities:
Accounts receivable -- net.............................. (3,869) 1,319 2,228
Inventory............................................... (4,008) (3,952) (746)
Inventory in transit.................................... 322 1,166 (1,152)
Other current assets.................................... (298) (786) 509
Other assets............................................ -- 25 (50)
Accounts payable........................................ 702 (51) 1,019
Accrued taxes/Income taxes receivable................... 3,873 (3,102) (7,892)
Accrued expenses........................................ 410 3,666 (1,448)
Interest payable........................................ 5,467 (2,866) (702)
Other liabilities....................................... -- -- 190
--------- --------- --------
Net cash provided by operating activities............... 82,624 69,632 51,507
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (1,247) (2,763) (2,752)
Purchase of business -- net of cash acquired.............. (2,200) -- --
Issuance of notes receivable.............................. (1,296) -- --
--------- --------- --------
Net cash used in investing activities................... (4,743) (2,763) (2,752)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable -- stockholders................. (30,000) -- --
Issuance of debt.......................................... 490,000 -- --
Repayment of debt......................................... (47,360) (192,000) (57,593)
Recapitalization and stock repurchase (net of related fees
and expenses)............................................. (484,809) -- --
Sale of common stock (net of related fees and expenses)... 5,056 153,941 661
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) (125)
--------- --------- --------
Net cash used in financing activities................... (77,485) (66,975) (57,057)
--------- --------- --------
Effect of exchange rate changes on cash................... -- 1 (8)
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 396 (105) (8,310)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 11,210 11,606 11,501
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 11,606 $ 11,501 $ 3,191
========= ========= ========
CASH PAID DURING THE YEAR FOR INTEREST...................... $ 22,208 $ 25,746 $ 20,205
========= ========= ========
CASH PAID DURING THE YEAR FOR INCOME TAXES.................. $ 7,886 $ 16,079 $ 19,193
========= ========= ========
SUPPLEMENTAL NON-CASH ACTIVITIES:
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
THE BOYDS COLLECTION, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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, 2000,
Boyds had borrowed $22.5 million under the revolving credit facility. Thus, the
unused balance is available to fund the working capital requirements.
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 are being 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 $66.0 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.
21
REVENUE RECOGNITION--Sales revenue, net of returns and discounts, is
recognized upon shipment of the items, when title passes to the customer.
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.
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, except for the Notes, is payable at variable rates which approximates
fair market value. The fair value of the Notes, face value of $82.7 million, was
$78.6 million at December 31, 2000, and was determined based on the market price
on that date as quoted by Dow Jones.
FOREIGN CURRENCY TRANSLATION--Assets and liabilities of Boyds foreign
subsidiary are translated at year-end exchange rates while revenue and expenses
are translated at weighted average rates prevailing during the year. Foreign
currency translation adjustments are reported as a separate component of other
comprehensive income/(loss) in the consolidated statement of stockholders'
equity.
22
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, $0.5 million and $2.4 million for the
years ended 1998, 1999 and 2000, 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.
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 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
3% 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.
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 amounts in the 1998 and 1999 financial statements
have been reclassified to conform to the 2000 presentation.
RECENTLY ISSUED ACCOUNTING STANDARD--SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, is effective for all fiscal years beginning
after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. Boyds will adopt SFAS 133 effective January 1, 2001.
Management does not expect the adoption of SFAS 133 to have a significant impact
on the financial position, results of operations, or cash flows of Boyds.
23
3. PROPERTY AND EQUIPMENT
The components of property and equipment at December 31, 1999 and 2000 were,
as follows:
DECEMBER 31
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
Equipment................................................... $1,673 $2,286
Software development costs.................................. 584 2,032
Leasehold improvements...................................... 1,590 1,814
Furniture and fixtures...................................... 1,578 2,310
------ ------
5,425 8,442
Less: accumulated depreciation and amortization............. (1,811) (2,807)
------ ------
Total..................................................... $3,614 $5,635
====== ======
Depreciation expense on property and equipment was $0.4 million,
$0.7 million and $1.1 million in 1998, 1999 and 2000, 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 home decor and accent products. The
aggregate purchase price was approximately $4.0 million, consisting of
$2.3 million cash paid, 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 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 recorded as additional purchase costs if and when H. C. Accents achieves
the minimum EBITDA thresholds. No contingent payments were required for 1998,
1999 or 2000.
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 and $2.8 million at December 31, 1999 and 2000, respectively. At
December 31, 2000, approximately 12% of Boyds accounts receivables was from one
customer, while no other customer accounted for more than 10%. At December 31,
1999 no customer accounted for more than 10% of accounts receivable.
24
6. LEASE COMMITMENTS
Boyds leases certain office, warehouse and showroom facilities under
non-cancellable operating leases. Rent expense amounted to $0.7 million,
$1.2 million and $1.6 million for the years ended December 31, 1998, 1999 and
2000, respectively. At December 31, 2000, the future minimum lease commitments
for the non-cancellable operating leases are as follows:
(IN MILLIONS)
-------------
2001........................................................ $1.0
2002........................................................ 1.0
2003........................................................ 0.9
2004........................................................ 0.5
2005........................................................ 0.4
Thereafter.................................................. 1.5
----
$5.3
====
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
At December 31, 1999 and 2000, Boyds had letters of credit outstanding under
bank credit agreements amounting to $7.9 million and $8.2 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 $0.3 million was paid to these stockholders during 1998.
During 1998, Boyds paid fees in the amount of $6.0 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 years ended December 31, 1998,
1999 and 2000 Boyds paid to KKR approximately $0.3 million, $0.5 million and
$0.4 million, respectively, for management fees and related expenses.
9. LONG-TERM DEBT
Long-term debt is summarized as follows:
DECEMBER 31
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
9% Senior Subordinated Notes due May 15, 2008............... $ 99,000 $ 82,657
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......... 63,750 --
Secured revolving loan due April 2005
Interest based on LIBOR or base rate as defined......... -- 22,500
-------- --------
Sub-Total................................................... 251,000 193,407
Less: Current portion of long-term debt..................... -- (6,250)
-------- --------
$251,000 $187,157
======== ========
For the years ended December 31, 1999 and 2000, the weighted average
interest rates in effect for the Term Loans were 7.488% and 7.358%,
respectively. For the year ended December 31, 2000 the weighted average interest
rate in effect for the revolving loan was 7.297%.
25
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, 2000. The agreement also provides that
the Term Loans and revolving loan commitment be secured by the capital stock of
Boyds' current and 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:
(IN MILLIONS)
-------------
2001........................................................ $ 6.3
2002........................................................ 14.0
2003........................................................ 17.0
2004........................................................ 23.0
2005........................................................ 28.0
Thereafter.................................................. 105.1
------
$193.4
======
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 for
income taxes for the period Boyds was a C Corporation.
Income tax expense consists of the following:
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Federal:
Current................................................... $ 8,879 $18,640 $ 9,315
Deferred.................................................. 9,237 14,175 13,968
------- ------- -------
Total Federal............................................... 18,116 32,815 23,283
State:
Current................................................... 4,173 1,242 2,329
Deferred.................................................. 2,214 633 584
------- ------- -------
Total State................................................. 6,387 1,875 2,913
------- ------- -------
Total Income Tax Provision.................................. $24,503 $34,690 $26,196
======= ======= =======
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, and a deferred tax asset for financial
reporting purposes. The
26
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 2000
-------- -------- --------
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State income taxes -- net of federal income tax benefit..... 4.6 1.3 2.8
Sub-chapter S income........................................ (12.5) -- --
Other....................................................... (0.1) 0.3 0.6
----- ---- ----
Effective income tax rate................................... 27.0% 36.6% 38.4%
===== ==== ====
The tax effect of significant items comprising the Company's deferred tax
assets and liabilities are, as follows:
DECEMBER 31
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
Deferred tax asset -- Goodwill.............................. $219,621 $203,221
Deferred tax asset -- Other................................. -- 1,822
Deferred tax liability -- Other............................. (26) --
-------- --------
Net deferred tax asset...................................... 219,595 205,043
Less: Current............................................... (17,655) (18,672)
-------- --------
Deferred tax asset.......................................... $201,940 $186,371
======== ========
11. CONTINGENCIES
Boyds has received from the State of Pennsylvania an assessment to pay
additional franchise taxes of approximately $7.0 million for 1998. Boyds firmly
believes that the assessment is without merit and intends to vigorously contest
the assessment in its entirety. In addition, Boyds is involved in various legal
proceedings, claims and governmental audits in the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the financial position or results of
operations of Boyds.
12. 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 agreed to a
settlement of the claim, resulting in a $4.4 million charge ($3.1 million after
tax), which was recorded in selling, general and administrative expenses in the
period ended December 31, 1999, and paid in March, 2000.
13. STOCKHOLDERS' EQUITY
COMMON STOCK--As of December 31, 1999 and 2000 Boyds had 100 million shares
of common stock (par value $0.0001), authorized and 59.1 million and
59.2 million shares outstanding, respectively. 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
27
stock from the Original Stockholders (see Note 1). In 1998, 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, 2000, the Company had repurchased 2,954,200
shares of its common stock under this plan. On February 27, 2000 Boyds announced
a further common stock share repurchase program and, as of December 31, 2000,
the Company had repurchased 19,200 shares of its common stock under this plan.
28
14. 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--Boyds has granted stock options under various incentive
stock option plans (the "Plans") which provide 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 Plans 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.
Boyds has reserved a total of 3,579,033 shares for issuance under the Plans,
of which 1,280,850 shares remain reserved at December 31, 2000 for future
issuances. The following table summarizes information about fixed stock options
at December 31, 2000:
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
---------- ---------
Shares reserved.............................. 1,333,000 -- -- --
Options granted.............................. (1,000,000) 1,000,000 $ 6.06 -- $ 7.00 $ 6.63
Options exercised............................ -- -- -- --
Options forfeited............................ 125,349 (125,349) $ 4.45 -- $13.88 $ 6.85
---------- ---------
DECEMBER 31, 2000............................ 1,280,850 2,110,189 $ 4.45 -- $18.00 $ 8.47
========== =========
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.
29
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income.............................. As reported $66,278 $53,102 $41,396
Pro forma $65,758 $52,682 $40,022
Basic earnings per share................ As reported $ 0.79 $ 0.89 $ 0.70
Pro forma $ 0.78 $ 0.89 $ 0.68
Diluted earnings per share.............. As reported $ 0.79 $ 0.89 $ 0.70
Pro forma $ 0.78 $ 0.88 $ 0.67
Pro forma information regarding net income and 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 2000
-------- -------- --------
Weighted average risk free interest rate.................... 6.1% 5.7% 6.66%
Volatility.................................................. 10.0% 48.0% 70.0%
Dividend yield.............................................. 0.0% 0.0% 0.0%
Expected life in years...................................... 6.5 6.5 6.5
The weighted average fair value of options granted during 1998, 1999 and
2000 was $1.3 million, $3.0 million and $2.2 million, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2000:
WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS OUTSTANDING OPTIONS EXERCISABLE REMAINING LIFE
- --------------------- ------------------- ------------------- ----------------
$ 4.45 to $ 6.88..... 935,284 232,019 8.4
$ 7.00 to $12.00..... 525,000 5,000 9.1
$13.36 to $18.00..... 649,905 197,362 8.3
EARNINGS PER SHARE--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,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings per share:
Net income............................................. $ 66,278 $ 53,102 $ 41,396
========== ========== ==========
Denominator:
Denominator for basic earnings per share -- weighted
average................................................ 84,142,163 59,494,985 59,148,826
shares...............................................
Effect of dilutive securities:
Effect of shares issuable under stock option plans
based on treasury stock method......................... 342,408 302,097 195,971
---------- ---------- ----------
Denominator for diluted earnings per share -- weighted
average shares......................................... 84,484,571 59,797,082 59,344,797
========== ========== ==========
30
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table shows results of operations for each of the quarters
during fiscal 1999 and 2000:
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, 1999:
Net sales......................................... $57,497 $43,921 $59,350 $50,328
Gross profit...................................... 38,822 28,871 39,203 31,871
Income from operations............................ 35,155 25,365 35,298 22,539
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
======= ======= ======= =======
Year Ended December 31, 2000:
Net sales......................................... $52,683 $39,276 $59,526 $32,561
Gross profit...................................... 33,280 25,428 37,320 18,038
Income from operations............................ 27,762 20,052 30,544 9,050
Income before extraordinary items................. 14,268 10,033 14,977 2,729
Extraordinary items:
Write off of deferred debt issuance costs....... 330 24 174 606
Redemption discount on bonds.................... -- -- -- (523)
------- ------- ------- -------
Net income........................................ $13,938 $10,009 $14,803 $ 2,646
======= ======= ======= =======
Earnings per share:
Basic and diluted earnings per share:
Income before extraordinary items............. $ 0.24 $ 0.17 $ 0.25 $ 0.05
Extraordinary items:
Write off of deferred debt issuance costs... -- -- -- (0.01)
Redemption discount on bonds................ -- -- -- 0.01
------- ------- ------- -------
Net income.................................. $ 0.24 $ 0.17 $ 0.25 $ 0.05
======= ======= ======= =======
31
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 2001 Annual Meeting of stockholders 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 2001 Annual
Meeting of stockholders 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 2001 Annual Meeting
of stockholders 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 2001 Annual Meeting of stockholders and is specifically
incorporated herein by reference.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS:
The index for the consolidated financial statements is under Item 8 of
this form 10K.
2. FINANCIAL STATEMENT SCHEDULE:
Schedule of valuation and qualifying accounts
THE BOYDS COLLECTION, LTD.
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- ---------- ----------- -----------
ADDITIONS DEDUCTIONS
CHARGED TO CREDITED TO
BALANCE AT COSTS AND COSTS AND BALANCE AT
DESCRIPTION JANUARY 1 EXPENSES EXPENSES DECEMBER 31
- ----------- ---------- ---------- ----------- -----------
(IN THOUSANDS)
1998
Allowance for doubtful accounts................. $150 $ 176 $ 146 $ 180
Allowance for returns and allowances............ -- 287 -- 287
Allowance for obsolete inventory................ -- -- -- --
1999
Allowance for doubtful accounts................. $180 $ 899 $ 620 $ 459
Allowance for returns and allowances............ 287 149 73 363
Allowance for obsolete inventory................ -- 625 -- 625
2000
Allowance for doubtful accounts................. $459 $2,518 $ 511 $2,466
Allowance for returns and allowances............ 363 142 -- 505
Allowance for obsolete inventory................ 625 3,000 2,980 645
32
(B) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
3.1 Amended and Restated Articles of Incorporation of Boyds
(incorporated by reference from Exhibit 3.1 of Amendment No.
1 to Boyds' Registration Statement on Form S-1, filed on
February 8, 1999, File No. 333-69535).
3.2 Amended and Restated Bylaws of Boyds (incorporated by
reference from Exhibit 3.1 of Amendment No. 1 to Boyds'
Registration Statement on Form S-1, filed on February 8,
1999, File No. 333-69535).
4.1 Indenture, dated as of April 21, 1998 between Boyds and The
Bank of New York, as trustee (incorporated by reference from
Exhibit 4.3 of Amendment No. 1 to Boyds' Registration
Statement on Form S-1, filed on February 8, 1999, File No.
333-69535).
4.2 Form of 9% Senior Subordinated Note due 2008 (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).
(C) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
- ------------------------
33
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 30th day of March, 2001.
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 30, 2001.
SIGNATURE TITLE
--------- -----
/s/ JEAN-ANDRE ROUGEOT
------------------------------------------- Chief Executive Officer and Director
Jean-Andre Rougeot
/s/ CHRISTINE L. BELL
------------------------------------------- Chief Operating Officer and Secretary
Christine L. Bell
/s/ GARY M. LOWENTHAL
------------------------------------------- Chairman of the Board
Gary M. Lowenthal
/s/ ROBERT T. COCCOLUTO
------------------------------------------- Director
Robert T. Coccoluto
/s/ HENRY R. KRAVIS
------------------------------------------- Director
Henry R. Kravis
/s/ GEORGE R. ROBERTS
------------------------------------------- Director
George R. Roberts
/s/ SCOTT M. STUART
------------------------------------------- Director
Scott M. Stuart
/s/ MARC S. LIPSCHULTZ
------------------------------------------- Director
Marc S. Lipschultz
/s/ TIMOTHY BRADY
------------------------------------------- Director
Timothy Brady
34