United States Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

 

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   ý  No   o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

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

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.        Financial Statements.

 

THE BOYDS COLLECTION, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of December 31, 2002 (Audited) and March 31, 2003 (Unaudited)

 

		December 31, 2002			March 31, 2003
		(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	5,875		$	11,220
Accounts receivable, less allowances of  $2,992 at Dec 31, 2002, and $2,176 at  March 31, 2003		10,489			15,156
Inventory - primarily finished goods, less allowance for obsolete inventory of $5,240 at Dec 31, 2002, and $3,619 at March 31, 2003		9,224			9,798
Inventory in transit		3,166			614
Other current assets		1,026			808
Income taxes receivable		3,216			1,703
Deferred income taxes		21,047			21,047
Total current assets		54,043			60,346
PROPERTY AND EQUIPMENT - NET  (Note 4)		18,666			18,616
OTHER ASSETS:
Deferred debt issuance costs		1,693			1,575
Deferred tax asset		162,262			157,831
Other assets		2,689			2,707
Total other assets		166,644			162,113
TOTAL ASSETS		$	239,353		$	241,075
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	2,569		$	1,400
Accrued expenses		4,340			4,264
Interest payable		829			1,895
Current portion of long-term debt (Note 5)		6,000			0
Total current liabilities		13,738			7,559
LONG-TERM DEBT (Note 5)		97,689			97,689
COMMITMENTS AND CONTINGENCIES (Notes 2 and 8)
OTHER LIABILITIES		126			34
STOCKHOLDERS’ EQUITY:
Common stock (61,838 shares issued at Dec 31, 20002, and March 31, 2003, respectively) and paid-in capital in excess of par		(41,221		)	(41,221		)
Other comprehensive income:
Accumulated other comprehensive loss		(50		)	(32		)
Retained earnings		196,010			203,985
Less: Treasury shares at cost (2,727 at Dec 31, 2002, and March 31, 2003, respectively)		(26,939		)	(26,939		)
Total stockholders’ equity		127,800			135,793
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	239,353		$	241,075

 

See notes to condensed consolidated financial statements.

 

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THE BOYDS COLLECTION, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three Months  Ended  March 31, 2002 and 2003

(Unaudited)

 

		Three Months Ended March 31,
		2002			2003
		(in thousands, except per share amounts)
NET SALES		$	40,479		$	35,101
COST OF GOODS SOLD		14,130			12,748
GROSS PROFIT		26,349			22,353
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		5,257			8,250
INCOME FROM OPERATIONS		21,092			14,103
OTHER INCOME/(EXPENSE)		(21		)	42
INTEREST EXPENSE:
Interest expense		1,754			1,411
Amortization of deferred debt issuance costs		138			118
TOTAL INTEREST EXPENSE		1,892			1,529
INCOME BEFORE PROVISION FOR INCOME TAXES		19,179			12,616
PROVISION FOR INCOME TAXES (Note 7)		7,885			4,641
NET INCOME		$	11,294		$	7,975
EARNINGS PER SHARE:
Basic and Dilutive Earnings Per Share - Net Income		$	0.19		$	0.13

 

See notes to condensed consolidated financial statements.

 

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THE BOYDS COLLECTION, LTD.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2003

(Unaudited)

 

		Common Stock				Common Stock and Paid-in Capital in Excess of Par			Treasury Stock			Accumulated Other Comprehensive Income/(Loss)			Retained Earnings			Other Comprehensive Income			Total Stockholders’ Equity
		Shares Issued And Outstanding		Treasury Stock
		(in thousands)
BALANCE, JANUARY 1, 2003		61,838		2,727		$	(41,221	)	$	(26,939	)	$	(50	)	$	196,010					$	127,800
Other comprehensive income:
Foreign currency translation		—		—		—			—			18			—			$	18		18
Net income		—		—		—			—			.			7,975			7,975			7,975
Comprehensive income		—		—		—			—			18			—			$	7,993		—
BALANCE, March 31, 2003		61,838		2,727		$	(41,221	)	(26,939		)	$	(32	)	$	203,985					$	135,793

 

See notes to condensed consolidated financial statements.

 

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THE BOYDS COLLECTION, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2002 and 2003

(Unaudited)

 

		Three Months Ended March 31,
		2002			2003
		(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	11,294		$	7,975
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		413			535
Amortization and write off of deferred debt issuance costs		138			118
Deferred taxes		4,432			4,431
Asset impairment charge		254			—
Changes in assets and liabilities:
Accounts receivable - net		(2,649		)	(4,667		)
Inventory - net		124			(574		)
Inventory in transit		1,651			2,552
Other current assets		200			218
Other assets		(16		)	(18		)
Accounts payable		(1,446		)	(1,169		)
Accrued taxes/Income taxes receivable		3,417			1,513
Accrued expenses		(778		)	(76		)
Interest payable		1,047			1,066
Other liabilities		(17		)	(92		)
Net cash provided by operating activities		18,064			11,812
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(1,971		)	(485		)
Net cash used in investing activities		(1,971		)	(485		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt		(11,500		)	(6,000		)
Net cash used in financing activities		(11,500		)	(6,000		)
Effect of exchange rate changes on cash		26			18
NET INCREASE IN CASH AND CASH EQUIVALENTS		4,619			5,345
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		815			5,875
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	5,434		$	11,220
CASH PAID DURING THE PERIOD FOR INTEREST		$	707		$	344
CASH PAID(RECEIVED) DURING THE PERIOD FOR INCOME TAXES		$	52		$	(1,304	)

 

See notes to condensed consolidated financial statements.

 

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THE BOYDS COLLECTION, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

 

 

1.             INTERIM FINANCIAL STATEMENTS

 

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

 

The condensed consolidated balance sheet, as of March 31, 2003, the condensed consolidated statements of income for the three months ended March 31, 2002 and 2003, the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2003 and the condensed consolidated statements of cash flows for the three months ended March 31, 2002 and 2003 are unaudited.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such interim financial statements have been included.  The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year.  These financial statements should be read in conjunction with the financial statements and notes included in Boyds’ Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2003.

 

In April 2002, the FASB issued SFAS No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”  This statement is effective for fiscal years beginning after May 15, 2002.  SFAS 145 requires, among other things, eliminating the extraordinary item treatment of debt extinguishments used as part of the Boyds’ debt management strategy. Boyds adopted this statement as of January 1, 2003 and the adoption did not have an impact on the financial statements.

 

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

 

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2.             FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

At December 31, 2002 and at March 31, 2003, Boyds had letters of credit outstanding under its bank credit agreement amounting to $5.1 million and $3.4 million, respectively.  These letters of credit represent Boyds’ commitment to purchase inventory, which is to be produced and/or shipped.

 

3.             RELATED PARTY TRANSACTIONS

 

Kohlberg, Kravis Roberts & Co. L.P. (“KKR”) represents a 59% shareholder of Boyds. Boyds paid to KKR approximately $0.1 million for management fees, recruitment fees and related expenses for each of the first quarters ended March 31, 2002, and 2003.

 

4.             PROPERTY AND EQUIPMENT

 

The components of property and equipment at December 31, 2002 and March 31, 2003 were, as follows:

 

		December 31, 2002			March 31, 2003
Land and building		$	15,232		$	15,384
Equipment		4,136			4,462
Software development costs		2,372			2,372
Leasehold improvements		1,924			1,924
Furniture and fixtures		395			398
Total		24,059			24,540
Less: accumulated depreciation and amortization		(5,393		)	(5,924		)
Total		$	18,666		$	18,616

 

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5.             LONG-TERM DEBT

 

Long-term debt is summarized as follows:

 

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

 

 

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

 

At March 31, 2002 and 2003, the weighted average interest rates in effect for the Tranche A Term Loan were 2.730% and 2.125%, respectively.  In addition, the Tranche A Term Loan has predetermined annual payments through April 2005.

 

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 March 31, 2003. The agreement also provides that the Term Loan and revolving loan commitment be secured by the capital stock of Boyds’ current and future subsidiaries. In addition, the Term Loan is 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, including current portion, are as follows:

 

2003		$	—
2004		23,000
2005		28,000
2006		—
2007		—
Thereafter		46,689
		$	97,689

 

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6.             STOCK BASED COMPENSATION

 

At March 31, 2003, Boyds has various stock-based employee compensation plans.  The company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  Under this 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.  No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if Boyds had applied the fair value recognition method of accounting provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

 

		Quarter Ended March 31
		2002			2003
Net income, as reported		$	11,294		$	7,975
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		407			572
Pro forma net income		$	10,887		$	7,403
Earnings per share:
Basic—as reported		$	0.19		$	0.13
Basic—pro forma		$	0.18		$	0.13
Diluted—as reported		$	0.19		$	0.13
Diluted—pro forma		$	0.18		$	0.13

 

 

7.             PROVISION FOR INCOME TAXES

 

For federal income tax purposes, Boyds has elected to treat the recapitalization and stock purchase that occurred in April 1998 as an asset acquisition by making an Internal Revenue Code Section 338 (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 income tax purposes, and a deferred tax asset for financial reporting purposes.  The deductible goodwill is amortized over a period of fifteen years.  In the opinion of management, Boyds believes it is more likely than not it will have sufficient profits in the future to realize the deferred tax asset.

 

Boyds’ effective tax rate, excluding the impact of franchise taxes, has increased to 39.6% in 2003 from 38.8% in 2002.  The increase in the percentage was a result of Boyds restructuring the tax treatment of international operations during 2003.

 

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8.             CONTINGENCIES

 

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, results of operations and cash flows of Boyds.

 

9.             EARNINGS PER SHARE

 

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the net income available to common stockholders:

 

		Three Months Ended 31-Mar
		2002			2003
		(in thousands)
Numerator for basic and diluted earnings per share:
Net income		$	11,294		$	7,975
Denominator:
Denominator for basic earnings per share - weighted average shares		59,062			59,111
Effect of dilutive securities:
Effect of shares issuable under stock option plans based on treasury stock method		96			59
Denominator for diluted earnings per share - weighted average shares		59,158			59,170
EPS - Basic		$	0.19		$	0.13
EPS - Diluted		$	0.19		$	0.13

 

10.          SUBSEQUENT EVENT

 

On April 1, 2003, Boyds purchased and retired $5.3 million of its 9% Senior Subordinated Notes for 101.5% of face value or $5.4 million.  The notes were purchased with cash on the open market.

 

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

 

GENERAL

 

Boyds is a leading designer, importer and distributor of branded, high-quality, hand crafted collectibles and other specialty giftware products.  Boyds sells its products through an extensive network of approximately

 

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14,000 accounts comprised of independent gift and collectibles retailers, premier department stores, selected catalogue retailers and other electronic and retail channels. This network of retailers is being serviced by a newly created outside sales force. In September 2002, Boyds Bear Countryä store opened in Gettysburg, Pennsylvania. This retail store will be used to generate income and expand the brand awareness and image of Boyds.

 

Boyds’ sales consist of plush animals, resin figurines, dolls, villages, home décor and other products. Other products include 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 49,000 paying members; international sales; sales from Boyds Bear Country^TM ; and related accessories.

 

Boyds licenses its product designs to other companies for products including home textiles, infant clothing and wallpaper. 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 in net sales.

 

Boyds exhibits its products at many national and regional tradeshows where orders are taken by Boyds’ employees. Boyds operates almost exclusively out of a leased office/distribution facility and owned retail store in the general vicinity of Gettysburg, Pennsylvania.

 

CRITICAL ACCOUNTING POLICIES

 

Preparing the financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Predicting future events is inherently an imprecise activity and as such requires the use of judgment.  Actual results may vary from estimates in amounts that may be material to the financial statements. Management believes that the estimates and assumptions used in connection with the amounts reported in Boyds’ financial statements and related disclosures are reasonable and made in good faith.

 

The most significant accounting estimates inherent in the preparation of Boyds’ financial statements include estimates related to valuing the ultimate collectability of accounts receivable and realizable value of inventory.  In addition, a significant amount of judgment exists in defining deferred tax valuation accounts.  The process of determining estimates is based on several factors, including historical experience, current and anticipated economic conditions and customer profiles. Boyds continually reevaluates these key factors and makes adjustments to estimates where appropriate. The following are Boyds’ critical accounting policies, some of which require the application of significant estimates and assumptions.

 

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

 

•                  Accounts receivable are presented at estimated net realizable value. Boyds uses estimates in determining the collectability of its accounts receivable and must rely on its evaluation of historical bad debts, customer credit ratings, current economic trends and changes in customer payment terms to arrive at appropriate reserves. Material differences may result in the amount and timing of earnings if actual experience differs significantly from management estimates.

 

•                  Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out method of accounting. Boyds records adjustments to the value of this inventory in situations where it appears that Boyds will not be able to recover the cost of the product.  This lower of

 

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cost or market analysis is based on Boyds’ estimate of forecasted demand by customer by product.  A decrease in product demand due to changing customer tastes, consumer buying patterns or loss of shelf space to competitors could significantly impact Boyds’ evaluation of its excess and obsolete inventories.

 

•                  Under the requirements of Statement of Financial Accounting Standards (SFAS) Nos.142 and 144, Boyds assessed the potential impairment of identifiable intangibles, long-lived assets and acquired goodwill whenever events or changes in circumstances indicated that the carrying value may not be recoverable.  In performing this evaluation, the Company evaluated current and future economic and business trends to develop business forecasts of future performance and related cash flows. Such estimates require the use of judgment and numerous subjective assumptions. As of January 1, 2003 based on Boyds evaluation there was no impairment of goodwill, identifiable intangibles or long-lived assets.

 

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

 

 

FACTORS WHICH AFFECT BOYDS’ RESULTS OF OPERATIONS

 

Seasonality

 

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. Boyds does not have the significant seasonal variation in its orders that it believes is experienced by many other giftware and collectibles companies.

 

Foreign Exchange

 

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

 

Boyds imports most of its products from manufacturers in China. Boyds’ costs could be adversely affected on a short-term basis if the Chinese renminbi appreciates significantly relative to the United States dollar. Conversely, its costs would be favorably affected on a short-term basis if the Chinese renminbi depreciates significantly relative to the United States dollar. Although Boyds generally pays for its products in United States dollars, the cost of such products fluctuates with the value of the Chinese 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.

 

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

 

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RESULTS OF OPERATIONS

 

Net sales consist of sales of our products, net of sales discounts, product returns and allowances, collectors club sales generated from Boyds’ collectors club and royalty income from licenses held by Boyds.  Sales are primarily made on a purchase order basis.  Revenue associated with sales is recognized when title transfers to the customer, or upon completion of a retail transaction.

 

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

 

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

 

		Three Months Ended March 31,
		2002		2003
Net sales		100.0	%	100.0	%
Gross profit		65.1	%	63.7	%
Selling, general and administrative expenses		13.0	%	23.5	%
Income from operations		52.1	%	40.2	%
Interest expense		4.7	%	4.3	%
Provision for income taxes		19.5	%	13.2	%
Net income		27.9	%	22.7	%

 

 

Three Months Ended March 31, 2003  vs. Three Months Ended March 31, 2002

 

Net Sales – Net sales declined $5.4 million, or 13.3%, to $35.1 million in the first quarter of 2003 from $40.5 million for the first quarter of 2002.  Sales of Boyds’ plush products decreased $2.3 million, or 9.8%, resin product sales declined $2.4 million, or 19.7%, other product sales declined $0.7 million, or 14.5%.  As a percentage of net sales for the quarter, plush products represented 61%, resin products represented 27%, and other products represented 12%.

 

The first quarter of 2003 was negatively impacted by the weak economy and the continuing struggles of the gift retail channel.  The shortfalls were partially offset by our new direct sales force and Boyds Bear Country^TM.

 

Gross Profit – Gross profit declined $3.9 million, or 14.8%, to $22.4 million in the first quarter of 2003 from $26.3 million for the first quarter of 2002.  Gross profit as a percentage of net sales decreased to 63.7% for the quarter from 65.1% for the same period in 2002.  The dollar and percentage decline was primarily attributable to the decline in sales volume.

 

Selling, General & Administrative Expenses (SG&A) – SG&A increased $3.0 million, or 56.6%,to $8.3 million in the first quarter of 2003 from $5.3 million for the first quarter of 2002.  SG&A as a percent of net sales increased to 23.5% for the quarter from 13.0% for the same period in 2002.  The dollar increase in

 

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SG&A expenses was a result of implementing a new sales force and the operational costs of Boyds Bear Countryä.  The percentage increase can be attributed to the sales decline and the additional costs from the direct sales force and Boyds Bear Country^TM.

 

Income from Operations – Income from operations declined $7.0 million, or 33.2%, to $14.1 million in the first quarter of 2003 from $21.1 million for the first quarter of 2002.  Income from operations as a percentage of net sales declined to 40.2% for the quarter from 52.1% for the same period in 2002.  The dollar decline and the decline in the percentage of net sales were primarily attributable to the decline in sales volume and the additional costs from the direct sales force and Boyds Bear Country^TM.

 

Total Interest Expense – Total interest expense declined $0.4 million, or 21.1% to $1.5 million in the first quarter of 2003 from $1.9 million for the first quarter of 2002.  Total interest expense as a percentage of net sales declined to 4.4% for the quarter from 4.7% for the same period in 2002.  The dollar decline and the decline in the percentage of net sales were due to the reduction of debt from excess cash and a decline in interest rates.

 

Provision for Income Taxes – Provision for income taxes declined $3.3 million, or 41.8%, to $4.6 million in the first quarter of 2003 from $7.9 million for the first quarter of 2002.   Provision for income taxes as a percentage of net sales decreased to 13.2% for the quarter from 19.5% for the same period in 2002. The provision was positively impacted in the first quarter of 2003 by a settlement notice from the State of  Pennsylvania regarding a franchise tax benefit of approximately $0.9 million relating to the tax year 2000.

 

Net Income – Net income declined $3.3 million, or 29.2%, to $8.0 million in the first quarter of 2003 from $11.3 million for the first quarter of 2002.  Net income as a percent of sales decreased to 22.7% for the quarter from 27.9% for the same period in 2002.  The dollar and percentage declines can be attributed to the lower sales volumes and the operating costs for the direct sales force and Boyds Bear Country^TM.

 

 

 

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 balances increased to $11.2 million in the first three months of 2003 from $5.9 million at December 31, 2002.  The increase was a result of the cash flows generated from wholesale operations and Boyds Bear Country^TM.

 

Operating Activities

 

Cash provided by operating activities decreased $6.3 million, or 34.8%, to $11.8 million in the first three months of 2003 from $18.1 million for the first three months of 2002. The cash flow decrease was primarily attributable to the decrease in net income.

 

Investing Activities

 

Capital and investment expenditures totaled $0.5 million in the first three months of 2003 as compared to $2.0 million in the first three months of 2002. This decrease is attributable to construction costs associated with Boyds Bear Country^TM incurred during 2002.  The construction was completed during the fourth quarter of 2002.

 

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Financing Activities

 

In connection with the recapitalization in 1998, 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, consisting of tranche A and tranche B, and a senior secured revolving credit facility providing for borrowings up to $40.0 million. As of March 31, 2003, Boyds has repaid $118.3 million of the notes, leaving a balance outstanding of $46.7 million.  Boyds has repaid $274.0 million of the term loans under the credit agreement, leaving a balance outstanding of $51.0 million as of March 31, 2003. Boyds has reduced its total debt by $31.0 million in the past twelve months.

 

The revolving credit facility provides loans in an aggregate amount up to $40.0 million.  Boyds did not have borrowings outstanding under the revolving credit facility as of March 31, 2003.  Thus, the unused balance under the revolving credit facility will be available to fund the working capital needs 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. 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.

 

On February 17, 2000, Boyds announced that its Board of Directors had approved the repurchase of 3.0 million shares of the Company’s common stock. As of March 31, 2003, Boyds had repurchased 132,480 shares of common stock pursuant to this stock repurchase program for an aggregate amount of approximately $1.0 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 March 31, 2003, Boyds had repurchased $52.3 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.

 

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.

 

 

RISK FACTORS WHICH MAY AFFECT FUTURE PERFORMANCE

 

Dependence on two independent buying agencies.  Substantially all of the products that Boyds sells are purchased through two independent buying agencies. One buying agency is located in Hong Kong, and the other buying agency is located in the United States. These two buying agencies, which contract with a total of 19 independent manufacturers, account for approximately 90% of Boyds’ total imports. These two buying agencies also perform a number of functions for Boyds, including collaborating in Boyds’ product design and development process. As a result, Boyds is substantially dependent on these buying agencies and the

 

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manufacturers with which they contract. Boyds does not have long-term contracts with either of its primary buying agencies. Boyds believes that the loss of either of its primary buying agencies would (1) have a material adverse effect on its financial condition and results of operations, (2) cause disruptions in its orders, (3) affect the quality of its products, and (4) possibly require it to select alternative manufacturers.

 

Potential economic and political risks of China.  All of Boyds’ significant manufacturers are located in China. Although Boyds has identified alternate manufacturers which could meet its quality and reliability standards at similar costs in China and in other countries, the loss of any one or more of its manufacturers could have a material adverse effect on its business.  Because Boyds relies primarily on Chinese manufacturers, it is subject to the following risks that could restrict its manufacturers’ ability to make its products or increase its manufacturing costs: (1) economic and political instability in China; (2) transportation delays; (3) restrictive actions by the Chinese government; (4) the laws and policies of the United States affecting importation of goods, including duties, quotas and taxes; (5) Chinese trade and tax laws.  In particular, Boyds’ business could be adversely affected if the Chinese renminbi appreciates significantly relative to the United States dollar due to the cost of its products fluctuating with the value of the Chinese renminbi.

 

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

 

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

 

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

 

Potential infringement of Boyds’  intellectual property.  Boyds believes that its trademarks and other proprietary rights are material to its success and competitive position. Accordingly, Boyds devotes resources to the establishment and protection of its intellectual property on a worldwide basis. The actions Boyds takes to establish and protect its trademarks and other proprietary rights may not be adequate to protect its intellectual property or to prevent imitation of its products by others. Moreover, while Boyds has not experienced any proprietary license infringements or legal actions that have had a material impact on its financial condition or results of operations, other persons have and will likely in the future assert rights in, or

 

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ownership of, its trademarks and other proprietary rights. Boyds may not be able to successfully resolve such conflicts. In addition, the laws of foreign countries may not always protect intellectual property to the same extent as do the laws of the United States.

 

 

EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS

 

In April 2002, the FASB issued SFAS No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”  This statement is effective for fiscal years beginning after May 15, 2002.  SFAS 145 requires, among other things, eliminating the extraordinary item treatment of debt extinguishments used as part of the Boyds’ debt management strategy. Boyds adopted this statement as of January 1, 2003 and the adoption did not have an impact on the financial statements.

 

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

 

RELATED PARTY TRANSACTIONS

 

Kohlberg, Kravis Roberts & Co. L.P. (“KKR”) represents a 59% shareholder of Boyds. Boyds paid to KKR approximately $0.1 million for management fees, recruitment fees and related expenses for each of the first quarters ended March 31, 2002, and 2003.

 

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.

 

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Item 3.                 Quantitative and Qualitative Disclosures About Market Risk.

 

Boyds faces minimal interest rate risk exposure in relation to its outstanding debt of $97.7 million at March 31, 2003. Of this amount, $51.0 million under the Credit Agreement is subject to interest rate fluctuations. A hypothetical 1% 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.

 

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

 

Item 4.                 Disclosure Controls and Procedures

 

Boyds maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission (SEC), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Boyds carried out an evaluation of its disclosure controls and procedures, under the supervision and with the participation of the Chief Executive and Chief Financial Officers, as of a date within 90 days of the filing date of this report, and based on such evaluation, Boyds’ Chief Executive and Chief Financial Officers believe that these disclosure controls and procedures are effective to ensure that Boyds is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.

 

There have been no significant changes in Boyds’ internal controls or in other factors that could significantly affect these controls, subsequent to the date Boyds’ Chief Executive and Chief Financial Officers completed their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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PART II

OTHER INFORMATION

 

 

Item 1.  Legal Proceedings.

 

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 proceedings, claims and audits will not have a material adverse effect on the financial position, results of operations, and cash flows of Boyds.

 

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

 

Item 3. Defaults Upon Senior Securities—None

 

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

 

Item 5. Other Information

 

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

 

(a) Exhibits – See Index to Exhibits

 

(b) Reports on Form 8-K - None

 

 

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SIGNATURES

Pursuant to the requirements 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.

 

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

 

 

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CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Jean-Andre Rougeot, Chief Executive Officer of The Boyds Collection, Ltd. (the “Company”), certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q of The Boyds Collection, Ltd.;

 

2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

 

4.             The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

 

a)             Designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)            Evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)             Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.             The Company’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

 

a)             All significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

 

b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

 

6.             The Company’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

/s/ Jean-Andre Rougeot
Jean-Andre Rougeot
Chief Executive Officer
Date: May 14, 2003

 

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CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Joseph Macharsky, Chief Financial Officer of The Boyds Collection, Ltd. (the “Company”), certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q of The Boyds Collection, Ltd.;

 

2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

 

4.             The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

 

a)             Designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)            Evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)             Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.             The Company’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

 

a)             All significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

 

b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

 

6.             The Company’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

/s/ Joseph E. Macharsky
Joseph E. Macharsky
Chief Financial Officer
Date: May 14, 2003

 

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Index to Exhibits

 

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

 

*    Filed herewith

 

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