BOYDS COLLECTION LTD - 10-Q Quarterly Report

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

THE BOYDS COLLECTION, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 2003 and June 30, 2004
(Unaudited)

	December 31,				June 30,
	2003				2004
	(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	4,173		$	739
Accounts receivable, less allowances of $2,189 at December 31, 2003, and $2,068 at June 30, 2004		8,174			12,781
Inventory—primarily finished goods, less allowance for obsolete inventory of $2,855 at December 31, 2003, and $3,308 at June 30, 2004		9,404			12,243
Inventory in transit		3,653			350
Other current assets		932			1,141
Income taxes receivable		1,964			922
Deferred income taxes		21,047			21,047
Total current assets		49,347			49,223
PROPERTY AND EQUIPMENT—NET (Note 4)		21,726			25,152
OTHER ASSETS:
Deferred debt issuance costs		961			796
Deferred tax asset		147,997			145,609
Other assets		2,923			2,881
Total other assets		151,881			149,286
TOTAL ASSETS		$	222,954		$	223,661
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	2,514		$	3,604
Accrued expenses		5,452			5,750
Interest payable		626			601
Current portion of long-term debt (Note 5)		14,000			38,000
Total current liabilities		22,592			47,955
LONG-TERM DEBT (Note 5)		62,392			34,392
COMMITMENTS AND CONTINGENCIES (Notes 2 and 9)
STOCKHOLDERS’ EQUITY:
Common stock (61,838 shares issued at December 31, 2003, and June 30, 2004, respectively) and paid-in capital in excess of par		(41,221		)	(41,221		)
Other comprehensive income:
Accumulated other comprehensive loss		(244		)	(221		)
Retained earnings		206,873			210,194
Less: Treasury shares at cost (2,834 at December 31, 2003, and at June 30, 2004, respectively)		(27,438		)	(27,438		)
Total stockholders’ equity		137,970			141,314
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	222,954		$	223,661

See notes to condensed consolidated financial statements.

THE BOYDS COLLECTION, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 2003 and 2004
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2004			2003			2004
	(in thousands, except per share amounts)
NET SALES	$	24,465		$	22,626		$	59,567		$	48,963
COST OF GOODS SOLD	8,621			8,728			21,370			19,182
GROSS PROFIT	15,844			13,898			38,197			29,781
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES	10,409			11,765			18,658			21,691
INCOME FROM OPERATIONS	5,435			2,133			19,539			8,090
OTHER EXPENSE	(68		)	(17		)	(27		)	(96		)
INTEREST EXPENSE:
Interest expense	1,249			1,008			2,660			2,022
Amortization of deferred debt issuance costs	234			86			352			165
TOTAL INTEREST EXPENSE	1,483			1,094			3,012			2,187
INCOME BEFORE PROVISION FOR INCOME TAXES	3,884			1,022			16,500			5,807
PROVISION FOR INCOME TAXES (Note 8)	1,706			495			6,347			2,486
NET INCOME	$	2,178		$	527		$	10,153		$	3,321
EARNINGS PER SHARE:
Basic and Dilutive Earnings Per Share—Net Income	$	0.04		$	0.01		$	0.17		$	0.06

See notes to condensed consolidated financial statements.

THE BOYDS COLLECTION, LTD.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2004
(Unaudited)

	Common Stock				Common Stock							Accumulated
	Shares				and Paid-in							Other						Other			Total
	Issued And		Treasury		Capital in				Treasury			Comprehensive				Retained		Comprehensive			Stockholders’
	Outstanding		Stock		Excess of Par				Stock			Income/(Loss)				Earnings		Income			Equity
	(in thousands)
BALANCE, JANUARY 1, 2004		61,838		2,834		$	(41,221	)	$	(27,438	)		$	(244	)	$	206,873					$	137,970
Other comprehensive income:
Foreign currency translation		—		—		—			—				23			—			$	23		23
Net income		—		—		—			—				.			3,321			3,321			3,321
Comprehensive income		—		—		—			—				—			—			$	3,344		—
BALANCE, June 30, 2004		61,838		2,834		$	(41,221	)	(27,438		)		$	(221	)	$	210,194					$	141,314

See notes to condensed consolidated financial statements.

THE BOYDS COLLECTION, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2004
(Unaudited)

	Six Months Ended June 30,
	2003			2004
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	10,153		$	3,321
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,096			944
Amortization and write off of deferred debt issuance costs	352			165
Loss on sale of equipment	(2		)	(3		)
Deferred taxes	8,863			2,388
Changes in assets and liabilities:
Accounts receivable—net	(2,110		)	(4,607		)
Inventory—net	(3,105		)	(2,839		)
Inventory in transit	2,074			3,303
Other current assets	55			(209		)
Other assets	(20		)	(14		)
Accounts payable	(1,355		)	1,090
Accrued taxes/Income taxes receivable	(1,232		)	1,042
Accrued expenses	(275		)	297
Interest payable	(90		)	(25		)
Net cash provided by operating activities	14,404			4,853
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(763		)	(4,310		)
Net cash used in investing activities	(763		)	(4,310		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt	(11,297		)	(14,000		)
Net borrowings under revolving credit agreement	—			10,000
Net cash used in financing activities	(11,297		)	(4,000		)
Effect of exchange rate changes on cash	(8		)	23
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	2,336			(3,434		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	5,875			4,173
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	8,211		$	739
CASH PAID DURING THE PERIOD FOR INTEREST	$	2,749		$	2,047
CASH RECEIVED DURING THE PERIOD FOR INCOME TAXES	$	(1,284	)	$	(969	)

See notes to condensed consolidated financial statements.

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 the “Company”) operates in two segments, which consist of the Company’s wholesale gift business and the Company’s retail gift/entertainment business. In September 2002, Boyds Bear Country™ store opened in Gettysburg, Pennsylvania. The Company expects to open its second retail store in Pigeon Forge, Tennessee in mid-November of 2004, its third in Myrtle Beach, South Carolina, in mid-2005, and the Company has entered into a letter of intent for its fourth location in Branson, Missouri. These retail stores are 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 June 30, 2004, the condensed consolidated statements of income for the three and six months ended June 30, 2003 and 2004, the condensed consolidated statement of stockholders’ equity for the six months ended June 30, 2004 and the condensed consolidated statements of cash flows for the six months ended June 30, 2003 and 2004 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 six months ended June 30, 2004 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 29, 2004.

In November 2002, the FASB issued Interpretation No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees.” The disclosure requirements are effective for financial statements issued after December 15, 2002, and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2003. The adoption of this statement did not have a material impact on the financial position, results of operations or cash flow of Boyds.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, which provides guidance on when to consolidate variable interest entities. In December 2003, the FASB revised FIN 46 with FIN 46R. In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. The Interpretation applies immediately to variable interest entities created after December 31, 2003. The adoption of this standard did not have a material impact on the financial position, results of operations or cash flow of Boyds.

In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” This statement amends SFAS No. 123 “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reporting results. The disclosure provisions of this standard are effective for fiscal years ended after December 15, 2002 and have been incorporated into these condensed consolidated financial statements and accompanying notes (see Note 7).

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In general, this statement is effective for contracts entered into or modified after September 30, 2003, and for hedging relationships designated after September 30, 2003. The adoption of this statement did not have a material impact on the financial position, results of operations or cash flow of Boyds.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for the classification and measurement in an issuer’s statement of financial position of certain financial instruments that embody obligations for the issuer that are required to be classified as liabilities. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The provisions of the statement did not have a material impact on the financial position, results of operations or cash flow of Boyds.

2. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

At December 31, 2003 and at June 30, 2004, Boyds had letters of credit outstanding under its bank credit agreement amounting to $3.1 million and $5.2 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”) is a 59% shareholder of Boyds. For each of the second quarter and six months ended June 30, 2003 and June 30, 2004, Boyds paid to KKR approximately $0.1 million and $0.2 million for management fees and related expenses.

4. PROPERTY AND EQUIPMENT

The components of property and equipment at December 31, 2003 and June 30, 2004 were, as follows:

	December 31,				June, 30,
	2003				2004
Land and building		$	18,713		$	18,887
Construction in progress		1,050			5,023
Equipment		4,673			4,767
Software development costs		2,372			2,408
Leasehold improvements		1,924			1,942
Furniture and fixtures		398			399
Total		29,130			33,426
Less: accumulated depreciation and amortization		(7,404		)	(8,274		)
Total		$	21,726		$	25,152

5. LONG-TERM DEBT

Long-term debt is summarized as follows:

	December 31,				June 30,
	2003				2004
9% Senior Subordinated Notes due May 15, 2008		$	34,392		$	34,392
Credit Agreement:
Revolver		—			10,000
Secured Tranche A Term Loans due April 2005.
Interest based on LIBOR or base rate as defined		42,000			28,000
Sub-Total		76,392			72,392
Less: Current portion of long-term debt		(14,000		)	(38,000		)
		$	62,392		$	34,392

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% until 2006. Interest on the Notes is payable semi-annually on May 15 and November 15.

At June 30, 2003 and 2004, the weighted average interest rates in effect for the Tranche A Term Loan were 1.853% and 2.027%, respectively. In addition, the Tranche A Term Loan has predetermined annual payments through April 2005. The weighted average interest rate in effect for the Revolver at June 30, 2004 was 1.938%. The Company had no amount outstanding on the Revolver at June 30, 2003.

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 June 30, 2004. The Company believes that it will also be in compliance with all of its debt covenants based on its expected future earnings. The Credit Agreement also provides that the Term Loan and Senior secured revolving credit facility be collateralized 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. The Credit Agreement expires in April of 2005. The Company expects to refinance its existing debt and plans to have a new debt structure in place by the end of 2004.

The scheduled maturities of the long-term debt, including current portion of $38.0 million due in April 2005, are as follows:

2005	38,000
2006	—
2007	—
2008	34,392
	$	72,392

6. SEGMENTS OF THE COMPANY AND RELATED INFORMATION

The Company operates in two segments which consist of the Company’s wholesale gift business and the Company’s retail gift/entertainment business. These segments are evaluated regularly by the Company’s Chief Executive Officer in deciding how to assess performance and allocate resources. Prior to the retail operations becoming a significant portion of the Company’s performance, the Company had only one reportable segment. As a result, the Company has reclassified the prior year’s single segment information to be consistent with the current period’s presentation.

The Company’s wholesale business designs, imports, and distributes resin figurines and plush animals via a global network of independent retailers and distributors. The Company’s retail operation sells resin figurines, plush animals and a unique entertainment experience directly to the end consumer at its Gettysburg, Pennsylvania flagship location. Additional retail stores are planned, with the second to open in Pigeon Forge, Tennessee in mid-November of 2004, the third to open in Myrtle Beach, South Carolina in mid-2005. The Company has entered into a letter of intent to open its fourth store in Branson, Missouri.

	For the Three Months Ended, June 30,
	2003								2004
	Wholesale			Retail		Consolidated			Wholesale			Retail		Consolidated
Sales		$	20,694	$	3,771		$	24,465		$	19,044	$	3,582		$	22,626
Gross Profit		12,998		2,846			15,844			11,169		2,729			13,898
SG&A		8,782		1,627			10,409			9,684		2,081			11,765
Income from Operations		4,216		1,219			5,435			1,485		648			2,133

	For the Six Months Ended, June 30,
	2003							2004
	Wholesale		Retail		Consolidated			Wholesale		Retail		Consolidated
Sales	$	53,611	$	5,956		$	59,567	$	43,312	$	5,651		$	48,963
Gross Profit	33,620		4,577			38,197		25,526		4,255			29,781
SG&A	15,562		3,096			18,658		17,750		3,941			21,691
Income from Operations	18,058		1,481			19,539		7,776		314			8,090
Total Assets	$	208,955	$	13,999		$	222,954	$	203,341	$	20,320		$	223,661

7. STOCK-BASED COMPENSATION

At June 30, 2004, Boyds has various stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“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 SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

	Quarter Ended					Six Months Ended
	June 30,					June 30
	2003		2004			2003		2004
Net income, as reported	$	2,178	$	527		$	10,153	$	3,321
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	588		582			588		968
Pro forma net income(loss)	$	1,590	$	(55	)	$	9,565	$	2,353
Earnings per share:
Basic—as reported	$	0.04	$	0.01		$	0.17	$	0.06
Basic—pro forma	$	0.03	$	0.00		$	0.16	$	0.04
Diluted—as reported	$	0.04	$	0.01		$	0.17	$	0.06
Diluted—pro forma	$	0.03	$	0.00		$	0.16	$	0.04

8. 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 will have sufficient profits in the future to realize the deferred tax asset.

9. 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.

10. 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				Six Months Ended
	June 30,				June 30,
	2003		2004		2003		2004
Numerator for basic and diluted earnings per share:
Net income	$	2,178	$	527	$	10,153	$	3,321
Denominator:
Denominator for basic earnings per share—weighted average shares	59,111		59,004		59,111		59,004
Effect of dilutive securities:
Effect of shares issuable under stock option plans based on treasury stock method	33		5		55		6
Denominator for diluted earnings per share—weighted average shares	59,144		59,009		59,166		59,010
EPS—Basic	$	0.04	$	0.01	$	0.17	$	0.06
EPS—Diluted	$	0.04	$	0.01	$	0.17	$	0.06

11. SUBSEQUENT EVENTS

During July 2004, the Company drew on its revolver in the amount of $2.5 million to fund its continuing operations.

On July 13, 2004, Dennis Brando, Vice President of Merchandising, left the Company. The Company will incur approximately $0.1 million in expenses associated with his departure.

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

GENERAL

The Company operates in two segments which consist of the Company’s wholesale gift business and the Company’s retail gift/entertainment business. 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 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 national sales force that was created in 2002. In September 2002, the Boyds Bear Country™ store opened in Gettysburg, Pennsylvania. The Company is expecting to open its second retail location in Pigeon Forge, Tennessee in mid-November of 2004. The third retail location is expected to open in mid-2005 in Myrtle Beach, South Carolina. The Company has entered into a Letter of Intent for its fourth retail location in Branson, Missouri. The Company plans to continue opening two stores per year.

Boyds’ sales consist of plush animals, resin figurines, and other products. Other products include home décor, stationary, accessories and 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 35,000 paying members, 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. Boyds also leases warehouse space in Dunkeswell, United Kingdom, and Dordrecht, The Netherlands.

SEGMENTS

The Company’s wholesale business designs, imports, and distributes resin figurines and plush animals via a global network of independent retailers and distributors. The Company’s retail operation sells resin figurines, plush animals and a unique entertainment experience directly to the end consumer currently at its Gettysburg, Pennsylvania flagship location. The Company plans for one store to be added in 2004 and then two additional stores per year beginning in 2005.

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 the valuation of the deferred tax assets, determining the ultimate collectability of accounts receivable and the realizable value of inventory. 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.

· As of June 30, 2004, the Company has net deferred tax assets of approximately $160 million or approximately 72% of total 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 management’s assessment of future operating results. In situations which management believes the probability of benefiting from deferred tax assets is less likely than not, a valuation allowance is established for the amount that is less likely than not to be utilized. The Company will need to generate approximately $400 million of taxable income over the next 30 years to fully realize the federal net deferred tax assets. In addition, the Company will need to generate approximately $20 million of taxable income in each of the next 10 years to fully realize the state net deferred tax assets.

· 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.

· 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 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 SFAS No.142, “Goodwill and Other Intangible Assets”, and SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, Boyds assesses the potential impairment of identifiable intangibles, long-lived assets and acquired goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In performing this evaluation, the Company evaluates 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. Based on Boyds’ evaluation as of January 1, 2004, there was no impairment of goodwill, identifiable intangibles or long-lived assets.

· 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.

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. In anticipation of the holiday season, 60% of orders are placed between May and October. The remaining 40% of orders are placed between November and April. Boyds does not have the significant seasonal variation in its orders that it believes is experienced by many other giftware and collectibles companies. 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 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 generally pays for its products in United States dollars. However, Boyds’ cost of such products fluctuates with the value of the Chinese renminbi because 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. While Boyds does not do so now, 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 growing sales operations based in Europe and Canada, but at this time Boyds does not expect any significant impact due to fluctuations in the Euro, the British Pound or the Canadian dollar.

RESULTS OF OPERATIONS

Net sales consist of wholesale and retail 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. Wholesale 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:

	Quarter				Six months
	Ended				Ended
	June 30,				June 30,
	2003		2004		2003		2004
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Gross profit	64.8	%	61.4	%	64.1	%	60.8	%
Selling, general and administrative expenses	42.5	%	52.0	%	31.3	%	44.3	%
Income from operations	22.2	%	9.4	%	32.8	%	16.5	%
Other expense, net	0.0	%	(0.1	)%	0.0	%	(0.1	)%
Interest expense	6.1	%	4.8	%	5.1	%	4.5	%
Provision for income taxes	7.0	%	2.2	%	10.7	%	5.1	%
Net income	8.9	%	2.3	%	17.0	%	6.8	%

Executive Summary

In the second quarter of 2004, the Company’s net sales declined by 8%, which was primarily attributed to the wholesale segment. While the Company is not pleased with this decline, it is appreciably better than the negative trend the Company experienced through 2003 and into the first quarter of 2004, which was a decline of approximately 25%. Key to impacting this negative trend was the release of several new product lines that the Company began shipping in the second quarter, most notably our NASCAR™ plush line. The Company’s bookings (cancelable orders) for the second quarter are down 10-12%, which is better than the 2003 trends that the Company experienced, but lower than the trend we saw in the first quarter of 2004. This slowing can be attributed to the timing of product introduction on several product lines that was delayed to coincide with our participation in the July Atlanta Gift Show. We continue to see opportunities in the giftable business and we have been expanding our presence in retail locations with this giftable profile. In an effort to bolster our “collectible” stores we are rolling out our Boyds Home Reunion™ (home party) program, which allows retailers to extend their store-fronts into the homes of their customers. This program is currently targeted at our larger retailers. The Company’s retail store experienced a decline in net sales of 5%, compared to the same period for 2003, due to a decline in customer traffic.

The Company’s net income for the second quarter decreased from 2003 by $1.7 million to $0.5 million. This decrease was caused by the reduction in sales, increased licensed product royalties, increased SG&A costs associated with fully staffing the national sales force, the retirement package for the Company’s Chief Operating Officer and additional management overhead costs in the retail segment.

Cash provided by operations in the first six months of 2004 was approximately $4.9 million. In the first six months of 2004, the Company utilized its existing cash, cash generated from operations and borrowings under the Revolving Credit Agreement to repay approximately $14.0 million of debt and invested approximately $4.3 million of cash in property and equipment. The Company is actively working to refinance its existing debt and plans to have a new debt structure in place by December 31, 2004.

Three Months Ended June 30, 2004 vs. Three Months Ended June 30, 2003

Net sales decreased $1.9 million, or 8%, to $22.6 million in the second quarter of 2004 from $24.5 million for the second quarter of 2003. Sales of Boyds’ plush products increased $0.4 million, or 4%, resin product sales decreased $1.8 million, or 22%, and other product sales decreased $0.5 million, or 14%. As a percentage of net sales for the quarter, plush products represented 58%, resin products represented 28%, and other products represented 14%.

Wholesale net sales declined $1.7 million in the quarter, or 8%, to $19.0 million in 2004 from $20.7 million in 2003. Retail net sales declined $0.2 million to $3.6 million in 2004 from $3.8 million in 2003. Wholesale revenues were impacted by the reduced sales of the Company’s resin lines, specifically its Bearstone™ and Teaberrie™ lines, and in its core fashion family plush lines. These reduced sales were partially offset by strong plush sales in our newly offered NASCAR™ line and from our custom plush. Retail sales were impacted by the continued slowness of customer traffic to the Gettysburg store.

Gross profit decreased $1.9 million, or 12%, to $13.9 million in the second quarter of 2004 from $15.8 million for the second quarter of 2003. Gross profit as a percentage of net sales decreased to 61% for the quarter from 65% for the same period in 2003. The dollar decrease and percentage decrease is attributed to the decrease in sales, a decrease in the amount of costs capitalized in inventory, higher transportation costs, and costs associated with NASCAR™ royalties. The Company’s NASCAR™ product line has a lower gross margin compared to its other product lines due to the additional royalties that are paid on these product lines. Wholesale gross profit decreased by $1.8 million, or 14%, to $11.2 million in 2004 from $13.0 million in 2003. Retail gross profit decreased by $0.1 million, or 4%, to $2.7 million in 2004 from $2.8 million in 2003.

SG&A expense increased $1.4 million, or 13%, to $11.8 million in the second quarter of 2004 from $10.4 million for the second quarter of 2003. SG&A as a percent of net sales increased to 52% for the quarter from 43% for the same period in 2003. The dollar increases can be attributed to the costs associated with fully staffing the national sales force, the retirement package for the Company’s Chief Operating Officer and increased management overhead costs in the retail segment. Additionally, the decline in sales along with the previously mentioned SG&A dollar increases, are the causes in the percentage increase to SG&A expense.

Income from operations declined $3.3 million, or 61%, to $2.1 million in the second quarter of 2004 from $5.4 million for the second quarter of 2003. Income from operations as a percentage of net sales declined to 9% for the quarter from 22% for the same period in 2003. The dollar decline and the decline in the percentage of net sales was primarily attributable to the decline in sales, increased licensed product royalties, operational costs associated with fully staffing the national sales force, the retirement package for the Company’s Chief Operating Officer and increased management overhead costs in the retail segment.

Total interest expense declined $0.4 million, or 27%, to $1.1 million in the second quarter of 2004 from $1.5 million for the second quarter of 2003. Total interest expense as a percentage of net sales decreased to 5% for the second quarter of 2004 from 6% for the same period in 2003. The dollar decline was due to the lower amount of outstanding debt for the period.

Provision for income taxes decreased $1.2 million, or 71%, from $1.7 million for the second quarter of 2003 to $0.5 million in the second quarter of 2004. The dollar decline was due to decreased sales, increased licensed product royalties, increased operational costs associated with fully staffing the national sales force and increased management overhead costs in the retail segment.

Net income declined $1.7 million, or 77%, to $0.5 million in the second quarter of 2004 from $2.2 million for the second quarter of 2003. Net income as a percent of sales decreased to 2% for the quarter from 9% for the same period in 2003. The dollar decline and the decline in the percentage of net sales was primarily due to the decline in sales, increased licensed product royalties, increased costs associated with fully staffing the national sales force, and increased management overhead costs in the retail segment.

Six Months Ended June 30, 2004 vs. Six Months Ended June 30, 2003

Net sales decreased $10.6 million, or 18%, to $49.0 million in the first six months of 2004 from $59.6 million for the first six months of 2003. Sales of Boyds’ plush products decreased $6.6 million, or 19%, resin product sales decreased $3.0 million, or 17%, and other product sales decreased $1.0 million, or 13%.

As a percentage of net sales for the first six months, plush products represented 56%, resin products represented 30%, and other products represented 14%.

Wholesale net sales declined $10.3 million in the first six months, or 19%, to $43.3 million in 2004 from $53.6 million in 2003. Retail net sales declined $0.3 million to $5.7 million in 2004 from $6.0 million in 2003. Wholesale net sales were impacted by the decline in plush product from the first quarter, which were partially offset by the increases in the giftable plush, as described above, which was experienced in the second quarter, particularly in the new NASCAR™ line. Resin products continue to struggle specifically the Company’s more collectible Bearstone™ line. While the customer traffic slowdown at the retail store in Gettysburg continues, in the second quarter the Company did see a slowing of the negative trend. The slowing of the trend is attributed to promotional events held in May and June of 2004.

Gross profit decreased $8.4 million, or 22%, to $29.8 million in the first six months of 2004 from $38.2 million for the first six months of 2003. Gross profit as a percentage of net sales decreased to 61% for the first six months from 64% for the same period in 2003. The dollar decrease and the percentage decrease can be attributed to the decrease in sales, a decrease in the amount of costs capitalized in inventory, higher transportation costs, and costs associated with NASCAR™ royalties. Wholesale gross profit decreased by $8.1 million, or 24%, to $25.5 million in 2004 from $33.6 million in 2003. Retail gross profit decreased by $0.3 million, or 7%, to $4.3 million in 2004 from $4.6 million in 2003.

SG&A expense increased $3.0 million, or 16%, to $21.7 million in the first six months of 2004, from $18.7 million for the fist six months of 2003. SG&A as a percent of net sales increased to 44% for the first six months from 31% for the same period in 2003. The dollar increase in SG&A expenses was a result of fully staffing the national sales force, the retirement package for the Company’s Chief Operating Officer, a reduction in the benefit received from the reversal of bad debt expense, and increased management overhead costs in the retail segment. Additionally, the decline in sales along with the previously mentioned SG&A dollar increases, are the cause in the percentage increase to SG&A expense.

Income from operations declined $11.4 million, or 58%, to $8.1 million in the first six months of 2004 from $19.5 million for the first six months of 2003. Income from operations as a percentage of net sales declined to 17% for the quarter from 33% for the same period in 2003. The dollar decline and the decline in the percentage of net sales was primarily attributable to the decline in sales, increased licensed product royalties, operational costs associated with fully staffing the national sales force and increased management overhead costs in the retail segment.

Total interest expense declined $0.8 million, or 27%, to $2.2 million in the first six months of 2004 from $3.0 million for the first six months of 2003. Total interest expense as a percentage of net sales decreased to 4% for the first six months of 2004 from 5% for the same period in 2003. The dollar decline was due to the lower amount of outstanding debt for the period.

Provision for income taxes decreased $3.8 million, or 60%, to $2.5 million in the first six months of 2004 from $6.3 million for the six months of 2003. The dollar decline was due to decreased sales, increased licensed product royalties, increased operational costs associated with fully staffing the national sales force and increased management overhead costs in the retail segment. These were partially offset by a settlement notice from the State of Pennsylvania received in the first quarter of 2003 regarding a franchise tax benefit of approximately $0.9 million relating to the tax year 2000.

Net income declined $6.9 million, or 68%, to $3.3 million in the first six months of 2004 from $10.2 million for the first six months of 2003. Net income as a percent of sales decreased to 7% for the year from 17% for the same period in 2003. The dollar decline and the decline in the percentage of net sales was due primarily to the decline in sales, increased licensed product royalties, the increased costs associated with fully staffing the national sales force, and increased management overhead costs in the retail segment.

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 requirements and to service debt. Cash balances decreased to $0.7 million in the first six months of 2004 as compared to $4.2 million at December 31, 2003.

Operating Activities

Cash provided by operating activities decreased $9.5 million, or 66%, to $4.9 million in the first six months of 2004 from $14.4 million for the first six months of 2003. The cash flow decrease was primarily attributable to the decrease in sales and the additional costs associated with the national sales force and an increase in accounts receivable caused by new dating programs for select customers.

Investing Activities

Capital and investment expenditures totaled $4.3 million in the first six months of 2004 as compared to $0.8 million in the first six months of 2003. This increase in expenditures was a result of construction costs of $3.5 million on Boyds Bear Country™—Pigeon Forge, Tennessee.

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 June 30, 2004, Boyds has repaid $130.6 million of the notes, leaving a balance outstanding of $34.4 million. Boyds has repaid $297.0 million of the term loans under the credit agreement, leaving a balance outstanding of $28.0 million as of June 30, 2004. Boyds has reduced its total debt by $20.0 million in the past twelve months.

The revolving credit facility provides loans in an aggregate amount of up to $40.0 million. The Company has borrowed $10.0 million under this agreement as of June 30, 2004. 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 being amortized 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. Boyds is in compliance with all applicable covenants as of June 30, 2004 and the Company believes that based on its future earnings it will also be in compliance with all of its debt covenants. 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 June 30, 2004, Boyds had repurchased 344,730 shares of common stock pursuant to the Stock Repurchase Program for an aggregate amount of approximately $2 million. These repurchases were financed out of operating cash flow. Any future repurchases under the Stock Repurchase 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 June 30, 2004, Boyds had repurchased $64.6 million of its notes pursuant to the Bond Repurchase Program. These repurchases were funded out of operating cash flow. Any future repurchases under the Bond Repurchase Program are expected to be funded 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 existing revolving credit facility, which expires in April 2005, will provide adequate funds for Boyds’ foreseeable working capital needs, planned capital expenditures, debt service obligations, the Stock Repurchase Program and the Bond Repurchase Program. The Company is actively working to refinance its existing debt and plans to have a new debt structure in place by December 31, 2004. 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 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 addition, 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 because the cost of importing from such countries may increase. 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, 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 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.

Required debt payments. Boyds has significant debt on its balance sheet. If the Company does not refinance its existing debt and/or does not generate sufficient cash flows, the Company may have difficulty making its required debt payments in the future.

EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” This statement amends SFAS No. 123 “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reporting results. The disclosure provisions of this standard are effective for fiscal years ended after December 15, 2002 and have been incorporated into these condensed consolidated financial statements and accompanying notes (see Note 7).

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In general, this statement is effective for contracts entered into or modified after June 30, 2004, and for hedging relationships designated after June 30, 2004. The adoption of this statement did not have a material impact on the financial position, results of operations or cash flow of Boyds.

RELATED PARTY TRANSACTIONS

Kohlberg, Kravis Roberts & Co., L.P. (“KKR”) is a 59% shareholder of Boyds. . For each of the second quarter and six months ended June 30, 2003 and June 30, 2004, Boyds paid to KKR approximately $0.1 million and $0.2 million for management fees and related expenses.

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 3. Quantitative and Qualitative Disclosures About Market Risk.

Boyds faces minimal interest rate risk exposure in relation to its outstanding debt of $72.4 million at June 30, 2004. Of this amount, $38.0 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 and Canadian operations that are denominated in the local currency of the Euro, the British Pound and the Canadian dollar, to the U.S. dollar. The currency risk exposure is not material as the operations of the European and Canadian subsidiaries do not have a material impact on the Company’s earnings.

Boyds also faces foreign exchange risks that arise from paying in United States Dollars for products that are manufactured in China. While it does not do so now, 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 costs of sales. Boyds intends to manage foreign exchange risks to the extent appropriate.

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.

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

Common Stock, par value $.0001 per share	59,004,202
(Class)	(Outstanding as of August 6, 2004)

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of December 31, 2003 and June 30, 2004	3
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2003 and 2004	4
	Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2004	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2004	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Disclosure Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 2.	Changes in Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 5.	Other Information	23
Item 6.	Exhibits and Reports on Form 8-K	23
	Signatures	24
	Index to Exhibits	25

The Boyds Collection, Ltd.
	By:	/s/ Jan L. Murley
	Name:	Jan L. Murley
	Title:	Chief Executive Officer
	By:	/s/ Joseph E. Macharsky
	Name:	Joseph E. Macharsky
	Title:	Chief Financial Officer

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).
10.9		Form of Employment Agreement dated October 21, 2003 between Jan L. Murley and Boyds (incorporated by reference from Exhibit 10.9 of Boyds’ Annual Report on Form 10-K, filed on March 29, 2004, File No. 001-14843).
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a)*
31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a)*

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This certification is being furnished in accordance with the Sarbanes-Oxley Act of 2002 and Commission Release No. 34-47551 and shall not be deemed “filed” with the Commission for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.)*
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This certification is being furnished in accordance with the Sarbanes-Oxley Act of 2002 and Commission Release No. 34-47551 and shall not be deemed “filed” with the Commission for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.)*