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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003

Commission File Number 001-14843

THE BOYDS COLLECTION, LTD.
(Exact Name of Registrant as Specified in its Charter)

(717) 633-9898
(Registrant's Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:
None

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o    No ý

        The aggregate market value of the Registrant's Common Stock held by non-affiliates (assuming solely for the purpose of this calculation that directors and officers are affiliates) of the Registrant, based on the reported last sale price of such stock on the New York Stock Exchange on June 30, 2003, was approximately $64,197,663.

        As of March 22, 2004, the number of shares of the Registrant's Common Stock outstanding was 59,004,202.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Proxy Statement relating to the Registrant's 2004 Annual Meeting of Stockholders which is expected to be filed within 120 days following the end of the fiscal year covered by this report, are incorporated by reference into Part III hereof.

Table of Contents

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.

PART I

Item 1. DESCRIPTION OF BUSINESS

Available Information

        The Boyds Collection, Ltd. ("Boyds" or the "Company") files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any document Boyds files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Boyds' electronic SEC filings are available to the public at http://www.sec.gov.

        Boyds' public internet site is http://www.boydsstuff.com/. Boyds makes available free of charge through its internet site, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. Boyds also makes available through its internet site, statements of beneficial ownership of Boyds' equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

General

        Boyds is a leading designer, importer and distributor of high-quality, hand-crafted collectibles, gift, and other specialty 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, as well as its own flagship retail

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store in Gettysburg, Pennsylvania. Boyds imports substantially all of its products from manufacturers in China through buying agencies.

History

        Boyds was founded in 1979 by Gary and Justina Lowenthal as a small antique business in Boyds, Maryland. By 1984, Boyds had begun to reproduce and sell miniature houses, duck decoys and merino wool teddy bears to selected retail outlets. In 1984, Boyds also introduced its first major plush product, a unique, fully jointed wool teddy bear named Matthew™, and the Gnomes Homes™, a small collection of hand-sculpted miniature cast resin houses. Boyds relocated from Maryland to southern Pennsylvania in 1987 and expanded its product line to include other plush animals and related accessories including miniature clothes, furniture and ornaments. Boyds began distributing its plush animal lines to department stores and gift retailers, opting against selling to mass merchandisers and major discount stores. In 1993, Boyds began selling cast resin figurines with the introduction of its Bearstones™ line. In 1998, Boyds acquired H.C. Accents, a home décor company and in 2001, J & T Designs, a Christmas gift company. In September 2002, Boyds opened Boyds Bear Country™ retail store in Gettysburg, Pennsylvania. In 2002, Boyds replaced its in-house sales force with the roll out of a national direct sales force.

Business Segments

        The Boyds Collection, Ltd. operates in two segments that 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. This retail store is being used to generate income and expand the brand awareness and image of Boyds. Another store is being built in Pigeon Forge, Tennessee and is scheduled to open in December of 2004.

Product Lines

        Since 1984, Boyds' product lines have expanded from plush bears to include other plush animals such as hares, moose and cats, as well as resin figurines and other products as described below.

Plush Animals

        Boyds began selling its plush animals in 1982. The plush animal category consists of both dressed and non-dressed animals, most of which are fully jointed with sewn-in joints for arms, legs and heads. Today, the plush animal category has grown to encompass over 400 different items ranging from 2¹/2" miniatures to 40" large animals.

        Boyds' non-dressed plush animal lines include the Huggle-Fluffs™, the Artisan Series™, The Mohair Bears™, J.B. Bean & Associates™, the Archive Collection™ and Angels and Friends™ ornaments. The largest revenue-generating line in this plush category is Boyds' J.B. Bean & Associates™, featuring fully jointed bears, hares, moose, lambs and other animals.

        Introduced in 1992, the popularity of Boyds' T.J.'s Best Dressed™ line, characterized by fully jointed bears, cats, moose and other animals dressed in stylish, hand-sewn outfits, has become the largest selling line in the plush category.

        Retail prices for the plush animals generally range from $5 to $95. Animals in the plush animal category are made of various materials with outer coverings ranging from acrylic plush to custom-dyed chenille and wool. Interiors are filled with plastic pellets for the beanbag animals and 100% acrylic fiberfill for the other animals.

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Resin Figurines

        Boyds' resin figurine category currently consists of the main collection, Bearstones™, and sub-collections, Dollstones™, Charming Angels™, Shoebox Bears™ and Faeriéssence™. Together, these categories include over 300 styles of finely detailed, hand-painted miniature cast resin bears, other animals and people.

        Pieces in the resin figurine category are generally priced between $9 and $60 at retail. Each figurine is inscribed with Boyds' distinctive symbol of authenticity, a hidden bear paw, and a bottom stamp indicating the name, edition and piece number. Many figurines contain famous quotes which help the customers identify with the piece. The items are packaged individually with a certificate of authenticity describing the product.

Other Products

        Boyds sells over 300 additional items ranging from miniature furniture, wooden accessories and glasses, through cast iron products, resin accessories, to home décor. In addition various printed and promotional materials are sold to support Boyds product lines.

New Product Introductions

        Boyds continually evaluates new product ideas and regularly introduces new product lines that maintain Boyds' whimsical and "Folksy with Attitude" themes. Starting in 2002, Boyds concentrated on broadening the giftability of its core resin figurine and plush animal products. New introductions during 2003 included the following new lines:

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Razz-bearries™, plush and resin lines with humorous and edgy comments targeted to gift-focused retailers.



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Bears & Friends™, a soft value-priced plush line targeted to gift-focused retailers.

Product Design and Development

        Boyds' creative design team works with its manufacturers and buying agencies, primarily in the People's Republic of China, to create prototypes and refine the product's appearance for review by Boyds. Boyds also works with its buying agencies and manufacturers in order to ensure the product can be produced at an acceptable cost per unit, without compromising quality, given a certain level of production.

Intellectual Property

Trademarks

        Boyds has obtained various trademark registrations in the United States, Europe, and Japan for trademarks and logos related to its resin figurines and plush animals. These registrations allow Boyds to use on an exclusive basis these trademarks and logos in the United States, Europe, and Japan in connection with its products. If Boyds continues to use such trademarks and logos, makes timely filings and pays all required fees to the United States Patent and Trademark Office, its trademark registrations can exist in perpetuity. Boyds also has common-law trademark rights to the extent it uses unregistered names and logos on its various products. The strength and scope of these rights is determined by the geographic extent and duration of their use. Additionally, to the extent that the packaging and overall visual impact of Boyds' products is inherently distinctive or has acquired distinctiveness through sales in the marketplace, Boyds has proprietary rights in such "trade dress" of its products.

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Copyrights

        Boyds has secured several hundred copyright registrations for its products with the United States Copyright Office. Boyds may enforce these rights in United States courts with regard to infringements occurring in the United States and also, to varying extents, in foreign jurisdictions with regard to infringements occurring outside the United States. In addition, Boyds has copyrights in the original expression contained in other products that it has created, whether or not those copyrights have been registered. In all events, Boyds' copyright in its products is limited in scope to the original, creative expression embodied in them and does not extend to elements drawn from public sources or to functional elements. For all products created by or on behalf of Boyds since its founding date, the U.S. copyright currently runs for a term of 95 years from the date of their creation.

Licenses

        Boyds licenses its product designs to other companies for products including home textiles, infant clothing and wallpaper. The licensing contracts range from 2 to 5 years in duration. Boyds believes such licensing arrangements provide a significant benefit to Boyds business by generating royalty income and increasing consumer awareness of Boyds' designs and brand image.

        Boyds protects its intellectual property rights, both through policing any potential infringement by third parties and registering such rights, when appropriate, with applicable government authorities. Boyds believes that its trademarks and other proprietary rights are material to its success and competitive position.

Sourcing of Products

        Boyds coordinates its production and cooperative development efforts primarily through two buying agencies with whom it has established long-term business relationships. These buying agencies perform a number of functions for Boyds, including collaborating in its product design and development process, identifying suitable manufacturers for its products and supervising its manufacturers to assure the proper quality and timing of Boyds' orders.

        Boyds does not own or operate any manufacturing facilities and imports most of its products from manufacturers in the Pacific Rim, primarily The People's Republic of China. Boyds' ability to import products and thereby satisfy customer orders is affected by the availability of, and demand for, quality production capacity abroad. Boyds competes with other importers of collectibles for the limited number of foreign manufacturing sources which can produce detailed, high-quality products at affordable prices. Boyds is subject to the following risks inherent in foreign manufacturing: the laws and policies of the United States affecting the importation of goods (including duties, quotas and taxes); restrictive actions by foreign governments; fluctuations in currency exchange rates; nationalizations; and foreign trade and tax laws.

        Substantially all of Boyds' products are subject to customs duties and regulations pertaining to the importation of goods, including requirements for the marking of certain information regarding the country of origin on Boyds' products. The United States and the foreign countries in which Boyds' products are manufactured may, from time to time, impose new quotas, duties, tariffs or other charges or restrictions, or adjust presently prevailing quotas, duty or tariff levels, which could adversely affect Boyds' financial condition or results of operations or its ability to continue to import products at current or increased levels. Boyds cannot predict what regulatory changes may occur or the type or amount of any possible financial impact on Boyds in the future.

        Although Boyds believes that the loss of either of its two primary buying agencies would have a short-term material adverse effect on its financial condition and results of operations, it believes that

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alternative buying agencies would be available in the long-term and such alternative buying agencies would be able to work directly with Boyds' manufacturers.

        Boyds' domestic products are shipped by ocean freight to the United States and then by truck to Boyds' 209,000 square-foot distribution center in McSherrystown, Pennsylvania. Boyds ships the majority of its products to its nationwide retailer network via United Parcel Service.

Distribution Network and Customers

        Boyds has a large national distribution network, which includes approximately 14,000 independent retail gift and collectibles accounts, high-end department stores and selected catalogue retailers, representing approximately 20,000 individual retail outlets. Boyds' resin figurine product line is sold through a network of authorized dealers consisting of approximately 8,000 accounts, selected primarily from Boyds' plush-only dealers. The top ten accounts comprised approximately 18.6% of net wholesale sales during fiscal 2003.

        Boyds believes it has low annual customer account turnover among its resin dealers and normal turnover for its other dealers. Turnover among non-resin dealers occurs primarily in small accounts, which become inactive due to ownership changes, poor credit or lack of commitment to Boyds' products. Accounts which became inactive during fiscal 2003 represented approximately 5.3% of Boyds' fiscal 2002 net sales. Boyds generally does not offer dating terms or volume discounts.

        In September 2002, Boyds opened Boyds Bear Country™, a 130,000 sq. ft. retail store in Gettysburg, Pennsylvania. The store serves as a tourist attraction that has helped to expand brand awareness, as well as become a sales channel for visitors. The Company expects to open its second retail store in Pigeon Forge, Tennessee, in the fall of 2004. Boyds also sells its products to its collectors club members known as Friends of Boyds.

Sales & Marketing of Products

        Boyds generates its order volume through a nationwide direct sales force, catalogue mailings to its retailers, trade show sales, and through its B2B web site. Boyds sends catalogues and promotional mailings to all retailers at least twice a year for its spring and fall product offerings. In 2002, Boyds began rolling out a nationwide sales force to interact directly with its customers and replace its tele-ordering model. The national sales force was fully implemented by the end of the third quarter of 2003. The sales force operates in concert with a more focused customer service/telemarketing group and interacts directly with customers, thereby strengthening relations with current customers and creating new customers. Boyds leases showroom space in Atlanta and Dallas.

Seasonality

        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 have the significant seasonal variation in its orders that it believes is experienced by many other giftware and collectibles companies.

Competition with Producers of Collectibles and Giftware Products

        Boyds competes generally for the disposable income of consumers and, in particular, with other producers of fine quality collectibles, specialty giftware and home decorative accessory products. The collectibles area, in particular, is affected by changing consumer tastes and interests. The giftware and collectibles industries are highly competitive, with a large number of both large and small participants. Boyds' competitors distribute their products through independent gift retailers, department stores, mass merchandisers and catalogue retailers or through direct response marketing. Boyds believes the

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principal elements of competition in the giftware and collectibles industries are product design and quality, product and brand name loyalty, product display and price. Boyds believes its competitive position is enhanced by a variety of factors, including the innovativeness, quality and enduring themes of Boyds' products, its reputation among retailers and consumers, its in-house design expertise, its sourcing and marketing capabilities and the pricing of its products. Some of Boyds' competitors, however, are part of large, diversified companies having greater financial resources and a wider range of products than Boyds. In addition, this industry is subject to intense competition from small and large companies, each having the ability to create unique, appealing products at relatively low entry cost.

Employees

        Boyds currently employs a total of 419 full time individuals, 275 of whom are located in Pennsylvania. None of these employees are represented by labor unions.

Item 2. PROPERTIES

Showrooms, Warehousing, Distribution Facilities and Retail

        Boyds leases approximately 209,000 square feet of distribution and warehouse space in McSherrystown, Pennsylvania. Boyds' existing distribution center includes two loading docks, two automated conveyor systems and 180,000 square feet of storage area, which are in good operating condition. Boyds' lease expires in 2009. Attached to the warehouse area is Boyds' 24,000 square-foot corporate headquarters which is subject to the same lease provisions. Boyds also leases warehouse space in Dunkeswell, United Kingdom, and Dordrecht, The Netherlands. These warehouses are 11,184 and 23,585 square feet respectively. The warehouse in the United Kingdom has a lease which expires in 2005, while The Netherlands lease expires in 2008. Boyds also leases office space in Illinois and showroom space in Atlanta and Dallas. Management believes that its current facilities are suitable and adequate for Boyds' planned growth needs for the next several years, and vacant land is available on-site for additional expansion should it be necessary.

        Boyds Bear Country™ sits on 128.2 acres in Gettysburg, PA, which is owned by Boyds. The retail store comprises approximately 130,000 square feet. The Company has purchased 40 acres in Pigeon Forge, Tennessee, to open its second retail store in December of 2004.

Development and Upgrades of Management Information Systems

        Boyds' management information systems have been developed through the modification of off-the-shelf software programs to serve Boyds' current needs. Boyds launched its official company website on November 15, 1999 at www.BoydsStuff.com. which, among other things, permits interested collectors to sign-up for club membership online. Boyds has a B2B website which permits Boyds' dealers to place their orders, review order status, check their accounts and conduct other related matters via a "business-to-business" link.

        During 2001, Boyds invested in the implementation of a sales interface system that was expected to improve sales force efficiency and effectiveness. Due to implementation difficulties during the fourth quarter of 2001, the system was reduced to its net realizable value.

Item 3. 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 or results of operations of Boyds.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

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PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Since Boyds' initial public offering of 16,000,000 shares of its common stock, par value $.0001 per share ("Common Stock") on March 4, 1999, Boyds' Common Stock has been listed on the New York Stock Exchange ("NYSE") under the symbol "FOB". To date, the NYSE has been the principal market for the exchange of the freely tradable shares of Boyds' Common Stock. The following table shows, on a per share basis, the high and low prices for the Boyds' Common Stock for the periods indicated as reported on the New York Stock Exchange:

        As of March 22, 2004, the approximate number of holders of record of Boyds' Common Stock was 632. Since its initial public offering in 1999, Boyds has not paid cash dividends on its Common Stock; however, Boyds may consider paying cash dividends in the future. Boyds intends to retain its earnings to finance the development and growth of its business and to service its debt. Currently Boyds is subject to restrictions that limit its ability to declare and pay cash dividends on its Common Stock under certain covenants contained in Boyds' debt agreements.

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Item 6. SELECTED FINANCIAL DATA

FIVE YEAR FINANCIAL SUMMARY

(1)

The increase from 2002 to 2003 was largely the result of $5.2 million in operational expenses associated with the national sales force, $4.5 million in operational costs at Boyds Bear Country™—Gettysburg, and a $1.8 million charge for the change in our Chief Executive Officer.

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

        In 2003, the Company saw its net sales decline by approximately 14% while net income declined by approximately 65%. The decline in net sales can be attributed to the struggling retailer channel, lower per order bookings, and increased competition in our core product lines. The decline in net income can be attributed to higher fixed costs as a percentage of net sales, the cost to operate the national sales force, inventory obsolescence, deferred tax valuation charges, severance related charges, and charges associated with our change in Chief Executive Officer which were only partially offset by the profits earned at Boyds Bear Country. As the Company looks ahead to 2004, we expect the trend of decreasing wholesale revenue to continue in at least the first and second quarters of 2004. In response to this trend, we have initiated several actions to reverse this sales trend; including introducing several new product lines that are gift focused, refocusing our national sales force and expanding our distribution channels. In addition, we are realigning our cost structure to be more in line with our current level of expected revenues. We expect that these actions will begin to make an impact in the trend in the second half of 2004.

        The Company has made significant investments in both its retail segment and its national sales force. The Company plans to continue to expand its retail presence using the experience that has been acquired in its Gettysburg store. This will be achieved by opening a store in Pigeon Forge in December of 2004, and then, starting in 2005, opening two stores per year in strategic locations across the country. We are working to ensure that we realize the benefits that we had anticipated from the national sales force. We are focusing the field sales organization on expanding distribution to new high traffic channels where consumers shop for gifts. Additionally, the Company has taken steps to remove costs from our operating model and is continuing to identify and evaluate unnecessary costs.

        Despite the decline in sales and net income for the year, the Company was able to pay down approximately $27 million in debt and begin construction on its second retail location. Management believes that the Company will be able to make the required debt payments and proceed with the capital expenditures for its retail expansion plans by utilizing operating cash flow and the Company's existing debt structure. The Company's Bank Credit Agreement expires in April 2005. The Company has initiated steps to replace its existing financing and anticipates that a new agreement will be in place by the end of 2004.

        The following discussion and analysis of the results of operations for the three fiscal years ended December 31, 2001, 2002 and 2003, respectively, has been derived from and should be read in conjunction with the consolidated financial statements, included elsewhere in this annual report.

General

        Boyds is a leading domestic designer, importer and distributor of branded, high-quality, handcrafted collectibles and other specialty giftware products. Boyds sells its products primarily 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. Boyds also sells its products directly to consumers through its new retail store Boyds Bear Country™ in Gettysburg, PA.

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        Boyds' product lines include plush animals, resin figurines, porcelain dolls, villages and others. The following table sets forth Boyds' plush animals, resin figurines, dolls, villages and other product sales and their percentage of Boyds' net sales for the last three fiscal years ended December 31, 2003:

        The most important categories within the plush product line are the dressed animals in the T.J's. Best Dressed™ collection, introduced in 1992, and the other custom-designed plush animals. Boyds began selling non-dressed plush animals in 1982 and has since introduced product collections which currently include Baby Boyds™, J.B. Bean & Associates™, the Archive Collection™, Mohair Bears™ and Huggle-Fluffs™.

        The major figurine product within the resin figurines product line is Bearstones™ which Boyds introduced in late 1993. In early 1994, Boyds introduced another resin figurine line known as Folkstones™, followed by Dollstones™ in late 1995. Boyds also established a network of dealers in 1994, selected primarily from Boyds' plush-only dealers, which were authorized to carry Boyds' resin figurine product lines. These dealers currently number approximately 8,000 accounts.

        Included in other sales are food sales from our retail store, home décor, accessories, dolls and royalty income generated by licensing contracts.

        Boyds exhibits its products at many national and regional tradeshows where orders are taken by Boyds' employees. Boyds operates primarily out of a leased office/distribution facility in McSherrystown, Pennsylvania, which it believes provides attractive labor and rental costs. Boyds also owns and operates Boyds Bear Country™ store in Gettysburg, PA.

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.

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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

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meets the criteria of Staff Accounting Bulletin No. 101, including the transfer of title, probable collectibility, identified customer and no recourse.

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As of December 31, 2003, the Company has net deferred tax assets of approximately $169 million or approximately 76% 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.



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Accounts receivable are presented at their estimated net realizable value. Boyds uses estimates in determining the collectibility 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.



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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.



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Under the requirements of Statement of Financial Accounting Standards ("SFAS") Nos. 142 Goodwill and Other Intangible Assets, and 144 Accounting for the Impairment and 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.



•

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.

        Boyds' accounting policies are more fully described in Item 8—Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 2.

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

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approximately 60% of orders are placed between May and October in anticipation of the holiday season. 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 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.

Acquisition

        On April 25, 2001, Boyds acquired all of the issued and outstanding shares of capital stock of J & T Design ("J & T"). J & T is a designer and distributor of Christmas gift products. J & T's results from operations are included in Boyds' consolidated statement of income subsequent to April 25, 2001. The aggregate purchase price was approximately $0.5 million paid in cash. The purchase price was assigned to the acquired assets, primarily inventory and accounts receivable, based on their fair market values. In addition, Boyds has recorded goodwill of approximately $0.5 million, included in other assets, related to the excess of the purchase price over the fair value of assets acquired.

Results of Operations

        Net sales consist of sales of our products, net of sales discounts, product returns and allowances, retail sales from Boyds Bear Country™, collectors club sales generated from members of 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 products are shipped to the customer or upon the 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, and administration and professional fees.

        Other income consists of interest income and exchange rate gain/loss.

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

Fiscal Year Ended December 31, 2003 vs. Fiscal Year Ended December 31, 2002

        Net Sales—Net sales decreased $18.3 million, or 14%, to $113.0 million in the twelve months of 2003 from $131.3 million for the twelve months of 2002. Sales of Boyds' plush products decreased $15.8 million, or 20%, resin product sales decreased $4.9 million, or 14%, and other product sales declined $2.4 million, or 17%. As a percentage of net sales for the twelve months, plush represented 57%, resin products represented 28%, and other products represented 15%.

        Wholesale net sales in the twelve months declined $27.8 million, or 22%, to $97.3 million in 2003 from $125.1 million in 2002. Wholesale revenues were negatively impacted by the continuing weakness in the channel, lower initial volumes in the new accounts that were added in 2003, and lower volumes for existing accounts. As we look to the first quarter of 2004, the bookings that we are seeing in Boyds' spring selling season, are indicating a slowing of the negative trends from 2003. This was helped by the addition of several new products, Razz-bearies™, Bears and Friends™, and the introduction of a new licensed plush collection in partnership with NASCAR. Retail net sales increased $9.5 million to $15.7 million in 2003 from $6.2 million in 2002. Retail net sales are not comparable for the year, as the Gettysburg store did not open until September 2002.

        Gross profit—Gross profit decreased $14.6 million, or 18%, to $68.5 million in the twelve months of 2003 from $83.1 million for the twelve months of 2002. Gross profit as a percentage of net sales decreased to 61% for the twelve months of 2003 as compared to 63% for 2002. The dollar decline was primarily attributable to the decline in sales volume and the additional obsolescence charge of $1.9 million incurred during the year. Wholesale gross profit decreased by $21.9 million, or 28%, to 56.4 million in 2003 from $78.3 million in 2002. Retail gross profit increased by $7.3 million, to $12.1 million in 2003 from $4.8 million in the twelve months of 2002.

        Selling, General & Administrative Expenses ("SG&A")—SG&A expenses increased $13.6 million, or 49%, to $41.5 million in the twelve months of 2003 from $27.9 million for the twelve months of 2002. SG&A as a percent of net sales increased to 37% for the twelve months from 21% for the same period in 2002. The dollar and the percentage increase in SG&A expenses was a result of an additional $5.2 million in operational expenses associated with the national sales force, $4.5 million in operational costs at Boyds Bear Country™—Gettysburg, and a $1.8 million charge for the change in our Chief Executive Officer.

        Income from operations—Income from operations declined $28.2 million, or 51%, to $27.0 million in 2003 from $55.2 million in 2002. Income from operations as a percentage of net sales declined to

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24% in 2003 from 42% in 2002. The dollar decline and the decline in the percentage of net sales were negatively impacted by the decline in sales volume, the additional inventory obsolescence charge, the charge for the change in our Chief Executive Officer and the operational costs of the national sales force and were positively impacted by the operations at Boyds Bear Country™—Gettysburg.

        Total interest expense—Total interest expense declined $1.5 million, or 21% to $5.5 million in the twelve months of 2003 from $7.0 million for the twelve months of 2002. The dollar decline was due to the reduction of debt of approximately $27.3 million from excess cash and a decline in interest rates.

        Income taxes—Income taxes decreased $6.2 million, or 37%, to $10.7 million in the twelve months of 2003 from $16.9 million for the twelve months of 2002. The provision was positively impacted in 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 and negatively impacted by the establishment of a valuation allowance for certain deferred state tax assets of approximately $5.0 million. In 2002, the provision was positively impacted by a non-operating tax benefit resulting from the combination of a change to the Pennsylvania tax law and a change to the Company's tax status.

Fiscal Year Ended December 31, 2002 vs Fiscal Year Ended December 31, 2001

        Net Sales—Net sales declined $22.2 million, or 14%, to $131.3 million in the full year 2002 from $153.5 million for full year 2001. Sales of Boyds' plush products declined $4.8 million, or 5%, resin product sales declined $8.4 million, or 19%, doll product sales declined $2.7 million, or 54%, village product sales declined $3.9 million, or 65%, and home décor product sales declined $1.6 million, or 21%. As a percentage of net sales for the full year, plush products represented 57%, resin products represented 26%, doll products represented 2%, village products represented 2% and home décor products represented 3%. The sales declines can be attributed to the slowing economy and the reluctance of our retailers to make forward looking purchases during these difficult times. These sales declines were only partially offset by the impact of our new direct sales force and the opening of our retail store, Boyds Bear Country™.

        Gross profit—Gross profit declined $7.3 million, or 8%, to $83.1 million in the full year 2002 from $90.4 million for the full year 2001. Gross profit as a percentage of net sales increased to 63% for the full year from 59% for the same period in 2001. The dollar decline was primarily attributable to the decline in sales volume. The percentage increase was attributable to the opening of Boyds Bear Country and the inventory obsolescence charge in 2002 being $6.9 million less than in 2001 as a result of Boyds adjusting its purchasing strategy to align with the economic conditions affecting its customers.

        Selling, General & Administrative Expenses (SG&A)—SG&A decreased $0.6 million, to $27.9 million in the full year 2002 from $28.5 million for the full year 2001. SG&A as a percent of net sales increased to 21% for the full year from 19% for the same period in 2001. The increase in SG&A expenses was a result of the startup costs of the new sales force and Boyds Bear Country™.

        Income from operations—Income from operations declined $6.7 million, or 11%, to $55.2 million in the full year 2002 from $61.9 million for the full year 2001. Income from operations as a percentage of net sales increased to 42% for the full year from 40% for the same period in 2001. The dollar decline was attributable to the decline in sales volume. The increase in the percentage of net sales can be attributed to the opening of Boyds Bear Country™ and the inventory obsolescence charge in 2002 being $6.9 million less than in 2001 as a result of Boyds adjusting its purchasing strategy to align with the economic conditions affecting its customers.

        Total interest expense—Total interest expense declined $6.6 million, or 49% to $7.0 million in the full year 2002 from $13.6 million for the full year 2001. 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.

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        Income taxes—Income taxes increased $5.8 million, or 52%, to $17.0 million in the full year of 2002 from $11.2 million for the full year 2001. The dollar and the percentage increase were due to the impact of a change in the 2001 Pennsylvania State Corporation Income Tax regulations, which resulted in an increase to the deferred tax asset and a reduction in income tax expense.

Liquidity and Capital Resources

        Commitments to purchase products for resale are not included in the preceding table. Boyds had letters of credit outstanding with vendors for orders placed at December 31, 2003 in the amount of $3.1 million.

        Boyds' primary sources of liquidity are cash flow from operations and borrowings under its credit agreement, which includes a revolving credit facility. For the full year cash provided by operations was approximately $31.3 million. This cash was largely used for repayment of debt totaling $27.3 million and purchases of property and equipment totaling $5.0 million, including $2.7 million for the purchase of land for our second store in Pigeon Forge, Tennessee.

Operating Activities

        Cash provided by operating activities decreased $22.9 million, or 42.2%, to $31.3 million in 2003 from $54.2 million in 2002. The cash flow decrease was primarily attributable to the decrease in revenues.

Investing Activities

        Capital and investment expenditures totaled $5.0 million in 2003. Boyds is currently constructing another store that is expected to be placed into service during December of 2004. During 2003, Boyds incurred approximately $3.8 million in capital expenditures related to Boyds Bear Country™—Pigeon Forge, with an additional $13.5 million expected during 2004. Other than the store, Boyds does not expect to incur significant capital expenditures for the foreseeable future, due to its sourcing arrangements with suppliers.

Financing Activities

        In connection with the re-capitalization 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 of up to $40.0 million. As of December 31, 2003, Boyds has paid down $130.6 million since the inception of the Notes, leaving $34.4 million outstanding. At December 31, 2003, Boyds has repaid $283.0 million of the term loans under the credit agreement, leaving a balance outstanding of $42.0 million.

        Boyds had no outstanding balance on the revolving credit facility at December 31, 2003. Thus, the unused balance available under the revolving credit facility will be available to fund the working capital requirements of Boyds. Borrowings under the credit agreement bear interest at a rate per annum, equal

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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. Boyds is in compliance with all applicable covenants as of December 31, 2003. The tranche A term loans 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. As of December 31, 2000, the tranche B term loan had been fully repaid.

        On February 17, 2000, Boyds announced that its Board of Directors had approved the repurchase of 3.0 million shares of Boyds' common stock. As of December 31, 2003, Boyds had repurchased 344,730 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.

        On July 27, 2000, Boyds announced that its Board of Directors had approved a repurchase program for its outstanding 9% Series B Senior Subordinated Notes due 2008. As of December 31, 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 and the revolving credit facility. Any future repurchases under this program are expected to be financed similarly. Boyds may 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. The Company has begun the process of replacing its existing debt structure. A new debt structure should be in place by the end of 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 that 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

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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 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.

        In the event that the Company does not replace its existing debt structure and the negative sales trends that the Company experienced in 2003 continue, along with the Company continuing its retail store expansion, the Company may have difficulty making its required debt payment in 2005. The

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Company does not foresee any cash issues at this point for 2004 and believes that it will successfully replace its existing debt structure.

Recently Issued Accounting Standards

        In November 2002, the Financial Accounting Standards Board ("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, 2002. 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. The Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Interpretation applies immediately to variable interest entities created after January 31, 2003, or in which the Company obtains an interest after that date. The interpretation is effective July 1, 2003 to variable interest entities in which the Company has assessed the impact of adopting this Interpretation. The Company has determined that it is not required to consolidate or disclose information about a variable interest entity.

        In July 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, which was effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also required the Company to complete a transitional goodwill impairment test six months from the date of adoption. The result of this impairment test identified that as of January 1, 2003 there were no impairments of goodwill or intangible assets to be recorded. Boyds will continue to conduct impairment tests annually in the first quarter of each fiscal year or sooner if circumstances require. As of January 1, 2002, Boyds discontinued the amortization of all goodwill. Amortization for the twelve months ended December 31, 2001 was $136,000.

        In April 2002, the FASB issued SFAS No. 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 No. 145 requires, among other things, eliminating the extraordinary item treatment of debt extinguishments used as part of the Boyds' debt management strategy requiring the reclassification of 1999, 2000 and 2001 extraordinary items to interest expense in 2003.

        In June 2002, the FASB issued SFAS No. 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 is required at the beginning of fiscal year 2003. The Company has adopted the provisions of this statement in the first quarter of 2003, which were incorporated in the consolidated financial statements.

        In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123 which amends SFAS No. 123, Accounting for Stock-Based Compensation and the reporting provisions of APB No. 30, "Interim

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Financial Reporting." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Boyds adopted the disclosure provision of this standard on December 31, 2002 and has determined that the adoption did not have any impact on the financial position, results of operations or cash flows of Boyds.

        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.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Boyds faces minimal interest rate risk exposure in relation to its outstanding debt of $76.4 million at December 31, 2003. Of this amount, $42.0 million 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 Boyds.

        Boyds faces currency risk exposure that arises from translating the results of its European operations to the U.S. dollar. The currency risk exposure is not material as the European subsidiary operations do not have a material impact on Boyds' earnings.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Schedule

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INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
The Boyds Collection, Ltd. and Subsidiaries
McSherrystown, Pennsylvania

        We have audited the accompanying consolidated balance sheets of The Boyds Collection, Ltd. and Subsidiaries (the "Company") as of December 31, 2002 and 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company, at December 31, 2002 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

DELOITTE & TOUCHE LLP

Baltimore, Maryland
March 23, 2004

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THE BOYDS COLLECTION, LTD.

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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THE BOYDS COLLECTION, LTD.

CONSOLIDATED STATEMENTS OF INCOME

See notes to consolidated financial statements.

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THE BOYDS COLLECTION, LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

See notes to consolidated financial statements.

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THE BOYDS COLLECTION, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements.

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THE BOYDS COLLECTION, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2001, 2002 and 2003

1.     GENERAL

        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. 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.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Principles of Consolidation—The accompanying consolidated financial statements include the accounts of Boyds and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

        Revenue Recognition—Sales revenue, net of returns and discounts, is recognized upon shipment of the items, when title passes to the customer or completion of a retail transaction.

        Cash and Cash Equivalents—Boyds considers all short-term interest-bearing investments with original maturities of three months or less to be cash equivalents.

        Inventories—Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out method of accounting. Inventory in-transit consists of purchases from foreign suppliers for which title has passed to Boyds.

        Property and Equipment—Property and equipment is stated at cost. For assets acquired prior to January 1, 1999 depreciation is computed using the declining balance method over the estimated useful lives of the various assets. Beginning January 1, 1999, all new assets purchased are depreciated using the straight line method over the estimated useful lives. The estimated useful lives of furniture and fixtures range from five to seven years and the estimated useful lives of equipment range from three to seven years. The estimated useful life of leasehold improvements is the lesser of the estimated life of the improvement or the term of the lease.

        Software Development Costs—During 1999, Boyds adopted the AICPA's Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". Accordingly, certain computer software project costs incurred during the application development stage have been capitalized and are being amortized on a straight line basis over a period of three years. Such costs include external direct costs of materials and services consumed in developing internal-use software and payroll costs for employees who are directly associated with the internal-use computer software project, and are included in property and equipment on the consolidated balance sheet.

        Goodwill—Goodwill represents the cost in excess of the fair value of net assets acquired. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", which was effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The result of this impairment test identified that as of January 1, 2003 there were no

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impairments of goodwill or intangible assets to be recorded. Boyds will continue to conduct impairment tests annually in the first quarter of each fiscal year or sooner if circumstances require. As of January 1, 2002, Boyds discontinued the amortization of all goodwill. Amortization for the twelve months ended December 31, 2001 was $127,000.

        Deferred Debt Issuance Costs—Boyds amortizes deferred debt issuance costs using the interest method over the life of the debt. Amortization of deferred debt issuance costs as a result of the prepayment of the related debt is accelerated to the date of the prepayment and is included as an extraordinary item in the consolidated statements of income.

        Impairment Accounting—Boyds reviews the recoverability of its long-lived and intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the assets may not be recoverable. The measurement of possible impairment is based on Boyds' ability to recover the carrying value of the asset from the expected future undiscounted cash flows generated. The measurement of impairment requires management to use estimates of expected future cash flows. If an impairment loss existed, the amount of the loss would be recorded in the consolidated statements of income. It is possible that future events or circumstances could cause these estimates to change.

        In the first quarter of 2002, Boyds reduced capitalized software costs to its net realizable value through an impairment charge totaling $0.3 million, recorded in selling, general and administrative expenses on the consolidated statement of income. During the fourth quarter of 2001, Boyds reduced capitalized software costs to its net realizable value through an impairment charge totaling $2.1 million, recorded in selling, general and administrative expenses on the consolidated statement of income. The software costs were associated with a sales interface system that was expected to improve sales force efficiency and effectiveness.

        Fair Value of Financial Instruments—Management considers that the carrying amount of financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, approximates fair value. Interest on long-term bank debt is payable at variable rates which approximates fair market value. The fair value of the 9% senior subordinated notes (the notes), face value of $34.4 million, was $34.2 million at December 31, 2003.

        Foreign Currency Translation—Assets and liabilities of Boyds' foreign subsidiaries are translated at year-end exchange rates while revenue and expenses are translated at weighted average rates prevailing during the year. Foreign currency translation adjustments are reported as a separate component of other comprehensive income in the consolidated statement of stockholders' equity.

        Income Taxes—Boyds accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to accounting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Income taxes/benefit is the tax payable/receivable for the period plus or minus the change during the period in deferred income tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized.

        Stock-Based Compensation—At December 31, 2003, Boyds has various stock-based employee compensation plans, which are described more fully in Note 13. 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

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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.

        Segment Reporting—SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information requires enterprises to report certain information about products and services, activities in different geographic areas and reliance on major customers and to disclose certain segment information in their financial statements. The basis for determining an enterprise's operating segments is the manner in which financial information is used internally by the enterprise's chief operating decision maker. The Company operates in two segments that 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 during 2003, 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 retail segment of the Company's operations began in September of 2002, and thus no segment reporting is necessary for 2001.

        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. Boyds operates in two segments that 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. This retail store is being used to generate income and expand the brand awareness and image of Boyds. Another store is being built in Pigeon Forge, Tennessee and is scheduled to open in the fall of 2004. In addition, less than 3% of total revenue is derived from customers outside the United States and substantially all

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long-lived assets are located in the United States. No customer represents more than 10% of total revenue.