U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period endedMarch 31, 2002.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from_______________to_______________.
Commission file number1-12580.
THE VERMONT TEDDY BEAR CO., INC.
(Exact name of small business issuer as specified in its charter)
New York 03-0291679
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6655 Shelburne Road, Post Office Box 965
Shelburne, Vermont 05482
(Address of principal executive offices)
(802) 985-3001
(Issuer's telephone number)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesX; No .
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: 6,865,921 shares of Common Stock, $.05 par value per share, as of May 13, 2002.
The Vermont Teddy Bear Co., Inc.
Index to Form 10Q
March 31, 2002
| Page No. |
Part I - Financial Information |
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Item 1. Consolidated Financial Statements |
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Consolidated Balance Sheet as of March 31, 2002 | 3 |
Consolidated Statements of Income for the Three and Nine Months ended March 31, 2002 | 4 |
Consolidated Statements of Cash Flows for the Three and Nine Months ended March 31, 2002 | 5 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 |
Item 3. Quantitative and Qualitative Disclosure About Market Risk | 15 |
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Part II - Other Information |
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Item 1. Legal Proceedings | 15 |
Item 2. Charges in Securities and Use of Proceeds | 15 |
Item 3. Default upon Senior Securities | 15 |
Item 4. Submission of Matters to a Vote of Stockholders | 15 |
Item 5. Other Information | 15 |
Item 6. Exhibits and Reports on Form 8-K | 16 |
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Signatures | 17 |
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE VERMONT TEDDY BEAR CO., INC AND SUBSIDIARY
Consolidated Balance Sheet
| March 31, 2002 |
| June 30, 2001 |
| (Unaudited) |
| (Audited) |
ASSETS |
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Cash and cash equivalents (includes restricted cash of $586,000 and $579,000 respectively) | $ 12,535,678 |
| $ 9,523,652 |
Accounts receivable, trade | 19,808 |
| 121,424 |
Inventories | 4,710,199 |
| 5,571,189 |
Prepaid expenses and other current assets | 491,222 |
| 193,015 |
Deferred income taxes | 273,068 |
| 273,068 |
Total Current Assets | 18,029,975 |
| 15,682,348 |
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Property and equipment, net | 8,182,935 |
| 8,307,975 |
Deposits and other assets | 916,908 |
| 927,377 |
Note receivable | 36,267 | 44,086 | |
Total Assets | $ 27,166,085 |
| $ 24,961,786 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current portion of capital lease obligations | 152,039 |
| 140,626 |
Accounts payable | 3,589,094 |
| 3,120,926 |
Accrued expenses | 1,257,370 |
| 1,204,694 |
Income taxes payable | 973,497 |
| 268,558 |
Total Current Liabilities | 5,972,000 |
| 4,734,804 |
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Capital lease obligations, net of current portion | 5,154,095 |
| 5,269,594 |
Deferred income taxes | 40,796 |
| 40,796 |
Total Liabilities | $ 11,166,891 |
| $ 10,045,194 |
Commitments and Contingencies |
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Series C convertible redeemable preferred stock Authorized 110 shares; 69 shares issued and outstanding, $690,000 liquidation value. |
603,732 |
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562,863 |
Stockholders' Equity: |
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Preferred stock, $.05 par value: Authorized 1,000,000 shares Series A; issued and outstanding, 90 shares. |
1,314,000 |
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1,260,000 |
Common stock, $.05 par value: Authorized 20,000,000 shares; issued and outstanding 6,864,171 shares at March 31, 2002, and issued and outstanding 6,854,246 shares at June 30, 2001. |
343,209 |
342,712 | |
Additional paid-in capital | 11,676,794 |
| 11,939,720 |
Treasury stock at cost: 23,020 shares | (117,500) |
| (117,500) |
Retained earnings | 2,178,959 |
| 928,797 |
Total Stockholders' Equity | $ 15,395,462 |
| $ 14,353,729 |
Total Liabilities and Stockholders' Equity | $ 27,166,085 |
| $ 24,961,786 |
The accompanying notes are an integral part of these consolidated financial statements.
THE VERMONT TEDDY BEAR CO., INC. AND SUBSIDIARY
Consolidated Statements of Income
For the Three and Nine Months Ended March 31, 2002 and 2001
(Unaudited)
Three Months Ended Nine Months Ended
2002 | 2001 | 2002 | 2001 | ||||
Net Revenues | $14,522,438 |
| $14,241,228 |
| $27,836,123 |
| $27,094,197 |
Cost of Goods Sold | 4,896,181 |
| 4,716,775 |
| 10,107,905 |
| 9,667,697 |
Gross Profit | 9,626,257 |
| 9,524,453 |
| 17,728,218 |
| 17,426,500 |
Operating Expenses: |
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Selling Expenses | 5,597,071 |
| 5,312,773 |
| 11,139,970 |
| 10,514,467 |
General and Administrative Expenses | 1,360,306 |
| 1,479,203 |
| 3,462,362 |
| 3,553,636 |
6,957,377 |
| 6,791,976 |
| 14,602,332 |
| 14,068,103 | |
Operating Income | 2,668,880 |
| 2,732,477 |
| 3,125,886 |
| 3,358,397 |
Interest Income | 60,325 |
| 101,152 |
| 177,715 |
| 236,658 |
Interest Expense | (140,050) |
| (143,694) |
| (423,029) |
| (431,912) |
Other Income | 7,500 |
| 0 |
| 16,878 |
| 103,458 |
Income Before Income Taxes | 2,596,655 |
| 2,689,935 |
| 2,897,450 |
| 3,266,601 |
Income Tax Provision | (908,829) |
| (1,049,491) |
| (1,029,245) |
| (1,251,324) |
Net Income | 1,687,826 |
| 1,640,444 |
| 1,868,205 |
| 2,015,277 |
Series A Preferred Stock Dividends | (18,000) |
| (18,000) |
| (54,000) |
| (54,000) |
Series C Preferred Stock Dividends | (8,877) |
| (9,000) |
| (27,026) |
| (27,000) |
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Accretion of Original Issue Discount in connection with Series C preferred stock warrants | (13,623) |
| (13,623) |
| (40,869) |
| (40,869) |
Net Income - Common Stockholders | 1,647,326 |
| 1,599,821 |
| 1,746,310 |
| 1,893,408 |
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Basic Net Income Per Common Share | $0.24 |
| $0.24 |
| $0.26 |
| $0.28 |
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Diluted Net Income Per Common Share | $0.20 | $0.19 | $0.21 | $0.22 | |||
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Weighted Average Number of Common Shares Outstanding | 6,839,448 |
| 6,794,253 |
| 6,836,738 |
| 6,771,199 |
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Weighted Average Number of Diluted Common Shares Outstanding | 8,368,769 | 8,684,283 | 8,283,211 | 8,668,658 |
The accompanying notes are an integral part of these consolidated financial statements.
THE VERMONT TEDDY BEAR CO., INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 2002 and 2001
(Unaudited)
| 2002 |
| 2001 |
Cash flows from operating activities |
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Net Income | $1,868,205 |
| $2,015,277 |
Adjustments to reconcile net income to net cash Provided by(used for) operating activities: |
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Depreciation and amortization | 657,593 |
| 608,967 |
(Gain) Loss on disposal of fixed assets | (86) |
| 17,451 |
Changes in assets and liabilities: |
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Accounts receivable, trade | 101,616 |
| 81,528 |
Inventories | 860,990 |
| (2,197,398) |
Prepaid and other current assets | (298,207) |
| 264,244 |
Deposits and other assets | (28,422) |
| (772,134) |
Accounts payable | 468,168 |
| 1,058,375 |
Accrued expenses and other liabilities | 52,676 |
| 848 |
Income taxes payable | 704,939 |
| 1,043,133 |
Net cash provided by operating activities | 4,387,472 |
| 2,120,291 |
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Cash flows from investing activities: |
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Purchases of property and equipment | (495,916) |
| (869,494) |
Proceeds from sale of property and equipment | 2,340 |
| 127,541 |
Decrease of Note Receivable | 7,819 |
| 22,500 |
Net cash used for investing activities | (485,757) |
| (719,453) |
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Cash flows from financing activities: |
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Principal payments on capital lease obligations | (104,087) |
| (98,792) |
Issuance of common stock, exercise of stock options Warrant repurchase | 10,019 (768,595) |
| 96,470 - |
Payment of preferred stock dividends | (27,026) | - | |
Net cash used in financing activities | (889,689) |
| (2,322) |
Net increase in cash and cash equivalents for the period | 3,012,026 |
| 1,398,516 |
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Cash and cash equivalents, beginning of period | 9,523,652 |
| 8,737,397 |
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Cash and cash equivalents, end of period | $12,535,678 |
| $10,135,913 |
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Supplemental Disclosures of Cash Flow Information: |
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Cash paid for interest | 423,029 |
| 431,912 |
Cash paid for income taxes | 324,306 |
| 206,658 |
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Supplemental Disclosures of Non-cash Investing and Financing Activities: |
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Series C preferred stock dividends | - |
| 27,000 |
Accretion of original issue discount in connection with Series C preferred stock | 40,869 |
| 40,869 |
The accompanying notes are an integral part of these consolidated financial statements.
THE VERMONT TEDDY BEAR CO., INC. AND SUBSIDAIRY
NOTES TO FINANCIAL STATEMENTS
Basis of Presentation
The interim financial statements of The Vermont Teddy Bear Co., Inc. (the "Company") included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments necessary to present fairly the financial condition and results of operations for such interim periods. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended June 30, 2001, included in the Company's filing with the SEC on Form 10-KSB. The Company's sales are seasonal in nature and, therefore, the results for these interim periods are not necessarily indicative of the results for the respe ctive years.
Basis of Consolidation
The consolidated financial statements include the accounts of The Vermont Teddy Bear Co., Inc. and it's wholly owned subsidiary, SendAMERICA, Inc. All material inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings Per Share
In accordance with SFAS No. 128,Earnings Per Share, basic and diluted net income per common share is calculated by dividing net income by the weighted number of common shares outstanding for all periods presented. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock.
The following table reconciles the weighted average common shares outstanding to the shares used in the computation of basic and diluted common shares outstanding:
Three Months Ended Nine Months Ended
| 03/31/02 |
| 03/31/01 |
| 03/31/02
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| 03/31/01 |
Weighted average number of shares used in basic EPS calculation | 6,839,448 |
| 6,794,253 |
| 6,836,738 |
| 6,771,199 |
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Add: Common Shares Issuable Upon Exercise of: |
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Stock Options | 1,333,233 |
| 1,359,802 |
| 1,229,584 |
| 1,384,246 |
Warrants | 193,111 |
| 738,109 |
| 193,111 |
| 738,109 |
Convertible Preferred Stock | 657,087 |
| 654,230 |
| 657,087 |
| 654,230 |
Total Common Shares Issuable | 2,183,431 |
| 2,752,141 |
| 2,079,782 |
| 2,776,585 |
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Less: Shares assumed to be repurchased under treasury Stock method |
(654,110) |
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(862,111) |
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(633,309) |
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(879,126) |
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Weighted average number of shares used in diluted EPS calculation | 8,368,769 |
| 8,684,283 |
| 8,283,211 |
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8,668,658 |
Diluted weighted average shares outstanding for the three and nine months ended March 31, 2002 exclude 56,000 potential shares from because the price of the options was greater than the average market price of the common stock those periods respectively. Diluted weighted average shares outstanding for the three months and nine months ended March 31, 2002 exclude 149,167potential common shares because the price of the options was greater than the average market price of the common stock for that period.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations, and No. 142, Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The adoption of SFAS Nos. 141 and 142 will not have a material effect on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for the fiscal years beginning after June 15, 2002. The Company believes the adoption of SFAS No. 143 will not have a material impact on its results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144,"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Under this statement it is required that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently evaluating t he impact of this statement on its results of operations or financial position upon the adoption of SFAS No. 144.
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components. The comprehensive income is the same as net income for each period presented.
Income Taxes
The Company accounts for income taxes in accordance with the Statement of Financial Accounting Standards (SFAS) No. 109,Accounting for Income Taxes, which requires the use of the liability method. This standard determines deferred income taxes based on the estimated future tax effects of any differences between the financial statement and the tax basis of assets and liabilities, given the provisions of the enacted tax laws. The company records a provision for income taxes in interim periods at the expected effective tax rate for the year.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out method. Inventories consisted of the following:
| March 31, 2002 |
| June 30, 2001 |
Raw materials | $ 460,392 |
| 670,262 |
Work in process | 397,456 |
| 325,459 |
Finished goods | 3,852,351 |
| 4,575,468 |
| $ 4,710,199 |
| $ 5,571,189 |
Debt and Borrowings
On July 18, 1997, the Company completed a sale-leaseback transaction involving its factory headquarters and a portion of its property located in Shelburne, Vermont. The Company entered into the sale-leaseback to pay off a maturing mortgage, pay down a line of credit, and improve its liquidity. This financing replaced the Company's mortgage and line of credit agreement with the Vermont National Bank. The Company received approximately $5.9 million in cash, of which approximately $3.3 million was used to pay off the existing mortgage with the Vermont National Bank (now the Chittenden Bank). The balance, approximately $2.6 million, was used for general working capital purposes, to pay down a $600,000 balance on the Company's line of credit (which was retired as the result of the termination of the original mortgage loan), and for associated transaction costs of $679,000 which have been capitalized and recorded as a component of other assets as of March 31, 2002. The lease obligation, secured by the business assets of the Company, is payable on a twenty-year amortization schedule through July 2017 with three additional five year renewal options. The transaction was accounted for as a sale with a leaseback.
Segment Information
Operating segments represent components of the Company's business that are evaluated regularly by key management in assessing performance and resource allocation. The Company has determined that its reportable segments consist of Bear-Gram Gift Delivery Service, Retail Operations, Corporate/Wholesale (including licensing), and SendAMERICA.
The Bear-Gram delivery service involves sending personalized teddy bears directly to recipients for special occasions such as birthdays, anniversaries, weddings, and new births, as well as holidays such as Valentine's Day, Christmas, and Mother's Day. Bear-Gram orders are placed through the toll free number, on-line, or through the catalog.
The Retail operation segment involves one retail store offering factory tours at the Company's headquarters in Shelburne, Vermont. In an effort to make a visit to the factory more entertaining and draw additional traffic, the Company has implemented the Make-A-Friend-For-Life bear assembly area, where visitors can participate in the creation of their own teddy bear. The company plans to open a new retail store in Waterbury, Vermont in June of 2002. The Corporate/Wholesale segment was begun during the Company's fiscal year 1998. The Company is pro-actively developing opportunities in the corporate affinity market and certain wholesale markets as a business segment.
SendAMERICA, Inc., a new wholly owned subsidiary, is a new business segment begun in fiscal 2001 for the purposes of extending the Company's product offerings in the gift delivery service industry to include other American made gift products in addition to teddy bears.
The reporting segments follow the same accounting policies used for the Company's consolidated financial statements as described in the summary of significant accounting policies. Management evaluates a segment's performance based upon gross margin and gross margin percentage.
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THREE MONTHS ENDED 03/31/02 | Bear-Gram Service | Retail Operations | Corporate/ Wholesale | SendAMERICA |
Net Revenues | $ 13,918,500 | $ 419,985 | $ 112,109 | $ 71,844 |
Cost of Goods Sold | 4,640,536 | 157,357 | 51,510 | 46,778 |
Gross Margin | $ 9,277,964 | $ 262,628 | $ 60,599 | $ 25,066 |
Gross Margin % | 66.7% | 62.5% | 54.1% | 34.9% |
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NINE MONTHS ENDED 03/31/02 | Bear-Gram Service | Retail Operations | Corporate/ Wholesale | SendAMERICA |
Net Revenues | $ 24,464,106 | $ 2,598,608 | $ 519,722 | $ 253,687 |
Cost of Goods Sold | 8,760,056 | 915,444 | 273,731 | 158,674 |
Gross Margin | $ 15,704,050 | $ 1,683,164 | $ 245,991 | $ 95,013 |
Gross Margin % | 64.2% | 64.8% | 47.3% | 37.5% |
THREE MONTHS ENDED 03/31/01 | Bear-Gram Service | Retail Operations | Corporate/ Wholesale | SendAMERICA |
Net Revenues | $ 13,805,726 | $ 340,769 | $ 75,857 | $ 18,876 |
Cost of Goods Sold | 4,543,141 | 122,972 | 36,292 | 14,370 |
Gross Margin | $ 9,262,585 | $ 217,797 | $ 39,565 | $ 4,506 |
Gross Margin % | 67.1% | 63.9% | 52.2% | 23.9% |
NINE MONTHS ENDED 03/31/01 | Bear-Gram Service | Retail Operations | Corporate/ Wholesale | SendAMERICA |
Net Revenues | $ 24,386,494 | $ 2,454,042 | $ 222,957 | $ 30,704 |
Cost of Goods Sold | 8,578,498 | 939,045 | 106,770 | 43,384 |
Gross Margin | $ 15,807,996 | $ 1,514,997 | $ 116,187 | ($ 12,680) |
Gross Margin % | 64.8% | 61.7% | 52.1% | - |
The Company believes that there is no discernable basis to identify assets by segment.
Revenues from individual customers, revenues between business segments, and revenues, operating profit and identifiable assets of foreign operations are not significant.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the financial statements and footnotes which appear elsewhere in this report, as well as the 10-KSB filing for the fiscal year ending June 30, 2001. This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934. The words "believe," "expect," "anticipate," "intend," "estimate," and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Such statements involve risks and uncertainties that could cause actual results to differ materially from those set for th in such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Results of Operations
Comparison of the three-month periods ended March 31, 2002 and 2001.
Net revenues for the three month period ended March 31, 2002 totaled
$ 14,522,000 a 2.0 percent increase from net revenues of $ 14,241,000 for the three-month period ended March 31, 2001. By business segment, Bear-Gram gift delivery service revenues, which include radio, Internet, and direct mail revenues, increased
$ 13,000. Retail revenues at the Company's Shelburne, Vermont factory retail location increased $79,000. Net revenues from the Corporate/Wholesale segment increased
$ 6,000. Net revenues from SendAMERICA, Inc. a wholly owned subsidiary, increased $53,000, as SendAMERICA launched its first Valentine's Day catalog, for the three month period ended March 31, 2002.
Gross margin increased to $9,626,000 for the three months ended March 31, 2002, from $9,524,000 for the three months ended March 31, 2001. As a percentage of net revenues, gross margin decreased to 66.3 percent from 66.9 percent for the three-month periods ended March 31, 2002, and 2001, respectively. The gross margin percent for the three month period ended March 31, 2002 decreased primarily in the Bear-Gram segment due to increased revenues from our loyalty marketing programs which traditionally have lower margins due to discount offerings.
Selling expenses increased to $5,597,000 for the three-month period ended March 31, 2002, from $5,313,000 for the three-month period ended March 31, 2001. Selling expenses as a percentage of revenues increased to 38.5 percent from 37.3 percent for the three months ended March 31, 2002 and 2001, respectively. This $284,000 increase which was primarily attributable to increases in Bear-Gram advertising costs of $230,000, which include radio, catalog, Internet, and print costs, was offset by decreases to call center and customer service costs of $17,000. Corporate/Wholesale expenses increased $23,000, and Retail expenses increased $10,000. Merchandising costs associated with the Company's new wholly owned subsidiary SendAMERICA, increased $ 38,000.
General and administrative expenses decreased to $1,360,000 for the quarter ended March 31, 2002, compared to $1,479,000 for the quarter ended March 31, 2001 primarily due to decreases in salary expenses. General and administrative expenses as a percentage of net revenues decreased to 9.4 percent from 10.4 for three month periods ended March 31, 2002 and 2001, respectively.
The company has recorded an income tax provision of $909,000 for the quarter ended March 31, 2002 based on the expected effective tax rate of 35% for fiscal year 2002. This compares to a $1,049,000 provision recorded for the quarter ended March 31, 2001 which was based on the expected effective tax rate for fiscal year 2001 of 39%.
As a result of the foregoing factors, net income to common stockholders totaled
$1,647,000, for the quarter ended March 31, 2002, compared to a net income to common stockholders of $1,600,000, for the quarter ended March 31, 2001.
Comparison of the nine-month periods ended March 31, 2002 and 2001.
Net revenues for the nine month period ended March 31, 2002 totaled $27,836,000, a 2.7 percent increase from net revenues of $27,094,000 for the nine month period ended March 31, 2001. By business segment, Bear-Gram gift delivery service revenues, which include radio, Internet, and direct mail revenues, increased $78,000. Increases attributable to the expansion of the Company's direct response radio advertising campaign into new markets around the country, increased sales from the Company's vermontteddybear.com web-site, including sales from new loyalty marketing and internet affiliate marketing initiatives were temporarily impacted by the events of September 11, 2001. Retail revenues increased $145,000. Net revenues from the Corporate/Wholesale segment increased $297,000. Net revenues from SendAMERICA, Inc. a wholly owned subsidiary, increased $ 223,000, as SendAMERICA launched their first holiday and Valentine's Day catalogs.
Gross margin increased to $17,728,000 for the nine months ended March 31, 2002, from $17,427,000 for the nine months ended March 31, 2001. As a percentage of net revenues, gross margin decreased to 63.7 percent from 64.3 percent for the nine month periods ended March 31, 2002, and 2001, respectively. The gross margin percent increased in the Retail segment as the factory store realized higher unit margins and increased sales of its Make-A-Friend-For-Life teddy bears where visitors can participate in the creation of their own teddy bear. This increase in gross margin percent was more than offset by decreases in both the Bear-Gram and Corporate/Wholesale segment margins during the nine month period ended March 31, 2002. The gross margin percent in the Bear-Gram segment decreased primarily
due to increased revenues from our Loyalty marketing programs which traditionally have lower margins due to discount offerings and higher fixed costs associated with the company's new high volume distribution facility required to meet the demands of the Valentine's Day and Mother's Day peak selling seasons, which was not in operation during the entire nine months ended March 31, 2001
Selling expenses increased to $11,140,000 for the nine month period ended March 31, 2002, from $10,514,000 for the nine month period ended March 31, 2001. This $626,000 increase was primarily due to increases in merchandising costs associated with the Company's wholly owned subsidiary SendAMERICA, Inc. of $279,000. Increases in Bear-Gram advertising costs, which include radio, catalog, Internet and print costs, of $376,000, were offset by decreases in call center and customer service costs of $40,000. Corporate/Wholesale increased $40,000, and Retail expenses decreased by $29,000. The selling expenses as a percentage of revenues rose to 40.0 percent from 38.8 percent for the nine months ended March 31, 2002 and 2001, respectively.
General and administrative expenses decreased to $3,462,000 for the nine months ended March 31, 2002, compared to $3,554,000 for the nine months March 31, 2001 primarily due to decreases in salary expenses. General and administrative expenses as a percentage of net revenues decreased to 12.4 percent from 13.1 percent for nine month periods ended March 31, 2002 and 2001, respectively.
Other income decreased $100,000 due to the Company recognizing a gain of $100,000 as other income in the nine months ended March 31, 2001, when a cash settlement was received from Tyco in September of 2000.
The Company recorded an income tax provision of $1,029,000 for the nine months ended March 31, 2002 based on the expected effective tax rate of 36% for fiscal year 2002. This compares to a $1,251,000 provision recorded for the nine months ended March 31, 2001 which was based on the expected effective tax rate for fiscal year 2001 of 38%.
As a result of the foregoing factors, net income to common stockholders totaled $1,746,000 for the nine months ended March 31, 2002, compared to a net income to common stockholders of $1,893,000 for the nine months ended March 31, 2001.
Liquidity and Capital Resources
As of March 31, 2002, the Company's cash position increased to $12,536,000, from $9,524,000 at June 30, 2001. Restricted cash balances at these dates were $586,000 and $579,000, respectively. The largest component of restricted cash at March 31, 2002 and June 30, 2001 was a $302,000 certificate of deposit required in connection with the Company's sale-leaseback transaction on July 18, 1997. An additional $200,000 certificate of deposit was required for collateral substitution under the Company's lease obligation to URSA (VT) QRS-30, Inc. upon sale of property. Cash increases provided by operating income, decreases in inventory, and increases in accounts payable were partially offset by cash used for the warrant repurchase agreement.
On November 3, 1998, the Company closed on a private placement of $600,000 of its Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock") to an investor group lead by TSG Equity Partners (formerly The Shepherd Group LLC). Accompanying the Series C Preferred Stock were Warrants to purchase 495,868 shares of the Company's Common Stock at an exercise price of $1.05 per share, which will expire seven years from the date of issuance (the "Warrants"). Also, the Company issued additional warrants to purchase 42,500 shares of the Company's Common Stock at an exercise price of $1.05 to the Company's lessor in the sale-leaseback transaction. Because of the mandatory redemption provision, the Series C Preferred Stock net of the value of the Warrants has been classified as long term debt in the accompanying balance sheet. The Company has valued the Warrants using the Black Scholes valuation model. The value of $272,449 was applied as a discount to the face value of the Series C Preferred Stock on the Company's balance sheet. The Company will accrete this discount, with charges to retained earnings over a five year period.
The following table shows the shares and dollar amounts of changes to the Series C Preferred Stock account:
| Shares |
| Amount |
Balance Series C, Preferred Stock as of June 30, 2001 | 69 |
| $562,863 |
|
|
|
|
Add: Accretion of Discount Related to Warrant Issuance | - |
| 40,869 |
|
|
|
|
Balance Series C, Preferred Stock as of March 31, 2002 | 69 | $603,732 |
Each of the shares of Series C Preferred Stock has a liquidation value of $10,000 per share, and is convertible into 9,523 shares of the Company's Common Stock. The Series C Preferred Stock requires redemption upon the tenth anniversary of its issuance, with both the Company and the Series C Preferred stockholders having call and put rights, respectively, beginning on the fifth anniversary of issuance. The Series C Preferred stock carries voting rights on an as-converted basis, and, as a class, has the right to elect two members to the Company's Board of Directors. Both the Series C Preferred Stock and the accompanying Warrants carry certain anti-dilution provisions. The Series C Preferred Stock has a cumulative preferred dividend of six percent per annum, payable quarterly. The dividends were required to be paid in additional shares of Series C Preferred Stock for the first two and one-half years after issuance. As of April 30, 2001, the Company was no longer required to pay the divid ends in stock and exercised its option to pay them in cash. For the nine months ended March 31, 2002 $27,026 was paid in cash dividends and for the nine months ended March 31, 2001 $27,000 of stock dividends were accrued.
On January 15, 2002, the Company executed a Warrant Repurchase Agreement with TSG Equity Partners to repurchase all of the outstanding Warrants issued in connection with the Series C Preferred Stock for a total purchase price of $768,595, representing a net cash amount of $1.55 for each share issuable on exercise of the Warrants, or $2.60 per share less the $1.05 exercise price of the Warrants. The transaction closed on January 15, 2002, and the warrants were terminated on that date. The transaction was recorded as an equity transaction in the quarter ending March 31, 2002. The original issue discount of $272,449 applied on issuance of the Warrants to the face value of the Series C Preferred Stock will continue to accrete through charges to retained earnings until October 2003.
The Company believes that its existing cash and cash equivalent balances, together with funds generated from operations, will be sufficient to finance the Company's operations for at least the next twelve months.
Commitments & Contingencies
On October 24, 1996, the company entered into a ten-year lease for 2,600 square feet on Madison Avenue in New York City. On December 7, 1997, the Company's 538 Madison Avenue location was closed due to structural problems at neighboring 540 Madison Avenue. On December 16, the Company announced that it was permanently closing that retail location. The City of New York deemed the 538 Madison Avenue building uninhabitable from December 8, 1997 to April 9, 1998, and the Company has not made any rent payments on the lease since December, 1997. On December 24, 1998, the Company received a notice from its landlord of 538 Madison Avenue alleging that it was in default under the lease for failure to resume occupancy, and demand for back rent for the period July 8, 1998 to December 31, 1998 in the amount of $144,355. Further on January 4, 1999 the Company received a demand to resume rent payments beginning January 1999. The Company disputed the landlord's position and believed it was not obligat ed to resume occupancy or pay rent under the lease. As a result, on May 25, 1999, the Company commenced action in the Supreme Court of the State of New York, County of New York against 538 Madison Realty Company. The action sought breach of contract damages and a declaration that the contract at issue, the former lease between the parties, has been terminated. The landlord moved to dismiss the action based on purported documentary evidence, the lease, itself. That motion was denied by order entered April 12, 2000. After having unsuccessfully attempted to resolve the disputes and after engaging in document discovery, the Company moved for summary judgement on its claims and dismissing the landlord's claims. That motion was granted by order dated July 25, 2001 and judgement was entered in favor of the Company and against the landlord in the amount of $211,146 on August 10, 2001. The landlord filed an appeal of that judgement and, as settlement discussions have been unsuccessful, has posted a bond to stay enfor cement of the judgement pending its appeal. The Company has accrued management's estimated cost of $220,000 to settle this contingency, but no assurance can be given that this dispute can be settled for this amount. In the event that no settlement is reached and the judgement is ultimately reversed on appeal and the Company is not successful in its suit against 538 Madison Realty Company, the remaining amount owed under the lease over its remaining term at face value is $2,825,000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in investment grade corporate and U.S. government securities, and secondarily, certain of its financing arrangements. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party in a suit against 538 Madison Realty Company pending in the Supreme Court of the state of New York, County of New York, seeking a declaration that a lease with 538 Madison Realty Company is terminated. A description of the background and current status of this action appears in Part I, Item 2 of this report under the heading Commitments and Contingencies.
From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business. The Company is not aware of any other legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, consolidated financial position, results of operations or liquidity.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Stockholders
No matter was submitted to a vote of security holders during the third quarter of the fiscal year covered by this report.
Item 5. Other Business
On March 19, 2002, the Company entered into a three year lease agreement with two three year renewal options for 2,000 square feet of retail space in Waterbury, Vermont. The annual amount due under the lease is $24,000 for the first year and increases two percent annually thereafter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Not applicable
(b) Reports on Form 8-K
Not applicable.
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Vermont Teddy Bear Co., Inc.
Date: May 14, 2002/s/ Elisabeth B. Robert,
Elisabeth B. Robert,
Chief Executive Officer and
Chief Financial Officer
