| |
|
"Gram |
Services" |
|
|
|
SIX MONTHS ENDED 12/31/03 |
Bear-Gram Service |
PajamaGram Service |
Calyx & Corolla Service |
TastyGram
Service |
Retail Operations |
Corporate/ Wholesale |
Net Revenues |
$ 7,845,323 |
$ 1,949,567 |
$ 6,168,208 |
$ 141,192 |
$ 2,077,064 |
$ 208,617 |
Cost of Goods Sold |
3,101,914 |
824,307 |
3,101,557 |
86,690 |
741,074 |
108,491 |
Gross Margin |
$ 4,743,409 |
$ 1,125,260 |
$ 3,066,651 |
$ 54,502 |
$ 1,335,990 |
$ 100,126 |
Gross Margin % |
60.5% |
57.7% |
49.7% |
38.6% |
64.3% |
48.0% |
|
|
|
|
|
|
|
|
|
"Gram |
Services" |
|
|
|
SIX MONTHS ENDED 12/31/02 |
Bear-Gram Service |
PajamaGram Service |
Calyx & Corolla Service |
TastyGram
Service |
Retail Operations |
Corporate/ Wholesale |
Net Revenues |
$ 10,195,900 |
$ 1,363,928 |
-- |
$ 174,653 |
$ 2,417,680 |
$ 221,874 |
Cost of Goods Sold |
3,815,385 |
707,946 |
-- |
154,471 |
777,195 |
112,510 |
Gross Margin |
$ 6,380,515 |
$ 655,982 |
-- |
$ 20,182 |
$ 1,640,485 |
$ 109,364 |
Gross Margin % |
62.6% |
48.1% |
-- |
11.6% |
67.9% |
49.3% |
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.
(10) 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.
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 obliga
ted 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, being 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 judgment on its claims and dismissal of the landlord's claims. That motion was granted by order dated July 25, 2001 and judgment 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 judgment and, as settlement discussions were unsuccessful, posted a bond to stay e
nforcement of the judgment pending its appeal, which was argued on November 1, 2002. That judgment was affirmed by a 3-2 vote of New York's Appellate Division, First Department. Based on the two dissenting votes, the landlord had a right of appeal to New York's Court of Appeals. That appeal has been fully briefed and was argued on February 10, 2004. 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 judgment 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.
There are various other claims, lawsuits, and pending actions against the Company incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance, however, that claims will not be made against the Company in the future. Such claims, if material, may adversely affect the Company's businesses and results of operations.
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 results of operations and financial condition. The discussion should be read in conjunction with the financial statements and footnotes that appear elsewhere in this report filed on Form 10-Q. 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 that predict or indicate future events and trends, and that 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 forth in such forward-looking state
ments. 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, except as required by applicable laws and regulations.
Summary
The Company's sales are seasonal in nature and, therefore, the results for interim periods are not necessarily indicative of the results expected for the respective full years. It is more instructive to compare the Company's performance in each interim period to the performance in the same interim period of prior years, in the context of comparable seasonal forces. In the period described in this report, net revenues increased substantially in the Company's Gram segment over the same period in the prior year due to increases in revenues from Calyx & Corolla and the PajamaGram business, which offset decreased revenues in other businesses in the Gram segment. The addition of the Calyx & Corolla business to the Gram segment increased the Company's sales during the December holiday season, which has not been one of the major holiday seasons for the Company's other Gram businesses, and thus improved balance in the Company's seasonal business cycle. The Company's net marg
ins also increased in this period, due to increased margins in the Calyx & Corolla, PajamaGram and Tasty Gram businesses, which offset decreased margins in the Bear-Gram business and the Retail Store segment. Net marketing and selling expenses increased during the period described in this report, although increases in marketing expenses for the PajamaGram and Calyx & Corolla lines were offset by decreases in marketing expenses for the Bear-Gram and Tasty Gram businesses during the period.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their impact cannot be determined with absolute certainty. Therefore the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
We believe application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change.
We have identified certain critical accounting policies, which are described below:
Inventory Valuation
The Company carries its inventory at the lower of cost or market on a first-in, first-out basis. The Company makes certain assumptions to adjust inventory based on historical experience and current information in order to assess that inventory is recorded properly at the lower of cost or market. If actual market conditions are less favorable than those projected by management, additional inventory adjustments may be required. These adjustments can have a significant impact on future operating results and financial position.
Providing for Litigation Contingencies
T
he Company is involved in litigation incidental to its business, the disposition of which is expected to have no material effect on the Company's financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by differences between the Company's assumptions related to these proceedings and actual results. The Company accrues its best estimate of the probable cost for the resolution of legal claims. Such estimates are developed in consultation with outside counsel handling these matters and are based upon a combination of litigation and settlement strategies. To the extent additional information arises, it is possible that the Company's best estimate of its probable liability in these matters may change.
Returns and Allowances Provision
The Company accrues a provision for returns and allowances. The Company makes certain assumptions to adjust this provision based on historical experience and current information in order to assess that the provision
is estimated properly. If actual market conditions are less favorable than those projected by management, additional adjustments to the provision may be required. These adjustments can have a significant impact on future operating results and financial position.
Goodwill and Indefinite Lived Intangibles
The Company acquired Calyx & Corolla, Inc. on August 29, 2003. This acquisition resulted in $5,383,000 of goodwill and other indefinite lived intangible assets. The Company will test goodwill and other indefinite lived intangible assets for impairment at least annually. The Company expects to complete its impairment testing as of June 30, 2004. Management's estimates of market values, projections of future cash flows and other factors are significant factors in testing goodwill and indefinite lived intangible assets for impairment. If these estimates or projections change in the future, the Company may be required to record an impairment charge. These adjustments can have a significant impact on future operating results and financial position.
Income Tax Provision
The Company provides for income taxes at rates equal to our combined federal and state effective rates, however, certain estimates are made based on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Subsequent revisions to the estimated net realizable value of deferred tax assets, deferred tax liabilities and other income tax liabilities could cause our provision for income taxes to vary significantly from period to period.
Results of Operations
Comparison of the three-month periods ended December 31, 2003 and 2002.
Net revenues for the three month period ended December 31, 2003 totaled $13,410,000, an increase of $4,120,000 from net revenues of $9,290,000 for the three month period ended December 31, 2002. By business segment, $1,577,000 in decreased revenues were attributable to the Bear-Gram gift delivery service, $112,000 in decreased revenues were attributable to the Retail Store segment, $63,000 in decreased revenues to the Corporate/Wholesale segment and $54,000 in decreased revenues to the TastyGram segment.
Revenues in the Bear-Gram segment decreased as the Company curtailed radio and catalog advertising in this segment in the three month period. Revenues in the Retail Store segment declined due to fewer tourists visiting the Company's factory retail store in the period ended December 31, 2003. These decreases were offset
by increases in the PajamaGram gift delivery service segment revenues of $402,000 and revenues of $5,524,000 generated from the recently acquired Calyx and Corolla floral delivery segment.
Gross margin increased $1,989,000 to $7,664,000 for the three month period ended December 31, 2003, from $5,675,000 for the three month period ended December 31, 2002. Gross margin decreases in the Bear-Gram segment and the Retail Store segment are primarily the result of lower net revenues in these segments. These decreases in gross margin dollars described above were offset by gross margin dollar contribution from the recently acquired Calyx & Corolla segment and gross margin increases in the PajamaGram segment related to increased revenues for the three months ended December 31, 2003. Gross margin as a percentage of net revenues decreased to 57.1 percent from 61.1 percent in the quarter. Increased bear unit manufacturing costs as domestic bear production volume was adjusted to the Company's lower net revenues resulted in a 1.1 percentage point decrease in the Bear-Gram segment. An increase of 9.8 percentage points in the PajamaGram segment resulted from im
proved unit gross margins and product mix changes in the period. The 5.6 percentage point increase in the Corporate/Wholesale segment is the result of increased sales of imported bears with lower unit costs in this period. The gross margin increase in the TastyGram gift delivery service segment is attributed to higher unit gross margins and improved product mix in this segment as compared to the three month period ended December 31, 2002. The 50.6 gross margin percentage contribution resulting from the recently acquired Calyx & Corolla segment, which is less as a percentage of net revenues than the Company's overall gross margin percentage, contributed to the decrease in gross margin as a percentage of net revenues.
Marketing and Selling expenses increased $1,105,000 to $5,219,000 for the three month period ended December 31, 2003, from $4,114,000 for the comparable period ending December 31, 2002. Increased PajamaGram radio and catalog advertising costs of $177,000 and $1,699,000 in marketing and selling costs associated with the Company's recently acquired Calyx & Corolla segment were partially offset by decreased Bear-Gram advertising costs of $480,000, which include radio, catalog, Internet and print costs as the company scaled back its radio and catalog advertising, decreased TastyGram radio marketing and merchandising costs of $155,000, decreased call center and customer service cost
s of $96,000, decreased Retail Store costs of $26,000, and decreased Corporate/Wholesale marketing and selling costs of $14,000 during the three month period ended December 31, 2003. Marketing and selling expenses decreased as a percentage of net revenues to 38.9 percent from 44.3 percent in the quarter. Calyx & Corolla Marketing and Selling costs also include $43,000 in wage and severance costs for employees at the Vero Beach, Florida location whose positions have been eliminated during this period. The wage costs may be partially offset by adding staff at the Shelburne, Vermont location.
General and administrative expenses increased to $1,484,000 for the three month period ended December 31, 2003, compared to $1,248,000 for the three month period ended December 31, 2002. As a percentage of net revenues, general and administrative expenses decreased to 11.1 percent for the three month period ended December 31, 2003, from 13.4 percent for the comparable period ended December 31, 2002. General and administrative expenses for the three month period ended December 31, 2003 include $361,000 of expenses attributable to Calyx & Corolla. Calyx & Corolla General and Administrative costs also include $101,000 in wage and severance costs for employees at the Vero Beach, Florida location whose positions have been eliminated during this period. The wage costs may be partially offset by adding staff at the Shelburne, Vermont location.
Interest expense increased to $184,000 due to increased long term debt obligations for the three month period ended December 31, 2003, compared to $143,000 for the comparable period ending December 31, 2002. Interest income decreased to $6,000 as a result of lower cash balances and lower interest rates in the three month period ended December 31, 2003, compared to $20,000 for the three month period ended December 31, 2002.
The Company has recorded a tax provision of $356,000 for the three month period ended December 31, 2003, which is comprised of a current provision of $319,000, an effective income tax rate of 40.7 percent and a deferred provision of $37,000 resulting primarily from amortization of tax basis goodwill and acquired intangible assets. The Company recorded a tax provision of $78,000 for the comparable period ended December 31, 2002, at an effective income tax rate of 40.0 percent.
As a result of the foregoing factors and the Series A Preferred Stock dividends of $18,000, the Series C Preferred Stock dividends of $2,000, the accretion of an original issue discount of $4,000, and the Series D Preferred Stock dividends of $32,000, the net income available to Common Stockholders for the three month period ended December 31, 2003 was $372,000, compared to a net income available to Common Stockholders of $81,000 for the three month period ended December 31, 2002.
Comparison of the six-month periods ended December 31, 2003 and 2002.
Net revenues for the six month period ended December 31, 2003 totaled $18,390,000, an increase of $4,016,000 from net revenues of $14,374,000 for the six month period ended December 31, 2002. By business segment, $2,351,000 in decreased revenues were attributable to the Bear-Gram gift delivery service, $341,000 in decreased revenues were attributable to the Retail Store segment, $13,000 in decreased revenues to the Corporate/Wholesale segment and $33,000 in decreased revenues to the TastyGram segment.
Revenues in the Bear-Gram segment decreased as the Company curtailed radio and catalog advertising in this segment in the six month period. Revenues in the Retail Store segment declined due to fewer tourists visiting the Company's factory retail store in the period ended December 31, 2003. These decreases were offset by increases in the PajamaGram gift delivery service segment
revenues of $586,000 and revenues of $6,168,000 generated from the recently acquired Calyx and Corolla floral delivery segment.
Gross margin increased $1,619,000 to $10,426,000 for the six month period ended December 31, 2003, from $8,807,000 for the six month period ended December 31, 2002. Gross margin decreases in the Bear-Gram segment and the Retail Store segment are primarily the result of lower net revenues in these segments. These decreases in gross margin dollars described above were offset by the gross margin dollar contribution from the recently acquired Calyx & Corolla segment and gross margin increases in the PajamaGram segment related to increased revenues for the six months ended December 31, 2003. Gross margin as a percentage of net revenue decreased to 56.7 percent from 61.3 percent in the six month period. Increased bear unit manufacturing costs as domestic bear production volume was adjusted to the Company's lower net revenues resulted in a 2.1 percentage point decrease in the Bear-Gram segment. The decrease of 3.6 percentage points in the Retail Store segment is a
ssociated with higher unit costs in this segment. An increase of 9.6 percentage points in the PajamaGram segment resulted from improved unit gross margins and product mix changes in the period. The gross margin increase in the TastyGram gift delivery service segment is attributed to higher unit gross margins and improved product mix in this segment as compared to the six month period ended December 31, 2002. The 49.7 gross margin percentage contribution resulting from the recently acquired Calyx & Corolla segment, which is less as a percentage of net revenues than the Company's overall gross margin percentage, contributed to the decrease in gross margin as a percentage of net revenues. During this six month period, the Calyx & Corolla gross margin was negatively impacted by $62,000 of costs related to the relocation of Calyx & Co
rolla's fulfillment and inventory operations to the Company's Shelburne, VT location.
Marketing and Selling expenses increased $829,000 to $7,000,000 for the six month period ended December 31, 2003, from $6,171,000 for the comparable period ending December 31, 2002. Increased PajamaGram radio and catalog advertising costs of $138,000 and $1,949,000 in marketing and selling costs associated with the Company's recently acquired Calyx & Corolla segment were partially offset by decreased Bear-Gram advertising costs of $846,000, which include radio, catalog, Internet and print costs as the company scaled back its radio and catalog advertising, decreased TastyGram radio marketing and merchandising costs of $197,000, decreased call center and customer service costs of $135,000, decreased Retail Store costs of $48,000, and decreased Corporate/Wholesale marketing and selling costs of $32,000 during the six month period ended December
31, 2003. Marketing and selling expenses as a percent of net revenues decreased to 38.1 percent from 42.9 percent in the six month period. Calyx & Corolla Marketing and Selling costs include $40,000 in temporary occupancy costs and $9,000 in salaries and other costs related to the relocation of Calyx & Corolla's operations to the Company's Shelburne, VT location. Calyx & Corolla Marketing and Selling costs also include $60,000 in wage and severance costs for employees at the Vero Beach, Florida location whose positions have been eliminated during this period. The wage costs may be partially offset by adding staff at the Shelburne, Vermont location.
General and Administrative expenses increased to $2,557,000 for the six month period ended December 31, 2003, compared to $2,329,000 for the six month period ended December 31, 2002. As a percentage of net revenues, general and administrative expenses decreased to 13.9 percent for the six month period ended December 31, 2003, from 16.2 percent for the comparable period ended December 31, 2002. General and administrative expenses for the six month period ended December 31, 2003 include $484,000 of expenses attributable to Calyx & Corolla, of which $19,000 are related to the relocation of Calyx & Corolla's information technology operations to the Company's Shelburne, VT location. Calyx & Corolla General and Administrative costs also include $127,000 in wage and severance costs for employees at the Vero Beach, Florida location whose positions have been eliminated during this period. The wage costs ma
y be partially offset by adding staff at the Shelburne, Vermont location.
Interest expense increased to $337,000 due to increased long term debt obligations for the six month period ended December 31, 2003, compared to $277,000 for the comparable period ending December 31, 2002. Interest income decreased to $18,000 as a result of lower cash balances and lower interest rates in the six month period ended December 31, 2003, compared to $84,000 for the six month period ended December 31, 2002.
The Company has recorded a tax provision of $262,000 for the six month period ended December 31, 2003, which is comprised of a current provision of $225,000, an effective income tax rate of 40.7 percent, and a deferred provision of $37,000 resulting primarily from amortization of tax basis goodwill and acquired intangible assets. The Company recorded a tax provision of $47,000 for the comparable period ended December 31, 2002, at an effective income tax rate of 40.0 percent.
As a result of the foregoing factors and the Series A Preferred Stock dividends of $36,000, the Series C Preferred Stock dividends of $5,000, the accretion of an original issue discount of $18,000, and the Series D Preferred Stock dividends of $42,000, the net income available to Common Stockholders for the six month period ended December 31, 2003 was $189,000, compared to a net loss available to Common Stockholders of $5,000 for the six month period ended December 31, 2002.
Liquidity and Capital Resources
The following is a summary of the Company's contractual commitments and other obligations as of December 31, 2003. The Company's Other Long-Term Obligations are comprised of employment contracts and certain consulting arrangements.
Payments due by period
Contractual
Obligations |
Total |
Less: Amounts representing interest |
Sub total
|
Less than 1 year |
1-3 years |
3-5 years |
More than 5 years |
Long-Term Debt Obligations |
$3,036,500 |
($184,458) |
$3,220,958 |
$542,256 |
$2,259,647 |
$419,055 |
-- |
Capital Lease Obligations |
$5,019,762 |
($4,541,396) |
$9,561,158 |
$351,944 |
$2,111,667 |
$1,407,778 |
$5,689,769 |
Operating Lease Obligations |
$3,872,197 |
-- |
$3,872,197 |
$567,658 |
$1,985,243 |
$842,610 |
$476,687 |
Series C & D Redeemable Preferred Stock Obligations |
$3,077,027 |
-- |
$3,077,027 |
$67,990 |
$1,642,940 |
$1,366,097 |
-- |
Other Long-Term Liabilities |
$543,250 |
-- |
$543,250 |
$212,000 |
$320,833 |
$10,417 |
-- |
Total |
$15,548,736 |
($4,725,854) |
$20,274,590 |
$1,741,848 |
$8,320,330 |
$4,045,956 |
$6,166,455 |
As of December 31, 2003, the Company's cash position decreased to $4,727,000, from $5,701,000 at June 30, 2003. Of the $4,727,000, $539,000 is classified as restricted cash; there was $533,000 of restricted cash at June 30, 2003
. The largest component of the restricted cash is $469,000 restricted by a debt service reserve, which was required as part of the Acquisition Loan agreement with Banknorth, N.A., that is required to be maintained as part of the Company's sale-leaseback transaction. Cash decreases from the increase in inventories, and the cash paid for the acquisition of Calyx & Corolla were offset by the cash provided from the borrowing from Banknorth, N.A. associated with the acquisition of Calyx & Corolla.
On August 29, 2003, the Company closed on the $1.0 million Acquisition Loan facility with Banknorth, N.A. for the acquisition of substantially all of the assets and the assumption of certain liabilities of the floral delivery business Calyx & Corolla from Equity Resource Partners LLC. The Acquisition Loan is being repaid by monthly payments of principal and interest over a term of five years. The Company had the option to select one of two interest rate options, as follows: (i) a variable rate equal to either the bank's prime
rate minus 0.50% (adjusted daily) or (ii) LIBOR (for 30, 60, 90 day interest periods) plus 2.20% (except that no more than three LIBOR based borrowings would be allowed at any one time). The Acquisition Loan was subject to an origination fee of 0.25% of the principal amount. At closing, the Company selected a 3.32 percent interest rate based on the 30 day LIBOR rate.
The Company's sales are heavily seasonal, with Valentine's Day, Mother's Day and Christmas as the Company's largest sales seasons, resulting in fluctuations in working capital obligations similar to those incurred in the past.
The Company intends to continue to invest in support of its growth strategy. These investments include primarily continued advertising and marketing programs designed to enhance the Company's brand name recognition, retain and acquire new customers, expand its current product offerings and further develop its web site and operating infrastructure.
The Company believes that its existing cash and cash equivalent balances, together with funds generated from operations and available borrowings under its loan commitments from Banknorth, N.A., 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 obliga
ted 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, being 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 judgment on its claims and dismissal of the landlord's claims. That motion was granted by order dated July 25, 2001 and judgment 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 judgment and, as settlement discussions were unsuccessful, posted a bond to stay e
nforcement of the judgment pending its appeal, which was argued on November 1, 2002. That judgment was affirmed by a 3-2 vote of the New York Appellate Division, First Department. Based on the two dissenting votes, the landlord had a right of appeal to the New York Court of Appeals. That appeal has been fully briefed and was argued on February 10, 2004. 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 judgment 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.
There are various other claims, lawsuits, and pending actions against the Company incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance, however, that claims will not be made against the Company in the future. Such claims, if material, may adversely affect the Company's businesses and results of operations.
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 money market funds. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. A ten percent fluctuation in interest rates would not have a material impact on the Company's ability to meet its financial obligations.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Accounting Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Accounting Officer have concluded that these disclosures and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2003 that have materially affected, or reasonably likely to materially affect, our internal controls over financial reporting.
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, Note 10 of this report under the heading Legal Proceedings.
There are various other claims, lawsuits, and pending actions against the Company incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance, however, that claims will not be made against the Company in the future. Such claims, if material, may adversely affect the Company's businesses and results of operations.
Item 2. Changes in Securities and Use of Proceeds
On August 29, 2003 the Company issued 250 shares of a new series of preferred stock designated Series D Convertible Redeemable Preferred stock in partial consideration of the Company's acquisition of the floral delivery business Calyx & Corolla. A description of the new Series D Preferred stock appears in Part I, Note 8 of this report under the heading Acquisition. This new issue of preferred stock was a private placement of securities exempt from registration pursuant to section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Stockholders
On December 11, 2003, the Company held an Annual Meeting of Shareholders, at which the following matters were voted upon:
1. To have Common shareholders elect six (6) individuals to the Company's Board of Directors for the ensuing year.
Name |
For |
Withheld |
Jason Bacon |
5,442,769 |
5,417 |
Maxine Brandenburg |
5,445,096 |
3,090 |
Nancy Brock |
5,446,123 |
2,063 |
Fred Marks |
5,445,664 |
2,522 |
Spencer C. Putnam |
5,440,619 |
7,567 |
Elisabeth B. Robert |
5,444,140 |
4,046 |
| |
|
|
2. To have Series C Preferred shareholders elect two (2) individuals to the Company's Board of Directors for the ensuing year.
Name |
For |
Withheld |
Thomas R. Shepherd |
174,311 |
0 |
William Woo |
174,311 |
0 |
| |
|
|
3. To have Series D Preferred shareholders elect one (1) individual to the Company's Board of Directors for the ensuing year.
Name |
For |
Withheld |
Andrew Williams |
708,215 |
0 |
4. To ratify the selection of Deloitte & Touche LLP as the Company's independent public accountants for the 2004 fiscal year.
For |
Against |
Abstentions |
5,411,966 |
35,673 |
547 |
5. To approve the amendment of The Vermont Teddy Bear Co., Inc. Non-Employee Stock Option Plan to authorize the quarterly grant of options to Directors to be determined based upon attendance at 75% of Board and Committee meetings rather than solely on attendance at quarterly meetings of the Board of Directors.
For |
Against |
Abstentions |
Not Voted |
4,104,586 |
99,335 |
29,801 |
1,214,464 |
All matters were approved by the Company's Shareholders.
Item 5. Other Information
Elisabeth B. Robert, the Company's Chief Executive Officer/Chief Financial Officer and Mark J. Sleeper, the Chief Accounting Officer, have furnished to the SEC the certification with respect to this Form 10-Q that is required by Section 906 of the Sarbanes-Oxley Act of 2002. See exhibit 32
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31 Rule 13a-14(a)/15d-14(a) Certifications.
32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Elisabeth B. Robert, President, Chief Executive Officer, Treasurer, and Chief Financial Officer and Mark J. Sleeper, Chief Accounting Officer (filed herein).
99 Non Employee Director Stock Option Plan amended December 11, 2003.
(b) Reports on Form 8-K
As reported on September 3, 2003
On August 29, 2003, the Company, through a wholly-owned subsidiary, Calyx & Corolla, Inc., a Delaware corporation, purchased substantially all of the assets of the floral delivery business Calyx & Corolla from Equity Resource Partners, LLC, a Delaware limited liability company and wholly owned subsidiary of Equity Resource Holdings, LLC, a Delaware limited liability company. The acquisition was consummated pursuant to an Asset Purchase Agreement and related documents on August 29, 2003.
As reported on November 12, 2003
The Company filed an amended Form 8-K with respect to the filing on September 3, 2003 mentioned above. The Company timely filed by amendment financial statements of the business acquired and pro forma financial information as required by Item 7 of Form 8-K.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Vermont Teddy Bear Co., Inc.
Date: February 17, 2004 /s/ Elisabeth B. Robert ,
Elisabeth B. Robert,
Chief Executive Officer and
Chief Financial Officer