because the price of the potential common shares was greater than the average market price of the common stock for that period. Diluted weighted average shares outstanding for the three and nine months ended March 31, 2002 exclude 56,000 potential common shares from stock options because the price of the potential common shares was greater than the average market price of the common stock for that period.
(5) Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 addresses financial accounting and reporting for the impairment of long lived assets held for use and for long-lived assets that are to be disposed of by sale (including discontinued operations). SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 on July 1, 2002. The adoption of this statement did not have a material effect on the Company's financial position, results of operations or cash flows.
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13 and Technical Corrections." For most companies, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Extraordinary treatment will be required for certain extinguishments as provided in Accounting Principles Board Opinion No. 30. SFAS No. 145 also amends SFAS No. 13 for certain sales-leaseback and sublease accounting. The Company adopted the provisions of SFAS No. 145 on July 1, 2002.
In June 2002, the FASB issued SFAS No. 146, Accounting for Cost Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged.
(6) Indebtedness
On September 27, 2002, the Company closed on two loan facilities with Banknorth N.A. These facilities consisted of a 4.79 percent fixed rate per annum term loan in the amount of $3,000,000 for the repurchase of the Company's capital stock and a variable rate revolving line of credit in an amount up to $4,000,000 for working capital needs. The fixed rate term loan will be paid by monthly payments of principal and interest over a term of five years. The 4.79 percent fixed rate, determined at the closing of the loan, was equal to the 2.5 year term Federal Home Loan Bank rate plus 2.0 percent200 basis points. The revolving line of credit in the amount of $4,000,000 shall be repaid on its second anniversary, at which time all principal outstanding plus accrued and unpaid interest shall be due. During the term of the revolving line of credit, the Company will make monthly payments of interest on the outstanding principal balance. The interest rate payable on borrowings under the revolving line
of credit will be primarily at LIBOR (for 30, 60, and 90 day periods) plus 2.20 percent220 basis points (except that no more than three LIBOR based borrowings will be allowed at any one time). Any borrowings the Company plans to repay in less than 30 days will be at the Wall Street Journal prime rate. At March 31, 2003 there were no outstanding borrowings on the Banknorth N.A. revolving line of credit.
On October 8, 2002, the Company announced the results of the August 21, 2002 offer to purchase up to 3 million shares of the Company's common stock at a purchase price of $3.50 per share ("Issuer Tender Offer"). A total of 3,424,604 shares of the Company's common stock were validly tendered and not withdrawn, including 2,899,619 shares deposited with the depositary for the offer, and 524,985 shares deposited directly with the Company for Series C Convertible Preferred Stock tendered on an as converted basis. Upon Pursuant to the Company's offering documents and applicable securities laws, the maximum number of shares that the Company was authorized to purchase without extending the offer was 3,149,266 shares. The total cost to purchase these shares, including transaction costs of $123,000, was $11,146,000. Because the total number of tendered shares exceeded that the maximum, the Company accepted for payment the maximum number of authorized shares that were t
endered in accordance with the priority and proration rules described in Section 1 of our Offer to Purchase dated August 21, 2002.
| |
|
"Gram Services" |
|
|
|
THREE MONTHS ENDED 03/31/03 |
Bear-Gram Service |
PajamaGram Service |
TastyGram
Service(*) |
Retail Operations |
Corporate/ Wholesale |
Net Revenues |
$12,151,047 |
$1,785,435 |
$147,425 |
$404,546 |
$39,813 |
Cost of Goods Sold |
4,304,460 |
806,829 |
116,965 |
148,302 |
16,905 |
Gross Margin |
$7,846,587 |
$978,606 |
$30,460 |
$256,244 |
$22,908 |
Gross Margin % |
64.6% |
54.8% |
20.7% |
63.3% |
57.5% |
|
|
|
|
|
|
|
|
"Gram Services" |
|
|
|
THREE MONTHS ENDED 03/31/02 |
Bear-Gram Service |
PajamaGram Service |
SendAMERICA |
Retail Operations |
Corporate/ Wholesale |
Net Revenues |
$13,918,500 |
-- |
$71,844 |
$419,985 |
$112,109 |
Cost of Goods Sold |
4,640,536 |
-- |
46,778 |
157,357 |
51,510 |
Gross Margin |
$9,277,964 |
-- |
$25,066 |
$262,628 |
$60,599 |
Gross Margin % |
66.7% |
-- |
34.9% |
62.5% |
54.1% |
|
|
|
|
|
|
| |
|
"Gram Services" |
|
|
|
NINE MONTHS ENDED 03/31/03 |
Bear-Gram Service |
PajamaGram Service |
TastyGram
Service(*) |
Retail Operations |
Corporate/ Wholesale |
Net Revenues |
$22,346,948 |
$3,149,363 |
$322,077 |
$2,822,226 |
$261,687 |
Cost of Goods Sold |
8,119,846 |
1,514,775 |
271,435 |
925,497 |
129,415 |
Gross Margin |
$14,227,102 |
$1,634,588 |
$50,642 |
$1,896,729 |
$132,272 |
Gross Margin % |
63.7% |
51.9% |
15.7% |
67.2% |
50.5% |
|
|
|
|
|
|
|
|
"Gram Services" |
|
|
|
NINE MONTHS ENDED 03/31/02 |
Bear-Gram Service |
PajamaGram Service |
SendAMERICA |
Retail Operations |
Corporate/ Wholesale |
Net Revenues |
$24,464,106 |
-- |
$253,687 |
$2,598,608 |
$519,722 |
Cost of Goods Sold |
8,760,056 |
-- |
158,674 |
915,444 |
273,731 |
Gross Margin |
$15,704,050 |
-- |
$95,013 |
$1,683,164 |
$245,991 |
Gross Margin % |
64.2% |
-- |
37.5% |
64.8% |
47.3% |
|
|
|
|
|
|
(*) SendAMERICA, Inc. began doing business as the TastyGram delivery service in October, 2002.
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.
(9) 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.
There are various other claims, lawsuits, and pending actions against the Company that are routine and incidental 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.
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 judgement. 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 current and 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 current and 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 March 31, 2003 and 2002.
Net revenues for the three month period ended March 31, 2003 totaled $14,528,000, an increase of $6,000 from net revenues of $14,522,000 for the three month period ended March 31, 2002. By business segment, $1,785,000 in increased revenues were attributable to the marketing of the Company's new PajamaGram gift delivery service segment, and $76,000 in increased revenues were attributable to the TastyGram segment during the three month period ended March 31, 2003. These increases were offset by decreases in Bear-Gram gift delivery service revenues of $1,768,000, decreases in the Corporate/Wholesale segment of $72,000 as the result of decreased sales in the corporate affinity market, and decreases in the Retail segment of $15,000, for the three month period ended March 31, 2003.
Gross margin decreased by $491,000 to $9,135,000 for the three month period ended March 31, 2003, from $9,626,000 for the three month period ended March 31, 2002. As a percentage of net revenues, gross margin decreased to 62.9 percent for the three month period ended March 31, 2003, as compared to 66.3 percent for the three month period ended March 31, 2002. The gross margin percent decreased in the Bear-Gram segment this period primarily due to increased shipping costs and higher unit costs based on product mix. The gross margin for the TastyGram gift service segment during the three month period ended March 31, 2003 was lower than the three month period ended March 31, 2002, as this segment absorbed costs associated with packaging and product fulfillment in the transition to the TastyGram servicemark.
E=3>These decreases in gross margin were partially offset by increased gross margins in the Retail and Corporate/Wholesale segments. The gross margin in the Retail segment increased for this period as the stores realized increased sales of its Make-A-Friend-For-Life teddy bears that have a higher unit gross margin than other products sold in the retail store. The gross margin percent in the Corporate/Wholesale segment increased due to sales of product with higher unit margins during this period. Gross margins from the new PajamaGram gift service segment, which were less as a percentage of net revenues than the Company's overall gross margin percent, also contributed to the Company's decreased gross margin percent.
Selling expenses increased to $5,822,000, or 40.1 percent of net revenues, for the three month period ended March 31, 2003, from $5,597,000, or 38.5 percent of net revenues, for the comparable period ending March 31, 2002. This $225,000 increase was primarily due to the addition of $561,000 in new advertising expenses, which include radio and Internet costs, related to the marketing of the Company's new PajamaGram segment, and increases in Retail segment expenses of $42,000 due to the opening of a retail location in Waterbury,VT which was not in operation during the three month period ended March 31, 2002. These increases were offset by decreases of $271,000 to call center and customer service costs, decreased marketing and merchandising costs associated with the TastyGram segment of $106,000, and a $1,000 decrease in Bear-Gram advertising costs, which include radio, catalog, Internet and print costs.
General and administrative expenses increased to $1,489,000 for the three month period ended March 31, 2003 primarily due to increases in health insurance costs, compared to $1,360,000 for the three month period ended March 31, 2002. As a percentage of net revenues, general and administrative expenses increased to 10.3 percent for the three month period ended March 31, 2003, from 9.4 percent for the comparable period ended March 31, 2002.
Interest expense increased to $168,000 for the three month period ended March 31, 2003, compared to $140,000 for the comparable period ending March 31, 2002. Interest income decreased to $21,000 as a result of lower cash balances and lower interest rates in the three month period ended March 31, 2003, compared to $60,000 for the three month period ended March 31, 2002.
The Company has recorded a tax provision of approximately $670,000 for the three month period ended March 31, 2003, at an effective income tax rate of approximately 40.0 percent. The Company recorded a tax provision of approximately $909,000 for the comparable period ended March 31, 2002, at an effective income tax rate of approximately 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 $3,000 and the accretion of an original issue discount of $14,000, the net income available to Common Stockholders for the three month period ended March 31, 2003 was $971,000, compared to a net income available to Common Stockholders of $1,647,000 for the three month period ended March 31, 2002.
Comparison of the nine-month periods ended March 31, 2003 and 2002
Net revenues for the nine month period ended March 31, 2003 totaled $28,902,000, an increase of $1,066,000 from net revenues of $27,836,000 for the nine month period ended March 31, 2002. By business segment, $3,149,000 in increased revenues were attributable to the marketing of the Company's new PajamaGram gift delivery service segment during the nine month period ended March 31, 2003. Increased net revenues from retail store operations of $224,000 were a result of the opening of a second retail store location in Waterbury, Vermont which was not in operation during the nine month period ended March 31, 2002, and increased revenues in the TastyGram segment of $68,000. These increases were offset by decreases in Bear-Gram gift delivery service revenues of $2,117,000, and decreases in the Corporate/Wholesale segment of $258,000 as compared to the nine month period ended March 31, 2002.
Gross margin increased by $213,000 to $17,941,000 for the nine month period ended March 31, 2003, from $17,728,000 for the nine month period ended March 31, 2002. As a percentage of net revenues, gross margin decreased to 62.1 percent for the nine month period ended March 31, 2003, from 63.7 percent for the nine month period ended March 31, 2002. The gross margin percent decreased in the Bear-Gram segment this period primarily due to increased shipping costs and higher unit costs based on product mix. The gross margin for the TastyGram gift service segment during the nine month period ended March 31, 2003 was lower than the nine month period ended March 31, 2002, as this segment absorbed costs associated with packaging and product fulfillment in the transition to the TastyGram servicemark. These decreases in gross margin were partially offset by increased gross margins in the Retail and Corporate/Wholesale segments. The gross margin in the Retail segment increased
for this period as the stores realized increased sales of its Make-A-Friend-For-Life teddy bears that have a higher unit gross margin than other products sold in the retail store. The gross margin percent in the Corporate/Wholesale segment increased due to sales of product with higher unit margins during this period. Gross margins from the new PajamaGram gift service segment, which were less as a percentage of net revenues than the Company's overall gross margin percent, also contributed to the Company's decreased gross margin percent.
Selling expenses increased to $11,993,000, or 41.5 percent of net revenues, for the nine month period ended March 31, 2003, from $11,140,000, or 40.0 percent of net revenues, for the comparable period ending March 31, 2002. This $853,000 increase was primarily due to the addition of $1,270,000 in new advertising expenses, which include radio and Internet costs, related to the marketing of the Company's new PajamaGram segment, increases in Retail segment expenses of $169,000 due to the opening of a retail location in Waterbury,VT which was not in operation during the nine month period ended March 31, 2002 and increases to Corporate/Wholesale expenses of $7,000. These increases were offset by decreases of $327,000 to call center and customer service costs, decreases in marketing and merchandising costs associated with the Company's wholly owned subsidiary SendAMERICA, Inc. of
$228,000 which began doing business as the TastyGram gift delivery service in October 2002, and a $38,000 decrease in Bear-Gram advertising costs, which include radio, catalog, Internet and print costs.
General and administrative expenses increased to $3,819,000 for the nine month period ended March 31, 2003 primarily
due to increases in information technology support costs, health insurance costs, order processing fees from higher net revenues, and legal costs associated with the protection of trademarks,
compared to $3,462,000 for the nine month period ended March 31, 2002. As a percentage of net revenues, general and administrative expenses increased to 13.2 percent for the nine month period ended March 31, 2003, from 12.4 percent for the comparable period ended March 31, 2002.
Interest expense increased to $446,000 for the nine month period ended March 31, 2003, compared to $423,000 for the comparable period ending March 31, 2002. Interest income decreased to $105,000 as a result of lower cash balances and lower interest rates in the nine month period ended March 31, 2003, compared to $178,000 for the nine month period ended March 31, 2002.
The Company has recorded a tax provision of approximately $718,000 for the nine month period ended March 31, 2003, at an effective income tax rate of approximately 40.0 percent. The Company recorded a tax provision of approximately $1,029,000 for the comparable period ended March 31, 2002, at an effective income tax rate of approximately 40.0 percent.
As a result of the foregoing factors and the Series A Preferred Stock dividends of $54,000, the Series C Preferred Stock dividends of $16,000 and the accretion of an original issue discount of $41,000, the net income available to Common Stockholders for the nine month period ended March 31, 2003 was $966,000 compared to a net income available to Common Stockholders of $1,746,000 for the nine month period ended March 31, 2002.
The following is a summary of the Company's contractual commitments and other obligations as of March 31, 2003. The Company's Other Long-Term Obligations are comprised of employment contracts and certain consulting arrangements.
Liquidity and Capital Resources
Fiscal Year |
Long-Term
Debt |
Capital
Lease
Obligations |
Operating
Leases |
Other
Long-Term
Obligations |
Total
|
2003 |
226,987 |
164,007 |
249,809 |
108,745 |
749,547 |
2004 |
884,506 |
656,027 |
917,460 |
351,000 |
2,808,993 |
2005 |
630,665 |
656,027 |
756,503 |
184,333 |
2,227,528 |
2006 |
556,367 |
656,027 |
623,417 |
101,000 |
1,936,811 |
2007 |
472,603 |
656,027 |
408,589 |
68,500 |
1,605,719 |
Thereafter |
169,070 |
5,958,912 |
1,293,864 |
50,917 |
7,472,763 |
| |
2,940,198 |
8,747,027 |
4,249,641 |
864,495 |
16,801,361 |
Less Amounts representing interest |
(266,448) |
(3,602,955) |
- |
- |
(3,869,403) |
Total |
2,673,750 |
5,144,072 |
4,249,641 |
864,495 |
12,931,958 |
As of March 31, 2003, the Company's cash position decreased to $6,072,000, from $12,819,000 at June 30, 2002. Of the $6,072,000, $530,000 is classified as restricted cash; there was $587,000 of restricted cash at June 30, 2002. The largest component of the restricted cash is $460,000 restricted by a debt service reserve, which was required as part of the 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 acquisition of treasury stock and an increase in inventory as the Company prepares for the Mother's Day season were partially offset by increases in accounts payable, borrowings from Banknorth N.A. and exercises of stock options in connection with the Issuer Tender Offer described in Note 8 to the financial statements.
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. In connection with the issuance of the Series C Preferred Stock, a warrant to purchase 42,500 shares of the Company's Common Stock was issued 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 w
as 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, 2002 |
69.0 |
|
$617,355 |
Add: Accretion of original discount in connection with Series C Preferred Stock |
- |
|
40,869 |
Less: Series C, Preferred Stock converted to Common Stock |
(50.7) |
|
(506,958) |
| |
|
|
|
Balance Series C, Preferred Stock as of March 31, 2003 |