VERMONT TEDDY BEAR CO INC - 10-Q Quarterly Report

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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 ended December 31, 2003 .

[ ] Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from _______________ to _______________.

Commission file number 1-12580 .

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)

Check whether the registrant (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. Yes X ; No .

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes__; No X.

APPLICABLE ONLY TO CORPORATE ISSUERS

As of February 13, 2004, there were 4,973,191 shares of the registrant's common stock (par value $.05 per share) outstanding.

The Vermont Teddy Bear Co., Inc.

Index to Form 10-Q

December 31, 2003

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

THE VERMONT TEDDY BEAR CO., INC AND SUBSIDIARIES

Consolidated Balance Sheets

	Page No.
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2003 and June 30, 2003	3
Consolidated Statements of Income for the three and six months ended December 31, 2003 and 2002	4
Consolidated Statements of Cash Flows for the six months ended December 31, 2003 and 2002	5

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosure About Market Risk	20
Item 4. Controls and Procedures	20

Part II - Other Information
Item 1. Legal Proceedings	20
Item 2. Changes in Securities and Use of Proceeds	20
Item 3. Defaults upon Senior Securities	20
Item 4. Submission of Matters to a Vote of Security Holders	21
Item 5. Other Information	21
Item 6. Exhibits and Reports on Form 8-K	22
Signatures	23

The accompanying notes are an integral part of these consolidated financial statements.

THE VERMONT TEDDY BEAR CO., INC. AND SUBSIDIARIES

Consolidated Statements of Income

For the Three and Six Months Ended December 31, 2003 and 2002

(Unaudited)

Three Months Ended Six Months Ended

	December 31, 2003	June 30, 2003
ASSETS	(Unaudited)
Cash and cash equivalents	$ 4,188,451	$ 5,168,177
Restricted cash	538,654	532,641
Accounts receivable, trade (net of allowance for doubtful accounts of $13,000 as of December 31, 2003 and June 2003)	263,925	62,214
Inventories	6,402,037	4,778,439
Prepaid expenses and other current assets	1,071,835	1,271,478
Deferred income taxes	536,544	525,522
Total Current Assets	13,001,446	12,338,471

Property and equipment, net	7,451,667	7,679,721
Deposits and other assets	1,131,000	1,004,233
Goodwill and indefinite lived intangibles	5,383,260	--
Other intangibles, net	275,556	--
Total Assets	$ 27,242,929	$ 21,022,425

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$ 5,557,832	$ 3,727,671
Accrued expenses	2,504,781	1,416,992
Current portion of long-term debt	928,150	783,000
Current portion of capital lease obligations	173,042	182,273
Total Current Liabilities	9,163,805	6,109,936

Long-term debt, net of current portion	2,108,350	1,695,000
Capital lease obligations, net of current portion	4,846,720	4,918,847
Deferred income taxes	185,195	137,244
Total Liabilities	$ 16,256,219	$ 12,861,127

Series C convertible redeemable preferred stock Authorized 110 shares; issued 69.0 shares; outstanding 9.3 and 18.3 shares at December 31, 2003 and June 30, 2003 respectively; $93,000 and $183,000 Liquidation value at December 31, 2003 and June 30, 2003.	93,042	164,889

Series D convertible redeemable preferred stock Authorized 260 shares; issued 250 shares, outstanding 250 shares, $2,510,616 Liquidation value at December 31, 2003.	2,510,616	--

Stockholders' Equity:
Preferred stock, $.05 par value: Authorized 1,000,000 shares Series A; issued and outstanding, 90 shares	1,440,000	1,404,000
Common stock, $.05 par value: Authorized 20,000,000 shares; issued 8,142,477 and 8,035,520; Outstanding 4,970,191 and 4,861,234 shares at December 31, 2003 and June 30, 2003, respectively	407,124	401,676
Additional paid-in capital	13,626,954	13,518,960
Retained earnings	4,124,751	3,935,401
Treasury stock, at cost, 3,172,286 shares at December 31, 2003,and June 30, 2003	(11,263,628)	(11,263,628)
Total Stockholders' Equity	8,335,201	7,996,409
Total Liabilities and Stockholders' Equity	$ 27,242,929	$ 21,022,425

The accompanying notes are an integral part of these consolidated financial statements.

THE VERMONT TEDDY BEAR CO., INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Six Months Ended December 31, 2003 and 2002

(Unaudited)

	2003	2002	2003	2002
Net revenues	$ 13,410,319	$ 9,290,099	$ 18,389,971	$ 14,374,035
Cost of goods sold	5,746,506	3,615,253	7,964,033	5,567,508
Gross Profit	7,663,813	5,674,846	10,425,938	8,806,527

Operating expenses:
Marketing and selling expenses	5,218,754	4,114,216	6,999,618	6,171,029
General and administrative expenses	1,484,051	1,247,972	2,556,981	2,329,321
	6,702,805	5,362,188	9,556,599	8,500,350
Operating Income	961,008	312,658	869339	306,177
Interest income	5,735	20,383	17,760	83,845
Interest expense	(184,069)	(143,185)	(337,305)	(277,476)
Other income	1,754	4,804	2,242	5,729
Income before income taxes	784,428	194,660	552,036	118,275
Income tax provision	(356,204)	(77,864)	(261,673)	(47,310)
Net Income	428,224	116,796	290,363	70,965
Series A preferred stock dividends	(18,000)	(18,000)	(36,000)	(36,000)
Series C preferred stock dividends	(2,310)	(4,003)	(5,079)	(13,077)
Series D preferred stock dividends	(31,506)	--	(41,780)	--
Accretion of original issue discount	(4,530)	(13,623)	(18,153)	(27,246)
Net income(loss) available to Common stockholders	$ 371,878	$ 81,170	$ 189,351	$ ( 5,358)

Basic net income per common share	$ 0.08	$ 0.02	$ 0.04	$ 0.00

Diluted net income per common share	$ 0.07	$ 0.02	$ 0.04	$ 0.00

Weighted average number of common shares outstanding	4,902,902	5,275,566	4,883,728	6,067,582

Weighted average number of diluted common shares outstanding	6,243,958	5,851,064	5,971,473	7,012,306

The accompanying notes are an integral part of these consolidated financial statements.

THE VERMONT TEDDY BEAR CO., INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(1) 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, 2003, included in the Company's filing with the SEC on Form 10-K. The Company's sales are seasonal in nature and, therefore, the results for these interim periods are not necessarily indicative of the
results expected for the respective full years.

(2) Basis of Consolidation

The consolidated financial statements include the accounts of The Vermont Teddy Bear Co., Inc. and its wholly owned subsidiaries, SendAMERICA, Inc. and Calyx & Corolla, Inc. All material inter-company balances and transactions have been eliminated in consolidation.

(3) 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. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances.

(4) Earnings Per Share

The following tables reconcile the net income (loss) and the weighted average common shares outstanding to the diluted net income and shares used in the computation of basic and diluted earnings per share:

Three Months Ended Six Months Ended

	2003	2002
Cash flows from operating activities
Net Income	$ 290,363	$ 70,965
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	420,650	478,153
Deferred income taxes	36,829	--
Gain on disposal of fixed assets	--	(5,729)
Changes in assets and liabilities net of assets acquired and liabilities assumed:
Accounts receivable, trade	35,292	(3,800)
Inventories	(1,150,681)	(1,687,359)
Prepaid and other current assets	398,302	(309,409)
Deposits and other assets	62,433	(345,279)
Accounts payable	179,653	566,568
Accrued expenses	(269,888)	(197,943)
Net cash from operating activities	2,953	(1,433,833)

Cash flows from investing activities:
Purchases of property and equipment	(78,415)	(309,485)
Proceeds from sale of property and equipment	--	6,305
Cash paid for business acquired	(1,373,206)	--
Decrease (increase) in restricted cash	(6,013)	60,588
Net cash from investing activities	(1,457,635)	(235,462)

Cash flows from financing activities:
Borrowings of short-term debt	500,000	200,000
Borrowings of long-term debt	1,000,000	3,000,000
Payments of short-term debt	(500,000)	(200,000)
Payments of long-term debt	(441,500)	(130,500)
Principal payments on capital lease obligations	(81,359)	(81,262)
Issuance of common stock	23,442	685,471
Acquisition of treasury stock	--	(11,146,128)
Accrued preferred stock dividends	10,616	--
Payment of preferred stock dividends	(36,243)	(13,077)
Net cash from financing activities	474,956	(7,685,496)

Net decrease in cash and cash equivalents for the period	(979,726)	(9,354,791)

Cash and cash equivalents, beginning of period	5,168,177	12,231,990

Cash and cash equivalents, end of period	$ 4,188,451	$ 2,877,199
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$ 333,003	$ 276,060
Cash paid for income taxes	20,000	35,000

Supplemental Disclosures of Non-cash Investing and Financing Activities:
Conversion of Series C preferred stock to common stock	$ 90,000	$ 506,958
Warrant modification	--	84,000
Accretion of original issue discount	18,153	27,246
Issuance of Series D preferred stock for business acquired	2,500,000	--

Three Months Ended Six Months Ended

	12/31/03	12/31/02	12/31/03	12/31/02
Net Income (Loss) available to common stockholders used in basic EPS calculation	$371,878	$81,170	$189,351	($5,358)
Add: Dividends on Series C Preferred Stock	2,310	4,003	5,079	13,077
Accretion of original issue discount Attributable to Series C Preferred Stock	4,530	13,623	18,153	27,246
Dividends on Series D Preferred Stock	31,506	--	41,780	--
Net Income available to common stockholders used in diluted EPS calculation	$410,224	$98,796	$254,363	$34,965

Diluted weighted average shares outstanding for the three and six months ended December 31, 2003 exclude 14,000 and 35,000 potential common shares respectively 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 six months ended December 31, 2002 exclude 164,417 and 415,157 potential common shares respectively because the price of the potential common shares was greater than the average market price of the common stock for that period.

(5) Stock-Based Compensation

Stock-based compensation cost is accounted for using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, net proceeds, including the tax benefits realized, are credited to shareholders' equity.

Had the Company recognized compensation costs for its stock option and purchase plans based on fair market value for awards under those plans, in accordance with Statements of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock Based Compensation," pro forma net income and pro forma net income per share would have been as follows:

Six Months Ended

	12/31/03	12/31/02	12/31/03	12/31/02
Weighted average number of shares used in basic EPS calculation	4,902,902	5,275,566	4,883,728	6,067,582

Add: Common shares issuable upon exercise of:
stock options	957,537	779,883	951,526	910,509
Warrants	193,111	193,111	193,111	193,111
Convertible preferred stock	853,661	211,058	641,010	434,072
Total Common shares issuable	6,907,211	6,459,618	6,669,375	7,605,274

Less: Shares assumed to be repurchased under treasury stock method	(663,253)	(608,554)	(697,902)	(592,968)
Weighted average number of shares used in diluted EPS calculation	6,243,958	5,851,064	5,971,473	7,012,306

The fair values used to compute pro forma net income (loss) and net income (loss) per share were estimated at their fair value at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:

	12/31/03		12/31/02
Net Income(Loss) available to common stockholders		$189,351		($5,358)
Deduct: Total stock-based employee compensation expense determined under fair market value method for awards, net
of related tax effects		($41,904)		($92,181)
Pro forma Net Income(Loss) available to common stockholders		$147,447		($97,539)

Basic EPS - as reported		$0.04		$0.00
Basic EPS - pro forma		$0.03		($0.02)
Diluted EPS - as reported		$0.04		$0.00
Diluted EPS - pro forma		$0.04		($0.01)

(6) Recent Accounting Pronouncements

In January and December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 (FIN 46) and No. 46, revised (FIN 46R), "Consolidation of Variable Interest Entities". These statements, which address perceived weaknesses in accounting for entities commonly known as special-purpose of off-balance-sheet, require consolidation of certain interests or arrangements by virtue of holding a controlling financial interest in such entities. Certain provisions of FIN 46R related to interests in special purpose entities were applicable for the period ended December 31, 2003. The Company must apply FIN 46R to its interests in all entities subject to the interpretation as of the first annual period ending after March 15, 2004. Adoption of this new method of accounting for variable interest entities did not and is not expected to have a material impact on the Company's consolidated financial position or results of operations.

In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This pronouncement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments as liabilities. The provisions of this statement are effective for transactions that are entered into or modified after May 31, 2003. The adoptions of SFAS No. 150 did not have a material impact on the Company's consolidated financial position or results of operations.

(7) Indebtedness

On August 29, 2003, the Company closed on a $1,000,000 loan facility (the "Acquisition Loan") 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 of $16,667 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. The origination fee and certain other costs totaling $18,000 incurred in connection with the
acquisition loan were deferred and are being amortized over the five year term of the loan. At closing, the Company selected a 3.32 percent interest rate based on the 30 day LIBOR rate.

(8) Acquisition

On August 29, 2003, the Company, through a wholly-owned subsidiary, Calyx & Corolla, Inc., a Delaware corporation, purchased substantially all of the assets and assumed certain liabilities of the floral delivery business Calyx & Corolla from Equity Resource Partners, LLC, a Delaware limited liability company. The acquisition was consummated pursuant to an Asset Purchase Agreement and related documents on August 29, 2003. The results of Calyx & Corolla's operations have been included in the Company's consolidated financial statements since August 29, 2003.

The acquired assets included accounts receivable, inventory, the trade name, customer databases and lists, other intellectual property, and fixed assets, including order processing equipment and certain office furnishings used in the Calyx & Corolla floral delivery business. Working capital obligations assumed include trade payables, accrued compensation and certain executory contracts. Calyx & Corolla, Inc. holds the acquired assets and liabilities assumed and continues the Calyx & Corolla business.

The consideration paid was $3.7 million consisting of $1.2 million paid in cash and the remainder paid in the form of 250 shares of the Company's Series D Convertible Redeemable Preferred Stock ("Series D Preferred") at a fair value of $10,000 per share. In addition, the Company incurred approximately $173,000 of transaction costs consisting primarily of legal and accounting fees. The Series D Preferred shares are convertible into the Company's common stock at a price of $3.53 per common share and have voting rights on an as-converted basis. A portion of the cash consideration paid was financed with the five-year Acquisition Loan in the amount of $1.0 million from Banknorth, N.A, the remainder of the cash consideration and transaction costs paid was funded from cash on hand.

The following table sets forth the consideration paid by the Company:

	2003	2002
Risk-free interest rate	4.29%	3.83%
Expected dividend yield	0%	0%
Expected volatility	40.2%	64.0%
Expected lives	10 years	10 years

The acquisition was accounted for using the purchase method, and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.

The following table sets forth the allocation of the purchase consideration to working capital, fixed assets and intangible assets acquired:

Cash consideration	$ 1,200,000
Series D convertible redeemable preferred stock	2,500,000
Transaction costs and expenses	173,206
Total consideration	$ 3,873,206

The amount allocated to the trademark, tradename and customer list was determined by management after considering the results of an independent appraisal based on established valuation techniques. The customer list is being amortized over its estimated useful life of 3 years. The goodwill, trademark, tradename and customer list will be deductible for tax purposes over the tax life of 15 years.

The following unaudited pro forma information for the Company and its consolidated subsidiaries for the following three and six month periods ended December 31, 2003 and 2002 was prepared assuming the acquisition of Calyx & Corolla occurred on July 1, 2002. These pro forma amounts are not necessarily indicative of operating results that would have occurred if the Calyx & Corolla acquisition had occurred on July 1, 2002.

Three Months Ended Six Months Ended

December 31, December 31,

Accounts receivable	$ 237,003
Inventory	472,917
Prepaid expenses	199,259
Deposits	3,504
Equipment	91,626
Other intangible-trademark and tradename	1,220,000
Customer list	310,000
Goodwill	4,163,260
Accounts payable	(1,650,508)
Deferred revenue	(1,118,761)
Accrued expenses	(55,094)
	$ 3,873,206

Each of the shares of Series D Preferred has a minimum liquidation value of $10,000 per share, and is convertible into 2,832 shares of the Company's common stock. The Series D Preferred ranks junior to both Series A and Series C Preferred Stock but senior to all other shares of capital stock of the Company. The Series D Preferred stockholders may, at any time after December 31, 2004, require the Company to redeem some or all of the Series D Preferred shares at their minimum liquidation value, not to exceed $650,000 annually on a rolling 12-month basis. The Series D Preferred requires mandatory redemption of all outstanding shares at the minimum liquidation value along with all accrued but unpaid dividends ten years after issuance. The Series D Preferred carries voting rights on an as-converted basis, and, as a class, has the right to elect one member to the Company's Board of Directors. The Series D Preferred sh
ares have a cumulative preferred cash dividend of 5.0 % per annum, payable quarterly.

The Company obtained consent from its lessor in the sale-leaseback transaction and its lender related to this transaction as a result of restrictive covenants contained in certain of its lending arrangements.

There are no material relationships among the parties to the acquisition of Calyx & Corolla or their affiliates, officers, directors, members or managers, or any of their associates.

Subsequent to the August 29, 2003 closing date of the Calyx & Corolla acquisition, Equity Resource Partners, LLC reimbursed the Company $225,000 related to obligations of Equity Resource Partners, LLC paid by the Company.

(9) Segment Information

Operating segments represent components of the Company's business that are evaluated regularly by the Chief Executive Officer in assessing performance and resource allocation. The Company has determined that its reportable segments consist of the Gram delivery service, Retail Operations, and Corporate/Wholesale (including licensing). The Gram delivery service is comprised of Bear-Gram, PajamaGram, Calyx & Corolla floral, and TastyGram delivery services.

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 at vermontteddybear.com , or through the catalog.

The PajamaGram delivery service involves sending pajamas and related loungewear and spa products to recipients as gifts for similar special occasions and holidays. PajamaGram orders are placed via a toll free number or online at pajamagram.com.

The Calyx & Corolla business was acquired on August 29, 2003 for the purposes of extending the Company's product offerings in the gift delivery service industry to include floral delivery service. The Calyx & Corolla delivery service involves sending premium flowers and plants with unique up-scale arrangements and containers to recipients, direct from the growers, as gifts for special occasions and holidays. Calyx & Corolla orders are placed through a catalog, via a toll free number or online at calyxandcorolla.com.

SendAMERICA, Inc., a wholly owned subsidiary, is a business that extends the Company's product offerings in the gift delivery service industry to include food related gift products, under the service mark "TastyGram", delivered to recipients for special occasions and holidays. TastyGram orders are placed via a toll free number or online at tastygram.com.

The Retail Operation segment involves a retail location and family tours of its teddy bear factory in Shelburne, located ten miles south of Burlington, Vermont. The Company also has a retail store located on Route 100 in Waterbury, Vermont. In an effort to make a visit to the stores more entertaining and draw additional traffic, the Company has implemented the Make-A-Friend-For-Life bear assembly area at both stores, where visitors can participate in the creation of their own teddy bear.

The Wholesale/Corporate segment develops opportunities in the corporate affinity market and certain wholesale markets.

The reporting segments follow the same accounting policies used for the Company's consolidated financial statements and as described in the summary of significant accounting policies. Management evaluates a segment's performance based upon gross margin and gross margin percentage.

	2003	2002	2003	2002
Revenue	$ 13,410,319	$ 15,233,107	$ 19,542,092	$ 22,576,135
Basic net income(loss) attributable to common shareholders	$ 371,878	$ 89,534	$ 50,876	$ 84,486
Basic income(loss) per common share	$ 0.08	$ 0.02	$ 0.01	$ 0.01

Diluted net income (loss) attributable to common shareholders	$ 410 ,224	$ 107,160	$ 115,888	$ 124,809
Diluted income(loss) per diluted share	$ 0.07	$ 0.02	$ 0.02	$ 0.02

		"Gram	Services"
THREE MONTHS ENDED 12/31/03	Bear-Gram Service	PajamaGram Service	Calyx & Corolla Service	TastyGram Service	Retail Operations	Corporate/ Wholesale
Net Revenues	$ 5,277,253	$ 1,682,728	$ 5,524,868	$ 114,859	$ 724,279	$ 86,332
Cost of Goods Sold	1,937,715	705,791	2,726,966	66,176	273,567	36,291
Gross Margin	$ 3,339,538	$ 976,937	$ 2,797,902	$ 48,683	$ 450,712	$ 50,041
Gross Margin %	63.3%	58.1%	50.6%	42.4%	62.2%	58.0%

		"Gram	Services"
THREE MONTHS ENDED 12/31/02	Bear-Gram Service	PajamaGram Service	Calyx & Corolla Service	TastyGram Service	Retail Operations	Corporate/ Wholesale
Net Revenues	$ 6,854,444	$1,281,034	--	$ 168,845	$ 836,674	$ 149,102
Cost of Goods Sold	2,442,570	662,379	--	122,749	316,529	71,024
Gross Margin	$ 4,411,874	$ 618,655	--	$ 46,096	$ 520,145	$ 78,078
Gross Margin %	64.4%	48.3%	--	27.3%	62.2%	52.4%

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

The 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

		"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%