BEAR Vermont Teddy Bear (MM)

Vermont Teddy Bear Co.(R) Reports Q1 Results: Company Prepares for Busy Christmas Holiday Season with Expansion of Fulfillment Center SHELBURNE, Vt., Nov. 15 /PRNewswire-FirstCall/ -- The Vermont Teddy Bear Company(R) (NASDAQ:BEAR) today reported a 22% increase in net revenues to approximately $6.1 million for the three months ended September 30, 2004, the first quarter of its fiscal year 2005. Net revenues were approximately $5.0 million for the three months ended September 30, 2003. The Company also reported a net loss available to common stockholders for the quarter of $173,000, or $.03 per diluted common share, as compared to a net loss available to common stockholders of $183,000, or $.04 per diluted share, for the same quarter last year. The revenue increase of approximately $1,158,000 in the first quarter of the fiscal year 2005 is primarily attributed to an increase of $1,533,000 in the Calyx & Corolla segment as compared to last year which included one month of revenue in the first quarter subsequent to the August 29, 2003 acquisition of the Calyx business. Net revenues in the PajamaGram(R) and TastyGram(R) segments also increased during the period by $31,000 and $11,000, respectively. These increases to revenue were partially offset by a decrease in net revenues in the Bear-Gram segment of $260,000 as the Company reduced BearGram marketing and selling expenses by $321,000 in the first quarter, the Company's only quarter that does not include a major gift giving holiday. Revenues in the Retail segment decreased by $99,000 due to reduced tourist traffic throughout the summer tourism season. Revenues in the Corporate/Wholesale segment decreased by $58,000. As the Company prepares for what is anticipated to be the busiest Christmas holiday selling season in its history, the expansion of its distribution facility located on property contiguous to its factory headquarters in Shelburne, Vermont is nearing completion. The building was completed in October and the majority of setup of conveyor systems and related equipment is expected to be completed in November, just prior to the onset of the Company's Christmas selling season. In order to accommodate growth and ensure capacity to fulfill and ship orders for the coming peak selling seasons, the Company doubled the size of the existing 60,400 square foot facility, opened in the fall of 2000, to a 120,800 square foot main floor foot print. The 60,400 square foot expansion will include additional picking lines for the PajamaGram and Calyx businesses. The BearGram picking lines are also being modified to accommodate an increase in the number of orders that are personalized with embroidery or artwork and dressed just prior to shipment. In addition, the expansion will house added packing stations and expanded conveyors systems to sort and process orders for shipment. Lastly, the Company will consolidate 25,000 square feet of offsite warehousing currently located in Williston, Vermont into the new space. An unfinished 25,000 square foot mezzanine in the expansion space above the new 60,400 square foot main floor space will allow the Company to consolidate and expand its call center operations in the future. Currently the Company's call center is fragmented with 200 seats spread out in multiple locations within the factory headquarters building. The mezzanine will accommodate approximately 250 seats in one area and free up space in the headquarters building for marketing and selling, and administrative operations. Meanwhile, consolidated gross margin dollars increased $199,000 to approximately $3.0 million in the three month period ended September 30, 2004, as compared to $2.8 million in the same period last year due to the gross margin contribution of the Calyx business for the entire three month period in fiscal 2005 versus for the one month subsequent to the acquisition date in the comparable three month period of fiscal 2004. Gross margin as a percentage of net revenues, however, declined in the quarter to 48.3% from 55.5% last year. The decrease in consolidated margin percentage is primarily due to the addition of Calyx revenues, which traditionally generate lower margins on a percentage basis than the Company's BearGram business. The Company's gross margin percentage was also negatively impacted in all segments by higher delivery costs primarily related to higher fuel surcharges and other ancillary charges imposed by common carriers. Margins in the BearGram segment were also negatively impacted in the quarter by an increase in unit costs that is attributed to lower production volumes in its teddy bear manufacturing operation as the Company continues to adjust to lower sales volumes in this segment and as it transitions to new processes for lean manufacturing called modular manufacturing. Margins in the PajamaGram segment decreased as a percentage of net revenues in the first quarter of fiscal 2005 as the Company promoted a sale on its PajamaGram website to reduce remaining quantities of seasonal merchandise in order to accommodate the new merchandise assortment for the upcoming holiday seasons that includes a greater percentage of the Company's own private label product manufactured by its suppliers overseas. The Company began the transition to modular manufacturing in February 2004 primarily in response to escalating worker's compensation costs related to repetitive motion injuries. In modular processes, employees work in teams or "modules" and rotate between manufacturing tasks performed to complete a bear in significantly shortened manufacturing cycles. The anticipated benefits of modular manufacturing, in addition to reduced worker's compensation costs, include reduced levels of work in process inventory which is already being recognized in the Company's inventory balances and improved quality as problems are caught and addressed immediately when each bear is completed within the shortened cycle. When the transition is complete later this year, the Company expects to achieve higher levels of efficiency with lower direct labor costs and improved employee satisfaction as employees no longer focus on a single operation and can work in a team environment. Excess overhead that currently impacts negatively on the Company's cost of goods in the BearGram segment will be addressed as the Company's reallocates manufacturing space to other operations and as throughput increases later in the year. Corresponding to an increase in net revenues of approximately $1,158,000 is an increase to marketing and selling expenses in the first quarter of fiscal year 2005 of approximately $18,000 to $1,799,000 from approximately $1,781,000 of net revenues for the same quarter last year. Increases in the Calyx & Corolla, PajamaGram and Retail marketing and selling expenses as well as call center and customer service costs to process order volume related to the Calyx business totaled $352,000. These increases were largely offset by the decreases in the Bear-Gram, TastyGram and Corporate segments totaling $334,000. General and administrative expenses for the first quarter of fiscal 2005 increased to $1,218,000 from $1,073,000 in the first quarter last year. As a percentage of net revenues, however, general and administrative expenses decreased to 19.8% in the quarter from 21.5% last year. The $145,000 increase is primarily attributed to increased legal expenses, employee benefit costs, buildings and maintenance costs and telephone costs. The Company incurred additional legal expenses of $33,000 in the first quarter of fiscal 2005 due to renewed legal activity in preparing for settlement discussions and a possible trial in the New York lease dispute. Employee benefit costs increased year over year in the first quarter by $11,000. Buildings and maintenance and telephone costs were higher by $28,000 and $38,000, respectively compared to the same period last year as the result of unanticipated labor reductions and credits obtained in the prior year period. A Vermont Teddy Bear Company Bear-Gram gift is a popular alternative to sending flowers. Each Bear-Gram gift includes a customized Vermont Teddy Bear accompanied by a personal greeting card and candy treat, all packaged in a colorful gift box with an air hole. Orders are placed by calling 1-800-829-BEAR or by shopping at http://www.vermontteddybear.com/. The PajamaGram Company is a gift delivery service where customers can pamper their loved ones by sending pajamas and spa products in luxurious packaging by calling 1-800-GIVE-PJS or shopping at http://www.pajamagram.com/. The TastyGram Company specializes in the delivery of creatively packaged, deliciously presented gourmet foods and sweets by with a personalized greeting card calling 1-800-82-TASTY or shopping at http://www.tastygram.com/ Calyx & Corolla delivers premium direct-from-the-grower floral gifts through its catalog, by phone at 1-800-800-7788 or online at http://www.calyxandcorolla.com/. The foregoing can be interpreted as including forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested by the statements above. THE VERMONT TEDDY BEAR CO., INC. Condensed Consolidated Statements of Operations For the Three Months Ended September 30, 2004 and 2003 (Unaudited) Three Months Ended September 30, September 30, 2004 2003 Net Revenues $6,137,544 $4,979,652 Cost of Goods Sold 3,176,054 2,217,527 Gross Profit 2,961,490 2,762,125 Operating Expenses: Marketing and Selling Expenses 1,798,838 1,780,864 General and Administrative Expenses 1,217,799 1,072,930 3,016,637 2,853,794 Operating Loss (55,147) (91,669) Interest Income 7,578 12,025 Interest Expense (160,739) (153,236) Other Income 1,917 488 Loss Before Income Taxes (206,391) (232,392) Income Tax Benefit 84,414 94,531 Net Loss (121,977) (137,861) Preferred Stock Dividends (50,913) (31,043) Accretion of Original Issue Discount 0 (13,623) Net Loss Available to Common Stockholders $(172,890) $(182,527) Basic Net Loss Per Common Share ($0.03) ($0.04) Diluted Net Loss Per Common Share ($0.03) ($0.04) Weighted Average Number of Shares Outstanding 5,006,000 4,864,555 Weighted Average Number of Diluted Common Shares Outstanding 5,006,000 4,864,555 September 30, June 30, September 30, 2004 2004 2003 (unaudited) (unaudited) Cash and Cash Equivalents $1,308,109 $6,586,571 $1,897,104 Current Assets 9,832,147 12,831,098 9,957,903 Total Assets 24,476,296 27,312,738 24,854,263 Current Liabilities 5,394,021 7,879,743 7,018,713 Long Term Debt 6,542,425 6,754,669 7,307,132 Series C Preferred 93,042 93,042 178,512 Series D Preferred 2,510,274 2,510,274 2,510,274 Stockholders' Equity 9,936,534 10,075,010 7,839,632 DATASOURCE: The Vermont Teddy Bear Company(R) CONTACT: Nicole L'Huillier of Vermont Teddy Bear, +1-802-985-1362, Web site: http://www.vermontteddybear.com/

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