The Vermont Teddy Bear

Strategic Audit Report

Prepared by Sergei Dmitriev

The Vermont Teddy Bear Co., Inc.

Introduction

The Vermont Teddy Bear Co., Inc.: Challenges Facing a New CEOIntroductionVermont Teddy Bear Company was founded in 1981 by John Sorinto selling handsewn bears out of a pushcart in the streets of Burlington, Vermont. Since this time, the company[s focus has been to design, manufacture, and direct market the best teddy bears made in America using quality American materials and labor.Until 1994, Vermont Teddy Bear experienced a great deal of success and profitability. Problems arose in 1995. Since 1995, the company has had two CEOs. It changed its name to The Great American Teddy Bear Company and then changed it back to The Vermont Teddy Bear Company when customers got confused

1. Current Situations

The Vermont Teddy Bear Co., Inc. is the pioneer in direct marketing the Bear-Gram® gift delivery service, and the leading maker of hand-crafted, American-made Teddy Bears. The Company also services corporate accounts with customized Vermont-made as well as imported bears for the corporate affinity and wholesale markets.

Vermont Teddy Bear is a nationally recognized brand fueled currently through live reads with popular radio personalities in all 50 states, and in more than 120 markets. The Vermont Teddy Bear Company sells directly to customers though its 1-800-829-BEAR phone line (staffed by world-famous Bear-Counselors®), as well as online at www.VermontTeddyBear.com and at its two factory retail stores that receive over 150,000 visitors a year.

By offering its customers a creative alternative to flowers through its Bear-Gram gift delivery service, The Vermont Teddy Bear Company is gaining an ever growing share of the $15 billion dollar floral delivery industry. Well positioned with a solid balance sheet to pursue an aggressive growth strategy, the Company has been growing at an impressive rate. In this fiscal year, over 450,000 Bear-Gram gifts will be delivered around the world. Approximately 55% of these orders are received via the Company’s website, VermontTeddyBear.com.

Each Teddy Bear sent through its Bear-Gram delivery service is hand-crafted in Vermont and guaranteed for life, and is shipped with a personalized card and candy treat. With over 100 Bears from which to choose for any occasion, life event or holiday, the Vermont Teddy Bear Company helps people connect in a fun, personal and meaningful way.

A) Past Corporate Performance Indexes

Net revenues for the fiscal year ended June 30, 2004 totaled $55,828,000, an increase of

$15,553,000 from net revenues of $40,275,000 for the fiscal year ended June 30, 2003. Gross margin increased $6,671,000 to $31,501,000 for the fiscal year ended June 30,

2004, from $24,830,000 for the fiscal year ended June 30, 2003. Gross margin as a percentage of net

revenue decreased to 56.4 percent from 61.7 percent in the period.

Marketing and Selling expenses increased $4,553,000 to $21,814,000 for the fiscal year

ended June 30, 2004, from $17,261,000 for the fiscal year ended June 30, 2003.

Marketing and selling expenses as a percent of net revenues decreased to

39.1 percent for fiscal year ended June 30, 2004 from 42.9 percent for the fiscal year ended June

30, 2003.

General and Administrative expenses increased to $5,787,000 for the fiscal year ended

June 30, 2004, compared to $4,968,000 for the fiscal year ended June 30, 2003. As a percentage

of net revenues, general and administrative expenses decreased to 10.4 percent for the fiscal year

ended June 30, 2004, from 12.3 percent for the fiscal year June 30, 2003.

Interest expense increased to $668,000 due to increased long term debt obligations

associated with the acquisition of Calyx & Corolla for the fiscal year ended June 30, 2004,

compared to $599,000 for the fiscal year ended June 30, 2003. Interest income decreased to

$43,000 as a result of lower average cash balances in the fiscal year ended June 30, 2004,

compared to $138,000 for the fiscal year ended June 30, 2003.

The