U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1996.
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 of incorporation) (I.R.S. Employer Identification No.)
2236 Shelburne Road, Post Office Box 965
Shelburne, Vermont 05482
(Address of principal executive offices)
(802) 985-3001
(Issuer's telephone number)
Check whether the issuer (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 .
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 5,160,750 shares of
Common Stock, $.05 par value per share, as of November 13, 1996.
Traditional Small Business Disclosure Format (check one):
Yes ; No X .
<PAGE>
The Vermont Teddy Bear Co., Inc.
Index to Form 10-QSB
September 30, 1996
Page No.
PART I - FINANCIAL INFORMATION
Financial Statements
Statement of Operations for the Three Months
ended September 30, 1996 and 1995 2
Balance Sheet as of September 30, 1996 3
Statement of Cash Flows for the Three Months
ended September 30, 1996 4
Notes to Financial Statements 5
Management's Discussion and Analysis 7
PART II - OTHER INFORMATION
Legal Proceedings 10
Changes In Securities 10
Submission of Matters to a Vote of Security Holders 10
SIGNATURES 11
<PAGE>
THE VERMONT TEDDY BEAR CO., INC.
Statements of Operations
For the Three Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
1996 1995
----------- -----------
<S> <C> <C>
Net Revenues $2,924,256 $3,518,303
Cost of Goods Sold 1,175,283 1,705,338
----------- -----------
Gross Profit 1,748,973 1,812,965
Selling, General and Administrative Expenses:
Selling Expenses 1,207,084 1,346,297
General and Administrative Expenses 648,303 769,491
----------- -----------
1,855,387 2,115,788
----------- -----------
Operating Loss (106,414) (302,823)
Interest Income 15,512 13,225
Interest Expense (109,906) (93,111)
Other Income(Expense) (14,622) 8,499
----------- -----------
Loss Before Income Taxes (215,430) (374,210)
Income Tax (Provision)Benefit 86,172 0
----------- -----------
Net Loss (129,258) (374,210)
Preferred Stock Dividends (18,000) (18,000)
----------- -----------
Net Loss-Common Stockholders (147,258) (392,210)
=========== ===========
Net Loss Per Common Share ($0.03) ($0.08)
=========== ===========
Weighted Average Number of Shares Outstanding 5,160,750 5,160,500
=========== ===========
</TABLE>
2
<PAGE>
THE VERMONT TEDDY BEAR CO., INC.
Balance Sheet
September 30, 1996
(Unaudited)
<TABLE>
ASSETS
<S> <C>
Cash, cash equivalents(includes restricted $822,049
cash of $365,000)
Accounts receivable, trade 97,170
Inventories 2,434,554
Prepaid expenses and other current assets 504,317
Prepaid income taxes 48,807
Deferred income taxes 240,585
--------------
Total Current Assets 4,147,482
Property and equipment, net 10,215,236
Deposits and other assets 172,851
Note receivable 95,000
--------------
Total Assets $14,630,569
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of:
Long-term debt 3,486,600
Capital lease obligations 90,421
Accounts payable 1,314,534
Accrued expenses 595,791
--------------
Total Current Liabilities 5,487,346
Long-term debt, net of current portion 245,514
Other liabilities 37,500
Capital lease obligations, net of current portion 301,471
Deferred income taxes 240,585
--------------
Total Liabilities $6,312,416
Stockholders' Equity:
Preferred stock, $.05 par value:
Authorized 1,000,000 shares Series A; issued and
outstanding, 90 shares. 900,000
Authorized 375,000 shares Series B; issued and
outstanding, 204,912 shares. 10,245
Common stock, $.05 par value:
Authorized 20,000,000 shares: issued 5,172,750 shares,
outstanding 5,160,750 shares 258,638
Additional paid-in capital 10,565,482
Treasury stock at cost: 12,000 shares (106,824)
Accumulated deficit (3,309,388)
--------------
Total Stockholders' Equity 8,318,153
Total Liabilities and Stockholders' Equity $14,630,569
==============
</TABLE>
3
<PAGE>
THE VERMONT TEDDY BEAR CO., INC.
Statements of Cash Flows
For the Three Months Ended September 30, 1996 and 199
(Unaudited)
<TABLE>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss ($129,258) ($374,210)
Adjustments to reconcile net loss to net cash
provided by(used for) operating activities:
Depreciation and amortization 227,562 187,026
Loss on disposal of fixed assets 18,191 684
Changes in assets and liabilities:
Accounts receivable,trade 34,380 (76,877)
Inventories (459,823) 479,045
Prepaid and other current assets (226,815) 52,570
Deposits and other assets (74,765) 39,432
Accounts payable (39,164) (416,783)
Accrued expenses 81,813 (217,639)
Income taxes (86,172) 24,537
Deferred income taxes
----------- -----------
Net cash provided by(used for) operating activities (654,051) (302,215)
Cash flows from investing activities:
Acquisition of property and equipment (160,671) (341,969)
Proceeds from sale of fixed assets 0 19,900
----------- -----------
Net cash used for investing activities (160,671) (322,069)
Cash flows from financing activities:
Borrowings of long-term debt 57,104 3,500,000
Borrowings of short-term debt 40,617 558,572
Payments of short-term debt (10,585) (3,499,173)
Payments of long-term debt (47,929) (8,018)
Principal payments on capital lease obligations (25,068) (36,655)
Dividends Paid
Issuance of stock 501,132
----------- -----------
Net cash provided by financing activities 515,271 514,726
----------- -----------
Net decrease in cash and cash equivalents (299,451) (109,558)
Cash and cash equivalents, beginning of period 1,121,500 1,070,862
----------- -----------
Cash and cash equivalents, end of period $822,049 $961,304
=========== ===========
Cash paid for interest 109,564 119,277
Cash paid for taxes 0 3,166
Non-cash financing - capital lease 0 42,933
</TABLE>
4
<PAGE>
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, 1996, included in the Company's filing with the SEC
on Form 10-KSB. The Company's sales are seasonal in nature and
therefore the results for these interim periods are not necessarily
indicative of the results for the respective years.
(2) Net Earnings Per Share
Net earnings per common share is determined by dividing the net earnings
available to common stockholders by the weighted number of shares of
Common Stock and Common Stock equivalents outstanding.
(3) Income Taxes
The Company accounts for income taxes in accordance with the Statement
of Financial Accounting Standards No. 109, "Accounting for income
taxes," which requires the use of the liability method. This standard
determines deferred income taxes based on the estimated future tax
effects of any differences between the financial statement and the basis
of tax assets and liabilities, given the provisions of the enacted tax
laws. Based upon the Company's recent losses, a valuation allowance has
been provided to fully reserve its deferred tax assets. If the Company
is able to achieve sufficient profitability to realize all or a portion
of its deferred assets, the valuation allowance will be reduced through
a credit to income in future periods.
(4) Inventories
Inventories are stated at the lower of cost or market using the first-
in, first-out method.
5
<PAGE>
(5) Debt and Borrowings
Effective September 26, 1996, the Company extended its $1,000,000 line
of credit agreement with the Vermont National Bank through December 30,
1996. The line of credit, originally established September 26, 1995,
bears interest at a variable rate of two percent above the prime rate
and is secured by all assets of the Company. There was no borrowing on
the line at September 30, 1996.
On September 26, 1995, the Company executed a financing agreement with
the Vermont National Bank, consisting of a $3.5 million commercial
mortgage loan secured by a first mortgage on the Company's Shelburne,
Vermont facility, as well as business assets. Repayment of the mortgage
is based on a thirty-year amortization schedule, with a balloon payment
due on September 26, 1997. The Company is currently negotiating with
several parties to replace this mortgage loan financing, and management
believes it will be successful in securing an alternative financing
source to replace its mortgage loan with the Vermont National Bank.
On December 26, 1995, Green Mountain Capital L.P. agreed to lend the
Company up to $500,000 over a twelve-month period commencing upon the
date of agreement, in the form of five-year term notes. As of September
30, 1996, a total of $200,000 had been borrowed, the minimum borrowing
required by the terms of the agreement. The notes, which bear interest
at twelve percent per annum, are repaid in monthly installments through
December 26, 2000, and are secured by a subordinated security interest
in the Company's personal property. In addition, Green Mountain Capital
is entitled to receive warrants to purchase 4,000 shares of Common
Stock, at an exercise price of $3.375 per share, for each $100,000
advanced to the Company. The right to exercise these warrants begins
December 26, 1997, and expires the earlier of December 26, 2000, or five
years after full repayment of the notes. Accordingly, warrants to
purchase a total of 8,000 shares of the Company's Common Stock have been
granted to Green Mountain Capital as of September 30, 1996.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 which appear elsewhere in this
report, as well as the 10-KSB filing for the fiscal year ending June 30,
1996.
RESULTS OF OPERATIONS
Comparison of the three-month period ended September 30, 1996, and the
three-month period ended September 30, 1995.
Net revenues for the Company for the three-month period ended September
30, 1996 totaled $2,924,000, a 16.9 percent decrease from net revenues
of $3,518,000 for the three-month period ended September 30, 1995. By
business segment, retail store revenues increased $31,000, supported by
the opening of the Company's new store in North Conway, New Hampshire.
Wholesale sales decreased $355,000, primarily as the Company did not
have an appearance on the QVC television network in the recently-
completed quarter, as it had in the comparable period of 1995. Bear-
Gram revenues declined by $254,000, and Direct Mail revenues increased
$9,000.
Gross margin decreased to $1,749,000 for the quarter ended September 30,
1996, compared to $1,813,000 for the quarter ended September 30, 1995.
As a percentage of net revenues, gross margin increased to 59.8 percent
from 51.5 percent, for the three months ended September 30, 1996, and
1995, respectively. The Company's move to its new production facility
in July 1995 caused production downtime and required the re-
establishment and re-configuration of production processes, which
decreased the number of units produced in the period and led to a lower
gross margin percentage for the quarter ended September 30, 1995.
Marketing and selling expenses decreased to $1,207,000 for the three-
month period ended September 30, 1996, from $1,346,000 for the three-
month period ended September 30, 1995. This $139,000 reduction was
attributable primarily to the termination of the Company's NASCAR
sponsorship, as well as decreased wages in marketing and selling
functions. As a percentage of net revenues, marketing and selling
expenses were 41.3 percent and 38.3 percent for the three months ended
September 30, 1996, and 1995, respectively.
7
<PAGE>
General and administrative expenses were $648,000 for the quarter ended
September 30, 1996, compared to $769,000 for the quarter ended September
30, 1995. This decrease of $121,000 was the result of expense
reductions in several areas, including wages, legal fees, consulting,
recruitment expense, and other outside services. As a percentage of net
revenues, general and administrative expenses were 22.2 percent and 21.9
percent for the three months ended September 30, 1996, and 1995,
respectively.
The Company experienced an operating loss of $106,000 for the three
months ended September 30, 1996, compared to an operating loss of
$303,000 for the three months ended September 30, 1995. Improved
operating results, despite lower net revenues, resulted from improved
gross margin and reductions in selling, general and administrative
expenses.
Other expense totaled $15,000 for the quarter ended September 30, 1996,
due to an $18,000 loss recognized on the sale of a fixed asset. Other
income of $8,000 was realized in the quarter ending September 30, 1995,
all of which was rental income for a structure on the Company's site
which is no longer rented.
The Company recorded an income tax benefit of $86,000 for the quarter
ended September 30, 1996. For the comparable quarter of 1995, no tax
provision was recorded for the period. The Company had $2,360,000 in
Net Operating Loss Carryforwards ("NOLs") at June 30, 1996.
As a result of the foregoing factors, net loss to common stockholders
improved to a loss of $147,000, or three cents per common share, for the
quarter ended September 30, 1996, from a loss of $392,000, or eight
cents per common share, for the quarter ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company's cash position decreased to
$822,000, from $1,122,000 at June 30, 1996. Each of these amounts
include $365,000 classified as restricted cash, the largest component of
which is a $300,000 certificate of deposit required as part of the
Company's loan agreement with the Vermont National Bank. Proceeds from
a preferred stock issuance were more than offset by increases in
inventory, prepaid, and other current assets, as well as a reduction in
accounts payable.
Inventory levels of materials, work-in-process, and finished goods
totaled $2,435,000 at September 30, 1996, compared to $1,975,000 at June
30, 1996. In conjunction with the Company's Fall/Holiday catalog, which
began mailing on September 19, 1996, and in preparation for the upcoming
Christmas selling season, the Company increased its purchases of
materials to manufacture bears, as well as items for direct resale
during the three month period.
8
<PAGE>
On December 26, 1995, Green Mountain Capital L.P. agreed to lend the
Company up to $500,000 over a twelve-month period commencing upon the
date of agreement, in the form of five-year term notes. As of September
30, 1996, a total of $200,000 had been borrowed, the minimum borrowing
required by the terms of the agreement. The notes, which bear interest
at twelve percent per annum, are repaid in monthly installments through
December 26, 2000, and are secured by a subordinated security interest
in the Company's personal property. In addition, Green Mountain Capital
is entitled to receive warrants to purchase 4,000 shares of Common
Stock, at an exercise price of $3.375 per share, for each $100,000
advanced to the Company. The right to exercise these warrants begins
December 26, 1997, and expires the earlier of December 26, 2000, or five
years after full repayment of the notes. Accordingly, warrants to
purchase a total of 8,000 shares of the Company's Common Stock have been
granted to Green Mountain Capital as of September 30, 1996.
Effective September 26, 1996, the Company extended its $1,000,000 line
of credit agreement with the Vermont National Bank through December 30,
1996. The line of credit, originally established September 26, 1995,
bears interest at a variable rate of two percent above the prime rate
and is secured by all assets of the Company. There was no borrowing on
the line at September 30, 1996, or at June 30, 1996.
The Company has a commercial mortgage loan of $3.5 million with the
Vermont National Bank which is due on September 26, 1997. As this date
is within twelve months of the date of the financial statements
contained herein (September 30, 1996), the remaining principal amount
under the agreement has been reclassified as short-term debt. The
Company is in the process of exploring other financing alternatives to
replace its mortgage loan with the Vermont National Bank, and management
believes it will be successful in securing an alternative to its
mortgage loan financing with the Vermont National Bank.
On July 12, 1996, the Company privately placed $550,000 of Series B
Convertible Preferred Stock. The 204,912 preferred shares are not
entitled to any dividends or voting rights, but are convertible on a
share-for-share basis into the Company's Common Stock, subject to
certain anti-dilution rights, at any time on or after July 12, 1997.
Accompanying the issuance of the Preferred Stock were warrants to
purchase 204,912 shares of the Company's Common Stock exercisable
between July 12, 1997, and July 12, 1999 at an exercise price of $2.434
per share. In addition, finder's warrants for 10,245 shares of Common
Stock were issued with the same terms and conditions. Common shares
issued as the result of the conversion of the Series B Convertible
Preferred Stock and/or the exercise of the aforementioned warrants shall
be considered "restricted securities" and shall be subject to certain
registration rights.
Management believes that the amount and structure of financing available
to the Company, as well as cash flows from operations, will be
sufficient to meet the Company's working capital needs and planned
capital expenditures for the next twelve months, provided the Company is
successful in securing an alternative to its mortgage loan financing
with the Vermont National Bank prior to September 26, 1997.
9
<PAGE>
LEGAL PROCEEDINGS
A federal trademark application was filed in April 1992 by Donna L.
Boyce, of Hyde Park, Massachusetts, for the mark "Teddygrams." Based on
materials submitted with her application, Ms. Boyce is seeking trademark
protection to sell personalized teddy bears. In response, the Company
filed a notice of opposition, and, in November 1993, the United States
Patent and Trademark Office instituted the opposition against Ms.
Boyce's application to register "Teddygrams." On April 19, 1996, a
Motion for Summary Judgment in favor of the Company was denied. The
Company entered into a settlement agreement with Ms. Boyce as of August
1, 1996, which requires the Company to dismiss its opposition to the
application to register "Teddygrams," and requires Ms. Boyce to dismiss
her opposition to the Company's application to register "Bear-Gram" and
her counterclaim to cancel the Company's trademark "Teddy Bear-Gram."
The Company has agreed to pay a total of $35,000 to reimburse Ms.
Boyce's attorney's fees and other costs related to her opposition of the
Company's trademarks, and to acquire the right of first refusal on Ms.
Boyce's "Teddygrams" mark.
CHANGES IN SECURITIES
On July 12, 1996, the Company privately placed $550,000 of Series B
Convertible Preferred Stock. The 204,912 preferred shares are not
entitled to any dividends or voting rights, but do have a liquidation
preference on a pari passu basis with the Company's previously issued
Series A Preferred Stock. The Series B Preferred Stock is convertible
on a share-for-share basis into the Company's Common Stock, subject to
certain anti-dilution rights, at any time on or after July 12, 1997.
Common shares issued as the result of the conversion of the Series B
Convertible Preferred Stock shall be considered "restricted securities"
and shall be subject to certain registration rights.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
three-month period covered by this report.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The Vermont Teddy Bear Co., Inc.
Date: November 14, 1996 /s/ R. Patrick Burns,
R. Patrick Burns,
Chief Executive Officer
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE SEPTEMBER 30, 1996 BALANCE SHEET
AND THE THREE MONTH STATEMENT OF OPERATIONS ENDED
SEPTEMBER 30, 1996 FOR THE VERMONT TEDDY BEAR CO., INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 822,049
<SECURITIES> 0
<RECEIVABLES> 97,170
<ALLOWANCES> 0
<INVENTORY> 2,434,554
<CURRENT-ASSETS> 4,147,482
<PP&E> 12,072,027
<DEPRECIATION> 1,856,791
<TOTAL-ASSETS> 14,630,569
<CURRENT-LIABILITIES> 5,487,346
<BONDS> 4,124,006
0
910,245
<COMMON> 258,638
<OTHER-SE> 7,149,270
<TOTAL-LIABILITY-AND-EQUITY> 14,630,569
<SALES> 2,924,256
<TOTAL-REVENUES> 2,924,256
<CGS> 1,175,283
<TOTAL-COSTS> 1,175,283
<OTHER-EXPENSES> 1,870,009
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,394
<INCOME-PRETAX> (215,430)
<INCOME-TAX> 0
<INCOME-CONTINUING> (147,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (147,258)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
