U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 1999 .
[ ] 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)
Not Applicable
(Former name, former address, and former fiscal year, if changed
since last report)
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: 5,691,168 shares of Common Stock,
$.05 par value per share, as of March 31, 1999.
Transitional Small Business Disclosure Format (check one):
Yes ; No X .
The Vermont Teddy Bear Co., Inc.
Index to Form 10-QSB
March 31, 1999
Page No.
Part I - Financial Information
Financial Statements
Balance Sheet as of March 31, 1999 3
Statements of Operations for the Three and Nine
Months ended March 31, 1999 4
Statements of Cash Flows for the Three and Nine
Months ended March 31, 1999 5
Notes to Financial Statements 6
Management's Discussion and Analysis 10
Part II - Other Information
Item 4. Submission of Matters to a Vote of Stockholders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 18
<TABLE>
THE VERMONT TEDDY BEAR CO., INC.
Balance Sheet
March 31, 1999
(Unaudited)
<S> <C>
ASSETS
Cash, cash equivalents(includes restricted $4,150,097
cash of $363,000)
Accounts receivable, trade 35,831
Inventories 2,423,042
Prepaid expenses and other current assets 574,083
Deferred income taxes 233,203
Total Current Assets 7,416,256
Property and equipment, net 8,277,709
Deposits and other assets 967,153
Note receivable 65,000
Total Assets $16,726,118
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of:
Long-term debt 171,373
Capital lease obligations 242,779
Accounts payable 2,724,280
Accrued expenses 839,229
Total Current Liabilities 3,977,661
Long-term debt, net of current portion 211,097
Capital lease obligations, net of current portion5,563,907
Deferred income taxes 233,203
Total Liabilities $9,985,868
Series C Redeemable Preferred Stock 365,256
Stockholders' Equity:
Preferred stock, $.05 par value:
Authorized 1,000,000 shares Series A; issued and
outstanding, 90 shares. 1,098,000
Authorized 375,000 shares Series B; issued and
outstanding, 27,942 shares. 1,397
Common stock, $.05 par value:
Authorized 20,000,000 shares: issued 5,715,288 shares,
outstanding 5,691,168 shares 285,765
Additional paid-in capital 10,887,483
Treasury stock at cost: 24,120 shares (117,500)
Accumulated deficit (5,780,151)
Total Stockholders' Equity 6,374,994
Total Liabilities and Stockholders' $16,726,118
Equity
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
THE VERMONT TEDDY BEAR CO., INC.
Statements of Operations
For the Three and Nine Months Ended March 31, 1999 and 1998
(Unaudited)
<S> <C> <C> <C>
<C>
Three Months Ended Nine
Months Ended
Mar 31,1999 Mar 31,1998 Mar 31,1999
Mar 31,1998
Net Revenues $7,280,441 $5,772,179 $15,132,190
$12,814,044
Cost of Goods Sold 2,638,783 2,509,260 5,766,838
5,481,824
Gross Profit 4,641,658 3,262,919 9,365,352
7,332,220
Selling, General and Administrative Expenses:
Selling Expenses 2,486,568 2,355,946 5,521,599
6,029,059
General and Administrative Expenses
821,241 709,896 2,218,590
2,236,755
3,307,809 3,065,842 7,740,189
8,265,814
Operating Income(Loss) 1,333,849 197,077 1,625,163
(933,594)
Interest Income 23,296 14,560 43,512
29,815
Interest Expense (154,471) (165,453) (466,656)
(488,606)
Other Income 150 280 1,116
16,211
Income(Loss) Before Income Taxes
1,202,824 46,464 1,203,135
(1,376,174)
Income Tax Provision 0 (3,583) 0
(3,583)
Net Income(Loss) 1,202,824 42,881 1,203,135
(1,379,757)
Preferred Stock Dividends (27,000) (18,000) (69,000)
(54,000)
Accretion of Warrants Issued in connection with
Series C preferred stock (13,623) 0 (22,705)
0
Net Income (Loss)-Common Stockholders
1,162,201 24,881 1,111,430
(1,433,757)
Basic Net Income(Loss) Per Common Share
$0.21 $0.00 $0.21
($0.28)
Diluted Net Income(Loss) Per Common Share
$0.16 $0.00 $0.17
($0.28)
Weighted Average Number of Common Shares Outstanding
5,516,160 5,173,858 5,297,012
5,170,079
Weighted Average Number of Diluted
Common Shares Outstanding 7,175,489 5,578,028 6,532,918
5,170,079
The accompanying notes are an integral part of these financial
statements.
</TABLE>
<PAGE>
<TABLE>
THE VERMONT TEDDY BEAR CO., INC.
Statements of Cash Flows
For the Nine Months Ended March 31, 1999 and 1998
(Unaudited)
<S> <C>
<C>
1999
1998
Cash flows from operating activities
Net Income (loss) $1,203,135
$(1,379,757)
Adjustments to reconcile net income (loss) to net cash
provided by(used for) operating activities:
Depreciation and amortization 693,640
718,633
Loss on disposal of fixed assets 29,315
137,633
Changes in assets and liabilities:
Accounts receivable,trade 15,707
21,194
Inventories (26,797)
454,885
Prepaid and other current assets (129,854)
(61,236)
Deposits and other assets (97,105)
(634,837)
Note Receivable 22,500
- - -
Accounts payable 878,238
(104,485)
Accrued expenses and other liabilities (76,962)
229,328
Net cash provided by(used for) operating activities 2,511,817
(618,642)
Cash flows from investing activities:
Purchase of property and equipment (124,878)
(63,374)
Proceeds from sale of fixed assets 1,751
38,888
Net cash used for investing activities (123,127)
(24,486)
Cash flows from financing activities:
Borrowings of short-term debt - -
313,136
Borrowings of long-term debt - -
200,000
Payments of short-term debt (45,603)
(750,463)
Payments of long-term debt (186,980)
(3,416,328)
Proceeds from sale-leaseback of building and property - -
5,863,874
Principal payments on capital lease obligations (167,234)
(149,673)
Issuance of common stock, exercise of stock options 44,848
13,233
Issuance of preferred stock 600000
- - -
Purchase of Treasury Stock -10676
- - -
Net cash provided by financing activities 234,355
2,073,779
Net increase in cash and cash equivalents 2,623,045
1,430,651
Cash and cash equivalents, beginning of period 1,527,052
441,573
Cash and cash equivalents, end of period $4,150,097
$1,872,224
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest 465,081
491,772
Cash paid for taxes - -
3,734
Supplemental Disclosures of Non-cash Investing and Financing Activities:
Capital lease from sale-leaseback of building and property - -
5,863,874
Conversion of preferred stock to common stock 8848
- - -
The accompanying notes are an integral part of these financial
statements.
</TABLE>
Notes to Financial Statements
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, 1998, 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.
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.
Earnings Per Share
In accordance with SFAS No. 128, Earnings Per Share, basic and diluted net
income (loss) per common share is calculated by dividing net income (loss) by
the weighted number of common shares outstanding for all periods presented.
SFAS No. 128 establishes standards for computing and presenting earnings per
share and applies to entities with publicly held common stock or potential
common stock. The Company has applied the provisions of SFAS No. 128 and Staff
Accounting Bulletin (SAB) No. 98 retroactively to all periods presented.
The following table reconciles the weighted average common shares outstanding
to the shares used in the computation of basic and weighted average common
shares outstanding:
Three Months Ended Nine Months Ended
03/31/99 03/31/98 03/31/99 03/31/98
Weighted average 5,516,160 5,173,808 5,297,012 5,170,079
number of shares used
in basic EPS calculation
Add: Incremental weighted
average common shares
issuable upon exercise of
stock options and warrants
outstanding 1,659,329 404,220 1,235,906 --
Weighted average
number of shares used in
diluted EPS calculation 7,175,489 5,578,028 6,532,918 5,170,079
Shares under option plans
Excluded in computation of
Diluted EPS due to anti-
dilutive effects 861,130 551,155 97,755 1,738,679
New Accounting Pronouncements
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of SFAS No. 130 had no
impact on the Company's net loss or shareholders' equity for the twelve months
ended June 30, 1998 or the nine months ended March 31, 1999.
The Financial Accounting Standards Board issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, in June 1997. The statement
establishes standards for the way that public business enterprises report
information and operating segments in annual financial statements and requires
reporting of selected information in interim financial reports. The required
disclosures for SFAS No. 131, which are effective for fiscal years beginning
after December 15, 1997, will be included in the Company's fiscal 1999 annual
report on Form 10-K.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, requiring computer software costs
associated with internal use software to be expensed as incurred until certain
capitalization criteria are met. The Company will adopt SOP 98-1 beginning July
1, 1999. Adoption of this Statement is not expected to have a material impact
on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on Costs of Start-Up Activities,
requiring all costs associated with pre-opening, pre-operating, and organization
activities to be expensed as incurred. The Company will adopt SOP 98-5
beginning July 1, 1999. Adoption of this Statement is not expected to have a
material impact on the Company's financial position or results of operations.
Income Taxes
The Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards (SFAS) 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. In view of the
Company's recent losses, a valuation allowance has been provided to fully
reserve its deferred tax assets due to the uncertainty of their realization. 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 the income tax provision in future periods.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Inventories consisted of the following at March 31, 1998:
Raw materials $ 449,682
Work in process 240,729
Finished goods 1,732,631
$2,423,042
Debt and Borrowings
The Company has been operating without a working capital line of credit
since July 18, 1997.
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 The Shepherd Group LLC. Accompanying the
Series C Preferred Stock are 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 Company
will accrete, over a five year period, an aggregate of approximately $270,000.
Each of the sixty shares of Series C Preferred Stock has a liquidation
value of $10,000 per share, and is convertible into 9,523 shares of the
Company's Common Stock. The Series C Preferred Stock requires redemption upon
the tenth anniversary of its issuance, with both the Company and the Series C
Preferred stockholders having call and put rights, respectively, beginning on
the fifth anniversary of issuance. The Series C Preferred stock carries voting
rights on an as-converted basis, and, as a class, has the right to elect two
members to the Company's Board of Directors. Both the Series C Preferred Stock
and the accompanying warrants carry certain anti-dilution provisions. The
Series C Preferred Stock has a cumulative preferred dividend of six percent per
annum, payable quarterly. The dividends are required to be paid in additional
shares of Series C Preferred Stock for the first two and one-half years after
issuance, and thereafter may be paid in cash or additional shares of Series C
Preferred Stock, at the Company's option.
On December 31, 1997, the Company borrowed $200,000 from Green Mountain
Capital L.P. in the form of a five-year term note. The note bears interest at
12 percent per annum, is repayable in monthly installments through December 31,
2002, and is secured by a security interest in the Company's real and personal
property. In conjunction with the issuance of the notes, Green Mountain Capital
received warrants to purchase 100,000 shares of Common Stock at an exercise
price of $1.00 per share, subject to certain anti-dilution provisions. (Prior
warrants granted to Green Mountain Capital to purchase 20,000 shares at $3.375
were canceled upon the issuance of this new note.) The right to exercise these
warrants began December 31, 1998, and expires the earlier of December 31, 2004
or five years after the full repayment of the loan and existing notes. No value
has been ascribed to these warrants, as the amount would not be material to the
financial statements.
On July 18, 1997, the Company completed a sale-leaseback transaction involving
its factory headquarters and a portion of its property located in Shelburne,
Vermont. This financing replaced the Company's mortgage and line of credit
agreement with the Vermont National Bank. The Company received approximately
$5.9 million in cash, of which approximately $3.3 million was used to pay off
the existing mortgage with the Vermont National Bank. The balance,
approximately $2.6 million, was used for general working capital purposes, to
pay down a $600,000 balance on the Company's line of credit (which was retired
as the result of the termination of the original mortgage loan), and transaction
costs of $591,000 associated with the sale-leaseback. The lease obligation,
secured by the business assets of the Company, is payable on a twenty-year
amortization schedule through July 2017. The transaction was accounted for under
the financing method in accordance with Statement of Financial Accounting
Standard No. 98, "Accounting for Leases."
As of June 30, 1997, the Company had a $1,000,000 revolving line of credit from
a bank, which was terminated on July 18, 1997, pursuant to the Company's sale-
leaseback transaction.
Contingency
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 alleging that
it was in default under the lease for failure to resume occupancy and demanding
back rent for the period July 8, 1998 to December 31, 1998 in the amount of
$144,355, and on January 4, 1999 it received a demand to resume rent payments
beginning January, 1999. The Company disputes the landlord's position and
believes it is not obligated to resume occupancy or pay rent under the lease.
The Company has accrued management's estimated cost to settle this contingency
of $145,000 but no assurance can be given that this dispute can be settled for
this amount.
Series B Preferred Stock Conversion
On February 3, 1999, holders of 176,970 shares of Series B Preferred Stock
exercised their conversion rights in accordance with the Series B Preferred
Stock agreement. The 176,970 shares of Series B Preferred Stock were converted
to approximately 474,989 common shares.
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, 1998. 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 which are predictions of or indicate future events and trends
and which 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
statements. 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.
Results of Operations
Comparison of the three-month periods ended March 31, 1999 and 1998.
Net revenues for the Company for the three-month period ended March 31, 1999
totaled $7,280,000, a 26.1 percent increase from net revenues of $5,772,000 for
the three-month period ended March 31, 1998. By business segment, Bear-Gram
revenues, which include internet revenues, rose $1,383,000, attributable
primarily to increased sales from the Company's www.vermontteddybear.com web
site and the expansion of the Company's direct response radio advertising
campaign into new markets around the country. Direct mail revenues rose
$145,000, due primarily to improved demand-per-catalog for the 1999 Valentine's
Day catalog. Wholesale and corporate sales revenues rose $88,000 as the Company
added several new customers in the wholesale and corporate affinity markets,
while licensing revenues decreased $14,000. Retail revenues decreased $94,000.
Revenue for the quarter ended March 31, 1998 included results from the Company's
Freeport, Maine, and North Conway, New Hampshire retail stores, which were not
in operation during the quarter ended March 31, 1999.
Gross margin increased to $4,642,000 for the quarter ended March 31, 1999, from
$3,263,000 for the quarter ended March 31, 1998. As a percentage of net
revenues, gross margin increased to 63.8 percent from 56.5 percent for the
three-month periods ended March 31, 1999, and 1998, respectively. Factors
contributing to improved gross margin include a reduction in goods purchased for
resale and lower product distribution costs associated with the curtailment of
off-site retail store operations, the introduction of new products with higher
unit margins, and lower costs associated with imported raw materials, teddy bear
outfits and accessories.
Selling expenses increased to $2,487,000 for the three-month period March 31,
1999, from $2,356,000 for the three-month period ended March 31, 1998. The
decrease in retail store expenses due to the curtailment of off-site retail
store operations, were more than offset by increases in advertising expenses for
Bear-Gram radio marketing. As a percentage of net revenues, selling expenses
were 34.2 percent and 40.8 percent for the three months ended March 31, 1999,
and 1998, respectively. The percentage improvement is attributed to lower Bear-
Gram advertising costs as a percentage of net revenue in addition to the
curtailment of expenses related to the Company's off-site retail stores.
General and administrative expenses were $821,000 for the quarter ended March
31, 1999, compared to $710,000 for the quarter ended March 31, 1998. The
$111,000 increase is due to higher credit card processing costs associated with
the increase in net revenues, increased legal and accounting fees, and increased
health insurance costs. As a percentage of net revenues, general and
administrative expenses were 11.3 percent and 12.3 percent for the three months
ended March 31, 1999, and 1998, respectively.
Preferred Stock dividends increased by $9,000 during the quarter ended March 31,
1999. This increase is attributed to the six percent cumulative dividend on the
Series C Preferred Stock. Warrant accretion increased by $13,600 for the
quarter ended March 31, 1998. This increase is the result of accretion of the
net valuation attributed to the warrant issued in connection with the Series C
Preferred Stock of approximately $270,000, which is accreting ratably over a
five year period.
As a result of the foregoing factors, net income to common stockholders totaled
$1,162,000, or twenty-one cents per basic common share outstanding or sixteen
cents on a fully diluted basis, for the quarter ended March 31, 1999, compared
to a net income to common stockholders of $25,000, or zero cents per basic
common share outstanding for the quarter ended March 31, 1998.
Comparison of the nine-month periods ended March 31, 1999 and 1998.
Net revenues for the Company for the nine-month period ended March 31,
1999 totaled $15,132,000, an 18.1 percent increase from net revenues of
$12,814,000 for the nine-month period ended March 31, 1998. By business
segment, Bear-Gram revenues, which include internet revenues, increased
$2,062,000 and wholesale and corporate sales revenues increased $447,000.
Direct mail revenues increased $399,000 due to improved demand-per-catalog for
the 1999 Valentine's Day catalog. Licensing revenues rose $21,000. Retail
revenues decreased $611,000. Revenue for the nine months ended March 31, 1998
included results from all three of the Company's off-site retail stores. The
Company's New York City store was not in operation during the nine months ended
March 31, 1999. The Freeport, Maine store was closed in August, 1998, and the
North Conway, New Hampshire store was closed in October, 1998.
Gross margin increased to $9,365,000 for the nine months ended March 31,
1999 from $7,332,000 for the nine months ended March 31, 1998. As a percentage
of net revenues, gross margin increased to 61.9 percent from 57.2 percent, for
the nine months ended March 31, 1999 and 1998, respectively. This improvement
is primarily attributed to a reduction in goods purchased for resale and lower
product distribution costs associated with the curtailment of off-site retail
store operations and the introduction of new products with higher unit margins.
Selling expenses decreased by $507,000 to $5,522,000 for the nine-month
period March 31, 1999 from $6,029,000 for the nine-month period ended March 31,
1998. This reduction was primarily due to the curtailment of operational
expenses related to the Company's New York City, Freeport, Maine, and North
Conway, New Hampshire retail locations, as well as lower Bear-Gram advertising
costs as a percentage of net revenue. As a percentage of net revenues, selling
expenses were 36.5 percent and 47.1 percent for the nine months ended March 31,
1999 and 1998, respectively.
General and administrative expenses decreased $18,000 to $2,219,000 for
the nine months ended March 31, 1999, compared to $2,237,000 for the nine months
ended March 31, 1998. Increased credit card processing costs associated with
the increased net revenues, higher legal fees and costs associated with the
Company's Special Meeting of Shareholders held on September 11, 1998 were more
than offset by the fact that on December 31, 1997, the Company had accrued and
expensed the entire amount due to R. Patrick Burns, former Chief Executive
Officer of the Company, under his consulting agreement. As a percentage of net
revenues, general and administrative expenses were 14.7 percent and 17.5 percent
for the nine months ended March 31, 1999 and 1998, respectively.
Preferred Stock dividends increased by $15,000 for the nine months ended March
31, 1999. This increase is attributed to the six percent cumulative dividend on
the Series C Preferred Stock. Warrant accretion increased by $23,000 for the
nine months ended March 31, 1999. This increase is the result of accretion of
the net valuation attributed to the warrant issued in connection with the Series
C Preferred Stock of approximately $270,000, which is accreting ratably over a
five year period.
As a result of the foregoing factors, the net income to common stockholders
totaled $1,111,000 or twenty-one cents per basic common share or seventeen cents
on a fully diluted basis, for the nine months ended March 31, 1999, compared to
a net loss to common stockholders of $1,434,000 or twenty-eight cents per basic
common share, for the nine months ended March 31, 1998.
Liquidity and Capital Resources
The Company has been operating without a working capital line of credit facility
since July 18, 1997.
As of March 31, 1999, the Company's cash position increased to $4,150,000, from
$1,527,000 at June 30, 1998. Restricted cash balances at these dates were
$363,000 and $361,000, respectively. The largest component of restricted cash
at March 31, 1999 and June 30, 1998 was a $300,000 certificate of deposit
required in connection with the Company's sale-leaseback transaction on July 18,
1997. The cash increase from the sale of Series C Preferred Stock more than
offset a decrease to accrued expenses and payments on debts and capital leases.
Inventories increased to $2,423,000 at March 31, 1999, from $2,396,000 at June
30, 1998. Accounts payable totaled $2,724,000 at March 31, 1999, compared to
$1,846,000 at June 30, 1998 due primarily to increased radio advertising
expenses for Valentine's Day 1999.
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 The Shepherd Group LLC. Accompanying the
Series C Preferred Stock are 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 Company
will accrete, over a five year period, an aggregate of approximately $270,000.
Each of the sixty shares of Series C Preferred Stock has a liquidation
value of $10,000 per share, and is convertible into 9,523 shares of the
Company's Common Stock. The Series C Preferred Stock requires redemption upon
the tenth anniversary of its issuance, with both the Company and the Series C
Preferred stockholders having call and put rights, respectively, beginning on
the fifth anniversary of issuance. The Series C Preferred Stock carries voting
rights on an as-converted basis, and, as a class, has the right to elect two
members to the Company's Board of Directors. Both the Series C Preferred Stock
and the accompanying warrants carry certain anti-dilution provisions. The
Series C Preferred Stock has a cumulative preferred dividend of six percent per
annum, payable quarterly. The dividends are required to be paid in additional
shares of Series C Preferred Stock for the first two and one-half years after
issuance, and thereafter may be paid in cash or additional shares of Series C
Preferred Stock, at the Company's option.
On December 31, 1997, the Company borrowed $200,000 from Green Mountain
Capital L.P. in the form of a five-year term note. The note bears interest at
12 percent per annum, is repayable in monthly installments through December 31,
2002, and is secured by a security interest in the Company's real and personal
property. In conjunction with the issuance of the notes, Green Mountain Capital
received warrants to purchase 100,000 shares of Common Stock at an exercise
price of $1.00 per share, subject to certain anti-dilution provisions. (Prior
warrants granted to Green Mountain Capital to purchase 20,000 shares at $3.375
were canceled upon the issuance of this new note.) The right to exercise these
warrants begins December 31, 1999, and expires the earlier of December 31, 2004
or five years after the full repayment of the loan and existing notes.
On July 18, 1997, the Company completed a sale-leaseback transaction, involving
its factory headquarters and a portion of its property located in Shelburne,
Vermont. This financing replaced the Company's mortgage and line of credit
agreement with the Vermont National Bank. The Company received approximately
$5.9 million in cash, of which approximately $3.3 million was used to pay off
the existing mortgage with the Vermont National Bank. The balance,
approximately $2.6 million, was used for general working capital purposes, to
pay down a $600,000 balance on the Company's line of credit (which was retired
as the result of the termination of the original mortgage loan), and transaction
costs of $679,000 associated with the sale-leaseback. The lease obligation,
secured by the business assets of the Company, is payable on a twenty-year
amortization schedule through July 2017.
The Company has been operating without a working capital line of credit
facility since July 18, 1997. The Company believes that its existing cash and
cash equivalent balances, together with funds generated from operations, will be
sufficient to finance the Company's operations for at least the next twelve
months.
Contingency
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 alleging that
it was in default under the lease for failure to resume occupancy and demanding
back rent for the period July 8, 1998 to December 31, 1998 in the amount of
$144,355, and on January 4, 1999 and May 5, 1999 it received demands to resume
rent payments beginning January, 1999. The Company disputes the landlord's
position and believes it is not obligated to resume occupancy or pay rent under
the lease. The Company has accrued management's estimated cost to settle this
contingency of $145,000 but no assurance can be given that this dispute can be
settled for this amount.
Year 2000 Disclosure
The Company has been addressing computer software modifications or
replacements to enable transactions to process properly in the year 2000. Based
on currently available information, all necessary changes are expected to occur
in a timely manner. The cost of these changes, which incorporates amounts for
system upgrades to handle additional capacity, is expected to be approximately
$500,000, based on management's best estimates and may be changed as additional
information becomes available. If the project is not completed on time, the
Company is subject to certain risks, including the manual processing and
fulfillment of orders, which could detract from efficiency. Although the
Company is working with suppliers and customers regarding this issue, no
assurance can be given with respect to any potential adverse effects on the
Company of any failure by other parties to achieve year 2000 compliance.
Submission of Matters to a Vote of Stockholders
On January 7, 1999, the Company held an Annual Meeting of Shareholders, at
which the following matters were voted upon:
(1) Election of seven individuals to the Company's Board of Directors for
the ensuing year.
For Against
Jason Bacon 4,617,925 10,664
R. Patrick Burns 4,615,375 13,214
Fred Marks 4,617,375 11,214
Joan H. Martin 4,617,275 11,314
Spencer C. Putnam 4,617,875 10,714
Elisabeth B. Robert 4,619,275 9,314
(2) Ratification of the selection of Arthur Andersen L.L.P. as the
Company's independent public accountants for the 1997 fiscal year.
Votes cast for: 4,613,003 Votes cast against: 11,194 Abstentions: 5,592
(3) Authorization for the Company's Board of Directors to file an
amendment to the restated certificate of Incorporation to effectuate a one-for-
five reverse stock split.
Votes cast for: 4,399,356 Votes cast against: 214,451 Abstentions: 15,982
All matters were approved by the Company's Shareholders.
Other Information
On March 11, 1998, Joan Martin submitted a letter of resignation from the
Board of Directors of the Company, which was accepted by the Board. Ms.
Martin's resignation was for personal reasons.
On April 23, 1999, Barbara Johnson was elected by the Board to serve on
the Board of Directors for the ensuing year or until her successor is duly
elected and qualified to serve. Ms. Johnson has extensive experience building
and operating successful start-up businesses, including Internet companies. She
is currently the Chief Executive Officer of Streetmail.com, an on-line content
news and information Internet site. Previously, Ms. Johnson served as Chief
Operating Officer of Yoyodyne Entertainment, Inc., an Internet direct marketing
company which she assisted in turning around and preparing for sale to Yahoo!.
As of November 10, 1998, the Company and Ms. Robert signed an agreement
providing for her continued employment as President and Chief Executive Officer
of the Company through October 22, 2001. Under this new agreement, Ms. Robert
is entitled to receive: i) A base salary of $120,000, increasing to $135,000 on
October 23, 1999, and to $150,000 on October 23, 2000; ii) an annual cash bonus
equal to three percent of the Company's pre-tax profit, so long as the Company's
pre-tax profit is at least $100,000; iii) options to purchase 225,000 shares of
Common stock at an exercise price of $1.00 per share, being above the fair
market value on the date of grant, with 75,000 shares vesting when the Company's
closing stock price averages $2.00 for a three-month period, 75,000 shares
vesting when the Company's closing stock price averages $3.00 for a three-month
period, and 75,000 shares vesting when the Company's closing stock price
averages $4.00 for a three-month period, except that the options will fully vest
seven years from date of grant if Ms. Robert remains employed by the Company;
iv) any benefits generally available to the officers of the Company from time to
time, including, without limitation, a $30,000 life insurance policy, and a
company car of Ms. Robert's choice. The agreement prohibits Ms. Robert from
directly or indirectly engaging in any business that competes with the Company,
during the course of her employment agreement and for a period of eighteen
months thereafter. Ms. Robert's existing agreement for her employment as
Treasurer and Chief Financial Officer of the Company was cancelled upon the
signing of this new agreement, though Ms. Robert continues to serve as Treasurer
and Chief Financial Officer of the Company.
Exhibits and Reports on Form 8-K
Exhibits
3.5 Restated Certificate of Incorporation of the Company (filed with the
Securities and Exchange Commission as exhibit 3.5 to the Company's 10-QSB for
the quarter ended September 30, 1998 and incorporated herein by
reference).
3.6 Amended and Restated By-Laws of the Company (filed with the Securities and
Exchange Commission as exhibit 3.6 to the Company's 10-QSB for the quarter ended
September 30, 1998 and incorporated herein by reference).
4.1 Representative's Warrant issued to Barington Capital Group, L.P. upon the
consummation of the initial public offering of the Company's Common Stock in
November 1993 (filed with the Securities and Exchange Commission as exhibit 4.1
to the Company's 1993 Annual Report on Form 10-KSB (File No. 33-69898) and
incorporated herein by reference).
4.3 Form of Warrant, issued in connection with the private placement of
204,912 shares of the Company's Series B Convertible Preferred Stock (filed with
the Securities and Exchange Commission as exhibit 4.3 to the Company's 1996
Annual Report on Form 10-KSB (File No. 33-69898) and incorporated herein by
reference).
4.4 Form of Subscription Agreement issued in connection with the private
placement of 204,912 shares of the Company's Series B Convertible Preferred
Stock (filed with the Securities and Exchange Commission as exhibit 4.4 to the
Company's 1996 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated
herein by reference).
4.5 Waiver of Joan H. Martin, dated April 12, 1996, issued in connection with
waiver of accrued dividends on Series A Preferred Stock (filed with the
Securities and Exchange Commission as exhibit 4.5 to the Company's 1996 Annual
Report on Form 10-KSB (File No. 33-69898) and incorporated herein by reference).
4.6 Warrant to purchase 43,826.087 shares of the Company's Common Stock, dated
April 12, 1996, issued in connection with Joan H. Martin's waiver of accrued
dividends on Series A Preferred Stock (filed with the Securities and Exchange
Commission as exhibit 4.6 to the Company's 1996 Annual Report on Form 10-KSB
(File No. 33-69898) and incorporated herein by reference).
4.7 Stock Purchase Warrant Agreement, dated July 10, 1997, between the Company
and URSA (VT) QRS-30, Inc., in conjunction with the sale-leaseback of the
Company's headquarters in Shelburne, Vermont (filed with the Securities and
Exchange Commission as exhibit 4.7 to the Company's 1997 Annual Report on Form
10-KSB (File No. 33-69898) and incorporated herein by reference).
4.8 Stock Purchase Warrant Agreement, dated December 31, 1997, in connection
with the $200,000 Term Loan of Green Mountain Capital (filed with the Securities
and Exchange Commission as exhibit 4.8 to the Company's 10-QSB for the quarter
ended December 31, 1997, and incorporated herein by reference.)
4.8 Securities Purchase Agreement, dated September 25, 1998, between the
Company and The Shepherd Group LLC, in connection with the Company's private
placement of sixty shares of Series C Convertible Redeemable Preferred Stock
(filed with the Securities and Exchange Commission as exhibit 10.47 to the
Company's 1998 Annual Report 10-KSB (File No. 33-69898) and incorporated herein
by reference).
4.9 Amendment, dated November 3, 1998, between the Company and The Shepherd
Group LLC, to the Securities Purchase Agreement dated September 25, 1998 (filed
with the Securities and Exchange Commission as exhibit 4.10 to the Company's 10-
QSB for the quarter ended September 30, 1998 and incorporated herein by
reference).
4.11 Form of Warrant, issued in connection with the private placement of the
Company's Series C Convertible Redeemable Preferred Stock (filed with the
Securities and Exchange Commission as exhibit 4.11 to the Company's 10-QSB for
the quarter ended September 30, 1998 and incorporated herein by reference).
4.12 Warrant to purchase 42,500 shares of the Company's Common Stock, issued to
URSA (VT) QRS 12-30, Inc., dated November 3, 1998, in connection with the
issuance of the Company's Series C Convertible Redeemable Preferred Stock (filed
with the Securities and Exchange Commission as exhibit 4.12 to the Company's 10-
QSB for the quarter ended December 31, 1998 and incorporated herein by
reference).
10.2 Stock warrants issued to Edmund H. Shea, Jr. IRA, Allan Lyons and William
Maines in connection with the bridge financing prior to the initial public
offering of the Company's Common Stock in November 1993 (a form of which was
filed with the Securities and Exchange Commission as exhibit 10.2 to the
Company's Registration Statement on Form SB-2 (File No. 33-69898) and
incorporated herein by reference).
10.10 Incentive Stock Option Plan adopted by the Company on August 16, 1993,
with form of Incentive Stock Option Agreement (filed with the Securities and
Exchange Commission as exhibit 10.10 to the Company's Registration Statement on
Form SB-2 (File No. 33-69898) and incorporated herein by reference).
10.12 Agreement, dated as of June 19, 1995, between the Company and John N.
Sortino, providing the terms of Mr. Sortino's separation agreement with the
Company (filed with the Securities and Exchange Commission as exhibit 10.12 to
the Company's 10-KSB for the transition period ended June 30, 1995 and
incorporated herein by reference).
10.24 Amended 1993 Incentive Stock Option Plan of the Company, amended as of
November 28, 1995 (filed with the Securities and Exchange Commission as exhibit
10.24 to the Company's 10-QSB for the quarter ended March 31, 1995 and
incorporated herein by reference).
10.25 Loan Agreement, dated December 26, 1995, between Green Mountain Capital,
L.P. and the Company, in connection with a $500,000 Term Loan (filed with the
Securities and Exchange Commission as exhibit 10.25 to the Company's 10-QSB for
the quarter ended December 31, 1995 and incorporated herein by reference).
10.26 Convertible Note, dated December 26, 1995, in the principal amount of
$200,000, issued in connection with the $500,000 Term Loan of Green Mountain
Capital (filed with the Securities and Exchange Commission as exhibit 10.26 to
the Company's 10-QSB for the quarter ended December 31, 1995 and incorporated
herein by reference).
10.27 Stock Purchase Warrant Agreement, dated December 26, 1995, in connection
with the $500,000 Term Loan of Green Mountain Capital (filed with the Securities
and Exchange Commission as exhibit 10.27 to the Company's 10-QSB for the quarter
ended December 31, 1995 and incorporated herein by reference).
10.28 Employment and Loan Agreements, dated June 30, 1996, between the Company
and R. Patrick Burns (filed with the Securities and Exchange Commission as
exhibit 10.28 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-
69898) and incorporated herein by reference).
10.29 Employment Agreement, dated July 1, 1996, between the Company and
Elisabeth B. Robert (filed with the Securities and Exchange Commission as
exhibit 10.29 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-
69898) and incorporated herein by reference).
10.30 Amended 1993 Incentive Stock Option Plan of the Company, amended as of
November 22, 1996 (filed with the Securities and Exchange Commission as exhibit
10.30 to the Company's 10-QSB for the quarter ended December 31, 1996 and
incorporated herein by reference).
10.31 Non-Employee Directors Stock Option Plan adopted by the Company on
November 22, 1996 (filed with the Securities and Exchange Commission as exhibit
10.31 to the Company's 10-QSB for the quarter ended December 31, 1996 and
incorporated herein by reference).
10.32 Employment Agreement, dated as of July 1, 1996, between the Company and
Spencer C. Putnam (filed with the Securities and Exchange Commission as exhibit
10.32 to the Company's 10-QSB for the quarter ended December 31, 1996 and
incorporated herein by reference).
10.33 Convertible Note, dated November 19, 1996, in the principal amount of
$300,000, issued in connection with the $500,000 Term Loan of Green Mountain
Capital (filed with the Securities and Exchange Commission as exhibit 10.33 to
the Company's 10-QSB for the quarter ended December 31, 1996 and incorporated
herein by reference).
10.34 Lease Agreement, dated October 24, 1996, in connection with the Company's
lease of 2,600 square feet at 538 Madison Avenue in New York, New York (filed
with the Securities and Exchange Commission as exhibit 10.34 to the Company's
1997 Annual Report 10-KSB (File No. 33-69898) and incorporated herein by
reference).
10.35 Consulting Agreement, dated December 31, 1996, between the Company and
Venture Management Group, Inc., regarding the provision of consulting services
to the Company (filed with the Securities and Exchange Commission as exhibit
10.35 to the Company's 1997 Annual Report 10-KSB (File No. 33-69898) and
incorporated herein by reference).
10.36 Lease Agreement, dated January 17, 1997, in connection with the Company's
lease of 6,000 square feet at 55 Main Street in Freeport, Maine (filed with the
Securities and Exchange Commission as exhibit 10.36 to the Company's 1997 Annual
Report 10-KSB (File No. 33-69898) and incorporated herein by reference).
10.37 Lease Agreement, dated July 10, between the Company and URSA (VT) QRS-30,
Inc., regarding the sale-leaseback of the Company's headquarters in Shelburne,
Vermont (filed with the Securities and Exchange Commission as exhibit 10.37 to
the Company's 1997 Annual Report 10-KSB (File No. 33-69898) and incorporated
herein by reference).
10.38 Binding commitment letter, dated October 10, 1997, from Green Mountain
Capital LP, in connection with a $200,000 term loan (filed with the Securities
and Exchange Commission as exhibit 10.38 to the Company's 1997 Annual Report 10-
KSB (File No. 33-69898) and incorporated herein by reference).
10.39 Agreement, dated as of October 10, 1997, between the Company and R.
Patrick Burns, providing the terms of Mr. Burns' separation and consulting
agreement with the Company (filed with the Securities and Exchange Commission as
exhibit 10.39 to the Company's 10-QSB for the quarter ended December 31, 1997
and incorporated herein by reference).
10.40 Employment Agreement, dated December 3, 1997, between the Company and
Elisabeth B. Robert (filed with the Securities and Exchange Commission as
exhibit 10.40 to the Company's 10-QSB for the quarter ended December 31, 1997
and incorporated herein by reference).
10.41 Loan Agreement, dated December 31, 1997, between Green Mountain Capital,
L.P. and the Company, in connection with a $200,000 Term Loan (filed with the
Securities and Exchange Commission as exhibit 10.41 to the Company's 10-QSB for
the quarter ended December 31, 1997 and incorporated herein by reference).
10.42 Convertible Note, dated December 31, 1997, in the principal amount of
$200,000, issued in connection with the $200,000 Term Loan of Green Mountain
Capital (filed with the Securities and Exchange Commission as exhibit 10.42 to
the Company's 10-QSB for the quarter ended December 31, 1997 and incorporated
herein by reference).
10.43 Employment Agreement, dated March 13, 1998, between the Company and
Spencer C. Putnam (filed with the Securities and Exchange Commission as exhibit
10.43 to the Company's 10-QSB for the quarter ended March 31, 1998 and
incorporated herein by reference).
10.44 Employment Agreement, dated April 30, 1998, between the Company and Robert
D. Delsandro, Jr. (filed with the Securities and Exchange Commission as exhibit
10.44 to the Company's 10-QSB for the quarter ended March 31, 1998 and
incorporated herein by reference).
10.45 Non-Binding Proposal and Management Agreement, dated May 21, 1998, between
the Company and The Shepherd Group LLC, in connection with the Company's private
placement of sixty shares of Series C Convertible Redeemable Preferred Stock
(filed with the Securities and Exchange Commission as Exhibits A and B to the
Company's definitive proxy statement for its Special Meeting of Stockholders
held September 11, 1998 and incorporated herein by reference).
10.45 Amendment to Employment Agreement, dated June 1, 1998, between the Company
and Elisabeth B. Robert (filed with the Securities and Exchange Commission as
exhibit 10.46 to the Company's 1998 Annual Report 10-KSB (File No. 33-69898) and
incorporated herein by reference).
10.47 Employment Agreement, dated November 9, 1998, between the Company and
Elisabeth B. Robert (filed with the Securities and Exchange Commission as
exhibit 10.47 to the Company's 10-QSB for the quarter ended September 30, 1998
and incorporated herein by reference).
Reports on Form 8-K
There were no reports filed on Form 8-K during the three-month period ended
March 31, 1999.
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: May 13, 1999 /s/ Elisabeth B. Robert,
Elisabeth B. Robert,
Chief Executive Officer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE MARCH 31, 1999 BALANCE SHEET
AND THE NINTH MONTH STATEMENT OF OPERATIONS ENDED
MARCH 31, 1999 FOR THE VERMONT TEDDY BEAR CO., INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,150,097
<SECURITIES> 0
<RECEIVABLES> 35,831
<ALLOWANCES> 0
<INVENTORY> 2,423,042
<CURRENT-ASSETS> 7,416,256
<PP&E> 12,194,507
<DEPRECIATION> 3,916,798
<TOTAL-ASSETS> 16,726,118
<CURRENT-LIABILITIES> 3,977,661
<BONDS> 6,189,156
0
1,099,397
<COMMON> 285,765
<OTHER-SE> 4,989,832
<TOTAL-LIABILITY-AND-EQUITY> 16,726,118
<SALES> 15,132,190
<TOTAL-REVENUES> 15,132,190
<CGS> 5,766,838
<TOTAL-COSTS> 5,766,838
<OTHER-EXPENSES> 7,739,073
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 423,144
<INCOME-PRETAX> 1,203,135
<INCOME-TAX> 0
<INCOME-CONTINUING>1,111,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,111,430
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.17
</TABLE>
